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Commentaries and
Jurispudence on the
Commercial Laws of the
Philippines

Author: Aguedo F. Agbayani

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THE NEGOTIABLE INSTRUMENTS LAW
(ACT No. 2031)
INTRODUCTION
176. Codification of the Law in England. The Negotiable Instruments Law is peculiarly
a creature of the law merchant, from which it was imported into England and crystallized in the
England common law. It was codified in that country in 1882 by what is known as the Bills of
Exchange Act.
177. Codification of the Law in United States. In the United States there was, prior to
the drafting of the Negotiable Instruments Law, a codification of the law in some states but there
was nothing looking toward a codification for all the states of the Union. The earliest
codification for an individual state, in a strict sense, as heretofore stated, is found in the
California Code of 1372.
The history of the act looking to a uniformity of laws in all the states dated back to the
year 1895. Then, at the request of the American Bar Association and through its cooperation,
acts were passed in many states providing for the appointment by the governor of Commissions
for the Promotion of Uniformity of Legislation of the United States. It was provided that these
should meet in joint conference, frame and adopt statutes which they would recommend to their
respective legislature for all the states and thus endeavor to eliminate as much as possible the
confusing conflict in the commonness principles and provisions of private law.
At a conference of commissioners from nineteen states held in 1985, a resolution was
adopted requesting the committee on commercial laws to produce a draft on a bill relating to
commercial paper based on English Bills of Exchange Act and on such other sources of
information as the committee might deem proper to consult and to prepare a codification of the
law relating to bills and notes. The matter, as stated by John J. Crawford, was referred to a subcommittee consisting of Layman D. Brewster, of Connecticut; Henry C. Wilcox, of New York,
and Frank Bergen, of New Jersey; and Mr. Crawford was employed by the sum-committee to
draw the proposed law.
In Drafting this law when to decisions of the state courts were conflicting, the rules of
the Supreme Court of the United States were adopted and the decisions of that high tribunal were
followed. When completed, the draft was submitted to the sub-committee who printed and sent
copies each member of the conference, and also to many prominent lawyers and law professors
and to several English judges and lawyers, with an invitation for suggestions and criticisms.
The draft was submitted to the conference which met at Saratoga in August, 1896; and
the commissioners who were in attendance being twenty-seven in all and representing fourteen
different states, in a session of three days by the entire conference went over it section by section

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and made amendments therein. The draft, as thus amended, was adopted by the conference and
recommended for general enactment by the state legislatures. It also met with the approval of the
American Bar Association, and in such form was unanimously recommended by said association
to the Legislatures of the several states and territories of the Union for adoption.
178. Purpose of codification. As heretofore suggested in the preceding chapter, the law
is the result of two purposes; the first and chief purpose was to produce uniformity in the laws of
the different states upon this important subject , so that the citizens of each state might know the
rules which would be applied to their notes, checks, and other negotiable paper in very other
state in which the law was enacted, since it was an absolute impossibility for the commercial
purchaser in any state to know all the details affecting the negotiability of paper governed by the
laws of all the other states. The second purpose was to preserve the law as nearly as possible as it
then existed. And it may be said probably without question that, in the enactment of the statute,
no essential feature of the Law of Negotiable Instruments as therefore determined has been
eliminated. While it is simple and intelligible in its expression, great care was taken to preserve
the use of words which had repeated legal constructions and had become recognized terms in the
law merchant.
179. Law embraces substantive and adjective law. The law of negotiable instruments
is one of the few subjects embracing both the substantive and adjective law and consequently,
pleading and practice as well as the substantive law must be treated in a book on the law on
negotiable instruments in order to completely and accurately cover that subject. A knowledge of
both is necessary and essential.
180. Application of Law; where Exclusive. A case arising from a bank check which is
indisputably a negotiable instrument is, insofar as the indorsee is concerned vis--vis the
indorser, governed solely by the Negotiable Instruments Law (Secs 1 and 185). Article 2071 of
the New Civil Code on the rights of the guarantor is here completely irrelevant and can have no
application whatsoever.
181. Some matters not covered by law. As already stated, the negotiable instruments
law was intended to govern the law on that subject upon which there was unanimity of decision.
Consequently, certain matters were intentionally omitted by the author of the law arising from a
diversity of decisions in a various jurisdictions on this matters and because the decisions were so
evenly divided. Among the omitted matters are those pertaining to the conflict of laws, whether
or not the giving of a negotiable instrument is presumed to be given in payment, matters
pertaining to negligence in the execution and circulation of negotiable instruments when fraud is
also an element, the rights of remitters, and failure to stamp.
182. Adoption of law in the Philippines. The Negotiable Instruments Law of the
Philippines was patterned after the draft approved by the Commissioners of Uniform State Laws
in the United States. It was enacted as Act No. 2031 on February 3, 1911 and took effect ninety

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days after the publication in the Official Gazette of the Philippine Islands was completed. This
was on March 4, 1911, and therefore, the Act took effect on June 2, 1911.
183. Most common forms of negotiable instruments. The Negotiable Instruments Law
deals with three kinds of Negotiable Instruments, namely (1) Promissory Notes, (2) Bills of
Exchange, and (3) Checks, which are also bills of exchange, but of a special kind. There are
other forms of negotiable instrument. An instrument which does not comply with the
requirements of Negotiable Instruments Law is a simple contract in writing and is merely in
evidence of such intangible rights as may have been created by the assent of the parties. If,
however, it conforms to the requirements of the Negotiable Instruments Law, the instrument is
itself the contract and not just a mere evidence of rights. It is a mercantile specialty.
184. Promissory note, defined. A negotiable promissory note, within the meaning of
this act, is an unconditional promise in writing made by one person to another, signed by the
maker, engaging to pay on demand or at a fixed determinable future time, a sum certain in
money to order or bearer. Where a note is drawn to the makers own order, it is not completed
until indorsed by him. From the foregoing, it will be noted that a promissory note is essentially
a promise to pay a sum certain in money. The promise is to pay on demand or at a fixed
determinable future time. Its use must, therefore, be distinguished from the use of cash. Thus, a
person who purchased a piece of land at public auction cannot be compelled to accept a
promissory note which the judgment debtor is tendering under his right of redemption pursuant
to Section 66 of Act 3135 as amended.
185. Illustration of promissory note. The following is an example of a promissory note:
P10,000.00

Manila, Philippines
August 1, 1949

For value received, I promise to pay to the order of Pedro Reyes the sum of Ten Thousand
Pesos (P10,000.00) on or before December 31,1949, at the Philippine National Bank, Manila.
(Sgd.) ExequielFerrer
186. General characteristics of a promissory note. The following are the general
characteristics of a promissory note:
(1) The figures at the upper left hand corner of the instrument, P10,000.00. This is to
indicate the amount of the note and is more quickly grasped that if the written in words.
(2) The place, Manila, Philippines. It shows the place where the contract to pay is
executed.

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(3) The date, August 1, 1949. It is usually inserted either to determine when the note is
due or to fix the time when the interest is to run, when the payment for interest is stipulated, or
whether or not the collection of the instrument is barred by the statute of limitations.
(4) The date of maturity, on or before December 31, 1949. This indicates the time when
the promise to pay is to be fulfilled. Where, however, the date of maturity is not stated, the
instrument is payable on demand.
(5) The promise, I promise to pay. It consists of an absolute promise to do something,
that is , to pay. It is not subject to the fulfillment of a condition.
(6) The words, to the order of. It means that the promise is to pay as ordered or as
commanded by the payee. But an instrument may be payable to bearer.
(7) The name, Perdo Reyes. He is the person to whose order or command the money is
promised to be paid. He is known as the payee.
(8) The signature ExequielFerrer. ExequielFerrer is the maker of the note. He is the one
who promises to pay it at the first instance. A note may be signed by more than one person either
jointly, or jointly and severally.
(9) The place of payment, at the Philippine National Bank. It indicates where the note
is to be paid. However, that is not necessary. An instrument may be made payable at any other
place agreed upon by the parties.
(10) The amount, Ten Thousand Pesos. It indicates, as the figures do, the sum promised
to be paid. As it is written in words, it cannot easily be altered and, since it takes longer to write
the words than the figures, the words are more likely to be accurate.
(11) The consideration, for value received. This indicates that a consideration was
given for the note. The consideration may be specified. But the words for value received may
be omitted and the consideration not specified, as consideration is presumed.
187. Origin and history of promissory note. Promissory note are said to be and to have
been in Romans; but the negotiability of these instruments was unknown among the Romans and
is the development of modern times. The time of the introduction of promissory notes into the
England is not absolutely known but it appears to have been thirty years before the reign of
Queen Anne. They were use for a considerable time before they became the subject of the
litigation and legislation. The common law judges were opposed to the negotiability of
promissory note payable to order or bearer matter, the result of which was the enactment of a
statute conferring upon promissory notes the same qualities of assignablity and negotiability as
were opposed by the inland bills of exchange.

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188. Special types of promissory notes, i.e. bonds, due bills, etc. See comments under
Section 184, this Volume.
189. Bill of exchange, defined. A bill of exchange is an unconditional order of
writingaddressed by one person to another signed by the person giving it, requiring the person to
whom it is addressed to pay demand or at a fixed or determinable future time of a sum certain in
money to order or to bearer. From the foregoing, it will be noted that a bill of exchange is
essentially an order or a command in writing addressed to someone requiring him to pay a sum
certain in money.
190. Illustration of bill of exchange. The following is an example of an ordinary bill of
exchange:
P10,000.00

Manila Philippines
August 1, 1949

Thirty days after sight, pat to order of Juan Soriano the sum of Ten Thousand
Pesos (P10,000.00), Philipiine Currency. Value received and charge the same to the
account of
(Sgd.) Ernesto Reyes
To Augusto Tolentino
215 Regina Bldg.

191. Nature of acceptance does not determine whether negotiable paper is bill or
not. In a case, defendant, Aruego, contented that the drafts signed by him were not really bills
of exchange but mere pieces of evidence of indebtedness because payments were not made
before acceptance. It was held that as along as a commercial paper conforms with the
definition of a bill of exchange, that paper is considered a bill of exchange. The nature of
acceptance is important only in the determination of the kind of liabilities of the parties involved,
but not in the determination of whether a commercial paper is a bill of exchange or not.
192. General Characteristics of a bill of exchange.The following are the general
characteristics of a bill of exchange not found in the promissory note:
(1) The order or command to pay, Pay to. This is an order or command to pay. Thus,
instead of a promise, the bill of exchange contains a command or order to pay money.
(2) The signature, Ernesto Reyes. Ernesto Reyes is the drawer. He corresponds to the
maker of a promissory note,

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(3) The name, Augusto Tolentino. Augusto Tolentino is the drawee. He is the one
ordered or commanded to pay a sum certain in money.
193. Bill of exchange and promissory note distinguished. The fundamental distinction
between a bill of exchange and a promissory note is that the first is an order or a command, while
the second is a promise. But that bill is an order to pay should not be confused with an
instrument being payable to order. A bill may be payable to bearer and still be an order to pay
money. Where a bill is payable to bearer, it is an order to pay to bearer. Where it is payable to
order, it is an order to pay to order. Thus a bill of exchange is an order to pay not because it is
payable to order but because, by it terms, it orders or commands the drawee to pay money to a
payee or bearer.
A promissory note may be payable to bearer or to order, just as bill may be. Where a
promissory note may be payable to bearer, it is a promise to pay to order. Where it is payable
to order, it is a promise to pay to order But it does not become a bill by reason of the fact that it
is payable to order.
194. Origin and history of bills of exchange. The bill of exchange is the earliest form of
negotiable instrument. Bills of exchange, which were first used by the bankers and merchants of
Florence and Venice to facilitate the transfer of credits between distant points, came to England
through France earl in fourteenth century, that is, came from the continent of Europe where they
formed part of modern Roman or Civil Law. The English merchants used it as an instrument
whereby he avoided either sending money out of the country or bringing money into the country.
To pay a third party, he would give an order on one of the foreign debtors. Originally a bill of
exchange was purely a trade transaction which was a means whereby one country avoided
sending money to another.
195. Special types of bills of exchange, i.e. bankers acceptance, money orders, etc.
See comments under Section 126, this volume.
196. Check, defined. A check is a bill of exchange drawn on a bank payable on
demand. Already stated, a check is a bill of exchange of a special kind.
197. Illustration of a check. The following is an example of a check:
The Philippines
Bank of Commerce
Manila Philippines

No. 519917B

Manila, August 20, 1956


Pay to Dionisio A. Laserna or order One Thousand Pesos.
P 1,000.00
(Sgd.) Mariano C. Verzosa
To Augusto Tolentino
215 Regina Bldg.

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198. General Characteristics of a check.The general characteristics of a check are
similar to that of a bill of exchange for a reason that a check is a bill of exchange.
199. Special types of checks, i. e. certified check, cashiers check, etc. See comments
under Section 185, this volume.
200. Distinctions between check and bill of exchange.
(1) A check is always drawn upon a bank or banker, whereas, an ordinary bill may or
may not be drawn against a bank.
(2) A check is always payable on demand, whereas, an ordinary bill may be payable on
demand or at a fixed or determinable future time.
(3) It is not necessary that a check be presented for acceptance as in the case of a bill of
exchange. Checks are not to be accepted but presented at once for payment. However, if the
holder requests, and the banker desires, he may accept.
(4) A check is drawn on a deposit while the ordinary bill of exchange is not. In other
words, it is not necessary that a drawer of a bill of exchange should have funds in the hands of
the drawee, but in the case of the check, it would be fraud.
(5) The death of the drawer of a check, with the knowledge of the banks, revokes the
authority of the banker to pay, while the death of the drawer of the ordinary bill of exchange
does not. But there are some decisions to the contrary.
(6) An ordinary bill of exchange may be presented for payment within a reasonale time
after its last negotiation. But a check must be presented for payment for payment within a
reasonable time after its issue.
201. To whom instruments may be payable. As ready intimated, an instrument may be
made or drawn payable to: (1) bearer, or (2) order. It may also be payable to, (3) a specified
person.
202. When payable to a bearer. In general, an instrument is payable to bearer: (1) when
it is expressed to be payable, or (2) when it is payable to a person named therein or bearer.
203. Illustration of payable to bearer. The following instrument is payable to bearer.
Pay to B or bearer P1,000.00
(Sgd.) A
To X

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204. When payable to order. An instrument is payable to order when it is expressed to
be payable (1) to the order of a specified person, or (2) to a specified person or his order.
205. Illustrations. (1) The following illustrates an instrument payable to the order of a
specified person.
I promise to pat to the order of B P1,000.00
(Sgd.) A
(2) The following illustrates an instrument payable to a specified person or his order.
I promise to pay to B or his order P 1,000.00
(Sgd.) A
The first payable to the order of B (the specified person) and the second is payable to B
(the specified person) or his order.

206. When the instrument payable to a specified person. An instrument is payable to


specified person when the instrument is payable to a person named in the instrument and no
other. When an instrument is payable to a specified person, it is not negotiable because it is
neither payable to bearer nor payable to order.
207. Illustration. The following instrument is payable to a specified person.
I promise to pay to B P1,000.00
(Sgd.) A
208. Parties to a promissory note. The following are the original parties to a promissory
note: (1) the maker, and the (2) the payee, if the instrument is payable to order, or (3) bearer, if
the instrument is payable to bearer.
209. Maker. The person who executes the written promise to pay. In the illustration in
paragraph 201 of the text, A is the maker.
210. Payee. The person in whose favor the promissory note is made payable. In the
illustration, B is the payee. If the note is made payable to bearer, no patee is designated and it is
payable to the person in possession thereof.
211. Parties to a bill of exchange. The following are the original parties to a bill of
exchange. (1) the drawer, (2) the payee, if the instrument is payable to order, and the bearer if
the instrument is payable to bearer, and (3) the acceptor.

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212. Drawer. The person who executes the written order to pay. In the illustration given
of a bill of exchange in the paragraph 197 of the text, A is the drawer.
213. Payee. The person in whose favor a bill of exchange is drawn payable. In the
illustration, B is the payee. If the bill of exchange is payable to bearer, no payee is designated
and the bill is payable to the person in possession thereof. The bearer is the person in possession
of a bill or note which is payable to bearer.
214. Acceptor. The drawee who signifies his assent to the order of the drawer. The
addressee of a bill of exchange, that is, the person who is commanded or orders by the drawer to
pay a sum certain money, is called the drawee. When he signifies his assent to the order of the
drawer, he is called acceptor and by thus accepting the bill, he becomes a party thereto. Before
the acceptance, however, he is not a party to the instrument and is therefore not liable thereon. It
is only when he accepts the bill that he becomes a party thereto and liable thereon. Acceptance is
usually signified by writing across the bill the word accepted, with the signature of the drawee.
215. Parties to a check. As the check is a bill of exchange, although special kind, it had
the same parties as the ordinary bill of exchange. The only difference is that a check is usually
certified to, not accepted by, the drawee bank. But certification is equivalent to acceptance,
216. Other parties to negotiated instruments, The following are the other parties
added to negotiable instruments when they are negotiated: (1) indorser and (2) indorsee, in
the case of instruments payable to order and (3) persons negotiating by mere delivery and (4)
persons to whom the instrument is negotiated by delivery. in the case of instruments payable to
bearer.
217. Indorser and indorsee, explained. When an instrument is negotiated, other parties
are added to the instrument. Where the negotiation is by the indorsement completed by delivery,
the parties added are the indorser and the indorsee. The Indorser is the one who negotiates by the
indorsement and the indorsee is the one to whom the instrument is negotiated by the
indorsement. When the payee indores a bill or a note, he becomes also an indorser. When the
indorsee further indorses the instrument, he likewise becomes an indorser, and the person to
whom he indorses it is another indorsee.
218. Where the instrument is payable to bearer. Where the instrument is payable to
bearer, it can be negotiated by mere delivery without necessity of indorsement. He, therefore, is
also a part added to the instrument upon negotiation. For lack of a better term, he may be
designated as person negotiating by delivery The person to whom the instrument payable to
bearer is egotiated acquires certain rights as a holder. He is, therefore, also an additional party to
the instrument. For lack of better name, he may be designated as person to whom an instrument
is negotiated by delivery.

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219. Holder. Section 190 defines holder as the payee or indorsee of a bill or note,
who is in possession of it, or the bearer thereof. And the bearer is therein defined as the
person in possession of a bill or note which is payable to a bearer. Hence, the meaning of
holder depends upon the kind of instrument involved. If payable to order, holder means the
person (1) who is the payee or indorsee therein, and (2) who is in possession thereof. If the
payable to bearer, holder means the person (1) who is in possession thereof.
220. Holder explained. Suppose A makes the following instrument: I promise to pay B
or order P1,000.00 (Sgd.) A (1) keeps it in his drawer and does not deliver it to B. Is B a
holder? No because B is the payee, he is not in possession of the note.
(2) Suppose that A delivers the note to B and B indorses it to C, but delivers it to Y. Who
is the holder, C or Y? Neither is the holder. Y is not the holder because while he is in possession
of the note, he is no the indorsee. C is not the holder because while he is in the indorsee, he is not
in possession of the note.
(3) Suppose that the note is payable to B or bearer and A keeps the note in his drawer. Is
B the bearer? No, because he is not in possession of the note.
(4) But suppose that A delivers the note to Y but not to B. Is Y the holder? Yes, because
Y is in possession of the note which is payable to bearer.
221. Incidents in life of negotiable instrument. The following are the incidents in
the life so as to speak of a negotiable instrument: (1) Issue (2) negotiation (3) presentment for
the acceptance, in certain kinds of bills f exchange (4) acceptance (5) dishonor by non
acceptance (6) presentment for payment (7) dishonor by non payment (8) notice of dishonor and
(9) discharge.
222. Issue, defined. The first delivery of the instrument, complete in form to a person
who takes it as a holder. Thus, where A makes a note payable to the oerder of B who takes it as
a holder, the delivery is called issue
223. Delivery, defined. Transfer of possession with intent to transfer title. It consist
principally of placing the transferee in possession of instrument, but it must be accompanied by
an intent to transfer title. Delivery is essential as every contract on negotiable instrument is
incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto.
224. Negotiation, defined and explained. Negotiation is such transfer of an instrument
from one person to another as to constitute the transferee the holder of the instrument, In other
words, negotiation is a mode od transferring an instrument. It is distinguished form other modes
of transfer in that its effect is to make the transferee the holder of the instrument. Specifically, In
the case of an instrument which is payable to order, any series to stes which make the transferee
both the indorsee of the instrument and the possessor thereof constitute negotiation; and in the

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case of an instrument which is payable to bearer, any step which makes the transferee of the
instrument one in possession thereof constitute negotiation.
225. How is instrument payable to bearer negotiated. It is clear from the foregoing
that how an instrument is to be negotiateddepends upon whether it is payable to bearer or to
order. If it is payable to bearer, it may be negotiated by mere delivery, although the law does not
prohibit negotiation. By indorsement completed by delivery, Delivery is sufficient because by
delivery, the transferee is placed in possession of the instrument, and the moment the transferee
is in possession, he constitutes the holder thereof since the holder of an instrument is payable to
bearer is one on possession of it.
226. How instrument payable to order negotiated. If the instrument is payable to order, it
must be negotiated by indorsement completed by delivery. Indorsement is necessary to make the
transferee the indorsee, and delivery is also necessary ti place the transferee in possession of the
instrument. If there is indorsement only but no delivery, the transferee would be in possession,
but not the indorsee. In either case, the transferee, would not be contributed the holder. Hence,
there would be no negotiation. But there is indorsement completed by delivery, the transferee
would be constituted the holder of the instrument since the holder of an instrument payable to
order is the payee or indorsee thereof who is in possession of it.
227. Indorsement, defined and explained. Indorsement is a legal transaction, effected
by writing of one's own name on the back of the instrument or upon a paper attached thereto,
with or without additional words specifying the person to whom or to whose order the instrument
is to be payable whereby one not only transfers one's full legal title to the paper transferred but
likewise enters into an implied guaranty that the instrument will be duly paid. It will be clearly
see that, essentially, an instrument consists of the signature of the one indorsing and that an
indorsement is usually written at the back of the instrument. There are two principal kinds of
indorsement, (1) special, and (2) blank indorsement.
228. Special indorsement, defined and explained. A special indorsement is one that
specifies the person to whom or to whose order the instrument is to be payable. The following
written at the back of the instrument is a special indorsement:
"Pay to Pedro Reyes.
(Sgd.) Ernesto Rodriguez."
Ernesto Rodriguez is the indorser. He must either have been the payee or the indorsee. Pedro
Reyes is the indorsee in this instrument.
229. Blank indorsement, defined and explained.An indorsement in blank is one that
does not specify the person to whom or to whose order the instrument is to be payable. It consists

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merely of the signature of the indorser. The following written at the back of the indorsement is
an illustration of a blank indorsement:
(Sgd.) Ernesto Rodriguez
Ernesto Rodriguez is the indorser. He must either have been the payee or an indorsee.
230. Negotiation, indorsement, delivery, compared. From the foregoing, the following
will be noted:
(1) Strictly speaking, indorsement is not equivalent to negotiation. Indorsement is merely the
first step in the process of negotiating an instrument which is payable to order. The second step
in the process is delivery. However, section 191 defines indorsement as "an indorsement
completed by delivery." In this sense, indorsement is equivalent to negotiation.
(2) Where the instrument is payable to order, neither is delivery equipment to negotiation. The
mere delivery of such instrument, without indorsement, is merely equivalent to an assignment
thereof.
(3) But where the instrument is payable to bearer, delivery is equivalent to negotiation.
It should also be clearly understood that since the adoption of the Negotiable Instrument Law,
"the terms 'indorsement,' indorser, and indorsee should be applied only to negotiable
instruments and the words assignment, assignor, and assignee to non-negotiable xxx
instrument, that is, to all other instruments except negotiable instruments,
231. Presented for acceptance, explained. Presented for acceptance consists of
exhibiting the bill to the drawee and demanding that he accept it, that is signify his assent to the
order or command of the drawer. It is required only in certain kinds of bills of exchange.
232. Meaning of after sight. Sometimes, a bill is drawn payable thirty days after
sight. This means that the bill is payable thirty days after has been resented for acceptance,
whether it has been accepted or not. The period thirty days starts from the time the drawee sees
the bill at the time it is exhibited to him for acceptance.
233. Acceptance, defined and explained. Acceptance is the signification by the drawee
of his assent to the order of the drawer. As already stated, this is usually done by writing across
the face of the bill the word accepted, followed by the signature of the drawee. The term
acceptance has, therefore, a technical meaning under Negotiable Instruments Law. It should not
be used as the equivalent of receive. As to checks they generally certified instead of being
accepted. The certification of a check is usually done by stamping on the check the word
certified and underneath it is written the signature of the proper officer of the bank.
Certification is equivalent to acceptance.

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234. Dishonor by non-acceptance. Where the bill is presented for acceptance, and
acceptance is refused by the drawee, or cannot be obtained, or where presented for acceptance is
excused, and the bill is not accepted, it is said to be dishonored by non-acceptance
235. Presented for payment, explained. Presented for payment consist of exhibiting the
instrument to the person primarily liable thereon and demanding payment from him on the date
of maturity. This is required for all kinds of negotiable instruments.
236. Dishonor by non-payment. Where the instrument is presented for payment, and
payment is refused or cannot be obtained, or where presentment for payment is excused and the
instrument is overdue and unpaid, it is said to be dishonored by non-payment
237. Notice of dishonor, explained. When a negotiable Instrument has been dishonored
by non-acceptance or non-payment, a notice of dishonor must be given to the drawer and to each
indorser, and any drawer or indorser to whom such notice is not given discharged. The purpose
is to notify the drawer and the indorsers that the instrument has not been accepted by the drawee,
or that it has not been paid by the acceptor, in the case of bills, or by the maker, in the case of
notes.
238. Discharge, explained. A negotiable instrument is usually discharged by payment
in due course by or on behalf of the principal debtor. But where the one paying is a party
secondarily liable on the instrument, it is not discharged. Thus, suppose that A is the maker of a
note and B is the payee. He indorses to C, C to D, D to E and E to F. If A pays the instrument, it
is discharged. If C pays, the instrument is not discharged.
239. Parties primarily and secondarily liable, explained. Under the Negotiable
Instruments Law the person primarily liable on an instrument is the person who by terms of
the instrument is absolutely required to pay the same. All other parties are secondarily liable.
When one speaks of primary and secondary liability, at least two debtors or obligors are
contemplated. For instance, A and B are indebted to C in the sum of P10,000.00, A being
primarily liable, B secondarily liable. This means that A, the person primarily liable, must in the
first instance be made to pay obligation, and that it is only when he fails to pay, that the person
secondarily liable, B in this case, must be made to pay.
240. In bills of exchange. In a bill of exchange, the acceptor is primarily liable. He is the
primarily liable because under Section 62, he is absolutely required to pay the instrument as he
engages that he will pay it according to the tenor of his acceptance. He does not say that he will
pay it if someone does not pay. In the bill of exchange, the drawer, the qualified or general
indorser, and the person negotiating by mere delivery, are secondarily liable.
241. Secondarily liability of drawer. By the mere drawing of a bill, without saying
more, the drawer assumes the liability stated in Section 61. Under the said section, the general
tenor of the liability of the drawer is that he will pay the bill if the drawee does not accept or pay

15 FOUR-C LAW LIBRARY


the bill. In other words, he is not absolutely required to pay the bill. If the drawee pays, then he is
not required to pay. It is only when the drawee does not pay that he will be required to pay.
242. Secondary liability of indorser. By indorsing an instrument, without saying more,
an indorser assumes all the liability stated in Section 65 or 66, Under the said sections, the
general tenor of the liability of the indorser is that he will pay the instrument if the person
primarily liable will not pay. He is, therefore, not absolutely required to pay the instrument. If the
person primarily liable pays, the indorser will not be required to pay. It is only when the person
primarily liable fails to pay that he may be required to pay.
Thus a check while not regarded as legal tender is normally, under commercial usage, a
substitute for cash. The credit represented by it in stated monetary value is properly capable of
appropriation, as by the accused depositing check in his personal account.
243. Secondarily liability of one negotiating by delivery, By merely delivering an
instrument payable to bearer, without saying more, a person negotiating by mere delivery
assumes the liability stated in the Section 65. Under the said section, the general tenor of the
liability of a person negotiating by delivery is similar to that of an indorser.
244. In promissory notes. In the promissory note, the marker is primarily liable. The
qualified or general indorser and person negotiating by mere delivery are secondarily liable.
Under Section 60, the agreement of the maker is that he will pay the instrument in according to
its tenor. He does not say that he will pay it if somebody does not pay. Hence, he is primarily
liable.
245. Function of negotiable instruments. They are a substitute for money and increase
the purchasing medium in circulation. Otherwise, mere specie or paper money would be needed
in circulation to take care of everyday business transactions. Many customers of merchants pay
their monthly bills by check and manufacturers when unable to obtain cash from their customers,
take promissory notes, accepted bills, trade acceptances, or some form of commercial paper
which their banks will discount and turn into money for their payrolls. Thus, negotiable
instruments operate to supplement the currency of the government. The check is used for
immediate payment while the ordinary bill of exchange and the promissory note are intended for
circulation of credits.
246. Payment by negotiable instruments. Since a negotiable instrument is a substitute
for money, the question arises as to whether or not the giving and taking of a promissory note or
bill of exchange is a prima facie absolute payment as in the case of money or merely a prima
facie conditional payment. In the Philippines, there is no conflict of opinions. The rule is that,
the delivery of promissory notes payable to order, or bills of exchange or other merchantile
documents shall produce the effect of payment only when they have been cashed, or when,
through the fault of the creditor, they have been impaired. In the meantime, the action derived
from the original obligation shall be held in abeyance.

16 FOUR-C LAW LIBRARY


247. Where there is no showing when check given in payment was encashed, filing of
action to collect not clearly unfounded.
In the case, the debtors (Panginibans) sent a check to the creditor to to his check to his
debt. It is shown when the check was cashed by the creditor (Inhelder) who later February 19,
1975, acknowledged having received the check. Meanwhile, February 12, 1975, the attorney of
the creditor filed a collection case against the debtor which was dismissed. Later the debtor filed
a case against the debtor which was dismissed. Later the debtor filed a case against the creditor
for actual compensatory, moral and exemplary damages on the ground, among others, that the
collection case was clearly unjustified. Is the debtor entitled to damages?
Held: It is not clear that the account of the Panganibans had already been paid as of February 12,
1975. Under the Article 1249 of the Civil Code, payment should be held effective only when
PNB Check No. 32058 was actually cashed by, or credited o the account of Inhelder. If that did
not eventuate on or the account would still be unpaid, and the complaint in the Collection Case,
technically, could not be considered as substantially unfounded.
It is true that when the check of the Panginibans was received on February 5, 1975, the better
procedure would have been to withhold a complaint pending determination whether or not the
check was good. If dishonored, that would be the time to file the complaint. That procedure was
not followed because of the failure of the corresponding advice which could have been given to
Atty. Fajardo by the Inhelder Credit and Collection Manager. But the lack of that advice should
not justify qualifying the Collection Case as clearly unfounded. If the check had bounced, the
Collection Case would have been tried and acted upon by the Mandaluyong Court on merits.
248. Principal features of negotiable instruments. Negotiable Instruments have two
important features, namely: (1) negotiability, and (2) accumulations of secondary contracts as
they are transferred from one person to another.
249. Negotiability, explained. It is that attribute or property whereas a bill, note or
check passes or may pass from the hand to hand similar to money, so as to give the holder in due
course the right to hold the instrument and collect the sum payable for himself free from
defense. Thus, men in this way without cash in hand are enabled by means of credit to conduct
and carry to completion business enterprises upon their promissory notes, bill of exchange and
checks, knowing that other businessmen will treat these promises as cash. Furthermore, the
purpose of negotiability is to allow the bills and notes to go from hand to hand in the commercial
markets and to take the part of money in commercial transactions. The defenses from which the
holder in due course is free are personal defenses but not his free from real defenses.
250. Purpose of Negotiability. The primary purpose of negotiability of negotiable
instrument is to allow bills and notes the effect which money, in the form of government bills or
notes, supplies in the commercial world.

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251. Illustration of Negotiability. (1) A induces B by fraud to make a promissory note
payable to the order of A in the sum of P1,000.00 payable on demand. This is fraud in
inducement which is a personal defense. If A files action against the maker B, for the aount, B
can interpose the defense that he was induced to make a note by fraud and that he did not receive
any valuable consideration for it.
(2) Suppose that instead of trying to collect from B, A transfers the note to C, who pays
P1,000.00 and acquires the note under circumstances that make him a holder in due course. And
then he, C, files an action against B, the maker of the note for P1,000.00. If the note were not
negotiable, B can still interpose the same defense that he could interpose against A, with whom
he is an original party. But if the note is negotiable, B cannot interpose the defense that he was
induced by fraud to make the note that he did not receive any valuable consideration for it
because, by virtue of its attribute negotiability, C, the holder in due course, has the right to hold
the instrument and collect the sum payable regardless of defenses which might obtain between
the original parties.
252. Accumulation of secondary contracts, explained.Next to negotiability, the most
important characteristics of negotiable instrument is the accumulation of secondary contracts
which they pick up and carry along with them as they are negotiated from one person to another.
This attribute of negotiated instruments is just as essential as negotiability, if they are serve as
substitute of money. The party to whom it is offered may not know anything about the original
parties on their solvency and can afford to take paper only if the party with whom he is dealing
with adds his credit.
253. Illustration of accumulation of secondary contracts. Negotiation not only
operates to transfer negotiable instruments but also makes a contract for one negotiating it. Thus
suppose A makes a notes payable to the order of B. The primary contract is the one contained in
the promissory note proper whereby the maker promises to pay the payee or bearer, as the case
may be, the sum certain stated therein. If B indorses the note to C, by merely indorsing without
saying more, he thereby enters into a contract whereby he binds himself to pay the note, if A
maker does not pay. This is already a secondary contract. If C further negotiates the note to S. he
enters into a similar contract. This is another secondary contract. And so on, as the instrument is
transferred from one person to another.
254. Advantage of accumulation secondary contracts. Thus negotiable instruments
improve as they pass from hand to hand, as more debtors are added. There are many secondary
contracts and debtors as the indorsements. Hence, the more indorsements, the more debtors there
will be, the more debtors there are, ther greater the chances that the holder has to collect the
amounts payable on the instrument.
255. Negotiability distinguished from assignability. The following are the distinction
between negotiability and assignability:

18 FOUR-C LAW LIBRARY


(1) Assignability is a more comprehensive term than negotiability and pertains to
contracts in general. On the other hand, negotiability pertains only to special class of contracts,
namely, to negotiable instruments.
(2) A person who takes an instrument by assignment takes the instrument subject to
defenses obtaining among the other original parties, whereas, a person who takes an instrument
by negotiation takes it free from personal defenses available among the parties.
(3) At a common law, to maintain an action on a common law instrument, it was
necessary to allege and prove consideration. But in action on negotiable instrument,
consideration is presumed and need not be alleged and proved. This distinction does not,
however exist in the Philippines, as in every contarct, whether negotiable or not, although the
cause is not stated in the contract, it is presumed that it exists, and is lawful unless the debtor
proves the contrary.
(4) The indorser is not liable on his indorsement unless there be presentment for payment
at maturity and prompt notice of dishonor in case of dishonor. When these steps are taken, he
becomes immediately liable on the instrument.
(5) The general indorser is secondarily liable for any cause for which the party primarily
liable on negotiable instrument does not pay. He warrants the solvency of the party primarily
liable. The qualified indorser and the person negotiating by mere delivery have limited secondary
liability.
The assignor in good faith, however, does not warrant the solvency of the debtor unless it
has been expressly stipulated or unless the solvency was prior to the assignment and of common
knowledge. He merely warrants the existence and legality of the credit assigned at the time of the
assignment.

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I FORMS AND INTERPRETATION
Section 1. - Form of negotiable instruments. - An instrument to be negotiable must conform
to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
256. Requisites as to negotiable note. A promissory note, to be negotiable, must
conform to the following requirements: (1) It must be in writing and signed by the marker; (2) it
must contain an unconditional promise to pay a sum certain in money; (3) it must be payable on
demand, or at a fixed or determinable future time; and (4) it must be payable to order or to
bearer.
257. Requisites as to negotiable bill. A bill of exchange, to be negotiable, must conform
to the following requirements. (1) It must be in writing and signed by the drawer; (2) it must
contain an unconditional promise to pay a sum certain in money; (3) it must be payable on
demand, or at a fixed or determinable future time; and (4) it must be payable to order or to
bearer; and (5) the drawee must be named or otherwise indicated therein with reasonable
certainty.
258. The instrument must be in writing. The word in instruments implies that which
has been put into writing. In order to negotiate, there must be in writing of some kind, for, if the
instrument were not in writing, 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.
259. The instrument must be signed by the maker or drawer. The full name may be
written. At least, the surname should appear and, generally, the signature usually is by writing
the signers name. But it consist of mere initials or even numbers such as 1, 2, 8. But, where
name is not signed, the holder must prove that what is written is intented as a signature of the
person sought to be charged.
260. How signature written. The name may be printed, tyoewritten, stamped, engraved,
photographed or lithographed. But in such case, it must me shown to have ben adopted and used
by the party as his signature.
261. Location of Signature. The signature of the maker or drawer is usually written at
the bottom right hand corner. The location of the signature is not material. It may be at the top,

20 FOUR-C LAW LIBRARY


the middle, or at the bottom. What is important is that it appears there from that the person
intended to make it his own.
262. Illustration of location of signature. Suppose the promissory note reads as follows.
P3,000.00
Manila, P.I.
January 1, 1950
I, ORLANDO FERRER, after date of promise to pay to X or his order the
sum of P3,000.00.
This is held sufficient, as the signature appears in the body or the note.
263. If a bill, it must be contain an Order to pay. A bill is something more than the
mere asking of a favor. It is an instrument demanding right. It is, however, not necessary that the
word order be used. Any words which are equivalent to an order or which show the drawers
will that the money should be paid are sufficient to make the instrument a bill of exchange.
264. Effect of mere authority to pay. Suppose the bill of exchange reads as follows:
I hereby authorize you to pay P1000.00, on our account, to the order to
Pedro Cruz.
(Sgd.) Jose Reyes
To X
Is this instrument negotiable? It is not negotiable because not is not an order to pay. It is
mere authorization to pay. By the terms, the bill gives a discretion to the drawee to pay or not to
pay,
265. Effect or mere request to pay. Suppose the bill of exchange reads as follows.
Please to let the bearer have P70.00 and place to my account and you will oblige.
(Sgd.) Ernesto Cruz
To Reynaldo Reyes
207 LUZCo Bldg.
This bill is not negotiable because it does not contain an order to oay. It is nothing but mere
request to pay.

21 FOUR-C LAW LIBRARY

266. Effect of mere words of civility. Suppose the instrument reads as follows.
Mr. X will oblige X by paying Z or order P1,000.00 on his account.
(Sgd.) Y
To X
This instrument is negotiable. The mere fact that it contains word of civility or courtesy does not
make it non negotiable. In spite these words of courtesy or civility, the bill still contains an order
to pay. The word by paying are held sufficient to import an order to pay.
267. Where instrument is a note, it must contain promise to pay. The promise to pay
must be on the instrument itself, although it is not necessary to use the word promise. It is
enough (1) that words of equivalent meaning are used, or (2) that the promise is implied from the
promissory words contained in the instrument. But the promise to pay cannot be implied from
the mere existence of a debt.
268. Words of equivalent meaning. Instead of the promise, the following words may be
used: agree, will pay shall pay and the like. Thus, the following will be deemed to contain
a promise:
I agree to pay to the order of B, P1,000.00
(Sgd.) Z
The foregoing is the promissory note because, although it does not use the word
promise, still the word agree means a promise to pay.
269. Promissory word implying a promsise; illustrations.
As already stated, instead of the word promise, any word s fairly importing a
promise to pay may suffice. The following may be given as illustrations:
(1)The following contains a promise to pay because the word good implies a promise to pay.
Good to X or order P1,000.00
(Sgd.) Y
(2)When it is alleged that the defendant company se obligo a pagar it may, perhaps, be
considered as equivalent to an allegation that the company promised or agreed to pay.
(3) The following also contains a promise to pay because the words payable on demand
necessarily imply a promise to pay.

22 FOUR-C LAW LIBRARY


Due X or order P1,000.00 payable on demand.
(Sgd.) Y
270. Effect of mere acknowledgement of debt. A mere admission that the debt is due is
not sufficient. Thus:
Due x P1,000.00
(Sgd.) Y
The foregoing is not a promissory note because nothing but an acknowledgement of a debt. As
such, it evidences only the existence of a debt. As already stated before, a promise to pay cannot
implied from the mere existence of a debt.
271. When the acknowledgement of a debt is a promise; Illustration. In addition to
the acknowledgement of the indebtedness, there must be other words expressing the intention to
pay, such as:
(1) In the following, the words, to be paid imply a promise to pay.
I do acknowledge myself to be indebted to X or order in the sum of
P1,000.00, to be paid on demand.
(Sgd.) Y
(2) The following may be held promise because the sense requires the words to be paid to be
supplied before the words on demand.
Due X or order on demand P1,000.00
(Sgd.) Y
(3)In the following, the fact that the note contains on express promise to pay a specified amount
is no moment because an acknowledgement may become a romise in addition words by which a
promise of payment is naturally implied, such as, payable on demand: paid when called for
Received from A P10,000.00 payable six months after the war, without interest.
(Sgd.) Y
272.Effect of words of negotiability; illustrtations. The words order and bearer are
usually referred to as words of negotiability. Will the insertion of words of negotiability to be
construed to import promise. Thus;
(1) In the following, the word order has been held to imply a promise to pay.

23 FOUR-C LAW LIBRARY


Due X or order value received.
(2) In the following, the word bearer has been held to imply a promise to pay.
Due X or bearer P100, for value with interest.
273. The promise or order ro pay must be unconditional. It is not enough that there be
a promise or order. The promise or order must also be unconditional or absolute. This means that
it must not be subject to condition. Based on Article 1179 of New Civil Code, a condition is: (1)
a future event that may or may not happen, or (2) a past event which is unknown to the parties. It
is distinguished from an event that is certain to happen, even though the time of its happening is
not known.
274. Illustration of condition; effect. An example of a condition is marriage. In the
following, the order to pay is subject to a condition.
Pay to X or bearer P1,000.00 if he marries Z.
(Sgd.) Y
To A
The foregoing is not negotiable instrument because the order to pay is subject to
the condition that X marries Z. It is a condition because X may or may not marry Z. In other
words, the marriage is uncertain.
275. Illustration of event certain to happen; effect. An example of an event that is
certain to happen, even though the happening thereof is uncertain is death. In the following, the
promise to pay is subject to the happening of such an event:
I promise to pay B or order P1,000.00, ten (10) days after death of x.
(Sgd.) A
The Instrument is not rendered non-negotiable.
276. Sum payable must be definite and certain. The amount of money to be paid must
be determinable by inspection and must be stated plainly on the face of the instrument, and, like
the denomination of money, must be stated in the body of the instrument. Suppose that A makes
the following note:
I promise to pay X or order P1,000.00 thirty (30) days from this date, at
6% interest.
(Sgd.) Y

24 FOUR-C LAW LIBRARY


Will the addition of interest make sum uncertain? No. The sum is certain because by
mere mathematical computation, the amount to be paid on the maturity is ascertainable, namely,
P1,000.00 plus 6% interest for 30 days. All that is required, however, is that the principal shall be
certain.
277. Where the sum is not certain; illustration. But suppose the instrument reads as
follows.
I promise to pay to B or order P1,000.00 together with all sums that may be due to
him on December 31, 1950.
(Sgd.) A
The sum is not certain, P1,000.00 is not only the principal amount due. It also includes all
sums which may be due to B on December 31, 1950. How much those sums are is not stated and
are unknown until December 31, 1950. Consequently, this instrument is not negotiable as the
sums to be paid are not sums certain.
278. Sum payable must be in money only. Accordingly, a bill or note, if it is to be
negotiable, cannot be made payable in goods, wares, or merchandise, or in property, or in labor
or services. So also, an instrument is not negotiable if it is made payable in bonds, corporate
stocks, state paper, scrip, checks, foreign bills. Thus, the following instrument is not negotiable
because it is not payable in money but in carabaos.
I promise to pay to B or his order P1,000.00 in carabaos.
279. Reasons for requirement that instrument be paid in money. The real reason for
the requirement that negotiable instrument must be payable in money obviously is that money is
the one standard of value but in theory, at least, money always measures this rise and fall and
remains the same. The chattel which is used as means of payment may fluctuate in value.
280. Legal tender, defined. The 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.
281. Legal tender in the Philippines. The following are legal tender in the Philippines:
(1) The Philippine peso and half-peso, including the Philippine treasury certificates of any
denomination, shall be legal tender at the rate of one dollar for two pesos for all debts, public and
private. Philippine Subsidiary Coins of twenty centavos shall be legal amounts not exceeding
twenty pesos. Philippine minor coins of nickel and copper shall be legal tender in amounts not
exceeding two pesos.
(2) All notes and coins issued by the Central Bank shall be fully guaranteed by the Government
of the Republic of the Philippines for all debts, both public and private.

25 FOUR-C LAW LIBRARY


(3) The new victory series of the Philippine Treasury Certificate and Philippine coins identical to
pre-war issue now in circulation.
282. Check not legal tender. A creditor is not bound to accept a check, in satisfaction of
his demand because a check even in good when offered, does not meet yhe requirements of a
legal tender. This is true even as to manager check or whether the check is certified or not.
Accordingly, a consignation by check is not binding upon the creditor unless accepted by him.
And, it has further been held that, where a person entitled to make a repurchase of some
property, deposits with the court by way of consignation a check for the repurchase price, the
vendee is not under duty to accept the check and may refuse the consignation which cannot
produce the effect of payment.
There is no question that the rule applies to ordinary checks. However as to certified checks and
probably similarly situated checks such as managers check, as will be seen it has been held in a
1980 case, that a creditor cannot refuse to receive as payment a certified check, it being
equivalent to cash.
However, in a recent case, it was held that a negotiable instrument is only substitute for money
and not money, the delivery of such instrument does not by itself, operate as payment. A check
whether a managers check or ordinary check, is not legal tender and an offer of a check in
payment of a debt is not a valid tender of payment and may be refused receipt by the oblige or
creditor. Mere delivery of checks does not discharge the obligation under a judgement. The
obligation is not extinguished and remains suspended until the payment by commercial
document is actually realized. (Art. 1249, Civil Code, par. 3)
283. But if authorized by law or consent of creditor, cash may be substituted by
other means, or may be check. In the absence of an agreement, either express or implied,
payment means the discharge of a debt or obligation in money (US v. Robertson, 5 Pet. (US)
641, 8 L. ed. 257) and unless the parties so agree, a debtor has no rights, except is ownperil, to
substitute something in lieu of cash as medium ofpayment of his debt. Consequently, unless
authorized to do so by law or consent of the obligee a public officer has no authority to accept
anything other than money in payment ofan obligation under a judgment being executed. Strictly
speaking, the acceptance by, the sheriff of the petitioners checks, in the case at bar, does not per
se, operate as a discharge of the judgement.
284. Redemption by managers check where accepted, or not objected to on that
ground, is valid. Redemption of fore closed property by tender of payment accompanied by a
managers check is valid and efficacious where the purchaser rejected the tender on sole ground
that it was insufficient, and not that it was not efficacious because it was made by check. That
was accordingly waived. This Court has already sanctioned redemption by check where it was
accepted.
285. Creditor cannot refuse payment of his credit by it being equivalent to cash.
Illustrative case.
NEW PACIFIC TIMBER & SUPPLY CO., INC y SENERIS

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Facts. Creditor private respondent in the petition for certiorari refused used to accept the
payment of debtor petitioner herein, in the amount of P63,130, consisting of a certified, check for
P50,000 and P13,130 in cash. Thereafter, creditor caused certain property of debtor to be sold at
public auction.
The lower court sustained the refusal of the creditor on the basis of Section 63 of the Central
Bank Law Articles1249 and 1248 of the New Civil Code.
Held: The check deposited by the petitioner in the amount of P50,000.00 is not an ordinary
check but a Cashiers Check of the Equitable Banking Corporation, a bank of good. Standing and
reputation. As testified to by the Ex-Officio Sheriff with whom it has been deposited, it is a
certified crossed check. It is a well-known and accepted practice in the business sector that a
Cashiers Check is deemed as cash. Moreover, since the said check had been certified by the
drwee bank, by the certification, the funds represented by the check are transferred from the
credit of the maker to that of the payee or holder; and for all intents and purposes, the latter
becomes the depositor of the drawee bank, with rights and duties of one in such situation.
Hence, the exception to the rule enunciated under Section 63 of the Central Bank Act to the
effect that a check which has been cleared and credited to the account of the creditor shall be
equivalent to a delivery to the creditor in cash in an amount credited to his account shall apply in
this case. Considering that the whole amount, deposited by the petitioner consisting of Cashiers
Check of P50,000.00 and P13,130.00 in cash covers the judgment obligation of P63,000.00 as
mentioned in the writ of execution. Then see no valid reason for the private respondent to have
refused acceptance of the payment if the obligation in his favor. The auction sale therefore, was
uncalled for."
286. In recent cases, Supreme Court has apparently made a contrary ruling. In two
recent cases, the Supreme court has ruled that since a negotiable instrument is only a substitute
for money and not money, the de1ivy of such an instrument does not, by itself, operate as
payment. A check whether a managers check or ordinary check, is not legal tender, and an offer
of a check in payment of a debt is not valid tender of payment and may be refused receipt by the
obligee or creditor.
Hence, the tender of payment made by the debtor was not valid for failure to comply with
the requisite payment in legal tender or currency stipulated, the refusal to receive the tender of
payment by the creditor is valid, and the subsequent consignation did not operate to discharge
the former-from its obligation to the latter.
287. Treasury certificates not legal tender for all purposes. Even treasury certificates
are not legal tender except for the payment of taxes and public debts under Section 1626 of Act
No. 2711 as amended by Act No. 3058.
288. Instrument need not be payable in legal tender. It has been held that an
instrument need not be payable in lawful money of the United States. This is with reference to
the pro vision of the Negotiable Instrument Law that the validity and negotiable character of an
instrument are not affected by the fact that it designates a particular kind of current money in

27 FOUR-C LAW LIBRARY


which payment is to be made. But where the instrument is made payable in the paper or currency
of a particular bank, specifically and absolutely, and without reference to the currency or value
of the paper, it is held not to be for the payment of money and is not negotiable.
289. Instrument payable in foreign money. A bill or note may be made payable in
denominations of foreign money, currency, or coins, such as pounds or lire. Thus, where a note
is made payable in a country in the money or coins of another Country, which money or coins
have a value fixed by the lawor under the authority of the law of the country where the note is
payable and which value can, by a simple mathematical calculation, be expressed in the value of
the lawful money of the latter country, such note is negotiable.
290. Illustration: Suppose the promissory note reads as follows:
I promise to pay to B or his order P1,000.00
(Sgd.) A
This instrument is negotiable, although payable in foreign money because dollars have a
fixed value under our law in relation to our peso and the value of dollars can, by simple
mathematical calculation, be expressed in the value of our pesos. But at present, this is subject to
the provision of Republic Act No. 529.
291. Instrument must specify denomination. But the courts have held that the
instrument should express the specific denomination of money when it is payable in the money
of a foreign country in order that the courts may be able to ascertain its equivalent value;
otherwise, it is not negotiable.
And, under a leading New York case, where an instrument is made payable generally in
the money of a foreign country without specifying the kind or denomination of the coin or
money, so that payment may be made in our own coin or equivalent value as determined by the
par of exchange, it is not negotiable. The foregoing, however, is not the invariable rule. In a case,
a note payable in Canada currency was held negotiable.
292. Republic Act 529. Section 1 of Republic Act No. 529 provides that every
provision contained in, or made with respect to, any obligation which provision purports to give
the oblige the right to require payment n gold in a particular kind of coin or currency other than
Philippine currency or in an amount of money of the Philippines measured thereby, be as it is
hereby declared against public policy, and gp1, void and of no effect, and no such provision shall
be contained in, or made with respect to, any obligation hereafter incurred in every other
domestic obligation heretofore or hereafter incurred, whether or not any such provision as to
payment is contained therein or made with respect thereto, shall be discharged upon payment in
any coin or currency which at the time of payment is legal tender for public and private debts.
Provided that, if the obligation was incurred prior to the enactment of this Act and required
payment in a particular kind of coin or currency measured, it shall be discharged in Philippine
currency measured at the prevailing rate of exchange at the time the obligation was incurred
except in case of a loan made in foreign currency stipulated to be payable in the same currency in
which case, the rate of exchange prevailing at the time of the stipulated date of payment shall
prevail. All coin and currency, including Central Bank notes, heretofore or hereafter issued and

28 FOUR-C LAW LIBRARY


declared by the Government of the Philippines shall be legal tender of all debts, public and
private. This Republic Act took effect upon its approval on June 16, 1950.
293. Negotiability under Republic Act 529. The question now arises as to whether
under the foregoing provisions, an instrument otherwise complying with all the requirements of
Section 1 but payable in foreign money, is thereby rendered non-negotiable. It will be noted that
what the law declares to be void is to require payment in gold or in foreign money. The
obligation or instrument containing the void provision remains valid itself.
It be noted further that the law provides that every obligation or instrument, whether
containing the provision in question or not, shall be discharged upon payment in any coin or
currency which at the time of payment is legal tender for public or private debts in the
Philippines. Thus, it seems also that the obligation or instrument containing the void provision in
question- becomes payable in Philippine money which at the time of the payment is legal tender.
It may, therefore, be concluded that, since an instrument payable in foreign money is
converted into an instrument payable in Philippine money, such an instrument would be
negotiable if it otherwise complies with all the requirements of Section 1 of the Negotiable
Instruments Law.
For obligations incurred (after the enactment of RA 529, the rate of exchange shall be
that prevailing at the time of paymenst.
294. Only agreement to pay in foreign exchange is void, but creditors claim for
payment is not defeated. WhiIe an agreement to pay in dollars is declared as null and void and
of no effect, what the law specifically prohibits is payment in currency other than the legal
tender. It does not defeat a creditors claim for payment, as it specifically provides that every
other domestic obligation x xxx whether or not any such provision as to payment is contained
therein or made with respect thereto shall be discharged upon payment in any coin or currency
which at the time of payment is legal tender for public and private debts. A contrary rule would
allow a person to profit or enrich himself inequitably at anothers expense.
"If there is any agreement to pay an obligation in a currency other than Philippine legal
tender, the same is null and void as contrary to public policy, pursuant to Republic Act. No. 529,
and the most that could be demanded is to pay said obligation in dollars, meaning that a creditor
cannot oblige the debtor to pay him in dollars, even if the loan were given in said currency.
In such case, the indemnity to be allowed should be expressed in Philippine currency on
the basis of the current rate of exchange at the rime of payment.
295. Payable on demand or at a fixed or determinable future time. An instrument, to
be negotiable, must be payable either (1) on demand or (2) at a fixed or determinable future time.
If it is not either the instrument is not negotiable.
296. Where no year is specified. The following is neither payable on demand nor at a
fixed or determinable future time:

29 FOUR-C LAW LIBRARY

I promise to pay X or order P1,000.00 on or before December 2.


(Sgd.) Y
The time of payment is not determinable as the year is not stated. Neither is it payable on
demand as it. is to be paid at a certain time, December 2, Hence, the note is non-negotiable.
But an instrument in the following form: 250. August 14, 1907. Mr. W. T. will please
pay to R. T. J., or to order, two hundred fifty dollars and charge to my account. Due Oct. 1st, J..
R. is payable Oct. 1st, and is a bill of exchange.

297. The instrument must be payable to order or to bearer.


An instrument is not negotiable unless made payable to a person or his order to
bearer or unless words of similar equivalent import are use such as or assignee, or Thus, the
word on return of this certificate properly indorsed imply that it is to be indorsed and therefore
payable to order within the Negotiable Instruments Law.
298. Where payable to a specified person or assigns. Suppose that A draws the
following bill:
Pay to B or his assigns P1,000.
(Sgd.) A
To X
This instrument is negotiable because it is payable to order, although instead of the word order,
the word assign is used. The reason is that the word assigns is equivalent to the word
order.
299. Where payable to the order of bearer. The following is also negotiable:
I promise to pay to the order of bearer P1,000.00.
(Sgd.) A
This was held to be payable to order. The payee of such an instrument is the bearer and it can be
negotiated by his indorsement.7 But this has been criticized the ground payee is not named or
otherwise indicated with reasonable certainty, as required under Section 8.
300. Where payable to specified person. Where the instrument is payable only to a
specified person, it is not payable to order. Thus, in case, Kauffman v. National Bank , the
Philippine National Bank dispatched to its New York Agency a cablegram to the following
effect;

30 FOUR-C LAW LIBRARY


PAY GEORGE A KAUFFMAN, NEW YORK PHILIPPINE CO.,
$45,000. (SGD.) MANILA.
This was held to be non-negotiable as it was neither made payab1e to order, or to bearer as
required by subsection (d) of Section 1.
301. Where payable to a specified person or his agent. Suppose that A makes the
following note:
I promise to pay to B or his collector (or to B or his agent) the sum of
P1,000.00.
(Sgd.) A
This is payable to a specified person. The reason is that a collector or an agent is the same
as the principal. The agent or collector is merely taking the place of the principal. Consequently,
the instrument is actually payable only to a specified person, namely, to B, or B through his
agent or collector.
302. Where word bearer not used. The following is an illustration of an instrument
which is payable to bearer not withstanding that the word bearer is not used:
Pay to possessor P1,000.00 on demand.
(Sgd.)A
This is payable to bearer. The word possessor is equivalent to the word bearer.
303. Where payable to bearer B. But the following is not payable to bearer.
I promise to pay to bearer B P1,000.00.
(Sgd.) A
The reason is that the word bearer is merely descriptive. It is nothing but a modifier of B. In
effect, therefore, the instrument is payable to a specified person, namely, B, to be identified as
being the bearer.
304. The drawee must be named. This requirement refers only to bill of exchange but
not to promissory notes. The name of the person on whom a bill is drawn should appear on its
face.
Otherwise, the instrument would not be negotiable. Thus, an instrument in the form of a bill but
addressed to -------- Manila. Philippines is not negotiable.
305. Drawees name may be filed in. But under the Section 14, the drawees name maty
be omitted amd be filled in under implied authority like any other blank. And, an acceptance may
supply the omission of a designation. So, in example, if Pedro Facundo writes across the bill:
Accepted. (Sgd.) Pedro Facundo, the acceptance supplies the omission and the instrument is
negotiable.
306. Importance of formalities. The formalities requiredby the Negotiable Instruments
Law are essential for the security of merchantile transactions. They distinguish non-transferable
written contract, just as the coinage of a silver peso distinguishes it from uncoined silver, thereby
enabling the businessman to tell at glance whether he is taking negotiable paper or not.

31 FOUR-C LAW LIBRARY

307. Necessity of compliance with provisions. Before the Negotiable Instruments Law
can come into operation, there must be a document in existence of the character described in
Section 1 of the Law. This means that, where the instrument does not comply with the
requirement of Section 1 of the Negotiable Instruments Law, the provisions of that law will not
govern the instrument.
308. Illustration.(1) Thus, suppose that A makes the following note:
I promise to pay to B P1,000.00.
(Sgd.) A
It is evident that this note is not negotiable because it is neither payable to bearer nor payable to
order but to a specified person, and therefore, does not conform with paragraph of Section 1.
Consequently, the rights and liabilities of theparties thereto are not governed by the Negotiable
Instruments Law.
(2) Suppose then that A the maker, was induced by fraud to make the promissory-note in the
illustration. Then B, the payee, indorses the instrument to C, C to D, D to E, and E to F, under
circumstances that would have made F a holder in due course had the instrument been
negotiable. F then files an action against A, the maker, to collect the P1,000.00. Under the facts
of the illustration, can A interpose the defense of fraud against F?
Under the Negotiable Instruments Law, A cannot interpose the defense of fraud against a
holder in due course. But since the instrument is not negotiable, the Negotiable Instruments Law
does not apply. Consequently, A can still interpose the defense of fraud as the transfers of the
instruments by B to C, C to D, D to E, and E to F are nothing but assignments of the instruments.
(3) Furthermore, under the Negotiable Instruments Law, indorsers are entitled to oresentmentfoi
payment and notice of dishonored. Otherwise, they would be discharged. But since theinstrument
is not negotiable, its provisions giving indorserssuch rights are not applicable. Hence, C, D and
E, transferors, are not entitled to presentment for payment and notice of dishonor, and where F
fails to present the instrument for payment to A, maker, or fails to give notice of dishonor t C,
D,and E, said C, D and E will not be discharged.
309. Determination of negotiability. The negotiability of an instrument is to be
determined: (1) by the provisions of the Negotiable Instruments Law, particularly Section 1
thereof; (2) by considering the whole of the instrument; and(3) by what appears on the face of
the instrument and not elsewhere. In other words, to determine whether an instrument is
negotiable or not, only the instrument itself, and no other, must be examined and compared with
the requirements of the Negotiable Instruments Law as stated in Section 1. If it appears on the
Instrument that it lacks one of the requirements, it is not negotiable. The requirement lacking
cannot be supplied by using a separate instrument in which that requirement which is lacking
appears.

32 FOUR-C LAW LIBRARY


SECTION 2. What constitutes certainty as to sum. The sum payable is a sum certain
within the meaning of this act, although it -is to be paid.
(a) With interest; or (b) By stated installments; or
(c) By stated installments, with a provision that, upon de fault in payment of any
installment or of interest, the whole shall become due; or
(d) With exchange, whether at a fixed rate or at the current rate; or
(e) With costs of collection or an attorneys fee, in case payment shall not be made at
maturity.
310. With interest. The fact that the sum payable is to be paid with interest, as for
example, 8% per annum from date until paid does not render the sum uncertain. The amount
due can easily be computed. Thus, in the following note:
I promise to pay to B or order within 90 days from date the sum of P1,000.00 at
8% per annum provided, however, that when paid after maturity, the interest shall
be 10%.
(Sgd.) A
The sum would still be certain because the principal sum of P1.000.00 is certain. If paid before
the date of maturity, the sum would still be P1,000.00 plus, of course, 8% interest for the period
within which the payment is not made. If the payment is made after maturity, the principal sum
is certain, namely, P1,000.00 plus 10% interest from the date the note is not paid.
311. When interest stipulated but not specified. When interest is stipulated but not
specified, the interest shall be the legal rate, which is 12% for loans or forbearance of money.
Thus:
30 days from this date, I promise to pay to the order of B P1,000.00 with interest.
(Sgd.) A
Here, the interest is stipulated but not specified. This isalso the case where the note is expressly
to be payable with interest but the rate is left blank. The rate is determined to be the legal rate.
312. Where interest not stipulated. Where interest is not stipulated, legal interest will
be paid when the debtor incurs in delay. A debtor incurs in delay from the time the obligee
judicially or extrajudicially demands from him the payment of the instrument. Thus, where there
is no evidence in the case of any demand for payment of the debt made prior to the
commencement of the action, interest can be recovered only from- said commencement of the
action.
313. When interest shall earn interest. Interest due shall earn legal interest from the
time it is judicially demanded, although the instrument may be silent upon this point.
314. Escalation clause, and deescalation clause, defined; former valid if
accompanied by latter. An agreement pertaining to a loan or forbearance of money, goods or
credits may stipulate that the rate of interest agreed upon may be increased in the event that the
applicable maximum rate of interest is increased by law or by the Monetary Board. Deescalation
clause is a stipulation in the agreement that the rate of interest agreed upon shall be reduced if the

33 FOUR-C LAW LIBRARY


maximum rate of interest is decreased by law or by the Monetary Board. The escalation clause is
valid if there is also a descalation clause.
315. By stated installments. The sum payable is a sum certain within the meaning of
this act, although it is to be paid by stated installments. Consequently, an instrument containing
such a stipulation would not thereby be rendered non-negotiable. But the installments: (1) be
stated and (2) the maturity of each installment must be fixed or determinable. This last
qualification is required in order to comply with the requisite that the instrument, if not payable
on demand, must be payable at a fixed or determinable future time.
316. Illustration of installments not stated. Suppose the instrument reads as follows:
I promise to pay to B or order P1,000.00 in installments.
(Sgd.) A
This is not negotiable because the installments are not. Stated and, therefore, the sum
payable for each installment is uncertain. The same is true when the instrument is payable in
two installments, without more.
317. Illustration of stated installments. But in the following, the installments are stated:
I promise to pay to B or his order P1,000.00 in four equal monthly installments
beginning January 1, 1949.
(Sgd.) A
The same is true as to the following:
I promise to pay to the order of B the sum of P100.00 in two installments, as
follows:
(1) P45.00 on February 1, 1950
(2) P55.00 on June 1, 1950
(Sgd.) A
It is to be noted that, as already stated, it is also essential that the maturity of each installment be
known. It is not enough that the installments be stated.
318. By stated installments, with acceleration clause. The sum payable is a sum certain
within the meaning of this Act, although it is to be paid by stated installments, with a
provision that upon default in payment of any installment or of interest, the whole shall
become due. Consequently, an instrument containing such a stipulation would not thereby
be rendered non-negotiable.
I promise to pay to B or his order P1,000.00 in four equal monthly installments, the
first to be paid within the first five days of the month following this month, and the
other within the first five days of every month thereafter. Upon default in the
payment of any installment, the whole sum payable under this note shall become due.
(Sgd.) A

34 FOUR-C LAW LIBRARY

The last sentence is called the acceleration clause. It is so called because it hastens the payment
of the whole note. Under the note, only the sum P250.00 is payable within the first five days of
each month, not the whole amount, which is payable in four months in equal monthly
installments.
319. Effect of failure to pay an installment. But suppose B fails to pay the first
installment on its date of maturity. Not only the sum of P250.00 is due but the whole amount of
P1,000.00.
320.
With exchange. The sum payable is a sum certain within the meaning of this
act, although it is to be paid with exchange, whether at a fixed rate or at the current rate.
Consequently, an instrument containing such a stipulation would not thereby be rendered nonnegotiable. This is because while the rate of exchange is not always the same and while it is
technically true that resort must be had to extrinsic evidence to ascertain what it is, yet the
current rate of exchange between two places at a particular date is a matter of common
commercial knowledge, or at least easily ascertained by any one so that the parties can always,
without difficulty, ascertain the exact amount necessary to discharge the paper.
321. Exchange, defined and explained. Exchange is the difference in value of the same
amount of money in different countries. The exchange may be at the (1) current rate or at a (2)
fixed rate. In the case of the latter, there is really no question of uncertainty as to the amount
because the rate is fixed. Thus:
Pay to B or order P1,000.00 with exchange at 1.2%.
(Sgd.) A
322. Exchange applicable only to foreign bills. The provision on payment with
exchange naturally applies only to instruments drawn in one country and payable in another.
Where an instrument is drawn and payable in the same country, there can be no exchange, so a
provision for payment of exchange may be disregarded.
GREGORIO ARANETA, INC. y. PHILIPPINE: NATIONAL BANK The plaintiff filed an
application for commercial letter of credit with the defendant, which the latter granted. Said letter
of credit was in favor of an English firm in London for the sum of 7,440 pounds. On August 30,
1949, a draft in the amount of 4,031.13 pounds was negotiated by the defendants correspodent
bank in London against the plaintiffs credit. The defendant paid said correspondent bank the
amount of the draft at the official parity rate then existing at 4.0325 for every English pound. On
the face of the draft, it matured on December 25, 1949. On September 23, 1949, the British
pound was devaluated to $2.80125. The defendant contended that the plantiff was liable in the
sum of P33,727.92 based on the rate of exchange on August 30, 1949 when the draft was
negotiated. The plaintiff contended, however, thatit was liable only for P23,194.37 on the basis
of the rate of exchange on the date of maturity of the draft. The application for the letter of
credit, which embodies the contract of the parties, provides that the draft must be drawn and
presented or negotiated and agreed to pay at maturity in Philippine currency, the equivalent of
any amount that might be drawn or paid upon the faith of plaintiffs credit; and that the plaintiff
agreed to reimburse the defendant bank in said manner

35 FOUR-C LAW LIBRARY


HELD: Although the plaintiffs application provides for payment at maturity of the draft, this
refers merely to the time when the plaintiff was bound to pay, and not to the rate of exchange at
which the draft should be paid by the plaintiff,since the latters obligation is determined by the
rate of exchange on the date the draft was drawn and presented or negotiated which was not later
than August 31, 1949. x xx. Plaintiff-appellant invokes an alleged banking practice, custom or
practice whereby a draft should be paid at the rate existing onthe date of its maturity. Even
assuming the existence of thisbanking practice, the same is clearly immaterial, as there isan
express contract between the parties defining their rights and obligations.
323. With costs and attorneys fees. The sum payable isa sum certain within the
meaning of this Act, although it isto be paid with costs of collection or an attorneys fee, in
case,payment shall not be made at maturity. Consequently, aninstrument containing such a
stipulation would not thereby be rendered non-negotiable. An instrument may thus stipulatethat
costs of collection and/or attorneys fees shall be paid bythe debtor in addition to the principal
in case the instrumentshall not be paid at maturity. The legality of such a stipulation is expressly
recognized in the Negotiable Instruments Law, and impliedly in the New Civil Code.
324. Stipulation as to attorneys fees not usurious. Such a stipulation is not void as
usurious, even when added to acontract for the payment of the highest rate of interest
permissible. It may, of course, be made to conceal usury. Butthat is a matter of proof to be
determined in each case. Thepurpose of a stipulation in a note for reasonable attorneys feeis
not to give the lender a larger compensation for the loan than the law allows, but to safeguard the
lender against future loss or damage by being compelled to retain counsel to institute judicial
proceedings to collect his debt.
325. Stipulation as to attorneys fees will not make sum uncertain. Although such a
stipulation will make the sum payable after maturity, uncertain, it will not affect the certainty of
the sum payable at maturity and, therefore will not affect the negotiability of the instrument in
which it is stipulated. Thus:
One year after date, for value received. I promise to pay A. S. Juan & Co. or
bearer the sum of P1,000.00 with interest until paid. If not paid when due and issued
thereon, I hereby agree to pay collection and attorneys fees thereof.
(Sgd.) Godo Ramos
In this case, the mere fact that attorneys fees and cost of collection are to be paid in case
of non-payment on the date of maturity will not make the sum payable uncertain. Consequently,
the instrument is not thereby rendered non-negotiable.
326. Overdue Instrument not fully negotiable. It is to be noted that after the date of
maturity, the instrument will no longer be negotiable, in the full commercial sense, that is, in the
sense that any transferee acquiring it would not be a holder in due course, as he would acquire
the instrument after it is overdue. 45 Since the transferee would not be a holder in due course, he
would hold the instrument subject to defenses, as if it were non-negotiable.46 Consequently, even
if the amount to be paid after the date of maturity becomes uncertain by the payment of

36 FOUR-C LAW LIBRARY


attorneys fees and costs of collection, the negotiability will not be impaired as the certainty
occurs after maturity.
327. Attorneys fees must be reasonable. While attorneys fees may be legally
stipulated, they must be reasonable. The written stipulation shall control the amount to be paid
unless found by the court to the unconscionable or unreasonable. 48 Where the court finds the
court finds the stipulated unconscionable or unreasonable, it can ignore it and limit the recovery
to reasonable compensation. Thus, in a promissory note for P465, a stipulation providing that in
case of non-compliance we find ourselves to pay jointly and severally as damages, five pesos a
day (P5) beginning from the day of the expiration of the period agreed upon until the date of
payment was held void as being a repugnant spoliation, an iniquitous deprivation of
property. repulsive to the common sense of man, and an ostensible violation of moral
328. Attorneys fees not ordinarily recoverable. But in the absence of
stipulation, attorneys fees and expenses of litigation other than judicial costs, cannot be
recovered,
subject
to
the
exceptions
provided
for
in
the
law.
SECTION 3.When promise is unconditional. An unqualified order or promise (o
pay is unconditional within the meaning of this Act through coupled with
(a) An indication of a particular fund out of which reimbursement is to be made or a
particular account to the debited with the amount; or
(b) A statement of the transaction which gives rise to the instrument.
But an order or promise to pay out of a particular fundis not unconditional.
329. Application of section. This section amplifies paragraph (b) of Section 1. The
problem which is sought to be solved by this section is whether or not the indication of a
particular fund or particular account, or the statement of the transaction which gives rise to the
instrument, would make the promise or order conditional. If it the instrument is rendered nonnegotiable. If non-negotiable, the instrument is not rendered non-negotiable.
330 Indication of a particular fund, explained. An unqualified order or promise to
pay is unconditional within the meaning of this Act though coupled with an indication of a
particular fund out of which reimbursement is to be made. 2 But an order or promise to pay out
of a particular fund is not unconditional. In the first case, the particular fund indicated is the
direct source of payment. It is only the source of reimbursement. In second case, the particular
fund Indicated is the source of payment.
331. Illustration of fund for reimbursement. The following instrument contains an
indication of a particular fund out of which reimbursement is to be made: 4
Pay to B or order P100.00 and reimburse yourself out of my money in your
hands.
(Sgd.) A
This instrument, therefore, is negotiable excuse the order to pay is not rendered
conditional.

37 FOUR-C LAW LIBRARY

332. Illustration of fund for direct payment. But in the following instrument, the
particular fund indicated is not for reimbursement but for direct payment:
Pay B or order P100.00 out of my part the estate.
(Sgd.) A
To X
This is, therefore, non-negotiable as payment is to be made directly from the particular
fund indicated.5
In a case, the treasury warrants were made payable from Fund 501. It was that this
indication of a particular fund from which payment is to be made and make the treasury warrants
non-negotiable, and further that accordingly, Section 66 of the Negotiable Instruments Law does
not apply and consequently the indorser for the deposit of the warrants does not warrant that they
were genuine and in all respects that they purport to be.
333. Fund for reimbursement and fund for payment distinguished. The true
distinction seems to be this: in the first there are two cases, namely: (1) the drawee pays the
payee from his own funds: afterwards, (2) the drawee pays himself from the particular fund
indicated. In the second, however, there is only one act, namely, (1) the drawer pays directly
from the particular fund indicated.
334. Reason why one is unconditional while the other is conditional. In the second,
where the payment to the payee is directly from the funds indicated, the payment is subject to the
condition that the funds indicated are sufficient. But the funds indicated may or may not be
sufficient. In other words, when a particular fund is indicated out of which payment is to be
directly made, the order would in effect be:
Pay to X or order P1,000.00 out of my money in your hands, if money in
your hands are sufficient.
Hence the order is conditional. On the other hand, in the first case, w ere the fund is
merely for the purpose of subsequent reimbursement, the order or promise is not subject to the
sufficiency of the funds. The order or promise is upon the general credit of the drawee or maker.
It may, however, be argued that, if the drawer has no money in the hands of the drawee out of
which reimbursement could be made, the drawee may refuse to accept or pay the bill. This is
true. But, whether a bill of exchange is negotiable or not does not depend upon the drawees
willingness and ability to pay. It depends upon the tenor of the terms of the order. If the bill
absolutely requires the drawee to pay, then the order in the bill is unconditional.
335. Illustrative cases: (1) The following are not negotiable because the order or
promise is to pay out of the particular fund indicated: (a) Pay B or order P100.00 out of my
salary in the government. (b) I promise to pay B or orderP100.00 out of the proceeds of a
mortgage loan, and (c) I promise to pay B or order P100.00 from payment received on account
of sale of the merchandise for which this note is given.

38 FOUR-C LAW LIBRARY


(2) A note, negotiable in form, with the addition of this note is given to take up the
freight and re handling of N. P.car 43607, and the proceeds from resale of said car shall apply on
this note, is negotiable as it is not payable only out of the proceeds of resale.
(3) After making a note which was negotiable in form, the parties signed the following
written agreement on the same paper: It is herein provided and agreed that the above note is to
be paid from the proceeds obtained from the sale of lots in the town of Vanors x xx, and that
one-fourth of the proceeds of all sales of the lots xxx are to be applied to the payment of said
note and interest and until the same is paid. The promise to pay is unconditional.
(4) But in an action on a note which provided this note is given in payment of
merchandise and is to be liquidated by payments received on account of sale of such
merchandise, it was held that the note was non-negotiable.
(5) County warrants payable out of any money in the treasury appropriated for road
buildings were held not negotiable instruments.
(6) But a county bond payable out of the Yakima County Road Refunding Bond Fund
and secured to be paid by taxes and assessments, etc.. was held negotiable because it was not
restricted to the road fund.
(7) An order to pay on or before a fixed day and charge the same to $1,800 payment. is
not conditional.
(8) An instrument ordering payment of a certain sum and also directing the drawee to
charge the same amount $2,000 insurance draft issued by D. Alexander of the Voodman Circlein
my favor, the same being the balance of my account with him, is payable absolutely and not out
of a particular fund.
It appears from the foregoing that even if the sum payable is to be paid out of a particular
fund, if the payment is not restricted to that fund, negotiability is not destroyed.
336. Particular account to be debited, explained. An unqualified order or promise to
pay in unconditional within the meaning of this Act though coupled with an indication of a
particular account to be debited with the amount.
Hence, an instrument containing such a stipulation is not thereby rendered nonnegotiable. In this case, the instrument is to be paid first and, afterwards, the particular account
indicated will be debited. Hence, the payment is not subject to the sufficiency or adequacy of the
particular account to be debited. Thus:
Pay B or order P1.000.00 on account of contract between you and the
Soriano Construction Co.
(Sgd.) L
This instrument is negotiable. The order is not conditional notwithstanding the fact that a
particular account to be debited is indicated.
337. Statement of transaction, explained. An unqualified order or promise to pay is
unconditional within the meaning of this Act though coupled with a statement of the transaction
which gives rise to the instrument. Instruments are not issued without any transaction upon
which they are based. Where A paints the picture of B, B may issue a check in favor of A. The

39 FOUR-C LAW LIBRARY


transaction which gives rise to the check is the service performed by A in painting the picture.
Where A buys the car of B for P1,000.00. A may issue to B a promissory note. The transaction
which gives rise to the note would be the purchase and sale of the car. And the mere fact that the
purchase and sale which gives rise to the instrument is stated in the instrument will not make the
promise or order conditional.
338. Illustrations of statement of transaction. (1) In the following promissory note, the
transaction is the purchase of a horse.
I promise to pay 1or order P200.00 in payment for a horse I bought from
him the other day.
(Sgd.) A
(2) In the following bill of exchange, the reference to the renewal of note is a statement of
the transaction giving rise to the draft.
Pay to the order of B P1,000.00 to be used in a part renewal of n note due
June 1, 1950.
(Sgd.) A
339. Illustrative cases. The following have been held not to destroy the negotiability of
the instruments in which they appear because they are mere statements of the transactions which
gave rise to the instruments in question:
(1) For payment under contract of given date.
(2) This note is part of agreement dated Jan. 19, 1921.
(3) This note covers deferred installments under a conditional sale contract made this
day between the payee and the maker hereof.
(4) This note is given to apply on the purchase price of land
340. When statement of transaction will make instrument non-negotiable. But where
the promise or order is made subject to the terms and conditions of the transaction stated, then,
the instrument is rendered non-negotiable. To destroy the negotiability of the instrument, the
reference to the collateral contract must show that the obligation to pay is burdened with the
condition of the contract.
341. Illustration of statement making instrument non-negotiable. In the following
illustration, the statement of the transaction destroys the negotiability of the instrument.
I promise to pay to B or order P1,000.00, subject to the terms and
stipulations contained in the Deed of Sale executed by us to date.
(Sgd.)
A
In this case, the promise is subject to the terms and conditions of the transaction stated in
the instrument, namely, the Deed of Sale. Furthermore, this will necessitate an examination of a
separate instrument, namely, the Deed of Sale, for determining the negotiability of the

40 FOUR-C LAW LIBRARY


promissory note which is contrary to the rule already stated, that the negotiability of an
instrument must be determined only from the document itself and not elsewhere.
342. As per contract notes. The appearance of the words As per Contract on the face
of the instrument in any position, according to the great weight of authority, does not affect the
negotiability of the instrument.
343. Chattel notes. A promissory note given for a chattel land stipulating that the title to
the chattel shall remain in the vendor-payee until the note is paid, is not conditional.
344. Conditional sales agreement. The fact that a note contains conditional sales
agreement does not destroy its negotiability.
345. Reference to mortgages. Suppose that an instrument otherwise negotiable is
secured by a mortgage, does that fact render the instrument non-negotiable? The general
proposition represented by the weight of authority is that the provisions in the mortgage do not
affect the negotiability of the instrument it secures. Thus, where a note otherwise negotiable also
contains the words this note s secured by a mortgage and the mortgage contains clauses
promising to do many acts other than payment of money, it was held that the note is not rendered
non-negotiable. The provision in a mortgage a securing a negotiable promissory note requiring
the maker to pay, in addition to the principal and interest, such sums as the mortgagee may be
required to incur for insurance, taxes assessments and charges on the land, is not made part of the
note and does not render it non-negotiable.
346. When reference to mortgage renders instrument non-negotiable. But such
provisions in the note itself will render the note non-negotiable because of uncertainty of amount
or when such provision become part of the note, even though they are not in the note itself, the
instrument, is also rendered non-negotiable. Thus, where the note contains a stipulation that it
was secured by a mortgage, and that the payee agreed to look to the mortgage security for its
payment, the mortgage provisions became part of the note and rendered it non-negotiable. The
same is true where the note contains the following: This note is secured by a mortgage and
subject to the provisions of such a mortgage.
SECTION 4. Determinable future time; what constitutes. An instrument is payable at a
determinable future time, with-in the meaning of this Act, which Is expressed to be payable

(a) At a fixed period after date or sight; or


(b) On or before a fixed or determinable future time specified therein; or (e) 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 is not negotiable, and the happening of
the event does not cure the defect.

41 FOUR-C LAW LIBRARY


347. At a fixed period after date or sight; illustration. An instrument is payable at
a determinable future time, within the meaning of this Act, which is expressed to be payable at a
fixed period after date or sight. The following is an illustration:
60 days after sight, pay to the order of Jose Soriano the sum of P1.000.00.
(Sgd.)
To C
"After sight means after the drawee has seen the instrument upon presentment for acceptance.
Hence, the date of maturity of the instrument is determined by counting 60days from the date it
is presented to the drawee for acceptance. If the instrument is a promissory note, the date of
maturity is determined by counting the period from the date of issuance.
348. On or before a fixed or determinable time. An instrument is payable at a
determinable future time, within the meaning of this Act, which is expressed to be payable x xx
on or before a fixed or determinable time specified therein.
Thus:
On or before December 31, 1950 I promise to pay A or order P1,000.00.
(Sgd.) Y
December 31, 1950 is the future time specified in the instrument. The maker has the option to
pay on December 31,1950 or before said date.
349. Acceleration notes. There are certain notes containing acceleration provisions
which, for convenience, we may call acceleration notes. These provisions make it possible for
the maker to pay the instrument at an earlier date or make it possible for the holder to require
payment of the instrument at an earlier date. An illustration of the first class is the so-called
payable on or before a certain date note. Illustrations of the latter class are those instruments:
(1) that contain acceleration clauses on the makers default in payment of installments or of
interest, or on the happening of n extrinsic event; (2) or contain, in notes secured by collateral, a
provision that the maker shall supply additional collateral in case of depreciation in the value of
the original deposit, with the holders right to declare the note due immediately on failure to
make good the depreciation; or (3) contain provisions for acceleration where holder deems
himself insecure. The first is covered by paragraph (b) of Section 2.
350. Conflict of opinion as to the second. As to notes providing as to attached collateral
that if it depreciates in value, the maker must, on demand, deliver additional security or else the
note shall mature at once, there is a conflict of authority.
Thus:
(1) Those who maintain that such a stipulation renders the instrument non-negotiable argue that
the time for payment becomes uncertain and indefinite. If the maker fails when demanded to
furnish additional security to the satisfaction of the holder, the note matures at once. It is argued
that the maturity of the note is to be accelerated by the failure of the maker to do something in
addition to the payment of money and both contingencies are made to depend upon something
over which he has not the absolute control. It is within the power of the holder by refusing assent
to what the maker has done to make the note due at any time. If the holder is not satisfied with

42 FOUR-C LAW LIBRARY


the additional security, the note matures at once, and thus, the time at which it may mature would
depend upon the time at which the holder declared himself dissatisfied with the security
delivered by the maker. The effect of such stipulation, therefore, is to leave the time when
payable uncertain and indefinite.
(2) Those who maintain that the stipulation in question does not render the instrument containing
it non-negotiable argue that from the standpoint of expediency as encouraging circulation and
of business custom on account of their common acceptance by the commercial world, such
clauses should be interpreted as not affecting negotiability. This appears to be the better view.
351. Conflict of opinion also as to third. As to notes containing provisions for
acceleration where the holder deems himself insecure, there is a conflict of authority. Thus:
(1) It has been held that a note is rendered non-negotiable where it is payable at a fixed future
time, but with an option on the part of the holder to declare it due and payable before maturity,
whenever he deems it insecure.
(2) However, Brannan, in commenting on this, states: It is submitted that these cases holding an
instrument payable a fixed time, but accelerable at the option of the payee or holder nonnegotiable are directly contrary to the plain meaning of this section. Such instruments are
certainly payable onor before a fixed x xx time specified therein, and to hold them nonnegotiable is certainly a spurious construction of the Act. Under a proper interpretation, these
cases should be over ruled. This appears to be the better view.
352.On the occurrence of a specified event. An instrument is payable at a
determinable future time, within the meaning of this Act, which is expressed to be payable x xx
on- -- x xx the occurrence of a specified event which is certain to happen though the time of
happening be uncertain. It is essential that the specified event must be certain to happen
although the time of happening is uncertain, such as, death. If the event specified is not certain to
happen, then it is a condition, and the instrument would be rendered non-negotiable.
On the death of X, I promise to pay B ororder the sum of P1,000.00.
(Sgd.) A
The payment is on the occurrence of a specific event, the death of X, which is certain to happen
although when it will happen is not certain. Hence, the instrument is negotiable.
353. After the occurrence of a specified event. An instrument is payable at a
determinable future time, within the meaning of this Act, which is expressed to be payable x xx
at a fixed period after the occurrence of a specified event which is certain to happen though the
time of happening be uncertain."
Thus, suppose A draws the following bill:
10 days after the death of X, pay to the order of B, P1,000.00.
(Sgd.) B
To X

43 FOUR-C LAW LIBRARY


This is payable at a fixed period after the occurrence of a specified event, the death of X. This
event is certain to happen although the time when is not certain.
354. Word used is after. It is to be noted that the wordused n the law is after not
before. Is the following negotiable?
10 days before the death of X, I promise topay to bearer P1,000.00.
(Sgd.) B
This is not negotiable because the word used is before and the date of the maturity of the
instrument can be determined only after the note has become overdue. Consequently, the time for
payment is uncertain.
355. Last sentence. This refers to a condition such as, marriage, the election of a
candidate, the graduation of a student, or the passing by a student of the bar examinations. Thus:
I promise to pay to X or bearer P1,000.0010 days after B passes the bar
examinations.
(Sgd.) A
This is payable at a fixed period after a specified event but the event is not certain to happen.
Hence, the promise is conditional. But suppose B passes the bar, will that make the instrument
negotiable? It will not because, according to the law, the happening of the contingency or
condition does not cure the defect.
SECTION 5. Additional provisions not affecting negotiability. An instrument which
contains an order or promise to do any act in addition to the payment of money is not
negotiable. But the negotiable character of an instrument otherwise: negotiable is not
affected by a provision which
(a) Authorizes the sale of collateral securities in case the instrument be not paid at
maturity; or
(b) Authorizes a confession of judgment if the instrument be not paid at maturity; or
(c) Waives the benefit of any law intended for the advantage or protection of obligor; or
(d) Gives the holder an election to require something to be done in lieu of payment of
money.
But nothing in this section shall validate any provision orstipulation otherwise illegal.
356. General rule as to additional act. As stated in the first sentence of this section, the
general rule is that an instrument must not contain an order or promise to do any act in addition
to the payment of money. Otherwise, the instrument would be rendered non-negotiable, for then
the instrument would be payable not in money only but in money and the additional act promised
or ordered to be performed. Thus, suppose A makes the following note:
I promise to pay to bearer Pl,000.00 and to deliver to him two carabaos.
(Sgd.) A
This note is non-negotiable because it contains an additional act to be performed.

44 FOUR-C LAW LIBRARY

357. Illustrations of additional acts. The following clauses have been held to render the
instruments in which they arestipulated non-negotiable:
(1) and to pay taxes assessed upon the note or its mortgage security.
(2) and to keep free from incumbrance property on which pledged for security, of the
instrument depends.
(3) and to keep the machine, in payment for which it is given in repair.
The test of negotiability is whether or not the promise would give rise to a cause of action for
breach of contract if the additional act is not done. If it does, the instrument is rendered nonnegotiable.
358. Premise to furnish additional security. A promise of the maker to furnish
additional- will render the note non-negotiable, as that would be an additional act to the promise
to pay money. However, they are to be distinguished from those instruments in which the holder
may demand collateral and, failure to furnish it accelerates the instrument which are clearly
negotiable, being merely accelerable on the non-performance of an optional act.
359. Sale of collateral securities. The law gives four exceptions to the general rule that
an instrument which contains an order or promise to do any act in addition to the payment of
money is not negotiable. The first is that the negotiable character of an instrument otherwise
negotiable is not affected by a provision which authorizes the sale of collateral securities in case
the instrument be not paid at maturity.
360. Sale of collateral securities, explained. Sometimes the obligation arising from the
transaction which gives rise to the instrument is secured by a mortgage or pledge. Suppose A
borrows from B P1,000.00. A may deliver by way of pledge to B his ring to secure the payment
of the money he borrowed. He may also issue a promissory note in the following terms:
I promise to pay to B or order P1,000.00 on December 31. 1950, provided
however, that if this note is not paid at the date of maturity, the ring which I
deliver to B by way of pledge to secure the payment of my indebtedness to him
may be sold by R and the proceeds thereof applied to the value of this note.
(Sgd.)A
As will be seen, the note contains an act to be performed in addition to the payment of money.
Nevertheless, according to the law, the instrument is still negotiable. And with reason, as the
additional act to be performed is to be executed after the date of maturity, when the instrument
ceases to be negotiable in the full commercial sense. Before the date of maturity, no additional
act is performed except the payment of money. Hence, before and until the date of maturity, the
promise to pay is to pay money only.
361. Sale of collateral securities before maturity. But a stipulation authorizing sale of
collateral securities even before the date of maturity would render the instrument non-negotiable.
Thus, a note reciting that the title to property for which it is given shall remain in the payee, and

45 FOUR-C LAW LIBRARY


that he shall have the right to declare the money due and take possession of the property
whenever he may deem himself insecure, even before the maturity of the note, is not
negotiable.
362. Confession of judgment. The second exception to the general rule is that the negotiable
character of an instrument otherwise negotiable is not affected by a provision which x xx
authorizes a confession of judgment if the instrument be not paid at maturity. The following is
the form of a cognovit or confession of judgment note:
..195..................
S..
.after date, for value
received ..promise to pay to the
order of ..dollars, at
with interest at . . . . % per annum.
And to secure the payment of said sum I authorize, irrevocably, any attorney of
any court of record to appear for me in saidcourt, in term time or in vacation, at
any time hereafter, and confess a judgment without process in favor of the holder
of this note, for such amount as may appear to be unpaid thereon, with costs and .
. . % attorneys fees, and to waive all errors in any such proceeding and consent to
immediate execution upon such judgment, hereby ratifying and confirming all
that said attorney may do by virtuehereof.
(Signature)

The confession of judgment is an additional act. But, asin the preceding paragraph, the
additional act is to be performed after the date of maturity when the instrument ceases to be
negotiable in the full commercial sense.
363. Classes of confession of judgment. In common law,there were two kinds of
judgments by confession; the one, a judgment by cognovitsactionem, and the other, by
confessionrelictaverficatione. The term cognovit is often used interchangeably -with the term
confession of judgment or judgment notes, but, technically, this is incorrect since
cognovitmeans more than a warrant of attorney, as it also covers thejudgment itseIf.
364. Cognovitactionem, defined. A written confession ofan action by a defendant,
subscribed, but not sealed and irrevocably authorizing any attorney of any court of record to
confess judgment and issue execution usually for a- sum named. It is given in order to save
expense and differs from a warrantof attorney which is given to an expressly designated
attorneybeforethecommencement of any action and is under seal.
365. Confession relictaverificatione, defined. A confessionof judgment made after plea
is pleaded, such as cogno vitactionem, accompanied by a withdrawal of the plea.

46 FOUR-C LAW LIBRARY


366. Warrant of attorney, defined. An instrument in writing addressed to one or more
attorneys named therein, authorizing them, generally, to appear in any court, or in some specified
court on behalf of the person giving it, and to confess judgement in favor of some particular
person therein named in an action of debt.
367. Confession of judgment before maturity. A note which contains a provision
authorizing confession of judgment at any time thereafter, whether due or not, is not negotiable it
has been held by overwhelming weight of authority that a power of attorney to confess judgment
at any time before maturity renders a note non-negotiable. A provision authorizing confession of
judgment before, at or after maturity renders the instrument non-negotiable.
368. Effect of confession of judgment in the Philippines.
In the Philippines, confessions of judgement have been declared void as against public policy:
(1) because they enlarge the field for fraud; (2) because under the instrument, the promissory
bargains away his right to a day in court; and (3) because the effect of the instrument is to strike
down the right of appeal accorded by statute. And the mere fact that under paragraph (b) of
Section 5, authorization of confession of judgment is allowed, does not validate such kind of
stipulation in the Philippines, as under the last paragraph of said Section 5, nothing in said
section shall validate any provision or stipulation otherwise illegal.
369. Waiver of benefit. The third exception is that thenegotiable character of an
instrument otherwise negotiable isnot affected by a provision which x xx waives the benefit
ofany -law intended for the advantage or protection of the obligor. The following is an
illustration of a note containing sucha waiver.
Six months after date, I promise to payB or order P1,000.00, waiving the right to
appeal. and all of valuation, appraisement, stay and exemption laws.
(Sgd.) A
370. Other illustrations of benefits that may be waived. Other benefits intended for the
advantage or protection of the obligor are the rights to (1) a presentment for payment, (2) notice
of dishonor, and protest. All of these may be waived. Instruments otherwise negotiable in form
sometimes contain a provision:
(1) that the maker and indorser severally waive presentment and notice of protest, and consent
that time of payment may be extended without notice, and
(2) that no extension of time of payment with or without our knowledge by the receipts of
interest or otherwise shall release us or either of us from the obligation of payment, or
(3) that after maturity, this note may be extended from time to time by any one or more of us
without the knowledge or consent of any of the others of us and, after such extension, the
liability of all parties shall remain as if no such extension had been made, or similar provisions.
These provisions seem intended merely to prevent the discharge of secondary parties by
extensions of time but not to alter the specified date of maturity, unless there is an express
agreement between maker and holder for such an extension subsequent to the execution of the
note. These waivers clearly fall within Section 5(c), and, in the great majority of cases since the
Negotiable Instruments Law, such provisions have been held not to impair the negotiability of
the instrument.

47 FOUR-C LAW LIBRARY

371. Election of holder to require some other act. The fourth exception to the general
rule is that the negotiable character of an instrument otherwise negotiable is not affected by a
provision which gives the holder an election to require something to be done in lieu of payment
of money. Under this paragraph, even if there is an additional act, the instrument still remains
negotiable provided that the right to choose between payment of money or the performance of
the additional act is in the hands of the holder. Thus, suppose A draws the following bill:
Pay to B or order P1,000.00 or lo cavanes of palay, at the option of the holder.
(Sgd.) A
To C
In this case, the holder, not the drawee, has the choice of demanding either money or the 1
cavanes of palay. This instrument, therefore, is not non-negotiable.
372. Illustrative cases. The following are illustrative cases of instruments in which the
holder is given the election to require something to be done in lieu of money, and therefore, the
instrument in question is not rendered non-negotiable:
(1) A note providing that title to the property for which it was given should remain in the payee
and upon non-payment at maturity, the property was to be repossessed by the payee, did not
impair negotiability, since it gave the holder an election to take the property in lieu of payment of
money.
(2) A provision in a bond otherwise negotiable, entitling the holder, at his option, to receive
money or stock of the corporation-maker, does not destroy the negotiability of the bond.
(3) The negotiability of notes was not impaired by a provision that the payee could retake the
chattel for which the notes were given if they were not paid.
373. Where choice lies with debtor. But if the choice to pay money or to deliver rice is
in the hands of the debtor, the instrument is rendered non-negotiable under the general rule above
stated. Thus, suppose A makes the following note:
I promise to pay B or order P1,000.00 or10 cavanes of palay.
(Sgd.) A
In this case, B can either deliver the 10 cavanes or theP1,000.00 to the holder of the instrument.
The holder cannot demand the delivery of money even he wants to. This instrument, therefore, is
non-negotiable.
SECTION 6.Omission; seal; particular money. The validity and negotiable character of
an instrument are not affected by the fact that
(a) It is not dated; or
(b) Does not specify the value given, or that any value had been given therefore; or
(c) Does not specify the place where it is drawn or the place where it is payable; or
(d) Bears a seal; or
(e) Designates a particular kind of current money in which payment is to be made.
But nothing in this section shall alter or repeal any statute requiring in certain cases the
nature of the consideration to be stated in the instrument.

48 FOUR-C LAW LIBRARY


374. Effect of omission of date. The validity and negotiable character of an instrument are not
affected by the factthat it is not dated. Even where the instrument is not dated,still the
instrument is not rendered non-negotiable. There are,however, cases where the date is necessary
to fix the date ofmaturity.
375. Effect of omission of value. The validity and negotiable character of an instrument
are not affected by the fact that it x xx does not specify the value given, or that any value has
been given therefor.6 Usually, all that is stated in the instrument is that it is being issued for
value received, without specifying what that value is, whether it is a car bought, or services
rendered, or money borrowed. Nevertheless, even where the value given is not specified, still the
instrument is not rendered non-negotiable. As a. matter of fact, it is not even necessary to state
that value has been received. The following, therefore, is still negotiable.
I promise to pay X or order 1,000.00
(Sgd.) B
The reason is that consideration is presumed.
376. Effect of omission of place. The validity and negotiable character of an instrument
are not affected by the fact that x xx does not specify the place where it is drawn or the place
where it is payable.
Manila, Philippines
January 1, 1950
Pay to the order of B, P1000 at the Philippine National Bank Dagupan City
Branch.
(Sgd.) A
The bill of exchange is drawn in Manila and payable in Dagupan City. But even where those
places are not stated, still the instrument is not rendered non-negotiable.
377. Where instrument bears a seal. The validity and negotiable character of an
instrument are not affected by the fact that it x xx bears a. seal. At common law, a sealed
instrument is rendered non-negotiable and becomes subject to the rule governing contracts under
seal. Under the Negotiable instruments Law, however, that is no longer true. Hence, even if the
instrument is sealed, that fact alone will not make it non-negotiable.
378. Particular kind of current money. The validity and negotiable character of an
instrument are not affected by the fact that x xx designates a particular kind of current money in
which payment is to be made.2 As already stated under Section 1, 21 even if the money in
which the instrument is to be payable is not legal tender, provided that it is current money or
foreign money which has a fixed value in relation to the money of the country in which the

49 FOUR-C LAW LIBRARY


instrument is payable, still the negotiability of the, instrument is not affected, as the instrument
would still be considered payable in money.
379. Last paragraph. Under paragraph (b), the law authorizes that the value given need
not be specified. However, under the last paragraph of this section, where a statute requires that a
particular contract specify the value given, the value given under such contract must be specified.
There seems, however, to be no statute kind in the Philippines.
SECTION 7. When payable on demand. - An instrument is payable on demand:
(a) When it is so expressed to be payable on demand, or at sight, or on presentation; or
(b) In which no time for payment is expressed.
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.
380. Expressed to be payable on demand. An instrument is payable on demand where
it is expressed to be payable on demand, or at sight, or on presentation. Thus:
I promise to pay on demand P1,000.00 toX or bearer.
(Sgd.) A
Instead of on demand the words on sight or on presentation may be used. The words at
sight, however, are not ordinarily used in promissory notes.
381. Note for payment expressed. An instrument is payable on demand x xx in which
no time for payment is expressed. Thus:
Pay to X or order P1,000.
(Sgd.) A
To Y

This is payable on demand because no time for payment is expressed. Indeed, when a promissory
note expresses no time for payment, it is deemed payable on demand.
382. Where blank for time for payment unfilled. Is the following payable on
demand?
after

date

50 FOUR-C LAW LIBRARY


promise

to

pay

or

bearer

P100.00.

(Sgd.) A
This has been held to be payable on demand.24 However, it may properly be considered an
incomplete instrument and may fall under the provision of Sections 14, 15 or 16, depending upon
how the instrument is delivered. Moreover, a note payable one was held payable on demand.
383. Illustration of last paragraph. Suppose that A draws the following bill:
Pay to B or order P1,000.00 on December 31, 1950.
(Sgd.)

(1) In the example given, if A, the drawer, keeps the instrument without delivering it until after
December 31, 1950, its date of maturity, and then issues the instrument, say on January 15, 1951,
as to A, the person so issuing, the instrument is payable on demand.
(2) Suppose that A, the drawer, issues the instrument on December 1, 1950, before the date of
maturity, but X, the drawee, accepts it on January 20, after its date of maturity.
As to X, the person so accepting it, the instrument is payable on demand. But as far as A is
concerned who issued the instrument before the date of maturity, the instrument is payable at a
fixed
future
time.
(3) Suppose that A issues and X accepts the bill of exchange before December 31, 1950, before
the date of maturity, but B, payee, indorses the instrument to C after the date of maturity, say on
January 20, 1951. As to B, the person so indorsing it, the instrument is payable on demand. But
as to A and X, who respectively issued and accepted the instrument before the date of maturity,
the
instrument
is
payable
at
a
fixed
future
time.
384. Instrument on demand only as to parties. It must be remembered, however, that
after the date of maturity, the instrument can no longer be negotiated as to make the parties who
acquire the instrument after the date of maturity holders in due course because they become
holders thereof with notice that it is already overdue, as this can be determined from the face of
the instrument itself. The last paragraph of Section 7 means that the instrument is payable on
demand
only
as
between
immediate
parties.
385. On promissory note payable on demand, statute of limitations begins
immediately. The promissory note, dated January 30, 1962, is worded thus: For value received
from time to time since 1947, we jointly and severally promise to pay to Mr. [George Pay] at his
office at the China Banking Corporation the sum of [Twenty Six Thousand Nine Hundred Pesos]
(P26,900.00) with interest thereon at the rate of 12% per annum; upon receipt by either of the
undersigned of cash payment from the Estate of the late Don Carlos Palanca or upon demand
* * * As stated, this promissory note is signed by Rosa Gonzales Vda. de Carlos Palanca and
Justo Palanca. Action was filed fifteen years after execution of the note. Held: The obligation
being due and demandable, it would appear that the filing of the suit after fifteen years was much

51 FOUR-C LAW LIBRARY


too late. For again, according to the Civil Code, which is based on Section 4 of Act No. 190, the
prescriptive period for a written contract is that f ten years.
SECTION 8.When 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. It may be drawn payable
to the order of:
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or otherwise indicated
therein with reasonable certainty.
386. Words of negotiability. Among others, the instrument in order to be considered negotiable
must contain the so-called words of negotiability i.e., must be payable to order or bearer.
Under Section 8 of the Negotiable Instruments Law, there are only two ways by which an
instrument may be made payable to order There must always be a specified person named in the
instrument and the bill or note is to be paid to the person designated in the instrument or to any
person to whom he has indorsed and delivered the same. Without the words or order or to the
order of, the instrument is payable only to the person designated therein and is therefore nonnegotiable. Any subsequent purchaser thereof will not enjoy the advantages of being a holder of
a negotiable instrument, but will merely step into the shoes of the person designated in the
instrument and will thus be open to all defenses available against the latter.
387. Meaning of payable to order. Suppose A makes the following note:
I promise to pay to B or order P1,000.00 on December 1, 1951.
(Sgd.) A
This means that A promises to pay to B or if not to B, to anybody designated by B to whom A
must pay or to anybody designated by the person designated by B, and so on. The designation is
made by indorsement. Thus, suppose the following indorsements appear on the back of the note:
Pay to C

(Sgd.) B

Pay to D

(Sgd.) C

52 FOUR-C LAW LIBRARY


Pay to E

(Sgd.) D

Pay to F

(Sgd.) E

A is liable to F because he promised to pay to B or to anybody designated by B, who happens to


be C; or to anybody designated by C (who is the person designated by B), and so on until F, the
person designated by E to whom A is to pay the note.
388. Necessity of naming payee.Under the last paragraph of this section, the law
requires that the payee must be named or otherwise indicated with reasonable certainty. The
payee of an instrument payable to order must he a person in being, natural or legal, and
ascertained at the time of issue. If there is no payee, where the instrument is payable to order, no
one could indorse the instrument. Consequently, it is useless to consider it negotiable.
389. Where naming of payee equivocal. Illustrative case.
Equitable Banking Corporation v IAC
Facts: Edward J. Nell Company issued a check for P427,300to help Casals and Casville
Enterprises obtain a letter of credit from Equitable Banking Corporation in connection with
equipment, a garrett skidder, which Casals and Casville were buying from Nell. Nell indicated
the payee as follows: to the order of EQUITABLE B-ANXJNC CORPORATION A/C CAS
VILLE ENTERPRISES, INC.
Casals deposited the check with the defendant bank and the bank teller accepted the same for
deposit in defendant Casvilleschecking account. The bank teller stamped thereon the words
NON-NEGOTIABLE for Payees Account Only and NON- NEGOTIABLE TELLER NO. 4,
August 17, 1976 EQUITABLE BANKING CORPORATION. After depositing said check,
defendant Casville, acting through defendant Casals, then withdrew all the amount deposited.
Nell filed a case against Equitable, Casals and Casville. While the instant case was being tried,
defendants Casals and Casville assigned the garrett skidder to plaintiff which credited in favor of
defendants the amount of P450,000, as partial satisfaction of its claim against them. This left
only the question of the liability of Equitable to Nell for the Court to determine. The trial court
held Equitable to be liable to Nell for P427,300 and attorneys fees of P25,000. Respondent
Appellate Court upheld the above conclusions.
Issue: Whether Equitable is liable to Nell for the value of the check.
Held: Equitable is not liable. Nell should bear the loss. It was Nells own acts, which put it into
the power of Casals and Casville Enterprises to perpetuate the fraud against it.The subject check
was, initially, not non-negotiable. Neither was it a crossed check. The rubber-stamping
transversally on the face of the subject check of the words Non-negotiable for Payees Account
Only between two (2) parallel lines, and Non-negotiable, Teller No. 4, August 17, 1986,
separatelyboxed, was made only by the Bank teller in accordance withcustomary bank practice,

53 FOUR-C LAW LIBRARY


and not by NELL as the drawer of the check, and simply meant that thereafter the same check
could no longer be negotiated.

The subject check was equivocal and patently ambiguous. The payee was not indicated with
reasonable certainty in contravention of Section 8 of the Negotiable Instruments Law. As
worded, it could be accepted as deposit to the account of the party named after the symbols
A/C, or payable to the Bank as trustee, or as an agent, for Casville Enterprises, Inc., with the
latter being the ultimate beneficiary. That ambiguity is to be taken contra proferentem that is,
construed against NELL who caused the ambiguity and could have also avoided it by the
exercise of a little more care. Thus, Article 1377 of the Civil Code, provides:
Art. 1377. The interpretation of obscure words or stipulations in a contract shall not favor the
party
who
caused
the
obscurity.
390. Where blank for name of payee unfilled. Is the following payable to order?
Payto to
order P1,000.00.
(Sgd.)

This is not payable to order because the payee is not named, neither is he designated with
reasonable certainty. However, it may be considered an incomplete instrument and may be
covered by Sections 13, 14 and 15, depending upon how it is delivered.
391. To whose order instrument may be made or drawn. Under this section, a note
may be made and a bill may be drawn to the order of: (1) a payee who is not the maker; (2)a
payee who is not the drawer; (3) a payee who is not the drawee; (4) the drawer as payee; (5) the
maker as payee; (6)the drawee as payee; (7) two or more payees jointly; (8) one or some of
several payees; or (9) the holder of an office for the time being.
392. Payee not maker. An instrument may be drawn pay able to the order of a payee
who is not maker. Thus:
I promise to pay to the order of B P100.00.
(Sgd.) A
In this illustration, the payee, B, is other than the maker, A. B is not the same as A .
of

393. Payee not drawer or drawee. An instrument may be drawn payable to the order
payee
who
is
not
x
xx
drawer,
or
drawee.
Thus:

54 FOUR-C LAW LIBRARY


Pay to the order of B P100.00.
(Sgd.) A
To:

In this illustration, the payee B, is other than the drawer, A and the drawee, X .
drawer.

394. Drawer as payee. An instrument may be drawn payable to the order of the
Thus:
Pay to the order of ourslvs 100.00.
(Sgd.) Soriano & Co.
To:

The foregoing is payable to the order of the drawer. Where the instrument is payable to the order
of the drawer and it is accepted by the drawee, the instrument is equivalent to a promissory note
made by the acceptor in favor of the drawer.
395. Maker as payee. An instrument may be drawn payable to the order of the maker. Thus:
I promise to pay to the order of myself P100.00.
(Sgd.)

The maker is the payee. Under Section 184, however, the instrument is not complete until it is
indorsed
by
the
maker.
396. Drawee as payee. An instrument may be drawn payable to the order of the drawee. Thus:
Pay to yourself or order P100.00.
(Sgd.) X
To:

Y, who is drawee, is also the payee. The effect of this bill is to authorize the drawee to pay
himself from funds belonging to the drawer which are in the possession of the drawee.
397. Two or more payees jointly. An instrument may be drawn payable to the order of x xx
two
or
more
payees
jointly.
Thus:
I promise to pay A and B or order P100.00.
(Sgd.)
Being

order

joint

payees

is

indicated

by

the

C
conjunction

and.

398. One or more of several payees. An instrument may be drawn payable to the
of
xxx
one
or
more
of
several
payees.
Thus:

55 FOUR-C LAW LIBRARY

I promise to pays der of Aor B


(Sgd.)

Being joint and several payees is indicated by the conjunction or. Under this paragraph, the
instrument may also be made payable to the order of A, B and C or anyone of them or any two
of
Them.
399. Holder of office for the time being as payee. An instrument may be drawn payable to the
order of x xx the holder of an office for the time being.36 Thus:
Pay to the order of the oashier of the Lyceum of the Philippines, etc.
(Sgd.) A
To:

The cashier of the Lyceum of the Philippines is the holder of that office for the time being.
SECTION 9.When payable to bearer. The instrument is payable to bearer
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or
(c) When it is payable to the order of a fictitious or non-existing person, and such fact was
known to the person making it so payable; or
(d) When the name of the payee does not purport to be the name of any person; or
(e) When the only or last indorsement is an indorsement in blank.
400. When expressed to be so payable. The instrument is payable to bearer when it
is expressed to be so payable. Thus: Pay to bearer P1,000.00, etc. This is payable to bearer as
it is expressed to be so payable.
401. Payable to person named or bearer. The instrument is payable to bearer x xx
when it is payable to a person named therein or bearer.33 Thus: Pay to B or bearer, etc. This
is payable to bearer as it is payable to a person named therein, B, or bearer.
402. Payable to the order of a fictitious or non-existing person. The instrument is
payable to bearer x xx when it is payable to the order of a fictitious or non-existing person and
such fact was known to the one making it Sopayable. In general, there aretwo requisites: (1) the
payee named must be fictitious or non-existent; and (2) the one making the instrument so
payable must know him to be fictitious or non-existing. This provision of the law has been a
prolific source of litigation on the question as to: (1) when the paper is payable to a fictitious or
non-existing person; and (2) when such fact is known to the person making it so payable that
is, who is such person making it so payable.

56 FOUR-C LAW LIBRARY

403. Meaning of fictitious person. The first requirement must be qualified. The
words fictitious person are not limited to persons having no real existence. An existing person
may be considered a fictitious payee, depending upon the intention of the one making or drawing
the instrument. The words fictitious person mean to be a person who has no right to the
instrument because the drawer or the maker of it so intended, and, therefore, it does not matter
whether the name of the payee used by the drawer or maker be that of one living or dead, or one
who never existed.42 The name is fictitious when it is feigned or pretended and a non-existent
person is one who does not exist in the sense that he was not intended to he the payee by the
drawer.
404. Existing payee intended to receive proceeds; not payable to bearer.
Negotiable paper made payable to the name of an existing person known or believed by the
maker or drawer to be existing, with intent that he should receive it or its proceeds, or that it be
paid to him or upon his indorsement, is not payable a fictitio.is payee or to, bearer, although as a
matter fact such person has no interest in the paper and it, was procured by the fraud of a third
person or of the makers or drawers employee or agent whose knowledge or intent is not
imputable to the principal orthe employer, and cashed by the person having possession upon the
forged
indorsement
of
the
payee.
405. Illustration. Thus, suppose that Y, an employee of A, represents to A that he
bought a typewriter from Senator Madrigal. On this representation, A draws a check in favor of
Senator Madrigal, with the intention that Senator Madrigal will receive the proceeds of the
check. The fact, however, is that there was no purchase at all. The check is, not payable to bearer
The Want of interest in the payee is not the controlling consideration in determining whether an
instrument is payable to bearer. As payable to a fictitious person; and although a particular,
payee has in fact no interest, in the instrument, if the drawer or the maker intended that he should
have such interest and that such instrument be paid to him or upon his indorsement, although the
payee has in fact no such interest, the paper is not payable to a fictitious person, and must bear
the genuine indorsement of such payee before it can be validly transferred.
406. Existing payee not intended to receive proceeds payable to bearer. Although
a person bearing the name by which the payee is designated in the paper is in actual existence,
the paper is payable to a fictitious payee and by legal intendment to bearer, where the person
making or drawing it, or his agent or employee whose knowledge or intent is imputable to the
principal or the employer, does not intent that he shall receive the same or its proceeds, or that it
be paid to him or upon his indorsement. It follows that the mere fact that the payee named was an
existing person does not preclude the application of the rule as to fictitious payee, where,
although the existence of the payee was known to or believed by the maker, he, the maker, did
not intend that he should receive the paper or have an interest therein. Thus, an existing payee
may be a fictitious payee.
407. Illustration. Thus, suppose that A is the administrator of the estate of a deceased
person. He wants to appropriate for himself some money of the estate. For this purpose, as
administrator, he draws a check in favor Senator Madrigal from whom he bought a typewriter for
the use of the estate. Thereafter, he does not deliver -the check to Senator. Madrigal but instead

57 FOUR-C LAW LIBRARY


forges Senator Madrigals signature and collects the proceeds of the check. The check is payable
to bearer because it is deemed to be payable to a fictitious person.47 It is, the intention of the
drawer that the payee designated in the paper should not receive the same or its proceeds, and not
the circumstance that such person was not in fact entitled to the paper payable to a fictitious
payee. Consequently, although the payees designated in the paper are in fact entitled to the paper
or its proceeds, the paper is payable to fictitious persons if the maker intends that they should not
have
interest
in
the
paper
or
its
proceeds.
408. Non-existing payee, or one without interest, but be lieved existing or with
interest, and intended to receive proceeds; not payable to bearer. Where the instrument is
made payable to the name of a non-existing person, or of a person having no interest in the
transaction, but the maker believes that such person exists and has an interest in the transaction
and intends that he shall receive the same or its proceeds, it is not payable to a fictitious person
or to bearer, and, the negotiation of such paper under the forged indorsement of the name
designated thereon as the payee vests in the purchaser no right to enforce the same as against the
maker or the drawer. Thus, just as an actually existing person may be a fictitious payee, so a nonexisting person may be a real person, within the mean ing of this rule, where he is believed to
exist and is intended to receive the instrument.
409. Illustration. Thus, suppose that Y, agent of A, represents to A that he bought a
typewriter from B, a dead person or non-existing person. A, believing him to be existing, issues a
check to his (Bs) order. The check is not payable to a fictitious person and, therefore, is not
payable
to
bearer.
410. Non-existing payee, or one without interest, known or believed non-existing
not intended to receive proceeds; payable to bearer. An instrument payable to the name of anon-existing person, or of a person having no interest in the transaction, and known or believed
to be non-existing, and which isnot intended to be paid to a particular person, is an instrument
payable to a fictitious person and by legal intendment to bearer.
411. Person to whom the fictitious or non-existing character of the payee must be
known. Of course, the drawer drawing & bill or the maker making a note is the person to whom
the fictitious or non-existing character of the payee must be known. However, where the
instrument is drawn or made by an agent or prepared by an employee with the maker or drawer
signing only, the question arises as to whose intent should control. Thus it is said that a second
difficulty is, who is the person who makes the instrument payable to the payee the clerk who,
after investigating the creditors of a corporation and the amount due them, prepares the checks,
or the treasurer who goes through the mechanical task of signing his name, trusting in the
honesty of the clerk for all essential details? The better view would seem to be that the signer
does after all create the instrument and should determine who owns it x xx. The view advocated
is supported by the great weight of authority. x xx.
412. Where agent has no authority to execute instrument. If the agent has no
authority to execute the instrument himself on behalf of his principal, the knowledge of the
employer or principal is controlling, and if he, the employer or principal, has no knowledge of
the fictitious or non-existing character of the payee, the knowledge of the agent or the employee

58 FOUR-C LAW LIBRARY


will not avail to call into application the rule as to fictitious payees and the instrument will not
be considered payable to bearer. Where however, the agent or employee is authorized to make
or draw the paper, the knowledge or intention of such an employee or agent may be controlling,
and if he knows the payee to be fictitious or non-existing, the instrument, may be considered as
payable
to
bearer.
413. Name of payee not name of person. The instrument is payable to bearer x xx
when the name of the payee does not purport to be the name of any person. Thus:
Pay to cash.
Pay to the order of money.
Pay
to
the

order

of

cash.

In these cases, the name of the payee does not purport to be the name of any person. Hence, the
instrument would be payable to bearer. Under the Negotiable Instruments Law, a check drawn
payable to the order of cash is a check payable to bearer, and the bank may pay it to the person
presenting it for payment without the drawers indorsement.
ANG TEK LIAN y. THE COURT OF APPEALS. For having issued a rubber check, Ang Tek
Lian was convicted of estafa in the Court of First Instance of Manila. The Court of Appeals
affirmed the verdict. It appears that knowing that he had no funds therefore, Ang Tek Lian drew
a check upon the China Banking Corporation for P4,000 payable to the order of cash. He
delivered it to Lee Hua Hong in exchange for money which the latter handed in the act. The next
business day, the check was presented by Lee Hua Hong to the drawee bank for payment but it
was dishonored for insufficiency of funds, the balance of the deposits of Ang Tek Lian being
P335 only on both the dates of issuance and presentment for payment. It is argued that as the
check had been made payable to cash and had not been endorsed by Ang Tek Lian, the
defendant is not guilty of the offense charged. HELD: Under the Negotiable Instruments Law
[Sec. 9(d)], a check drawn payable to the order of cash is payable to bearer, and the bank may
it to the person presenting it for payment without the drawers indorsement. x xx. Ofcourse if the
bank is not sure ofthe bearers identity or financial solvency, it has the right to demand
identification and/or assurance against possible complications, for instance,4forgery of the
drawers signature, (b) loss of the check by the rightful owner, (c) raising of the amount payable,
etc. The bank therefore, requires for its protection that the indorsement of the drawer or of
some other persons known to it be obtained.6 x xx. A check payable to bearer is authority for
payment to the holder. Where a check is in the ordinary form and is payable to bearer so that no
indorsement is required, a bank to which it is presented for payment need not have the holder
identified, and is not negligent in failing to do so.
414. Where payable to estate of deceased person. Is the following payable to bearer?
Pay to the order of the intestate estate of Martin Mendoza, deceased, P1,000. This has been
held to be payable to bearer.8 But this decision is criticized. And it has been held that the estate
of a deceased person is a juridical person in a limited way.9 It would seem, therefore, that the
foregoing instrument is payable to order.

59 FOUR-C LAW LIBRARY


415. Only or last indorsement in blank. The instrument is payable to bearer x xx
when the only or last indorsement is an indorsement in blank. The instrument contemplated
isone which is originally payable to order. Thus:
Pay to X or order P1,000.00
ToY
(Sgd). Y
(Indorsement)
(Sgd.)

It is, therefore, payable to bearer where: (1) there is only one indorsement and that indorsement
is in blank, or (2) there are several indorsements but the last indorsement is in blank.
SECTION 10. Terms, when sufficient. The instrument need not follow the language of
this Act, but any terms are sufficient which clearly indicate an intention to conform to the
requirements thereof.
416. Exact words of law need not be used. It is advisable to use the words of the law
in order to avoid uncertainty and doubt. However, under this provision, it is not necessary to use
the exact words ofthe law. Thus, instead of promise, the word agree may be used. Instead
of bearer, holder may be used. Indeed, an instrument may be valid and negotiable though
written in a foreign language.
SECTION 11. Date, presumption as to. Where the instrument or an acceptance or any
indorsement thereon is dated, such date is deemed prima fade to be the true date of the
making, drawing, acceptance, or indorsement, as the case may be.
417. Application of Section 11. This legal provision applies to three cases: (1) the
instrument contains the date of issue; (2) in an accepted bill of exchange, the acceptance is dated,
such as, accepted, August 1, 1952, (Sgd.) X; and (3)an instrument is indorsed, and the
indorsement is dated, such as, July 2, 1952, Pay to C, (Sgd.) B. In the first case, the date placed
thereon is deemed prime facie the true date of the making or drawing of the instrument. In the
second case, August 1, 1952 is deemed prima facie the true date of acceptance, and in third case,
July 2, 1952 is deemed prima facie the true date of indorsement.
418. Meaning of prima facie. The words prima facie are Latin words which mean
that the evidence produces for the time being a certain result but that result may be repealed by
contrary evidence. They have been defined as meaning apparent, as it first appears,
presumably.2 The words prima facie refer to evidence or proof in an action in court.
419. Illustration. Suppose that a bill is payable 30 days after sight and the true date of
acceptance is August 15, 1952, but the holder thereof placed August 1, 1952, instead of the true
date. Thirty days after August 1, 1952, the date that appears on the instrument to be the date of
acceptance, the holder files an action in court against X, the acceptor. The holder need not prove
that August 1, 1952 is the true date of acceptance, as that is prima facie deemed to be true date of
acceptance. But this result is only for the time being. It can be repealed by contrary evidence, and
it is the duty of X, the acceptor, to introduce evidence to prove that the true date of acceptance is

60 FOUR-C LAW LIBRARY


really August 15, 1952. If he fails to do so, under this section, the court will consider August 1,
1952, as the true date of acceptance notwithstanding the fact that it is really the wrong date.
SECTION 12. Ante-dated and post-dated. The instrument is not invalid for the reason
only that it is ante-dated or post-dated, provided this is not done for an illegal or fraudulent
purpose. The person to whom an instrument so dated is delivered acquires the title thereto
as of the date of delivery.
420. Application of Section 12. This section contemplates of instruments ante-dated or
post-dated by the parties in accordance with a mutual agreement to the effect.
421. When ante-dated; illustration. An instrument is ante dated when the date written
thereon is earlier than the true date of its issuance. Thus:
Manila, Philippines
January 1, 1950
I promise to pay to B or order P1,000.00.
(Sgd.) A
Suppose that the instrument is really issued or delivered by A to B, the payee, on January 15,
1950. The instrument is ante-dated because the date written thereon is earlier than the, true date
of its issuance or delivery.
422. When post-dated. An instrument is post-dated when the date written thereon i
later than the true date of its issuance or delivery. In the example given, if A delivers or issues
the instrument to the payee on December 15, 1949, a date earlier than January 1, 1950, which
appears on the instrument, the instrument is said to be post-dated. An ante-dated or post-dated
instrument is not rendered invalid or non-negotiable by that fact alone. It may be negotiated
before or after the date given as long as it is not negotiated after its maturity.
423. When ante-dating or post-dating invalidates an instrument. The only
limitation is that the ante-dating or postdating is not done for illegal and fraudulent purposes,
such as, evading the Usury Law. Suppose that A wants to charge 24% on a loan of P1,000.00.
He may require the borrower to make a promissory note and ante-date it by one year, in order to
make it appear that the period for the payment is two years and that the interest is 12% a year. In
this case, the ante-dating is done for the purpose of evading the Usury Law. The instrument then
is avoided.
424. When title is acquired. According to the law, the person to whom the instrument
is delivered acquires title or ownership over it, not as of the date written on the instrument, but as
of the date of actual delivery.
SECTION 13.When date may be inserted. Where an instrument expressed to be payable
at a fixed period after date is issued undated, or where the acceptance of an instrument
payable at a fixed period after sight is undated, any holder may insert therein the true date
of issue or acceptance, slid the instrument shall be payable accordingly. The insertion of a

61 FOUR-C LAW LIBRARY


wrong date does not avoid the instrument in the hands of a subsequent holder in due
course; but as to him, e date so inserted is to be regarded as the true date.
425. When date necessary. Under Section 6, the date is not necessary for the negotiability of the
instrument. However, the date may be necessary to determine the date of maturity (but not for
negotiability). In the following cases, the date is also necessary: (1) where interest, is stipulated,
to determine when interest is to run, but not to make the instrument negotiable; and 2) to
determine whether a party has acted within a reasonable time, but not to make the instrument
negotiable.
426. Instrument payable at a fixed period after date. Suppose A makes the following note:
(No date)
I promise to pay to B or order P1,000.00, 60 days after date.
(Sgd.) A
In this case, the date of the instrument is necessary to determine the date of maturity. Under this
section, the holder may insert the true date of issue.
427. Instrument payable at a fixed period after sight. Suppose A draws the following bill:
Pay to B or order P1,000.00, 60 days after sight.
(Sgd.) A
To: C
Then, across the instrument, the following words appear:
Accepted
(Sgd.) X
(No date)
The date of maturity of the foregoing bill cannot be determined unless the acceptance is dated.
Under this section, the holder may insert the true date of acceptance.
428. Effect of insertion of wrong date. In the first illustration, suppose that the true date of the
issuance of the note is November 30, 1949 but the payee inserts November 1, 1949, in order to
hasten the date of maturity. What is the effect of this ante-dating as to B? Knowingly inserting
the wrong date in an undated instrument will avoid it as to the party so inserting the wrong date.
It is implied in this section that instrument void as to B, who, having knowledge of the true date,
made the wrong insertion. And under Section 12, it is also implied that the instrument, as to B, is
void because it was ante-dated for a fraudulent purpose.
429. As to the holder in due course. But suppose B, after inserting the wrong date, indorses the
instrument to C, under circumstances that make C a holder in due course. Is the instrument also
avoided as to C, who is a holder in due course? No. Under the last sentence of this section, the
insertion of a wrong date does not avoid the instrument in the hands of asubsequent holder in due
course. Furthermore, the date so inserted will be regarded as the true date. Consequently, in the

62 FOUR-C LAW LIBRARY


illustration given, the date of maturity as far as C is concerned is 60 days from November 1,
1949 the wrong date inserted, not from November 30, 1949 the true date of issuance.
SECTION14. Blanks; when may be filled. - Where the instrument is wanting in any
material particular, the person in possession thereof has a prima facie authority to
complete it by filling up the blanks therein. And a signature on a blank paper delivered by
the person making the signature in order that the paper may be converted into a negotiable
instrument operates as a prima facie authority to fill it up as such for any amount. In
order, however, that any such instrument when completed may be enforced against any
person who became a party thereto prior to its completion, it must be filled up strictly in
accordance with the authority given and within a reasonable time. But if any such
instrument, after completion, is negotiated to a holder in due course, it is valid and
effectual for all purposes in his hands, and he may enforce it as if it had been filled up
strictly in accordance with the authority given and within a reasonable time.
430. Scope of Section 14. There are two steps in the execution of a negotiable instrument,
namely: (1) the act of writing the instrument completely and in accordance with Section 1 of the
Negotiable Instrument Law and (2) the delivery of the instrument with the intention of giving
effect to it. Bills of exchange and promissory notes are sometimes executed in blank and
delivered to another to fill in and negotiate either for his own benefit or that of the maker. Such
instruments are, therefore, incomplete but delivered. It is to such incomplete but delivered
instruments
that
Section
14
applies.
431. Prima facie authority to fill up blanks. Where the instrument is wanting in any material
particular, the person in possession thereof has a prima facie authority to complete it by filing up
the blanks therein. The material particular referred to here may be: (1) a. particular the omission
of which will render the instrument non-negotiable, such the name of the payee, or the name of
the drawer; or (2) a particular the omission of which will not render the instrument non
negotiable,
such
as
the
date,
rate
of
interest.,
place
of
payment.
432. Facts from which prima fade authority presumed. The law presumes fin. two facts (1)
want of a material particular in the instrument, and (2) possession thereof, by a person, a third
fact, (3) that such a person had authority to fill up the blank. Thus, suppose that A makes a
note payable to b1iuithe space for the sum payable blank. The instrument is in the hands of B.
Under this section, B has a prima facie authority to fill up the blank. It will be, noted that the law
does not seem to require the delivery of the instrument, with intent to have it converted into a
negotiable paper, as is the case with a signature in blank. The law merely requires that it be in
the possession of a person other than the drawer or maker, and from such possession, together
with the fact that the instrument is wanting in a material particular, the law presumes agency to
fill
up
the
blanks.
433. Prima facie authority, to Kill, up to any amount. A signature in a blank paper delivered
by a person, making the signature in order that the paper may be converted into a negotiable
instrument operates as a prima facie authority to fill, it up as such for any amount. The law thus
presumes the existence of the authority to fill the instrument up to ,any amount from the
following two facts: (1) a signature on a blank paper and (2) that the person signing in blank

63 FOUR-C LAW LIBRARY


delivers it in order that the paper may be converted into a negotiable instrument. Mere
possession
by
aperson
is
not
enough.
434. Illustration. Thus, suppose that A signs his name on a piece of paper and delivers the same
to B for the purpose of enabling B to recognize As signature. Has B the prima facie authority to
write a promissory note above the signature of A up to any amount? No, because the second
requisite is not fulfilled. The paper was not delivered with the intention of having it converted
into
a
negotiable
instrument.
435. Requisites to hold prior parties liable. Suppose that A makes the following note: Lpromise to pay B or order_____________________ on demand. (Sgd.) A. A delivers this
mechanically incomplete note to B on April 6, 1951. He authorized B to put in the blank only
P1,000.00. In order that a subsequent holder who is not a holder in the due course may enforce
the instrument against A, a party prior to the completion of the note: (1) the blank must be filled
up strictly in accordance with the authority given (that is, P1,000.00) and
(2)
it
"must
be
filled
up_
within
a
reasonable
time."
436. Right of holder not due course where blank wrongly, filled. Suppose that B, however,
puts in the blank P10,000. Then he indorses the note to C, C to D, and D to E, who is not a
holder in due course. Can E enforce the note? There are two views on this point :
(1) The first . view Is that one who is not a holder in due course cannot enforce" the instrument
again.-W-a party prior to the completion of the instrument, such as A, in the illustration, if the
instrument is not filled up strictly in accordance with the authority given or within reasonable
time. In other words, in the illustration, E can collect nothing on the-note from A.
(2) The second view is that, in such case the holder can enforce the instrument according to the
authorized tenor. In other words, in the illustration, Bean collect from A P1,000.
The better view seems to be the first one. The law provides that in order that one who is not a
holder in due course may enforce mechanically incomplete but delivered instrument, the two
requisites must exist. The implication is that when one or both of the requisites are absent, the
instrument may not be enforced.
437. Liability of parties negotiating after completion. Of course, E can enforce the instrument
at P10,000 against 11,. and B is liable because he was the one who placed- the amount and
because, as indorser, he warrants that the instrument is in all respects what it purports to be and
in addition, if he is a general indorser, that it is valid and subsisting." C and D are, liable because
they are parties subsequent to the completion and because, as indorsers, they warrant that the
instrument is in all respects what it purports to be, and, in addition, if they are general indorsers,
that the instrument is valid and subsisting." They are, therefore, estopped or precluded from
claiming that the note was not filled up strictly in accordance with the authority given.
438. Meaning of reasonable time. In determining what is a "reasonable time" or an
"unreasonable time," regard is had to the nature of the instrument, the usage of trade or business
(if any) with respect to such instrument and the facts of the particular case. In other words, the
term is very relative. The decisions are not uniform as to what constitutes reasonable time for
completing instruments. If the, parties are ignorant or ill, 14 months from the date of execution
was held reasona.ble.24 But a delay of 8 months has been held unreason-able." 10C)

64 FOUR-C LAW LIBRARY

439. Rights of holder in due course. Suppose, however,' that E is a holder in due course. Can he
collect from A P10,000.00? Yes, under the last sentence of the section. The note was negotiated
after completion and he, being a holder in due course, the instrument is "valid and effective for
all purposes in his hands and he may enforce it as if it had been filled up strictly in accordance
with the authority given and within a reasonable time. As to indorsers (and persons negotiating
by delivery), such as B, C and I), it is with greater reason that the holder in due course can
enforce the instrument against them.
440. It is a personal defense. Under this section, the defense of parties prior to the completion,
such as A, is that it is not filled up strictly in accordance with the authority given or that it is not
filled up within a reasonable time. However, such a defense is available only against holders who
are not holders in due course. The defense is not available against a holder in due course because under the law, in the hands of such a holder, the complete but delivered instrument is
"valid and effective for all purposes in his hands, and he may en-force it as if it had been filled
up strictly in accordance with the authority given and within a reasonable time."" The defense is,
therefore, a personal or equitable defense.
441. Summary of rules where instrument is incomplete but delivered. In the case of an
instrument that is incomplete and delivered, but completed contrary to the authority given, or not
completed within reasonable time:
(1) Where the holder is a holder in due course, he can en-force the instrument as completed
against parties 144.or or, sequent to the completion.
(2) Where the holder is not a holder in due course, he can enforce the instrument as completed
only against parties sub-sequent to the completion but not against those prior thereto.
It is to be noted that the holder of an instrument is either the payee or indorsee or bearer in
possession thereof who en-forces an instrument. He would be the plaintiff in an action on the
instrument. On the other hand, it is the debtor, either the maker, acceptor, drawer or indorser,
against whom an instrument is enforced. He would be the defendant.
SECTION 15. Incomplete instrument not delivered. Where an incomplete instrument
has not been delivered, it will not, if completed and negotiate without authority, be a valid
contract in the hands of, any holder, as against any person whose signature was placed
thereon delivery.
442. Scope of Section 15. This section applies to incomplete and. undelivered instruments.
443. Instrument not valid against party before delivery. Suppose that A signed a blank check
which was subsequently stolen by B who filled. In the amount and a fictitious name as payee. B
then indorsed the payee's name and passed the check to C, C to D; D to E, and E to F. Can F
enforce the instrument against A? Why? No, because as against A, whose signature was placed
on the check prior to the delivery, the instrument is not valid.

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444. Where holder is in due course. Suppose that F is a holder in due course. Would the answer
be the same? Yes. 1 The non delivery of an incomplete instrument, is a valid defense not only
between the original parties but also against the holder in due course. The law does not make any
distinction between a holder in due course and one who is not a holder in due course. The law
uses the phrase any holder which includes a holder in due course.
445. But, indorsers, etc are liable. However, the invalidity of the instrument is only with
reference to parties whose sig-natures appear on the instrument prior to delivery. As to parties
whose signatures appear on the instrument after deli-very, the instrument may be valid. Thus
where B, who steals a blank check and fills it up, indorses it to C, C to D, D to E, and E to F, F
can enforce it against B, C, D, and E. The instrument is valid as to B because he was the one
responsible for the negotiation of the instrument, its theft and filling up, and because he is an
indorser and as such he warrants that the instrument is in all respect what it purports to be etc.,
and as C, D and E also they are indorsers.

446. It is a real defense. Under Section 15, the possible defense of a party whose signature
appears on an instrument prior to delivery is that, as against him, the instrument is not valid for
having been incomplete and undelivered. This defense may be called "want of delivery of a
mechanically incomplete instrument." Such a defense can be interposed not only against one
who is not a holder in due course but also against a holder in due course, as the law uses the term
"any holder" which includes a holder in due course. It is, therefore, real defense.
447. Delivery is not conclusively presumed where instrument , incomplete. Under Section
16, delivery is conclusively presumed where an instrument is in the hands of a holder in due
course, although possession is prima facie evidence of delivery, the presumption can be rebutted.
The provision of Section 18 that a valid delivery is conclusively presumed when the instrument
is in the hands of a holder in due course must be read in connection with Section 15, and Section
16 does not apply in the case of an incomplete instrument completed and negotiated without
authority. Section 16 applies to a mechanically complete instrument not delivered, while Section
l4" applies to a mechanically incomplete instrument not delivered.
448. But delivery presumed prima facie. But where an incomplete and undelivered instrument
is in the hands of a holder in due course, there is prima facie presumption of delivery which the
maker may rebut by proof of non-delivery. This presumption must, however, be distinguished
from the presumption where an undelivered mechanically complete instrument is in the hands of
a holder in due course, in which the presumption of valid delivery is not Merely prima facie but
conclusive: Furthermore, where the custody of the incomplete instrument has been entrusted to
another, who wrongfully completes and negotiates it to a holder in due course, delivery to the
agent or custodian is a sufficient delivery to bind the drawer or maker."
SECTION 16. Delivery; when effectual; when presumed. - Every contract on a negotiable
instrument is incomplete and revocable until delivery of the instrument for the purpose of
giving effect thereto. As between immediate parties and as regards a remote party other
than a holder in due course, the delivery, in order to be effectual, must be made either by
or under the authority of the party making, drawing, accepting, or indorsing, as the case
may be; and, in such case, the delivery may be shown to have been conditional, or for a

66 FOUR-C LAW LIBRARY


special purpose only, and not for the purpose of transferring the property in the
instrument. But where the instrument is in the hands of a holder in due course, a valid
delivery thereof by all parties prior to him so as to make them liable to him is conclusively
presumed. And 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.
449. Scope of section. The section applies to an instrument that is mechanically complete but
undelivered.
450. Undelivered instrument is incomplete. The law provides that "every contract on a
negotiable instrument is incomplete and revocable until delivery of the instrument for the
purpose of giving effect thereto." And no rights, properly speaking, arise in respect to an
instrument until it is delivered.
451. Delivery and issue. "As between immediate parties and as regards a remote party other
than a holder in due course, the delivery, in order to be effectual, must be made either by or
under The authority of the party making, drawing, accepting, or indorsing as the case may be."
Issue is "the first delivery of the instrument, complete in form, to a person who takes it as a
holder." Delivery and issuance are used interchangeably delivery or issuance may be made either
by the maker or drawer himself or through a duly authorized agent. Delivery or issuance may be
made either to the payee himself or to his duly authorized agent.
452. Outline of rules on delivery of negotiable instruments. The following is an outline of the
rules on delivery of negotiable instruments under Sections 15 and 16:
(1) Delivery is essential to the validity of any negotiable instrument.
(2) As between immediate parties, or those in like cases, delivery must have been with the
intention of passing title.
(3) An instrument signed by the drawer or maker but not completed by him and retained in his
own custody, is invalid as to him for want of delivery, even though stolen and negotiated to a
holder in due course.
(4) But when the instrument mentioned in (3) is in the hands of a holder in due course, there is
prima facie presumption of delivery which the maker or drawer may rebut by of non-delivery.
(5) Where the custody of the incomplete instrument has been entrusted to another, who
wrongfully completes and negotiates it to a holder in due course, delivery to the agent or
custodian is a sufficient delivery to bind the drawer or maker.
(6) Where maker or drawer executes a complete instrument which is found in the possession of
another other than the holder in due course, there is a prima 'facie presumption of delivery
subject to rebuttal.
(7) Where the instrument mentioned in (6) is in the hands of the holder in due course, there is a
conclusive presumption delivery.
(8) Delivery of the instrument may be made on a parol condition or for a special purpose not
inconsistent with its ten terms, where the validity of the instrument is to arise out of 'performance
of the condition or consummation of the purpose. But such condition or specification or purpose
does not affect the rights of a holder in due course. Such condition is a condition precedent, and
is to be sharply distinguished from a condition subsequent, the happening or non-happening of

67 FOUR-C LAW LIBRARY


which is to defeat or qualify the instrument. Such condition subsequent contradicts the written
terms and may not be set up by parol evidence."
453. Right to revoke. Before delivery, the maker or drawer can revoke, cancel or tear up the
instrument. The payee named in the instrument acquires no right until the instrument is delivered
to him,
454. Literal meaning of immediate and remote parties. Literally, the "drawer" and "payee"
are immediate parties to each other. So are the "maker" and the "payee" to each. So also are the
"indorser' and the "indorsee" to, whom the indorser indorses the instrument, to each other, But as
to the "drawer" or "maker," an indorsee is not an "immediate party.' Thus, suppose that A makes
a note payable to B or order. B negotiates the note to C, and C to D, and D to E. Literally, A and
B are immediate parties. So also are B and C to each other, as well as C and D to each other. But
A and C, or B and E are remote partie to each other, in the literal sense.
455. Broad meaning of "immediate" and "remote" parties. However, under the law, the term
"immediate parties" and "re-mote parties" are given broader meanings than their literal
significations. It has been held that the term "immediate par-ties" is confined to "those who are
'immediate, in the sense of knowing or being held to know the conditions or limitations placed
upon the delivery of the instrument." It means not proximity.4 0 In other words, the Criterion is
whether or not the party in question knows of the conditions or limitations placed upon the
deliver or the fact that the instrument was not delivered. If the party in question knows, he is an
immediate party even if he is physically remote. On the other hand, if he does not know, he is not
an immediate party even if he is the next party physically.
456. Illustrations. (1) Suppose that A makes a note pay-able to B's order. He keeps it in his safe
but B, his nephew after learning of its existence, steals it. B then indorse the note to C, C to D, D
to E, and 'E to F knows that B stole the note from his uncle's safe. In this case, even if F is
physically remote from A, F is an immediate party as far as A is concerned because he knows of
the lack of delivery.
(2) But suppose that A delivers the note to Y, his agent, with instructions to deliver the note to B
but only for safe-keeping. When Y delivers the note to B, Y does not tell him that the delivery is
only for safekeeping. Although B is physically immediate to A he is not immediate party within
the meaning of Section 16 as he does not know the limitations placed upon the delivery.
457. Presumption of valid delivery as to immediate party, or remote party not holder in
due course. Under the law "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."'" In the first illustration,4' since the note is no longer in the possession of A, whose
signature appears thereon as maker but already in the possession of F, the presumption is that A
validly and intentionally delivered the note to B.
458. Presumption is rebuttable. However, as against an immediate party and remote party who
is not a holder in due course, the .presumption will exist in his favor only until the contrary is
proven. In other words, the presumption is rebut-table as against an immediate party or a remote
party who is not a holder in due course and, as against him, it may be proved that: (1) no delivery

68 FOUR-C LAW LIBRARY


was made; or (2) if there was delivery, it was not 'authorized; or (3) if the delivery was made or
authorized, the delivery was conditional or for a special purpose and not fort, the purpose of
transferring the property in the instrument. In the first illustration, since F is an immediate party.
A can prove against him that he (A) did not deliver the note .bat was in fact stolen by B for his
safe. Consequently, F cannot recover from A. However, F can recover from B, C, they are
indorsers.
459. Conditional delivery. The following is an example of a conditional delivery: A makes a
complete note in favor of B, with the understanding that it is not to become binding on A until it
is also signed by C. If B files an action on the note without any additional proof, the presumption
is that it was delivered validly and intentionally. But as B knows of the condition placed upon the
delivery, he is an immediate party. Consequently, the presumption is rebuttable, and A can show
that the delivery was conditional and if the condition is not fulfilled, he cannot be held liable by
B.
460. Other illustrations of conditional delivery. Delivery on condition that the instrument is
not to be binding until, a corporation is established; or Until A passes the bar examinations, etc.
It is to be noted that what is conditional here is the delivery,, not the promise or order to pay. If
the promise or order to pay is conditional, the instrument is rendered non-negotiable.
461. Delivery for special purposes. The following is an ex-ample of delivery for a special
purpose: A delivers a complete note payable to bearer signed by him to B for (1) safekeeping or
(2) for ,collection B cannot enforce the note against A, as A can prove that the note was
delivered only for a special purpose, namely, for safekeeping or collection.
462. Presumption of delivery as to holder in due course. Under the law, "where the instrument
is in the hands of a holder in due course, a valid delivery thereof by all parties to him is
conclusively presumed." A presumption is said to be conclusive when contrary proof is barred:
first were a holder in due course, A cannot prove that the note was stolen by B, because in F's
hand, he being a holder in due course, valid and intentional delivery by A, a party prior to F, is
conclusively presumed and therefore, A cannot introduce evidence to disprove the presumption.
463. It is a personal defense. Under Section 16, the possible defense of a -party sought
to be charged is that the instrument was not delivered, or if delivered, delivery was not
authorized or only on a condition or for a special purpose. This defense may be termed "want of
delivery of a mechanically complete instrument." Such a defense is not available against a holder
in due course because under the law, proof of lack of delivery, or of unauthorized delivery; Or of
conditional delivery, or of deli-very for a special purpose, is barred inasmuch as in the hands Of
a holder in due course, the valid and intentional delivery of a mechanically complete but not
delivered instrument is conclusively presumed. It can, however, b -interposed against an
immediate party and remote parties holders in due course inasmuch as the presumption of valid
and intentional delivery is only rebuttable as to immediate parties and to remote parice who are
not holders in due course, The defense is, therefore, only a personal defense.
464. Conclusive presumption not applicable to incomplete instruments. It must be
remembered that the bills or notes dealt with in this section are mechanically complete. But

69 FOUR-C LAW LIBRARY


suppose that they are mechanically incomplete. Is there a conclusive presumption of valid and
intentional delivery as to a holder in due course? None, because this section applies only to
complete instruments not delivered. As already stated, under Section 15, an incomplete and
undelivered instrument is not valid even in the hands of a holder in due course as against a party
prior to delivery.
465. Lost or destroyed instruments. The duties and rights of the loser, finder and
holder of lost and destroyed negotiable instruments differ from the duties and rights as to
ordinary chattels. The reason is that negotiable instruments take the place of money, and "it
would be embarrassing if every taker of such instruments was bound to inquire into the title of
the holder and if he were obliged to take it with all the imperfections and subject to all the
defenses which attach to it in the hands of the holder."
466. Diligence of owner. "As soon as the owner discovers that he has lost negotiable
instrument, he should instantly give notice of the loss to all the parties on such paper and inform
them not to pay the amount to anyone except to the, loser,* his order. Thus, if an unaccepted bill
of exchange be lost 'the drawee should be advised not to accept the same.
467. Rights of finder. No title to a lost bill or note vests the finder and, the owner,
when he has identified it, may maintain trover against the finder. If the finder has received
payment of the bill or note, an action for money had and received for his use may be maintained
against him. Trover may likewise maintain the action of replevin against the finder.
468. Discharge of party liable. A party liable will not be discharged if he pays the
amount to the holder of the lost instrument before maturity, as such a payment is not made in the
usual course of business.' "Neither will the party liable be discharged if he had notice of the loss
unless the holder is a bona fide holder for value and entitled to enforce payment."
469. Theft of negotiable instruments. Checks and other commercial papers are
subject of theft, and, any person who, with intent to gain, but without violence against or
intimidation of persons nor force upon things, shall take a negotiable instrument belonging to
another without the latter' consent, is guilty of the crime of theft.' The face value of the check or
commercial paper shall serve as the basis for grading the penalty corresponding to the crime.
470. Estafa by destruction or concealment of negotiable instruments. Any person who shall
defraud another by removing, concealing or destroying in whole or in part of a negotiable
instrument is guilty of the crime of estafa.5 Thus, a debtor who has asked his creditor for the
return of a promissory note in order that he might renew it but later on fails to return the note
because of having destroyed the same when it came into his possession is guilty of estafa. And
the concealment of a document of credit, thereby making it difficult to collect the debt,
constitutes the crime of estafa, and the basis of the penalty is the amount of credit evidence in the
document.
SECTION 17. Construction where instrument is ambiguous. - Where the language of the
instrument is ambiguous or there are omissions therein, the following rules of construction
apply:

70 FOUR-C LAW LIBRARY


(a) Where the sum payable is expressed in words and also in figures and there is a
discrepancy between the two, the sum denoted by the words is the sum payable; but if the
words are ambiguous or uncertain, reference may be had to the figures to fix the amount;
(b) Where the instrument provides for the payment of interest, without specifying the date
from which interest is to run, the interest runs from the date of the instrument, and if the
instrument is undated, from the issue thereof;
(c) Where the instrument is not dated, it will be considered to be dated as of the time it was
issued;
(d) Where there is a conflict between the written and printed provisions of the instrument,
the written provisions prevail;
(e) Where 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) Where a signature is so placed upon the instrument that it is not clear in what capacity
the person making the same intended to sign, he is to be deemed an indorser;
(g) Where an instrument containing the word "I promise to pay" is signed by two or more
persons, they are deemed to be jointly and severally liable thereon.
471. When section applicable. It must be remembered that the rules stated in this section
shall not be availed of if the terms of the instrument in question are clear and admit of no doubt.
It is only when the instrument in question is ambiguous, doubtful or obscure, or when there are
omissions therein that the rules stated in this section apply.
472. Sum payable expressed in words and figures. Where a promissory note reads
"twelve pesos" (in words), in its body and P1,200," (in figures) at the margin, under this
provision, the note is good for P12.00 not P1,200.00. The reasons for this rule are that: (1) the
figures in the, margin do not form part of the instrument and are simply, for, convenience or
reference and (2) it is easier to change the figures or to commit a mistake in regards to them
when the sum is written alt in words.
473. Where words ambiguous. But when the words are ambiguous or uncertain;
reference may be had to the figures to fix the amount, such as, when the words read "EIGHTY
THOUSAND PESOS" and at margin the figures "P8,000.00" are written. And the letter Y is not
clearly written making it difficult to determine whether the maker intended it to, "EIGHTY
THOUSAND PESOS" In such a case, the note is good only for P8,000.00" Thus the following is
also ambiguous and uncertain: "I promise to pay to B or order One Pesos (Sgd.) A". The figures
written at the margin are P1,000.00. The note is for P1,000.00. And so also is a bank not justified
in dishonoring a check which bears the figures "$365" although the amount written is "three
sixty five dollars" since the marginal figures control in case of ambiguity."

71 FOUR-C LAW LIBRARY


474. Payment of interest. This applies to instruments where interest is stipulated' but
the date when interest begins to be paid is not specified. A note which reads as follows: "with
interest at ---------%, from --------- " will earn interest from the date of the note, or the date its
issue, at the legal rate." This is one case where the date is necessary to determine when interest is
to run.
475. Instrument not dated. This is different from Sec. 11. Under said section, the date
of the instrument, if dated, will be presumed to be its true date. However, the presumption is
prima facie, or rebuttable, between the immediate par. ties (but not against holders in due
course). Proof may be adduced to show a different date as the true date of the issue. acceptance,
or indorsement.'' Under Section 17, however, the instrument is not dated. In such a case, the date
of its issue will be considered its date. And in a case, it was held that an undated acceptance of an
undated bill of exchange is payable on demand and will be considered to be dated as of the time
it was executed.
476. Conflict between written and printed provisions." Sup-pose that the promissory
note reads as follows: "I promise to pay to the o .der Jose Soria,no only, for the sum of P500.00
(Sgd.) Y." The words and figures in italics are written by Y in his own handwriting. The other
words not in italics are printed. They are clearly in conflict with the handwritten words "Jose
Soriano" and "only" because the hand written words would make the instrument payable to a
specified person only, while the printed words would make the instrument payable to order. The
handwritten words will prevail. Consequently, the instrument is not negotiable as it is Payable to
a specified person, not to order, nor bearer's The reason in the rule-ii-that the written words are
deemed to express the true intention of the maker because they are written by himself and printed
forms are printed without any particular contract in view.
477. Instrument is ambiguous. Suppose that A executes the following instrument.
I promise to pay to the order of B P1,000.00 at the PNB.
(Sgd.)A
To the PNB
Accepted, (Sgd.) PNB.
This is an ambiguous instrument. It is a promise to pay but there is a drawee and acceptor. In this
case, the payee or the holder may treat it either as a bill or note.
478: Capacity of party signing not clear. Usually, the signature of the maker or drawer
is at the lower right hand corner of the face of the instrument, that of the indorsers at the back of
the instrument; and that of the acceptor across the face of the instrument. However, there may be
cases where it is not clear in what capacity a person signing intended to sign. Thus, suppose that
A is the maker of a promissory note which is payable to bearer. B signs his name across the face
of the instrument. Obviously, he cannot be an acceptor because the instrument is not a bill of
exchange. Under paragraph (f) of Section 17, he is deemed to be the indorser.

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479. Illustrative cases. (1) One who signed in the place of the maker's name is not an
indorser. Section 17 (f) applies only to cases of doubt arising out of the location of the nature.
(2) Where a note reading "We promise to pay" and stating the maker and .indorser each hereby
waive was signed by Framers Mutual Exhange through its treasurer, followed by the names of
twenty persons on the face of the instrument, it was held that these persons were liable as
indorsers, and indorsersements may be written on the face of the instruments.
480. Two or more persons signing. Suppose that A and B sign the following note: "I
promise to pay to C or order P1,000.00 (Sgd.) A and B." rn this case; A and B are &Mitt to be
jointly and severally liable not merely jointly liable. In other words; the holder of the instrument
can collect the whole amount of the instrument from either one of them. Inclusion of the other
co-signer in the complaint as codefendant is un, necessary." But if the note used the word "we
promise" instead of "I promise", A and B would only be jointly liable. And in this jurisdiction,
the word "jointly", when used by itself in a judgment rendered in English, is equivalent to the
word "mancomunadamente."
SECTION 18. Liability of person signing in trade or assumed name. No person is liable
on the instrument whose signature does not appear thereon, except as herein otherwise
expressly provided. But one who signs in a trade or assumed name will be liable to the
same extent as if he had signed lit his own name.
481. General rule as to liability of person whose signature not on instrument. The
rule stated here is that a person whose signature does not appear on the instrument is not liable.
Thus, a drawee who has not accepted the bill of exchange is not liable on the instrument. Thus,
also, one whose name does not appear on a note cannot be held liable thereon even though the
Payee knew at the time of making the note that the obligation was that of a person other than the
maker." So also, where a note Nvas signed by one individual, a person associated with him in a
joint oil enterprise for the benefit of which money was borrowed, was not liable on the note since
undisclosed prin-cipal may not be held liable on negotiable paper executed by the agent in his
own name."
482. Exceptions to general rule. The law, however, says "except as herein otherwise
provided for." The following are exceptions to the general rule:
(1) Where a duly authorized - I signs for a person, that person is liable.
(2) Where a person sought to be charged forges the sig-nature of another person, the forger is
liable even if his signature does not appear. Thereon.
(3) Where a person sought to be charged signs on a paper separate from the instrument itself, as
in an allonge, although the allonge may be considered a part' of the instrument; or where an
acceptance is written on a paper other than the bill itself, under Sections 134 and 135.

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(4) Where the person uses an assumed name or trade name. One may become a party to a
negotiable instrument by any designation he desires. In that case, the trade or assumed name is
equivalent to his signature and, therefore, the signature by an assumed or trade name is merely an
apparent exception to the general rule.
483. Illustrative cases. (1) The defendants were partners under the firm name of "The
Oregon Locators." A note was given for firm purposes signed, "The Oregon Locators, by F. L.
Granger, member of the firm authorized to sign the firm name." HELD: That all the partners
were liable on the note." (2) In an action by the payee against Bjornstad, who signed the note in
the following manner: "Lorry Hill Grocery, by J. G. Bjornstad" when there was no corporation in
Minne-sota by that name, but the defendant carried on business in good faith, using that name.
HELD: That directed verdict for the plaintiff was proper.
SECTION 19. Signature by agent; authority; how shown. The signature of any party may
be made by a duly authorized agent. No particular form of appointment is necessary for
this purpose; and the authority of the agent may be established as in other cases of agency.
484. Signature through agent form. As already stated, the party may sign personally or
through. The agency may be oral or written. There is no particular form required by the law and
the agency may be proved by oral or written evidence, unless specific provisions of the general
law, such as, the .Statute of frauds, require otherwise.
485. Authority to collect does not include indorsement. But the right of an agent to
indorse commercial paper is a very responsible power and will not be lightly inferred. A
salesman with authority to collect money belonging to his principal does not have implied
authority to indorse checks received in payment. Any person taking checks made payable to a
corporation which can act only by agents, does so at his peril and must abide by the
consequences if the agent who indorses the same is, without authority.""
SECTION 20. Liability of person signing as agent, and so forth. Where the instrument
contains or a person adds to his signature words indicating that he signs for or on behalf of
a principal or in a representative capacity, he is not liable on the instrument if he was duly
authorized; but the mere addition of words describing him as an agent, or as filling a
representative character, without disclosing his principal, does not exempt him from
personal liability.
486. Requisites for agent to escape liability. In order to escape personal liability on the
instrument, an agent C, must (1) be duly authorized; (2) add words to his signature indicating
that he signs as an agent, that is, for or on behalf of a principal, or in a representative capacity;
and (3) disclose his principal.
487. Illustrations. Pedro Vega, being the agent, he must sign as follows:

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(1) Jose Cruz By Pedro Vega
(2) Pedro Vega For Jose Cruz
(3) Pedro Vega As Agent of Jose Cruz
In all the foregoing, Pedro Vega is not personally liable unless he is not duly authorized. .
488. Where principal not disclosed. Suppose Pedro Vega signs as follows ': "Pay to A
or order P100. (Sgd.)Pedro Vega, Agent." Pedro Vega is personally liable on this instrument
even if he is duly authorized, as he did not disclose his principal. The word "agent" following his
name merely describes him. Thus, also, one is not relieved from liability by adding the
descriptive form "trustee", "administrator", or "guardian".' Thus in a case, defendant Aruego
signed as acceptor as follows:
"JOSE ARUEGO (A.gceptor) (SGD) JOSE ARUEGO," His defense was "that he signed the
supposed bills of exchange as an agent of the Philippine Education Foundation Company where
he is president." Now where has he disclosed that he was signing for the Philippine Education
Company. Held: "For failure to disclose his principal, Aruego is personally liable for the drafts
he accepted."
489. Disclosure need not be in signature. The disclosure of the principal in order to
'relieve the agent from liability need not be in the signature. Thus:
Y & Co., Inc
Manila
We promise to pay to X or order P1,000.
(Sgd.) Pedro Vega,
Treasurer
In the foregoing, Pedro Vega is not generally liable. The name at the heading is sufficient
disclosure of the principal.
(2)
We promise to pay to X or order P1,000 for money loaned to Y & Co.
(Sgd.) Pedro Vega, President
Juan Jose, Secretary
Pedro Vega and Juan Jose are not personally liable. There is a sufficient disclosure of principal
in the body of the note.

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490. Rule as to government officers. Officers of the government and other public
corporations are not held to the same rule of agency by which, in exceeding their authority, bind
themselves; everyone having dealings with a public officer is supposed to know the legal
limitations of his agency so that when the public officer, -in innocent -mistake of the law, makes
an unauthorized contract in the name of the public corporation, neither he nor the corporation is
bound.
SECTION 21. Signature by procuration; effect of. A signature by "procuration'
operates as notice that the agent has but a limited authority to sign, and the principal is
bound only in case the agent in so signing acted within the actual limits of his authority.
491. How signature per procuration made. Jose Cruz, being the principal, and Pedro
Vega, agent, he signs as follows:
Jose Cruz, Per procuration: Pedro Vega. Instead of per procuration, the following may also
be used: per proc. P P , Pp:
492. Effect of signature per procuration. It constitutes a warning that the agent has but
a limited authority and therefore, a person who takes the instrument so signed is bound at his
peril to inquire into the extent and nature of the the agents authority, and this applies- to every
person.
SECTION 22. Effect of indorsement by infant or corporation. The indorsement or
assignment of the instrument by a corporation or by Infant passes the property therein,
notwithstanding that from want of capacity, the corporation or infant may incur no liability
thereon.
493. Indorsement of minor or corporation. Ordinarily, a minor cannot give consent to
contracts and a contract entered into by him is voidable. In the case of corporations, they can-not
perform acts beyond the scope of their authority. Such acts would be ultra vires acts.
Nevertheless, if a minor or a corporation indorses an instrument, the indorsee acquires title to it
and can enforce it against the maker or acceptor or other parties prior to the minor. Such prior
parties cannot escape liability by setting up as a defense the incapacity of the indorser.
494. Illustration., Thus, suppose that A is the maker of a note with B as the payee. B
indorses the note to C, C to D, D to E and E to F. E was a minor at the time he indorsed the note
to F. F can enforce the note (as he acquired title to it in spite of the incapacity of E) against A, B,
C and D, parties prior to E, who cannot set up as a defense the incapacity of E. The maker," the
drawer,'" and the acceptor" warrant not only the existence of the-payee but also his then capacity
to indorse. Hence; -where the payee is a minor, they cannot interpose as a defense his incapacity
to indorse. 495. Indorsements by - Others incapacitated. This section is also applicable to
indorsements by lunatics, imbeciles, and other incapacitated persons. So, where A, an insane, is

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the payee in a note, and he indorses it to C, C acquires ownership over the note and can enforce it
against the maker.
SECTION 23. Forged signature; effect of. When a signature is forged without the
authority of the person whose signature it purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a discharge therefore, or to enforce payment
thereof against any party thereto, can be acquired through or, under such Signature;
unless the party against whom it is Sought to enforce such right is precluded from setting
up the forgery or want of authority.
496. Forgery, defined and explained. "By forgery is meant the counterfeit making or
fraudulent alteration of any writing, and may consist in the signing of another's name, or the
alteration of an instrument in the name, amount, description of the person and the like, with
intent to defraud." The intent to defraud distinguishes forgery from innocent alteration and
spoliation. Section 23 applies only to forged signatures or signatures made without the authority
of the person whose signature it purports to be. Consequently, if the forgery consists of alteration
in the amount, Section 23 does not apply. Such alterations are covered by Section 124.
497. Illustrations of ordinary forgery. B makes a promissory note, making himself the
payee, and forges the signature of A, making it appear that A made the note. (2) A draws a bill of
exchange against X, payable to the order of B. Y fraudulently gets hold of the bill and signs the
name of B, payee, indorsing the bill to himself. The other forms of forgery are: (1) fraud, in
factum (2) duress amounting to forgery and (3) fraudulent impersonation in certain cases.
498. Fraud amounting to forgery. B obtains the signature of A by telling A that it is
only for autograph purposes. Then B writes above the signature a negotiable instrument. The
fraud here amounts to forgery. This is called fraud in. factum or fraud in esse contractus. Here,
there is no intention to issue an instrument. As it amounts to forgery, it has the effect of forgery
such that it is a real defense.
499. .Illustrative cases.
(1) The maker of a note, an old colored man who almost was blind, was induced to place his
signature on a piece of paper without knowing that it was a note and without negligence on his
part. It was held that he was not liable to a holder in due course. The fact amounted to a forgery.
(2) The defendant signed a note in blank, having been fraudulently induced to believe that he
was signing a sales application. It was held that the subsequent completion of the instrument
amounted to a forgery so that a holder in due course could not recover.
500. Fraud in factum distinguished from fraud inducement. Fraud is factum must be
distinguished from fraud inducement, which does not amount to forgery and which is only a
personal defense: The following is an illustration of fraud inducement. A sells to B what he

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represents to B as a diamond ring, which in fact is only a glass. B issues to A a check. The check
is not a forgery. The fraud here is in inducing B to issue the check. Here, there is an intention (of
B) to issue an instrument. "
501. Duress amounting to forgery. Ordinarily, duress is merely a persona defense. But
where it amounts to forgery, it is a real defense, as where A takes B's hand and forces him to sign
his name.
502. Fraudulent impersonation. Suppose that X represents himself to be Juan Cruz,
when in fact he is not. By this misrepresentation, X obtains from Y a note payable to the order of
Juan Cruz. Then X indorses the note, signing "Juan Cruz." is forgery? It depends upon whom Y
intends to pay. If Y intends: That proceeds of the note will go to X, the person dealing with him,
named at the time Juan Cruz, then X's Signature of the name "Juan Cruz" is not a forgery if Y
intends that the proceeds of the note to the real Juan Cruz and not X, but to whom Y issued the
note on the belief that X was Juan Cruz, Xs signature of "Juan Cruz" would be a forgery. In the
first case, X is the intended payee, regardless of his name. In the second, Juan Cruz not X, is
intended payee.
503. Double intent in fraudulent impersonation. The fact, however, is that "in these
fraudulent impersonation cases, the maker or drawer of the instrument may be said to have a
double intent. First, he intends to make the instrument payable to the person before him or to the
person writing at the other end of the line, in case the negotiation is by correspondence. Second,
he intends to make the instrument payable to the person whom he believes the stranger to be. To
use the illustration, Y here may be said to have a double intent. First, he intends to make the
instrument payable to X, the person before him. And, second; he intends to make the instrument
payable to Juan Cruz whom he believes X, the stranger, to be.
504. General rule in fraudulent impersonation. The courts have almost unanimously
field that the first is the controlling intent except where the name of the payee was already
known to rnake - or drawer,' or was more particularly in some manner, e.g., by some
designation, description or title, in which cases the courts treat the second as the controlling
intent." Consequently, in the illustration, it would ordinarily be held that X is the intended payee,
and therefore, X's signature of "Juan Cruz" would ordinarily not constitute a forgery but the
signature of an assumed name. 505. Illustrative cases. (1) E representing himself to be N,
delivered to D a bogus check for $5,000.00. In turn, D delivered to E a check, with D as the
drawer, payable to N. E then indorsed it, using the name "N" to a purchaser for value without
notice. D stopped payment. It was held that D was liable to the indorsee because his primary
intent was to make the check payable to the visible man who stood before it, identified by sight
and hearing. (2) A is the owner of a piece of land. B is a real estate broker. B communicates with
C, representing himself to be A, the owner of the land. After some negotiation, C buys the land
and remitted money to D, a bank, directing D to pay to B, believing B to be A. B, posing as A,
presented the deed to the land to D, and D, believing B to be A, paid the money to him. It was

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held that the bank carried out the intent of C, who mistook his physical payee B for his mental
payee, The true A being unknown to him, he meant the money to be paid to the person with
whom he was dealing and that therefore C, not D bank, must bear the loss.
506. Reason for rule; theory of actual intent. "The theory commonly invoked in
support of the majority view which throws the loss on the drawer at least in the absence of
anything to show that the drawer had any doubt as to identify the person to whom he delivered
the paper as payee is that the drawee, in paying the paper, or the holder, in taking it upon the
indorsement of the impostor in the name of which the payee was described, carries out the
intention that the drawer entertained at the, the impostor, although that intention was conceived
in consequence Of The fraud of the impostor as to his identity and ownership of the property
which represented the consideration." This is called the theory of actual intent.
507. Another reason: for rule; theory of estoppel "Some cases which support the
doctrine that throws the loss upon the drawer, invoke in its support, generally, as an alternative
or in addition to the theory of actual intent the theory of negligence or estoppel, or more
broadly, the maxim that as between two innocent persons, the one whose act was the cause of
the loss should bear the consequences."" Thus, it was held that "it was his (drawer) duty to use
diligence to ascertain the identity of the party with whom he dealt. Failing to make this
discovery, he became the victim of a fraud. The impostor having succeeded in this first and
essential step in the practice of the fraud, the next was comparatively an easy one. The bank
(drawee) had a right to believe that Lester (drawer) has acted with full knowledge of the party to
whom he gave the creek for the money, and its duty to him was discharged when it satisfied
itself that the payment was intended to be made to the party who presented it.
508. Rule qualified where impostor represents himself as agent of payee. "There is
well-defined distinction between cases where the paper is delivered to the impostor as payee, in
the belief that he is the person to whom or upon whose indorsement it will be paid, and ceases
where the paper is delivered to the impostor upon his presentation, in the belief that he is agent
of the person named as payee, although the latter is a fictitious person, or at last a person who
has no connection with the transaction; ad it is held with practically no conflict at least, in the
absence of negligence on drawer's part that as between the drawer and drawee, or between the
drawer and a holder in due course, the loss falls on the drawee or the purchaser, as the case may
be, rather than on the drawer, where the imposter upon whose indorsement the paper was
purchased or paid, represent himself to be the agent of the payee, and not to payee himslf." "The
"doctrine of actual intent" does not apply because the drawer did not regard, the individual to
whom he delivered he check as the payee but merely as the intent of the payee.
509. Admission of genuineness and due execution. When an action or defense is fouled
upon a written instrument, such as a negotiable instrument, copied in or attached to the
corresponding pleading, the genuineness and due execution of the instrument shall be deemed
admitted unless -specifica0 denied under oath by the adverse party." Consequently, the

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genuineness and due execution of the written instrument or document copied in or attached to the
opponent's pleading as the basis of his claim or defense, should be denied specifically under
oath, otherwise they are deemed admitted."
510. Meaning of admission of genuineness and due execution. By the admission of the
genuineness and due execution of a written instrument or document, is meant that the party
whose signature it bears admits; (1) that he signed it or that it was signed by another for him and
with his authority ; (2) that at the time it was signed, it was in words and figures exactly as set
out in the pleading of the party relying upon it ; and (3) that any formal requisites required by
law, such as swearing and acknowledgment, or revenue stamp which it re-quires, are waived by
him."
511. Defenses cut off by admission of genuineness, etc. Defenses, therefore, which are
inconsistent with the due execution and genuineness of the written instrument or document are
cut off by an admission implied from failure-to make a verified specific denial, as, for instance:
(1) the defense that the signature is a forgery; (2) that it was unauthorized, as in the case of an
agent signing for his principal, or one signing on behalf of a partnership or a corporation or that
in the case of the latter, that the corporation was not authorized under its charter to sign the
instrument; or (3) that the party charged signed the instrument in some other capacity than that
alleged in the pleading setting it out. But defenses or new matters which are not inconsistent with
the execution and genuineness of the instrument may be made such as payment, statute of
limitations, illegality or want of consideration, fraud, mistake, compromise, estoppel, coercion,
imbecility, etc."
512. Failure to identify promissory note will not necessarily defeat claim; illustrative
case. This is an appeal from a decision of the Court of First Instance of Manila. FACTS: Plaintiff
brought this action to collect from defendant the sum of P350.00, plus interest, and the sum of
P300.00 as damages and costs. The case originated in the Municipal Court of Manila but was
taken on appeal to the Court of First Instance. Defendant admitted the execution of the
promissory note but alleged that he executed it only as an accommodation party. It appears that
during the trial of the case, plaintiff failed to acknowledge the original of the promissory note
that was presented to her, contending that the document signed by the defendant was presented
by her to the judge when the case was tried originally before the municipal court. Nevertheless,
the court admitted said document in view of plaintiff's explanation that it is the very document
that was presented in evidence before the municipal court. After plaintiff had presented her
evidence, defendant, without presenting any evidence, rested his case. Thereupon, the court
rendered judgment against defendant but minus the damages. HELD: "Apparently, plaintiff was
only confused when the document was presented to her for identification bearing in mind that the
promissory note signed by defendant was the one submitted by her to the municipal court.
Granting, however, that plaintiff failed to identify the said promissory note, this cannot defeat
her claim which appears expressly admitted by defendant in his answer, his only defense being

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that he executed the promissory note merely as an accommodation party. But this defense failed
because he submitted his case without presenting any evidence." Decision affirmed.
513. Effect of forgery in general. Section 23 of the Negotiable Instruments Law lays
down three fundamental rules as to the effect of a forged signature. They are:
(1) That the signature forged or made without authority is wholly inoperative:
(2) That no right to retain the instrument, or to give discharge therefore, or to enforce payment
thereof against any party thereto, can be acquired through or under such signature forged or
made without authority.
(3) That nevertheless, as against a party precluded from setting up the forgery or want of
authority, the signature forged or made without authority is operative and, rights to retain the
instrument, to give discharge therefore, or to enforce payment thereof, can be acquired through
or under the. signature forged or made without authority.
514. Illustrations.
(1) B makes a note, making it appear that A is the maker thereof, by forging the signature of A.
B makes himself the payee. Thereafter, he indorses the note to C, a holder in due course. Can C
enforce the note against A? No, because A's signature inoperative and, therefore, it did not
seperate to make A to the instrument nor to bind him herein. As against A, C acquired no right to
retain, discharge, or enforce payment of the note. (2). A makes a note payable to the order of X
obtains possession of the note fraudulently and indorses it to C, by forging B's signature. Can C
enforce the instrument A? No, because Bs signature is inoperative, and, therefore, it did not
operate to transfer the title over the instrument to C. C could acquire any of those three right.
(3) But suppose that in the first illustration (No. 1), C showed A the instrument before buying it
and A tells C to go ahead and buy it as it is all right. As against him, his signature is operative,
and C acquired the rights to retain the instrument, to give discharge therefore, arid to enforce
payment there-of. By his declaration, A is preclude from setting up the forgery of his signature.

515. Extent of the effect of forgery. It must be noted, however. It must be noted,
however, that:
(1) Only the signature forged or made without authority is stated by the law to the inoperative
but neither the instrument itself is, nor the genuine signatures are, rendered inoperative.
(2) The instrument can be enforced by holders to whose tie over the instrument the forged
signature is not necessary, such as, an indorsement of instrument which on its face is payable to
bearer.

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(3) The instrument can be enforced against those who are precluded from setting up the defense
of forgery, even against V those whose signatures are forged.
516. Only forged signature inoperative; illustration. Proof that one of several
signatures to a note was forged or affixed without authority does not necessarily avoid the note
as to those whose signatures are genuine, it clearly would not render the note unenforceable
against parties who actively procured the forgery or acquiesced in it on full knowledge. Thus,
suppose that A makes a note payable to the order of B. Y obtains the note fraudulently and
indorses the note to C, by forging B's signature. Suppose that C indorses the note to D. D can
recover from C whose signature is genuine and therefore operative. Since it is operative, C is
bound as an indorse on the note. And of course, C has a right of recourse against the forger.
517. Forged, signature not necessary for title of holder; illustration. Whether an
indorsement on a note, not necessary to the plaintiffs' title, is genuine or forged, is immaterial to
the plaintiff's right to recover. Thus, suppose that A makes a note payable to B or bearer, and
delivers the note to B. Thereafter, X obtains possession of the note fraudulently. He indorses the
no &e to C, by forging the signature of B. Can C hold A liable? Yes, because instruments
payable to bearer can be negotiated by mere delivery. Consequently, the forge, indorsement is
not necessary to the title of C.
518. Persons precluded from setting up defense of forgery. Those precluded divided
into two general classes, namely: (1) those who warrant or admit the genuineness of signature in
question; and (2) those who by their acts, silence or negligence, are estopped from setting up the
defense of forgery. Under the class of warrantors of genuineness are included: (1) indorsers, (2)
persons negotiating by delivery and (3) acceptors.
519. Indorsers as warrantors. Indorsers, whether qualified or general, warrant that the
instrument indorsed by them is genuine in all respects what it purports to be. (Sec. 65 and 66)
Consequently, they cannot interpose the defense that signatures prior to them are forged.
520. Persons negotiating by delivery as warrantors. Persons negotiating by mere
delivery also warrant that the instrument negotiated by them is genuine and in all respects what it
purports to be.' Consequently, they are also precluded from setting up the defense of forgery.
Thus: A, maker. B, payee. X fraudulently obtains possession of the note. X then indorses the
note to C, forging the signature of B, payee. C indorses the note to D, D to E, and E to F, present
holder. F can .enforce the note against C, D, and E, who, being indorsers, cannot interpose the
defense that B's signature is forged since they warrant that the note is genuine and in all respects
what it purports to be.
521. Acceptors as warrantors. Acceptors are also precluded from setting up the defense
of the forgery of the drawer's signature. Under Section 62, a drawee, by accepting the bill, admits
the genuineness of the signature of the drawer. Thus: A, drawer, B, payee. X, drawee. But A's
signature is really a forgery made by Y. On presentment for acceptance, X accepts the bill. B

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then negotiates the bill to C, C to D, D to E and E to F, present holder. When F demands
payment from X, acceptor, X refuses to pay on the ground that the drawer's signature was forged.
May X interpose this defense? No, because by accepting the bill, he admitted the genuineness of
the drawer's signature and, therefore, X is precluded from setting up the defense of forgery. I
522. Those estopped. "Precluded" includes those cases where there are estoppels against
the party desiring to set up the forgery,' "The word "precluded" is broad enough to include
ratification ; and the usual argument against ratification of a forgery on grounds of public policy
properly applies to criminal and not civil liability. This is the better rule on the agency."'
523. Estoppel as to forgery of instruments. The rule of estoppel stated in the New
Rules of Court, applied to forgery in negotiable instruments may be stated thus: Whenever a
party has, by his own declaration, act, or omission, intentionally and deliberately led another to,
believe, that his or another's signature in an instrument is genuine, and to act upon such belief, he
cannot, in any litigation arising out of such declaration, act, or omission, be permitted to set up
the forgery of such signatures. As may be noted, the estoppel may arise from: (1) a declaration,
(2) an act,. or (3) omission or negligence
524. Illustrative case: "A's signature on a note is forged. B is the payee. C wants to buy
the note but before buying it, he asks A if the signature is A's signature, and A says "It is all
right." C can collect from A who is estopped from setting up the defense of forgery.' The
following are examples of estoppel by omission, (1) unreasonable delays in giving notice of
forgery and (2) negligence in delivery.
525. Unreasonable delay. "Unreasonable delay, after his discovery of the forgery, on the
part of one having the opportunity and duty to speak, in disclosing a forgery upon commercial
paper to the one who ought to be apprised thereof, estops the former from thereafter asserting the
forgery as against the latter where the latter is prejudiced by such delay or failure." The requisites
are: (1) that the delay be unreasonable and (2) that the one who ought to be apprised of the
forgery
must
have
been
prejudiced.

526. Illustrative cases. (1) Y is the agent of B with power to sell goods and collect
accounts for B. As such, he comes into possession of a check with B as the payee. Y indorses
and cashes the check. B, however, delays in complaining to the collecting bank of the forgery for
three years. May B still recover from the collecting bank? No. B, the payee, is barred by his
delay of three years in complaining of the forgery, which amounts to ratification of the agent's
unauthorized acts.
(2) A forged the signature of his wife on a note signe by him as co-maker for a loan given him.
Thereafter, the wife discovered the forgery. She failed, however, for many months after she
discovered it, to inform the payee of it, thus prevent- ii( ing the payee from taking steps to ptect

83 FOUR-C LAW LIBRARY


itself against loss. May the payee hold the wife liable': , ,, he is estopped from set-ting up the
defense of forgery by her silence.'
527. Meaning of reasonably prompt "What is reasonably prompt notice of a forgery
depends upon the circumstances of the case, and the situation of parties with reference to the
remedies against any party is a proper element to enter into the estimate of the reasonableness of
the notice."'
528. When prejudiced and when not prejudiced. "A bank is prejudiced where, at the
time one discovered that his attorney had forged his indorsement to a draft in his favor, it had
assets of the attorney in its possession to protect itself but at the time it was notified of the
forgery, it has parted with such assets." But "a bank is not prejudiced by the delay of a
partnership in notifying it of the forgery by the cashier of the partnership indorsements of its
name to checks payable to it, where, at no time after the discovery of the 'forgery by the
partnership, did the cashier have any property with which to indemnify the bank.""
529. Estoppel by negligence in delivery. The omission may consist in negligence in the
delivery of the instrument. Thus, a drawer may be precluded from a defense of forgery of the
payee's indorsement if delivery by him to the payee is negligent.
530. Illustrative case. A had accounts with two persons named B, one in Oklahoma and
the other in Texas. A closed its accounts with the Texas B. Subsequently, A sold securities for
the Oklahoma B, and drew a check against X in favor of the Oklahoma B but the check was, by
mistake, mailed to the Texas B who had no rightto the die k. Notwithstanding this, the Texas
B indorsed it to C and had the check cashed at Y Bank. The Oklahoma B then assigned whatever
claims he had on the check to A. Can A, the drawer, recover from Y Bank? No. A was estopped
by its negligence in the delivery of the check to dispute the forgery, if it existed. The court gave
other reasons to support its holding but they were criticized as unsound."
531. Cases of forgery in general. The cases offorgery may be divided as follows: (1)
Forgery of promissory notes which may be further subdivided into: (a) forgery of an indorsement
in the note ; and (b) forgery of the maker's signature; (2) Forgery of bills of exchange which may
be further subdivided thus: (a) forgery of an indorsement on the bill; and (b) forgery of the
drawer's signature, either (1) with acceptance by the drawee, or (2) without such acceptance but
the
bill
is
paid
by
the
drawee.

532. Rights of parties in forgery of indorsement in note payable to order. Where the
indorsement is forged and the note is payable to order, the party whose indorsernent is forged
and parties prior, to him including the maker cannot be held liable by the holder, whether that
holder is a holder in due or not.

84 FOUR-C LAW LIBRARY


(1) The reason is that, inasmuch as the indorsernent is forged, it is inoperative. But since the note
is payable to order, it can be negotiated only by indorsement completed by delivery, and,
therefore, the forged indorsement is the only means, together with the delivery of the note,
through which the holder could .acquire any rights to it or.: its proceeds. In other words, the
forged indorsement is the only source and the basis of whatever rights the holder has its note. But
since the indorsement is inoperative, it can not effect any transfer of any rights to the holder.
Hence, the holder has, wrongly acquired the note and has no right to it or its proceeds.
(2) Moreover, the law further provides that no right to retain the note, give discharge therefore,
or enforce payment thereof, could be acquired through and under the forged sig-nature. Hence,
the holder did not acquire at least those three rights as against the party whose signature is forged
and par-ties prior to him, including the maker.
(3) Finally, from another viewpoint, in these cases the forger usually obtains possession of the
note by fraudulent or other unlawful means and, therefore, he has no right whatsoever in the
note. As he is the transferor to the holder or the predecessor of the holder, the transferee acquires
whatever rights the forger has in the note, but, as he has no rights whatever against prior parties,
the transferee likewise acquires no rights against such prior parties.
533. Rights of parties in forgery of indorsement in note payable to bearer. In case the
note is originally payable to bearer, the party whose indorsement is forged and parties prior to
him including the maker, may be held liable by a holder in due course but not by one who is not
a holder in due course provided at the note was mechanically complete before the forgery.
The reason is that the forged indorsement is not necessary to the title of the holder since
instruments payable to bearer can be negotiated by mere delivery. The defense in these cases by
the party whose indorsement is forged or of parties prior to him would be want to delivery of a
mechanically cornplete instead of forgery. But under Section 16, want of, delivery of a
mechanically complete instrument cannot be interposed against a holder in due course because
valid and intentional delivery to prior parties is conclusively presumed when such an instrument
is in the hands of a holder in due course.
However, where the holder is not a holder in due course, he may not enforce the note against the
party whose indorsement is forged. In such cases, the des available against him
534. Right of parties in forgery of maker's signature. Where the Maker's signature is
forged, he cannot be held liable by any holder, whether the holder is in due course or not. The
reason is that the purported maker is not a party to the instrument as his forged signature is
inoperative and no right to retain, enforce or discharge the note, may be acquired against him.
535. Rights of parties in forgery of indorsement in bill payable to order. Suppose A
is the drawer of check. B, payee. X, drawee bank. Y, fraudulently gets hold of the check and
forges the signature of the payee, B. Y then deposits it in C bank (called collecting bank). C bank

85 FOUR-C LAW LIBRARY


indorses the check to X drawee bank and collects from said X drawee bank through the clearing
house. Then Y, forger, withdraws from C bank the proceeds of the check and disappears. What
are the rights of the parties? In the absence of preclusion from setting up forg-ery by warranty as
in the case of indorsers, or by estoppel as in the case of negligence, the following are the rights
and lia-bilities of the parties:
(1) The drawer's (A's) account cannot be charged by the drawee, X, for the amount paid and if
his account is charged, the drawee, X.
(2) But the drawer, A, has no right to recover from the collecting bank, C.
(3) The drawee bank, X, can recover from the collecting bank, C.
(4) The payee B can recover from the drawer A as he still retained his claim of debt against the
drawer.
(5) Or, the payee B can recover from the recipient of the payment, such as the collecting bank, C.
(6) In the illustration, C, collecting bank, is liable to B, payee.
(7) But the payee B cannot collect from the drawee bank X.
(8) The collecting bank C bears the loss but can recover from the person to whom it has paid the
check, Y.
536. Drawee cannot charge account of drawer. In an action by the' drawee against the
drawer for the amount charged by the drawee against the account of the drawer where the drawee
paid a check on a forged indorsement, the drawee has no defense against the drawer," and the
drawer may recover from the drawee for an instrument paid on a forged indorsement. Thus, "the
general rule may be stated to be that where an employee or agent fraudulently procures his
employer or principal to issue checks payable to fictitious persons not known to the employer or
principal to be fictitious, or to persons not having interest in the proceeds of such checks, and
cashes the same upon the forged indorsement by him of the names of such persons the loss falls
upon the depository (drawee) cashing it."
537. Reason for the rule. "This is on the theory that he the depositor (drawee) owes to
the 'depositor ( drawer) an absolute and contractual duty to pay the check only to the person to
whom it is made payable or upon his genuine indorsement (cases cited). And the depository
cannot relieve himself of this day by any amount or degree of care he may have exercised to
determine that the indorsement is the genuine indorsement of the payee. In such cases, the
drawer authorizes and.directs the drawee pay only to the payee or to the order of the payee. It
does not authorize or direct the drawee to pay the check to any other person. The drawee bank
has no legal right to pay the money of the drawer on deposit with it to anyone except the drawer
or its order.

86 FOUR-C LAW LIBRARY

538. Drawer cannot recover from collecting bank. The drawer has no right to recover the
amount paid from the collecting bank, as the duty of the collecting bank to exercise care in
collection is due only to the payee, and as the drawer suffers no damage smc it can recover the
amount paid from the drawee bank which has no right to charge the drawers account.
539. Drawee can recover from collecting bank. The drawee may recover from the recipient of
payment, such as the collecting bank, under a forged indorsement. The reason for this is the same
as for the rule allowing the payee to recover from the recipient of the payment under a forged
indorsement.
540. Payee can recover from drawer. In the illustration, B, payee, can still recover from the
drawer A on the basis of his claim of debt upon which the check in the first place had been
issued. Suppose that A is an insurance company and B isthe. beneficiary ofa deceased person
whose life was insured by A. And A issue a check to B or his order to cover the proceeds of the
insurance policy. B would not lose his right to the proceeds of te policy just because somebody
without fault on his part forged the check, B can still collect from A on the basis of the insurance
contracts.
541. Payee can recover from recipient of payment. According to the general rule, a bank or
other corporation or an individual, who has obtained possession of a check, upon an
unauthorized or forged indorsement of the payees signature and who collects the amount of the
check from the drawee, is liable for the proceeds thereof to the payee or other owner,
notwithstanding that they have been paid to the person whom the check was obtained.
542. Collecting bank liable to payee. The theory of the rule set out x x x has been expressed in
different ways, all of which may be summed up in the statement that the possession of the check
on the forged or unauthorized indorsement is wrongful, and when the- money had been collected
on the check, the bank, or other person or corporation, can be held as for moneys had and
received,21 and the proceeds are held for the rightful owners of the payment and, may be
recovered by them. The position of the bank or other corporation or person taking the check. on
the forged or unauthorized indorsement is the same as if he had taken the check and collected the
money without indorsement at all, and the act of the bank amounts to conversion of the
check.
Payment to depositor of forged signature of the payee, or to drawee bank on the same forged
signature give rise to an obligation to return the amounts received. Section 2154 of the New Civil
Code mandates that: if something is received when there is no fight to demand it, and it was
unduly delivered through mistake, the obligation to return it arises.
543. Collecting bank bound to scrutinize checks deposited with it to determine genuineness
and regularity While the drawer generally owes no duty of diligence to the collecting bank, the
law imposes a duty of diligence on the collecting bank to scrutinize checks deposited with it for
the purpose of determining their genuineness and regularity. The collecting bank being primarily
engaged in banking holds itself out to the public as the expert and the law holds it to a high
standard of conduct. The collecting bank has privity with the depositor who is principal culprit in

87 FOUR-C LAW LIBRARY


this case. The defendant knows the depositor; her address and her history. Depositor is
defendants client. It has taken a risk on its depositor when it allowed her to collect on the
crossed checks.
Illustrative case of forgery of indorsement.
JAI ALAI CORPORATION OF THE PHILIPPINES vs. BANK OF THE PHILIPPINE
ISLANDS, (Aug. 6, 1975). Jai Alai, petitioner deposited ten checks with the Bank of the
Philippine Islands, respondent, totalling 8,030.58. The checks were issued by various drawers
to Inter-Island Gas Service, Inc., as payee. They were acquired by Jai Alai from Mr. Ramirez, a
sales agent of the Inter-Island Gas Service, Inc. and a regular bettor at jai alai games. It appeared
from the checks that they were indorsed by the cashiers of Inter-Island Gas Service, Inc. Upon
depositing the checks the Bank of the Philippine Islands temporarily credited the account of Jai
Alai in accordance with the clause printed on the deposit slips issued by the respondent and
which reads:
Any credit allowed the depositor on the books of the Bank for checks or drafts hereby received
for deposit, is provisional only, until such time as the proceeds thereof, in current funds or
solvent credits, shall have been actually received by the Bank and the latter reserves .to itself the
right to charge back the item to the account of its depositor, at any time before that event,
regardless of whether or not the item itself can be returned.
Later, however after the checks had been submitted to inter-bank clearing, the Inter-Island Gas
discovered that all theindorsements made on the checks purportedly by its cashiers, Santiago
Amplayo and Vicenta Mucor (who were merely authorized to deposit checks issued payable to
the said company) as well as the rubber stamp impression thereon reading Inter Island Gas
Service, Inc., were forgeries. In due time, the Inter-Island Gas advised the petitioner, the
respondent, the drawers and the drawee-banks of the said checks about the forgeries, and filed a
criminal complaint against Ramirez with the Office of the City Fiscal of Manila.
The respondents cashier, Ramon Sarthou, upon receipt of the letter of Inter-Island Gas dated
August 31, 1959, called up the petitioners cashier, Manuel Garcia, and advised the latter that in
view of the circumstances he would debit the value of the checks against the petitioners account
as soon as they were returned by the respective drawee-banks.
Meanwhile, the drawers of the checks, having been notified of the forgeries, demanded
reimbursement to their respective accounts from the drawee-banks, which in turn demanded
from the respondent, as collecting bank, the return of the amounts they had paid on account
thereof. When the drawee-banks returned the checks to the respondent, the latter paid their value
which--the--former in turn paid to the Inter-Island Gas. The respondent, for its part, debited
thepetitioners current account and forwarded to the latter the checks containing the forged
indorsements, which the petitioner, however, refused to accept. On October 8, 1959 the
petitioner drew against its current account with the respondent a check for 135,000 payable to
the order of Mariano Olondriz y Cia, in payment of certain shares of stock. The check was,
however, dishonored by the respondent as its records showed that as of October 8, 1959 the

88 FOUR-C LAW LIBRARY


current account of the petitioner, after netting out the value of the checks (p8,030.58) with the
forged indorsements, had a balance of only 128,257.65.
Three of the checks were crossed checks, and two of the crossed checks were bearer instruments
(payable to bearer).
Jai Alai filed a complaint against Bank of the Philippine Islands. The complaint was dismissed
both by the CFI and the Court of Appeals. Hence this petition for review.
HELD: (1) The Jai Mai, petitioner, cannot collect from Bank of the Philippine Islands,
respondent collecting bank. When the petitioner deposited the checks with the respondent, the
nature of the relationship created at the stage was one of agency, that is, the bank was to collect
from the drawees of the cheeks the corresponding proceeds. It is true that the respondent had
already collected the proceeds of the checks when it debited the petitioners account, so that
following the rule in Gullas vs. Philippine National Bank it might be argued that the relationship
between the parties had become that of creditor and debtor as to preclude the respondent from
using the petitioners funds to make payments not authorized by the latter. It is our view
nonetheless that no creditor-debtor relationship was created between the parties. Quoting Section
23 of the Negotiable Instrument Law, the court further said that since a forged signature in a
negotiable instrument is wholly inoperative and no right to discharge it or enforce its payment
can be acquired through or under the forged signature except against a party who cannot invoke
the forgery, it stands to reason, upon the facts of record, that the respondent, as a collecting bank
which indorsed the checks to the drawee-banks for clearing, should be liable to the latter for
reimbursement, for, as found by the court a quo and by the appellate court, the indorsements on
the checks had been forged prior to their delivery to the petitioner. In contemplation, therefore,
the payments made by the drawee-banks to the respondent on account of the said check was
ineffective; and, such beingthecase, the relationship of creditor and debtor between the petitioner
and the respondent had not been validly effected, the checks not having been properly and
legitimately converted into cash.
(2) Had the respondent collecting bank not debited (deducted from) the account of petitioner the
value of the checks P8,030.58, said petitioner Jai Alai would be liable to respondent collecting
bank for said amount. The court said that:
(a) We do not consider material for the purposes of the case at bar that more than three months
had elapsed since the proceeds of the checks in question were collected by the respondent. The
record shows that the respondent had acted promptly after being informed that the indorsements
on the checks were forged. Moreover, having received the checks merely for collection and
deposit, the respondent cannot be expected to know or ascertain the genuineness of all prior
indorsementson the said cheeks. Indeed, having itself indorsed them to therespondent in
accordance with the rules and practices of commercial banks, of which the Court takes due
cognizance, the petitioner is, deemed to have given up the warranty prescribed in Section 66 of
the Negotiable Instiuments Law that every single one of those checks is genuine and in all
respects what it purports to be.

89 FOUR-C LAW LIBRARY


(b) The petitioner was, moreover, grossly recreant in accepting the checks in question from
Ramirez. It could not have escaped the attention of the petitioner that the payee of all the checks
was a corporation . the Inter-Island Gas Service, Inc. Yet, the petitioner cashed these checks to
a mere individual who was admittedly a habitue at its jai-alai games without making any inquiry
as to his authority to exchange checks belonging to the payee-corporation. In Insular Drug Go.
vs.
National
the
Court
made
the
pronouncement
that
. . . The right of an agent to indorse commercial paper is a very responsible power and will not
be lightly inferred. A salesman with authority to collect money belonging to his principal does
not have the implied authority to indorse checks received in payment. Any person taking checks
made payable to a corporation, which can act only by agents does so at his peril, and must abide
by the consequences if the agent who indorses the same is without authority. (underscoring
supplied)
(c) It must be noted further that three of the checks in question are crossed checks, namely,
exhs. 21, 25 and 27, which may only be deposited, but not encashed; yet the petitioner
negligently accepted them for cash.
(d) That two of the crossed checks, namely, exhs. 21 and 25, are bearer instruments would not,
in our view, exculpate the petitioner from liability with respect to them. The fact that they are
bearer checks and at the same time crossed checks should have aroused the petitioners suspicion
as to the title of Ramirez over them and his authority to cash them (apparently to purchase jaialai tickets from the petitioner)-,_it-appearing on their face that a corporate entity the InterIsland Gas Service, Inc. was the payee thereof and Ramirez delivered the said checks to the
petitioner ostensibly on the strength of the the payees cashiers indorsements.
(e) At all events, under Section 67 of the Negotiable Instruments Law, Where a person places
his indorsement on an instrument negotiable by delivery be incurs all the liability of an indorser,
and under Section 66 of the same statute a general indorser warrants that the instrument is
genuine and in all respects what it purports to be. Considering that the petitioner indorsed the
said checks when it deposited them with the respondent, the petitioner as an indorser guaranteed
the genuineness of all prior indorsements thereon. The respondent which relied upon the
petitioners warranty should not be held liable for the resulting loss. us conclusion applied
similarly to exit. 22 which is an uncrossed bearer instrument, for under Section 65 of the
Negotiable Instruments Law, Every person negotiating an instrument by delivery. . . warrants
(a) that the instrument is genuine and in all respects what it purports to be. Under the same
section this warranty extends in favor of no holder other than the immediate transferee, which,
in
the
case
at
bar
would
be
the
respondent.
(3) As to whether the respondent is liable to the drawee banks for the value of the checks, the
court held that it is the obligation of the collecting bank to reimburse the drawee-bank the value
of the checks subsequently found to contain the forged indorsement of the payee. The reason is
that the bank with which the check was deposited has no right to pay the sum stated therein to
the forger or anyone else upon a forged signature. It was its duty to know, said the Court,
that [the payees] endorsement was genuine before cashing the check. The petitioner must in

90 FOUR-C LAW LIBRARY


turn--shoulder the loss of the amounts which the respondent, as its collecting agent, had to
reimburse to the drawee-banks.
(4) As to the clause printed on the deposited slip, the court held that the provision would not
materially affect the conclusion we have reached. The stipulation prescribes that there must be an
actual receipt by the bank of current funds or solvent credits; but as we have earlier indicated that
transfer by the drawee-banks of funds to the respondent on account of the checks in question was
ineffectual because made under the mistaken and valid assumption that the indorsements of the
payee thereon were genuine. Under Article 2154 of the New Civil Code If something is received
when there is no right to demand it and it was unduly delivered through mistake, the obligation
to return it arises. There was, therefore, in contemplation of law, no valid payment of money
made by the drawee banks to the respondent on account of the questioned checks.
544. Conversion, defined. Conversion means an unauthorized assumption and exercise of the
right of ownership over goods or personal chattels belonging to another, to the alteration of their
condition or exclusion of the owners right.
545. As affected by question of delivery to payee. In the majority of the x x x cases the check
did not reach the hands of the payee. The bearing of such absence of delivery is considered in
some cases and held not to be material. It has been pointed out, however, that where there is no
delivery to payee and no title vests in him, he ought not to be allowed to recover on the ground
that he lost nothing because he never became owner of the check and still retained his claim of
debt against the drawer.3 Nevertheless, the drawer could recover from the bank and the latter
from the purchaser (such as the collecting bank), so that the case uses one action to reach, by a
desirable short cut, the person who ought, in any event, to be ultimately liable as among the
innocent persons involved in the transaction. In other words, to use the illustration, since B,
payee, has the right to recover from A, drawer, and A, drawer, can recover from X, drawee bank,
and X, drawee bank can recover from C, collecting bank, in order to attain a desirable short cut,
B, payee, ought to be allowed to recover directly from C, collecting bank, regard1ess of whether
the check was delivered to B, payee.
546. Payee cannot recover from drawee. The general rule is that an action cannot be
maintained by a payee of the check against the bank on which it is drawn unless the check has
been certified or accepted by the bank on which it is drawn, x x x without acceptance or
certification, as provided by statute, there is no privity of contract between the drawee bank and
the payee, or holder of the check. Neither is there an assignment pro tanto of the funds where the
check is not drawn on a particular fund, or does not show on its face that it is an assignment of a
particular fund.35 Consequently, in the illustration, B payee, cannot hold liable X drawee bank.
Of course, if X has already accepted or certified the check, he would be liable thereon to B on his
acceptance or certification.
547. Rights of parties in forgery of indorsement in bill payable to bearer. The rules are the
same as in promissory notes. The holder can recover if he is a holder in due course but not if he
is not a holder in due course, for the same reasons.

91 FOUR-C LAW LIBRARY


548. Rights of parties in forgery of drawers signature where drawee has accepted bill.
Suppose: As signature appears on a bill drawn against X, drawee bank. But As signature was
forged by Y. B is the payee. He indorses the bill to C. Then C goes to X and presents the bill for
acceptance. X accepts. Thereafter, X discovers the forgery and when required by C to pay, X
refuses to pay on the ground that As signature is forged.
(1) Is this a valid defense? X cannot set up the defense of forgery because When he accepted the
bill, he admitted the genuineness of the signature of A, and therefore, he cannot thereafter be
heard to say that the signature is a forgery. Consequently, he stands to bear the loss and his
remedy is against the forger. Thus if the drawee accepts the paper after seeing it and then
permits it to go into circulation as genuine, on all the principles of estoppel, he ought to be
prevented from setting up forgery to defeat liability to one who has taken the paper on the faith
of the acceptance or certification.
(2) The purported drawer A is not liable as his signature is inoperative and, therefore, he is not a
party to the bill. No right to retain the bill, give a discharge therefor or enforce payment thereon
may be acquired against him by any holder. Furthermore, since his signature is inoperative, his
signature does not really appear on the bill, and, therefore, he is not liable thereon.
549. Rights of parties in forgery of drawers signature where drawee has not accepted bill
but paid it. B forges the signature of A in a check, with A appearing as the drawer thereon. The
drawee is X bank. B places himself as the payee. B indorses to C. C to D. D presents the check
for payment to X and X pays D. Can X recover from D on the ground of forgery? In the absence
of preclusion from setting up forgery by warranty as in the case of indorsers, or by estoppel as in
the case of negligence, the drawee be X, cannot recover from the drawer or the recipient of the
proceeds such as D. Thus in the case of the payment of a forged check even without former
acceptance, the drawee cannot recover from a holder in due course not chargeable with any act
or negligence or dis regard of duty. The rule is that, as between equally innocent persons, the
drawee who pay&-money on a check or draft the signature to which is forged, cannot recover the
money from the one who received it.
550. Reason for the rule. The drawee so paying is considered as being constructively negligent.
A bank is bound to know the signature of its customers;, and if it pays a forged check, it must
be considered as making the payment out of its own funds and cannot ordinarily charge the
amount so paid to the account of the depositor whose name was forged. This rule is absolutely
necessary to the circulation of drafts and checks and is based upon the presumed negligence of
the drawee in failing to meet its obligation to know the signature of its correspondent. Conditions
would be intolerable if the retiring of commercial paper, through its payment by the drawee, did
not close the transaction but it was possible at an indefinite time in the future to reopen the
matter and recover the money, if the paper proved to have been forged. No one would dare
handle it, and it would pass out of use regardless of its convenience or necessity as a part of the
life of business. There is nothing inequitable in such a rule. 1f the paper comes to the drawee in
the regular course of business, and he, having the opportunity of ascertaining its character,
pronounces it valid and pays it, it is not only a question of payment under mistake but payment
in neglect of the duty which the commercial law places upon him, and the result of his
negligence must rest upon him.

92 FOUR-C LAW LIBRARY

In a Philippine case, it was held that the prime duty of a bank is to ascertain the genuineness of
the signature of the drawer or the depositor on the check being encashed. It is expected to use
reasonable business prudence in accepting and cashing a check presented to it. Accordingly
where the drawer bank encashed a check in which the drawees signature is forged which shows
marked variation from the genuine signature of the supposed drawer, said bank is negligent, and
should return to the drawer what it has debited the latter s account.
551. But payment not equivalent to acceptance or certification. The payment of a forged
check does not include or imply its acceptance in the sense that this word is used in Section 62 of
the Negotiable Instruments Law. Payment is the final act which extinguishes a bill.
Acceptance is a promise to pay in the future and continues the life of the bill.4 Consequently,
the basis of the general rule is not that the drawee is precluded from setting up forgery because,
by-paying the check, it has accepted the check and therefore admitted the genuineness of the
drawers signature.4 The basis is that by paying the check, the drawee is presumed negligent or
deemed constructively negligent.
552. Qualifications to the foregoing rules. It must be remembered that the foregoing rules are
qualified by the rules precluding the setting up of the defense of forgery by warranty, as in the
case of parties negotiating an instrument subsequent to the forgery or by estoppel, as in the case
of negligence.
553 Indorsers and parties negotiating. Parties negotiating by indorsement and delivery, or by
mere delivery subsequent to the forgery, are precluded from setting up the defense of forgery and
may be held liable under their warranties or liabilities stated in Section 65 or 66. The following
are illustrations of this principle.
(1) As signature is forged, as maker. B payee. Re indorses to C. CtoD. DtoE. E toF. FcanholdB,
C, DorE liable because as indorsers, they warrant that the note is genuine and in all respects what
it purports to be. If they are general indorsers, they also warrant that the note is valid and
subsisting and therefore, they cannot be heard thereafter to deny the genuineness of As
signature.
(2) A, drawer, B, payee, X, drawee. Y steals the hill and forges Bs signature, and, by this means,
indorses the bill to C. CtoD. D to E. EtoF. FcanholdC, DandEliablefor the same reasons above
stated.
554. Negligence in forgery of indorsements in bill. A generally recognized or assumed
qualification of the general rule, however, is that it presupposes that the drawer himself was not
negligent or guilty of such conduct as would estop him from asserting the forged character of the
indorsement as against the depository (drawee), and that if he was negligentor guilty of such
conduct, the loss must fall on him.4 But the depositors negligence or conduct which would
stop him must be the proximate cause of the payment by the depository upon the forged
indorsement. Thus, the (1) negligence of drawers in making possible forged indorsements by
their swindling clerks, and not discovering or reporting them promptly, barred recovery from the

93 FOUR-C LAW LIBRARY


drawee bank by the drawers, as where there is negligence in delivery. Likewise: (2)
unreasonable delay in giving notice will bar recovery by the drawer from the drawee bank
555. Where mere possession of check with forged signature does not make company officer
possessing it guilty. In the Ranon y Court of Appeals case5 the president of a company,
petitioner in the case, encashed a check by signing as President, together with the forged counter
signature of the Treasurer. The record fails to show why the President should forge the signature
of the Treasurer. The funds generated were actually disbursed for salaries and operating
expenses. There is no evidence that he pocketed the money or profited in any way from the
forgery. The Court of Appeals applied the established rule that that in the absence of
satisfactory explanation, one found in possession of and who used a forged document is the
forger or the one who caused the forgery and, therefore, guilty of falsification.52 This was
reversed by the Supreme Court holding that the petitioner, being president and general, manager
of the firm was naturally the possessor of the firms negotiable instruments and other important
business papers. The circumstances create doubts on the petitions having been the one who
ordered the forging of the treasurers signature.
556. Extent of depositors duty. But with a few possible exceptions (cases cited) the courts are
generally agreed that the depositors (drawers) duty does not extend to the examination and
verification of the genuineness of the indorsements onthe checks, or to the discovery of forgeries
therein because adepositor is not required and may not be expected to know the signatures of the
payee and of the various indorsers through whose hands the check may pass, and therefore, even
if the cancelled checks were examined by him, the examination would not disclose the forgery;
that duty of verifying the genuineness of the indorsements rests on the depository (drawee)
cashing the check; and that the depositor may rely upon its proper performance of this duty
(cases cited) at least in the absence of evidence that he was familiar with the signature of the
payee.1 Thus, in the usual illustration, if A, drawer, fails to examine the indorsements of
indorsers on checks returned to him and fails to discover any forgery, he will not be deemed
negligent, and consequently, A, drawer, can still recover from the drawee X.
557. Where a depositor is using its own personalized checks, its failure to provide adequate
security measures to prevent forgeries of its checks constitutes gross negligence and bars it
from settina up the defense of forgery. Illustrative Case.
METROPOLITAN WATER WORKS AND SEWERAGE
SYSTEM
y
CORT

OP

APPEALS

Facts. PNB, respondent, is the depository of MWSS, petitioner and successor-in-interest of


NWSA. Twenty three (23) checks totalling P3,457,903 were issued by NWSA, all of which were
paid and cleared by PNB and charged by PNR against the account of NWSA. Said checks were
deposited by payees, Dizon, Sison and Mendoza, who turned out to be fictitious persons upon
investigation by NUI. NWSA later demanded byletter the restoration by PNB of its accounts for
3,457.903 but PNB refused, claiming that the checks were forged.Petitioner was using its own
personalized checks printed by its own printer not the Official PNB commercial checks. The
petitioner failed (1) to give its printer, Mesina Enterprises, specific instructions relative to the
safekeeping and disposition of excess forms check, vouchers, and safety papers; (2) to retrieve

94 FOUR-C LAW LIBRARY


from its printer all spoiled check forms; (3) to provide any control regarding the paper uses in the
printing of said checks; (4) to furnish the respondent drawee bank with samples of typewriting,
check writing, and print used by its printer in the printing of its checks and of the inks and pens
used in signing the same; and (5) to send representative to the printing office during the printing
of said checks.
The petitioner also failed to reconcile the bank statements with its own records as the one
assigned was unreasonably delayed in taking deliveries of bank statements and credit and debit
memos; The petitioner failed to provide appropriate security measures over its own records
thereby laying confidential records open to unauthorized persons. The office of Mr. Ongtengco
(Cashier No. VI of the Treasury Department at the NAWASA) is quite open to any person
known to him or his staff members and that the check writer is merely on top of his table. On
the other hand the PNB, in fact long before the encashment of twenty three (23) checks in
question, had issued constant reminders to all current Accounts Bookkeepers informing of the
activities of forgery syndicate.
Issue: Is the PNB liable to restore the amount charged against the account of the petitioner to
said account the amount of P3,457,903?
Held: Forgery cannot he presumed (Siasat, et al y Intermediate Appellate Court. et al; 139 SCRA
23?): It must be established by clear, positive, and convincing evidence. This was not done in
the present case. Moreover, the petitioner is barred from setting up the defense of forgery under
section 23 of the Negotiable instruments Law because it was guilty of negligence not only before
the questioned checks were negotiated but even after the same had already been negotiated.
There was gross negligence in the printing of its personalized checks as shown by
uncontroverted facts.
Another factor which facilitated the fraudulent encashment of the twenty-three (23) checks in
question was the failure of the petitioner to reconcile the bank statements with its own records.
The petitioner also failed to provide appropriate security measures over its own records thereby
laying confidential records open to unauthorized persons and had not taken the necessary
measures in the detection of forged checks and the prevention of their fraudulent encashment.
We cannot fault the respondent drawee Bank for not having detected the fraudulent encashment
of the checks because the printing of the petitioners personalized checks was not done under the
supervision and control of the Bank. There is no evidence on record indicating that because of
this private printing, the petitioner furnished the respondent Bank with samples of checks, pens,
and inks or took other precautionary measures with the PNB to safeguard its interests. Under the
circumstances, therefore, the petitioner was in a better position to detect and prevent the
fraudulent encashment of its checks,
558. But failure of depositor to make prompt reconciliation of the monthly bank statements
furnished by the bank constitutes negligence for which the bank cannot be blamed in case
depositors checks are forged. When a person opens a checking account with a bank, he is
given bank checks which he may fill out and used whenever he wishes. Each time he is sues a
check, he should also fill out the check stub to which the check is usually attached. This stub, if

95 FOUR-C LAW LIBRARY


properly kept, will contain the number of the check, the date of its issue, the name of the payee
and the amount thereof. The drawer would therefore have complete record of the checks he
issues. It is the custom of banks to send to its depositor a monthly statement of the status of their
accounts, together with the cancelled checks which have been cashed by their respective holders.
[f the depositor has filled out his check stubs properly, the comparison between them and the
cancelled checks will reveal any forged checks not taken from his checkbook. It is the duty of the
depositor to carefully examine the banks statement, his cancelled checks, his check stubs and
other pertinent records within a reasonable time, and to report any errors without any
unreasonable delay. If his negligence would cause the bank to honor a forged check or prevent it
from recovering the amount it may have already paid on such check, he cannot later complain
should the bank refuse to recredit his account with the amount of such check.
559. Drawers negligence in forgery of his signature. A depositor (drawer) is generally under
a duty toward his depository (drawee) to examine the returned vouchers and notify it within
reasonable time of any mistakes or inaccuracies in the amounts of cheek or forgeries of the
depositors signature. It is the duty of a depositor, on receiving from the bank a balanced pass
book, statement of account, or cancelled checks, to examine the same with reasonable
promptness, and report to the bank any error, forgery, or the like which he may discover.
Hence, in the usual illustration, if A, whose signature is forged as the drawer of a check, fails to
examine statements of accounts or checks returned by the drawee bank X, A would be
considered negligent and may be barred from recovery of the amount paid if the drawee has
account.
Illustrative

case:

RP y. EQUITABLE BANKING CORPORATION and RP y. BANK OF THE PHILIPPINE


ISLANDS21 (1964). CPB acquired 24 treasury warrants by accommodating its former
employee. The warrants were deposited with the care of BPI. Subsequently, the BPI presented
the warrants for payment to the drawee thereof, the Government, thru the clearing office of the
Central Bank. After being cleared, the warrants were paid by the Treasurer. The BPI then
credited the proceeds to the GPD, which in turn withdrew said proceeds and paid the
corresponding warrants to its employee. Four other treasury warrants were deposited with the
Equitable Banking Corporation by its customers, and after clearance by the Central Bank, said
warrants were paid. Later, it was discovered that although the 28 warrants were executed on
genuine government forms, the signatures thereon were forged. Hence, the Treasury returned the
warrants to the central Bank and demanded that the value thereof be charged against the accounts
of the two banks. Almost all of the warrant involved were for over P5,000 and, hence, beyond
the authority of the auditor of the Treasury, whose signature thereon had been forged, to approve.
It was only after the warrants had been cleared and honored when the Treasury gave notice of the
forgery. ISSUE: Was the Government, thru the office of the Treasury negligent so as to be
precluded from setting up the question of forgery and from recovery from the defendant bank?
HELD: Yes, The gross nature of the negligence of the Treasury becomes more apparent when
we consider that each one of the 24 warrants involved x x x was for over P5,000, hence, beyond
the authority of the auditor of the Treasury whose signature thereon had been forged to approve.
In other words, the irregularity of said warrants was apparent on the face thereof, from the
viewpoint of the Treasury. x x x. The loss of the amount thereof is mainly imputable to the acts

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and omissions of the Treasury, for which the Bank of PI and Equitable Bank should not and
cannot be penalized." Judgment affirmed.
560. But drawer generally not negligent where his cheek is stolen. Francisco S. Gown
II, who was a depositor of the Caloocan City Branch of the Philippine National Bank, went to the
bank in his car accompanied by his friend Ernesto Santos whom he left in the car while he
transacted business in the bank. When Santos saw that Gozon left his check book he took a check
therefrom, filled it up for the amount P5,000.00, forged the signature of Gozon, and thereafter he
enchashed the check in the bank on the same day. The account of Gozon was debited the said
amount. Upon receipt of the statement of account from the bank, Gozon asked that the said
amount of P5,000.00 should be returned to his account as his signature on the check was forged
but the bank refused. Held: Gozon cannot be considered negligent and he can recover the
amount debited his account. He could not have been expected to know that the said Ernesto
Santos would remove a check from his checkbook. Defendant had trust in his classmate and
friend. He had no reason to suspect that the latter would breach that trust.

561. Payee's negligence in forgery of drawer's signature. 'The payee in a check or


draft may be supposed to have knowledge of the circumstances under which it is drawn and,
generally, of the person drawing it, and is in a better situation to judge the genuineness of the
paper than are indorse. And there is a tendency to place greater responsibility upon him and he is
much more likely to be required to return the proceeds of the paper than are the indorsees."
"Witho/ut doubt, the same necessities of business which require the drawee to know the
signature of the drawer, and prevent his recovering money paid to an innocent holder of the
paper, require one who first negotiates the paper to take some precautions to learn whether or not
it is genuine and if he, through indifference, or worse, assists the forger in committing the fraud,
he should not be permitted to retain the proceeds of the draft from the drawee whose sole fault
was that he did not discover the forgery before he paid the draft."

562. Illustrative case. Y forges the signature of A, making A appear as drawer in a


check. X, drawee bank. B bank in the Payee. B bank pay for the check to Y, who is a stranger to
B, without requiring proof as to identity or making inquiries in regards to Y. Then B collects
from X, drawee bank. In this case, X can recover from B bank which has been negligent. The
doctrine of comparative negligence applies and the constructive negligence of the drawee bank is
overcome by the active negligence of the paying bank in not using the ordinary precautions
which are used by banks, namely, demanding identification of the person presenting the check
and putting forth some inquiry as to its genuineness before paying it and sending it on, dignified
and accredited by its own indorsement, which would tend to lull the suspicions and abate the
watchfulness of the drawee.

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563. Indorser's negligence (holder receiving payment). "After a draft or check has
once been negotiated so that it is in circulation, there is little opportunity for negligence on the
part of those through whose hands it passes; but as to them, in most cases, the rule will apply
that, as between innocent per-sons, the loss must fall on the drawee." Just the same, "the rule is
perfectly well settled that in determining the relative rights of a drawee who, under a mistake of
fact, has paid, and a holder who has received such payment, upon a check to which the name of
the drawer has been forged, it is only fair to consider the question of diligence or negligence of
the parties in respect thereto. So, If it appears that one to whom payment was made was not an
innocent sufferer but was guilty of negligence in not doing something which plain duty
demanded, and which if it had been done, would not have entailed loss on any one, he is not
entitled to retain the moneys paid through mistake on the part of the drawee bank."

564. Duty of purchaser of check or bill. And "most of the courts now agree that one
who purchases a check or draft is bound to satisfy himself that the paper is genuine; and that by
indorsing it or presenting it for payment or putting it into circulation before presentation, he
impliedly asserts that he has performed his duty, and the drawee, who has, without actual
negligence on his part paid the forged demand. may recover the money paid from such negligent
purchaser. Of course, the drawer must, in order to recover back from the holder, show that he
himself was free from fault. In other words, in the illustration, the drawee X, while
constructively negligent, must not be actually or actively negligent while the recipient of the
proceeds must be actually negligent. In such it case, the drawee can recover what it has paid. But
where the drawee X is not merely constructively negligent but is also actively or actually
negligent, its actual negligence will offset the actual negligence of the recipient and tenor
effective the constructive negligence of the drawee X. In such a case, it would seem that the
drawee cannot recover from the recipient what it has paid.

565. Illustrative case. "A's signature is forged by strangers in two checks. B is payee.
The strangers negotiated the checks to C for tire purchases, pretending to be agents of B. C did
not make any inquiries whatsoever, One check was crossed generally. The check with a prior
number to the other was issued on a latter date. A is a good customer of C which receives checks
from A every month in payment of account. C indorsed the checks to the D bank for deposit and
was credited with the amount. Thereafter, the checks were credited at the clearing house and X,
drawee, credited the D bank with the amount. When the X bank found that A's signature was
forged, it demanded payment from C. HELD: Under the facts, C was negligent and had no right
to retain the proceeds of the checks. X can recover from it what it has paid. The basic rule
underlying estoppel by negligence is that "where loss, which must be borne by one of two parties

98 FOUR-C LAW LIBRARY


alike innocent of forgery, can be traced to the neglect or fault of either, it is reasonable that the
one through whose name it has succeeded, must bear the loss, even if he is innocent of
intentional fraud.

566. Forgery of both drawer's and payee's signature. There is some difference of
opinion. But under the Negotiable Instruments Law, the indorser guarantees the genuineness of
prior indorsements, and if the indorsement of the payee is forged, the indorser is liable on his
warranty to all to whom it runs." But the drawee is held not to be a holder in due course, and
therefore. is not entitled to the benefit of the indorser's warranty. The result is that. so far as the
drawee is concerned, the situation is much the same as though the paper bore no indorsements,
but was payable to bearer, and the ordinary rules apply, making the right to recover depend on
the presence or absence of negligence on the part of the one who negotiated the paper, and
viewed in the light of subsequent negligence of the drawee which may have caused him to
change his position for the worse because of acts of the drawee.

567. Other rules change of position. "When negligence on the part of the one
receiving the proceeds has been established so as to entitle the drawee to recover the proceeds,
conduct of the drawee may again intervene to prevent his recovery. No matter how negligent the
one receiving the proceeds has been, he is entitled to receive prompt notice of the forgery so as
to enable him to preserve whatever rights he may have against the forger or other persons to
whom he may be entitled to look for reimbursement, and if the drawee is negligent in this
respect, he may be prevented from recovering his money.

568. Paper forwarded for collection. "The fact that the paper was not cashed and
indorsed with unrestricted indorsement but was taken for collection and forwarded for that
purpose under an indorsement giving notice of that fact, may place a greater burden upon the
drawee than it would otherwise bear. The mere fact that the paper bears an indorsement 'for
collection' should warn the drawee that the responsibility of the genuineness of the paper is
placed upon it."

569. Forgery of signature in instrument in falsification of private document. Under


the Revised Penal Code, any private person who shall counterfeit or imitate any handwriting or
rubric in any kind of commercial document, or cease it to appear that persons are parties thereto
when in fact they are not, is guilty of falsification of private documents. The element of damage
or intent to cause damage is not necessary.

99 FOUR-C LAW LIBRARY

570. Swindling through post-dating of checks. Among the methods whereby a person
may be guilty of swindling or estafa is the defrauding of another by post-dating a check or
issuing a check in payment of an obligation when the offender had no funds in the bank or his
funds deposited therein were not sufficient to cover the amount of the check. The failure of the
drawer of the check to deposit the amount necessary to cover his check within three (3) days
from receipt of notice from the hank and/or the payee or holder that said check has been
dishonored for lack or insufficiency of funds, shall be prima facie evidence of deceit constituting
false pretense or fraudulent act.

571. Forger need not imitate genuine signature. And it is not necessary that the forger
attempt to imitate or simulate the signature being forged. Consequently, one who signs the name
of another without the latters authority, as drawer in a check, and thereby makes it appear
falsely that the alleged drawer of the check was a real party thereto, when as a matter of fact he
did not participate in the transaction, is guilty of falsification, even though there was no attempt
to imitate or simulate the signature of the person whose name was illegally used.
572. Estafa by falsification of signature. Where the defendant represented to the
offended party that the check was in fact the check of the person whose signature is forged and
by reason of that representation, the defendant induced the offended person to receive the check
and deliver to him the difference between the value of the merchandise which he puchased and
the amount of the check, the defendant is guilty of estafa committed by means of the falsification
of a private commercial document.

573. Encashment of check by impostor. Illustrative case. In an action to recover the


face value of a check paid to a spurious claimant for arrears in army pay against the person who
identified and guaranteed payment thereof, the Republic of the Philippines, as a legal owner or
possessor of the money delivered through fraud, is the proper party in interest.
Money paid through check to an impostor still belongs to the legal owner or possessor
thereof. Its delivery through estafa does not transmit ownership of the amount to the impostor
who could not even acquire ownership through acquisitive prescription.
The person who identifies an impostor to whom the amount of a check is paid is a coprincipal by direct participation in the commission of the crime if he has guilty knowledge of the
case.
The stipulation on the voucher of payment of a check that "Payee Identified Payment
Witnessed and Guaranteed if Erroneously Delivered Through Identification" does not create the

100 FOUR-C LAW LIBRARY


contract of guaranty whereby the guarantor guarantees to the creditor the performance by the
Principal debtor of his obligation. What is "guaranteed" or warranted is the identity of the payee
by the identifier to the debtor. Where the payee is an impostor, the identifier becomes primarily
liable in view of the breach of his warranty. There is damage to the debtor because payment to
the wrong person does not extinguish his obligation to the true creditor.

574. Commercial documents, explained. Commercial documents or papers within the


meaning of Article 172 of the Revised Penal Code are, in general, documents or instruments
which one used by merchants or businessmen to promote or facilitate trade or credit transaction.
Such instruments naturally include letters of exchange, letters of credit, drafts, trade acceptance,
checks, notes or papers issued in the course of a business transaction. Quedans, bonds, books of
accounts and, in general, any negotiable instrument.

II CONSIDERATION

SECTION 24. Presumption of consideration. Every negotiable instrument is


deemed prima facie to have been issued for a valuable consideration; and every person
whose signature appears thereon to have become a party thereto for value.

575. Application of Section 24. Under this section, where A makes and issues note to the
order of B in the sum of P1,000, the presumption is that A received from B some valuable
consideration more or less equivalent to P1.000, such as a parcel of land worth P1,000. Under
this section also, where B places his signature on the note to C for instance as an indorser and
delivers the note to C, It is also presumed that B received some valuable consideration from C.

576. Presumption of Consideration is Disputable. One of the disputable


presumptions laid down by our Rules of Court is that a negotiable imtrument was given or
indorsed for a sufficient consideration. It is disputable in the sense that the said presumption is
satisfactory if not contradicted.

577. Consideration need not be alleged or proved. In an action based upon a negotiable
instrument, it is unnecessary to aver or prove consideration, for consideration is imported and
presumed from the fact that it is a negotiable instrument. The presumption exists whether the

101 FOUR-C LAW LIBRARY


words ''value received" appear on the instrument or not." And any allegation which sets forth the
existence of valuable consideration for the transfer of an instrument by indorsement is sufficient,
notwithstanding the failure to allege specifically the amount and nature of the consideration
which was in fact paid to the indorse.

578. Mere introduction of instrument sufficient. The mere introduction of the


instrument sued on in evidence, prima facie entitles the plaintiff of a recovery and unless such
prima facie case is overcome by evidence produced by the defendant the plaintiff is entitled to
recover. This means that the person claiming that a payee or an indorsee did not give valuable
consideration for an instrument must prove that there really was no valuable consideration given.
Thus, suppose that D is an indorsee of a note. He files an action against A the maker of the note.
D need not prove that he paid for the note. If A alleges that D did not pry for the note, A must
prove it.

579. Effect of lack of consideration. When it in shown that a promissory note is


executed without just, real or legal consideration, and "that it was executed so that the supposed
creditor may help the supposed debtor protect the latter's properties in the event of an expected
litigation to be commenced by a third person against said debtor, the same is without any effect
and the payment of said note is not demandable."
SECTION 25. Value, what constitutes. Value is any consideration sufficient to support
simple contract. An antecedent or pre-existing debt constitutes value; and is deemed such
whether the instrument is payable on demand or at a future time.

580. Valuable consideration in general. "Consideration" means inducement to a


contract that is cause, motive, price or impelling influence which induces a contracting party to
enter into a contract. Valuable consideration may "in general terms, be said to consist either in
some right, interest, profit or benefit accruing to the party who makes the contract, or some
forbearance, detriment, loss or some responsibility to act, or labor, or service given, suffered or
undertaken by the other side." Simply defined, valuable consideration means an obligation to
give, to do or not to do, in favor of the party who makes the contract, such as the maker or
indorser.
581. Obligation to give. To sell land; to deliver goods; to loan money. Thus, suppose
that A sells a piece of land to B. B gives a check. The delivery of the land to B is valuable
consideration given for the check.

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582. Obligation to do. To teach; to mow the grass; to paint a picture; to perform a dance;
to furnish music as by an orchestra; to repair a car. Thus, suppose that A repairs Bs car. B issues
a check in favour of A. As repairing the car is value given for the check. Accordingly, it has
been held that a consideration in a promissory note consisting of services rendered by one person
in securing for another the lease of certain premises is valid and not contrary to law, morals,
good customs, public order or policy.. And the consideration is not affected by the fact that the
services were rendered without an express promise to pay. However, services without
expectation of compensation rendered as mere acts of neighborly kindness. are not a good
consideration.

583. Obligation not to do. Not to give extension of time; not to compete in business.
Thus, suppose that A promises not to put up a gasoline station within one kilometer from the
gasoline station of B, in consideration of which B gives A a check for p5,000. The undertaking
not to put up thc gasoline station is suffcient consideration.

584. Pre existing debt. Suppose A owes B P1,000 payable on December 31, 1949. He
fails to pay in cash. He issues a check to B for the amount. The pre-existing debt is a sufficient
consideration for the check. But suppose that A, widow, issues a note for a pre-existing debt of
her deceased husband whose estate is insolvent. Is there valuable consideration? No, because
after the death of the husband, there is no more pre-existing debt as the estate is insolvent."

585. Third person's pre-existing debt. A third person's pre-existing debt is sufficient
consideration."

586. Bank credits as valuable consideration. B, payee of a check, deposits the check in
his bank. The bank credits his account for the amount of the check. Does the act of crediting
constitute value so as to make the bank a holder for value? There is a division of authorities. But
the better view is that the act of crediting constitutes value.

587. Exchange of negotiable papers. A issues a note to B, and B in return for the note,
issues a check in favor of A. One in sufficient consideration for the other.

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588. Consideration as to surety or guarantor. The consideration which supports the
obligation as to the principal debtor is sufficient consideration to support the obligation of the
surety or guarantor. It is unnecessary to prove consideration between the surety and the creditor.
And where the consideration in a promissory note consists of services rendered by one person in
securing for another the lease of certain premises, the guarantor therein is bound by the same
consideration no matter whether he participated in the benefit thereof."

589. Love or affection. Consideration founded on (1) love and affection, as between
husband and wife, father and son, etc., or (2) upon gratitude, is good consideration, but does not
constitute such valuable consideration as is sufficient of itself to support the obligation of a bill
or note, as between original parties. An agreement or promise to make gift in the future, not
being based upon a valuable consideration, is not enforceable, even when put in the form of
promissory note and therefore gift notes are not supported by sufficient consideration. And a
mere moral obligation is not a sufficient consideration to support a promissory note between the
parties to such obligation. But notes given for establishing such public institutions as churches,
schools, and hospitals, are supported by sufficient consideration.

590. Presumption of valuable consideration under Section 24 is prima facie and can
be rebutted. Illustrative case.

PINEDA v DELA RAMA


Facts: Pineda executed a promissory note in favor of Dela Rama for P9,300, with no
interest and no security. Dela Rama had known Pineda for only three months. Pineda had
obtained the services of Dela Rama to delay the filing of a criminal case against Pineda by
NARIC. Pineda claimed that he issued the note to cover advances allegedly made by Dela Rama
to Naric officials. The note itself recites:
This represents the cash advances made by him in connection with my case for which he
is my attorney-in-law. The alleged advances never reached the Naric officials. The original
action was filed by Dela Rama against Pineda to collect payment of the promissory note.

Held: "The presumption that a negotiable instrument is issued for a valuable


consideration is only prima facie. It can be rebutted by proof to the contrary.

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The terms of the note sustain the version of Pineda that he signed the P9,300.00
promissory note because he believed Dela Rama's story that these amounts had already been
advanced by Dela Rama and given as gifts for NARIC officials.
"We agree with the trial court which believed Pineda. It is indeed unusual for a lawyer to
lend money to his client whom he had known for only three months, with no security for the loan
and no interest.
"Considering the foregoing, we agree with the trial court that the promissory note was
executed for an illegal consideration" under Articles 1409 and 1412 of the Civil Code.
SECTION 26. What constitutes holder for value. 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 be-come such prior to -that time.
591. Meaning of holder for value. One who gives valuable consideration for an instrument
issued or negotiated to him is a holder for value. Thus, where D indorses a note to E, and E
gives valuable consideration to D for the indorsement of the note, E would be a holder for value.
But the term "holder for value" is not limited to one who is known to have given valuable
consideration for the instrument he holds. It refers also to any holder of an instrument for which
value has been given at any time.
592. Illustration of holder for value. Thus, where A is a maker, B is the payee, B indorses to
C, C to D, D to E, now holder and last indorsee. B gives to A no valuable consideration for the
note. C is known to have given valuable consideration to B for the indorsement of the note.
Whether D and E gave valuable consideration is not known. Under the law, as to A, B, and C, E
is considered a holder for value. Because at "C's time," valuable consideration was given, and A,
B, and C became parties to the instrument before that time when value was given. As to D,
however, it is not known.
SECTION 27. When lien on instrument constitutes holder for value. Where the holder
has a lien on the instrument arising either from contract or by implication of law, he is
deemed a holder for value to the extent of his lien.
593. Application of Section 27. Suppose that A makes a note in the sum of P1,000 payable to
the holder of B owes C P600. B indorses the note to C to secure the payment of his debt of P600
to C. C is said to have a lien on the note to the extent of P600 and, to that extent, he is a holder
for value. Can C indorsee, collect the whole amount of P1,000 from A, maker, or only P600? It
depends, If A maker, has defenses against B indorser, such as absence of consideration, C, even
if a holder in due course, can collect from A only P600, the extent of his lien."
594. Reason for the rule. The reason for this seem; to be that actually C is a holder in due
course only for P600. He is only a holder in due course for that amount because he is a holder for

105 FOUR-C LAW LIBRARY


value only for that amount. For the balance of P400, he is not a holder for value, and since, being
a holder for value is one of the requisites of a holder in due course, 44 he cannot be a holder in
due course as far as the P400 is concerned. Consequently, if A has personal defense, A cannot
interpose them as to the P600. Hence, C can collect P600. But since as to the P400, C is not a
holder in due course, A can interpose his personal defenses to the extent of that amount. Hence,
C cannot collect the balance of P400. 595. Where defenses are real, or non-existent. Of course, if
the defenses of A are real defenses, C can collect nothing because A can interpose those defenses
against C as to the whole amount of the instrument. But if A, maker, has no defenses at all
against B indorser, C can collect from A the whole P1,000. He has, however, the obligation to
hold the balance o P400 for the benefit of the indorser."
SECTION 28. Effect of want of consideration. Absence or failure of consideration is a
matter of defense as against any person not a holder in due course; and partial failure of
consideration is a defense pro tanto, whether the failure is an ascertained and liquidated
amount or otherwise.
596. Absence of consideration. It is a total lack of any valid consideration. Thus, where A
issues to B a P1,000 check in payment of forged certificates of stock, which are therefore
valueless, there is absence of consideration. The following are other examples of absence of
consideration: (1) note given for future illicit cohabitation;" (2) note by husband to his wife,
upon promise of the wife to withdraw all opposition to proceedings for divorce instituted by him
;" (3) a note given in consideration of an agreement to stifle or hinder a public prosecution for a
felony; 48 and (4) when the consideration for commercial paper is clearly fraudulent .
597. Failure of consideration. It is the neglect or failure of one of the parties to give, to do or to
perform the consideration agreed upon. In the illustration given above, where the stocks are not
forged and have some value but B fails to deliver the stocks, there is failure of consideration. The
following are examples of failure of consideration: (1) A thinks he owns a certain piece of
property but there is a judgment against him and the execution has not been taken and A conveys
that property for B's note. In the meantime, the property is taken on execution, making a failure
of consideration;" (2) consideration for a bill or note for the use of an invention fails Where the
patent is not obtained;' or (3) where the invention is non-patentable.2 But there is no failure of
consideration where the use of the invention or its sale merely proves unprofitable.
598. Absence and failure of consideration distinguished. Want or absence of consideration
embraces transactions where no consideration was intended to pass, while failure of
consideration implies that the giving of valuable consideration was contemplated but that it
failed to pass.
599. Absence and failure of consideration as defenses. The law provides that "absence or
failure of consideration is a matter of defense as against any person not a holder in due course."
The implication then is that they are not defenses as against holders in due course. Failure or

106 FOUR-C LAW LIBRARY


absence of considera-tion, whether total or partial, can, therefore, be interposed as a defense only
against persons not holders in due course but not against holders in due course.' These defenses
are, therefore, only personal or equitable defenses.
600. Illustrations. Thus, suppose that A is the maker of a note for P1,000 issued by him to B or
order for and in consideration of 10 forged shares of stock. Here, there is want or absence of
consideration. B indorses the note to C who knows of the want of consideration. Hence, C is not
a holder in due course. A can interpose the defense of want of consideration against C. C
therefore, cannot collect. But if C were a holder in due course, A cannot interpose the defense,
and C can collect.
601. Effect of want of consideration between drawer and acceptor as to holder. "The
drawee, by accepting unconditional-ly the bill, becomes liable to the holder, and cannot allege
want of consideration between him and the drawer. The holder is a stranger as regards the
transaction between the drawer and the drawee, and if the holder has given value to the drawer
and has no knowledge of any equity between the drawer and the drawee, he is in the same
situation as an indorsee in good faith. Hence, in an action brought by the holder against the
acceptor, it is no defense that the merchandise sent by the drawer and which constituted the
consideration for the drawing of the bill, is of inferior quality than was ordered by the drawee to
such a degree that it is not worth the value of the bill."
602. Partial failure of consideration. Suppose that the extent of the want of consideration is
only P600. In other words, B payee, gave to A maker, valuable consideration to the extent of
P400. A can interpose want of consideration only pro tanto, or proportionate, that is, only to the
extent of P600. In this case, therefore, if C were not a holder in due course, he can collect from A
only P400. But of course, if C were a holder in due course, he can collect P1,000 because failure
or absence of consideration, whether full or partial, is not available against a holder in due
course. 603. Effect of inadequacy of consideration. See comments under Section 52. "
SECTION 29. Liability of accommodation party. An ac-c6mrtiodation party is one who
has signed the instrument as maker, ,drawer, acceptor, or indorser, without receiving value
"therefore, and for The purpose lending his name to some other person. Such a person is
liable on the instrument to a holder for value, notwithstanding such holder, at the time of
taking the instrument, knew him to be only an accommodation party.
604. Accommodation party; requisites. "An accommodation party is one who has signed, the
instrument as maker, drawer, acceptor, or indorser without receiving value therefore, and for the
purpose of lending his name to some other ;person.'7 The following therefore are the requisites
in order that-a son may be considered an accommodation party: (1) he must be a party to the
instrument, signing as maker, drawer, acceptor or indorser; (2) he must not receive value
therefore; and () he must sign for the purpose of lending his name or credit. On the basis of the
foregoing requisites, it is not a valid defense that the accommodation party did not receive any

107 FOUR-C LAW LIBRARY


valuable
consideration
when
he
executed
the
instrument.
605. Accommodation maker. B needs P1,000 but nobody would lend him because he has 110
property which he can give as security. However, he has rich friend A. Upon request of B, A
makes a note for P1,000 payable to B without receiving any consideration for the note, but in
order to lend his name or credit to B. Then B indorses the note to the PNB which will now
discount the note because of A's credit. In this illustration: (1) A signed as maker of the note, (2)
without consideration, to enable B to raise the money. A here is an accommodation party,
signing as maker. And B is the accommodated party. The note is an accommodation note.
606. Accommodation indorser. A needs money but as he has no credit standing in the
community, the local bank would not lend him money on his signature alone. He asks his friend
B, a rich man and of high credit standing, to accommodate him by indorsing his note.
Accordingly, A makes a note in favor of the bank, and before delivering the same to the bank, B
signs as an indorser in blank at the back of the instrument, without receiving value therefor. B
here is an accommodation indorser. However, where an indorsement is made as a favor to the
indorsee, who requests it, not the better to secure payment, but to relieve himself from a
distasteful situation, and where the Only consideration for such indorsement passes from the
indorser to the indorsee, the situation does not present one creating an accommodation
indorsement, nor one where there is a consideration sufficient to sustain an action on the
indorsement."'
MAULINI v. SERRAN0. This is an action by the plaintiff against the defendant on the basis of
the defendant's indorsement of a promissory note to the plaintiff. The defendant was a broker
doing business in the city of Manila and part of his business consisted in looking up and
ascertaining persons who had money to loan as well as those who desired to borrow money, and
acting as a mediary, negotiate a loan between the two. According to the usual method followed
in these transactions and the procedure in this particular case, the broker delivered the money
personally to the borrower, took the note in his own name and immediately transferred it by
indorsement to the lender. In the case at bar, this was done at the special request of the indorsee
and simply as a favor to him, the latter stating to the broker that he did not wish his name to
appear on the books of the borrowing company as a lender of money and that he desired that the
broker take the note in his own name, immediately transferring to him title thereto by
indorsement. This was done, the note being transferred at once to the lender. Two important
questions were involved: (1) whether the defendant was an accommodation party or not; and (2)
whether parol evidence may be introduced by an indorser in an action against him by the
indorsee that the indorsement was wholly without consideration.
HELD: (1) The accommodation to which reference is made in Section 29 of the Negotiable
Instruments Law "is not one to the person who takes the note that is, the payee or indorsee,
but one to the maker or indorser of the note. It is true that, in the case at bar, it was an
accommodation to the -se-use, to have the defendant indorse the note; but it was not the
accommodation described in the law but rather a mere favor to him and one which in no way

108 FOUR-C LAW LIBRARY


bound Serrano. In cases of accommodation indorsement, the indorser makes the indorsement for
the accommodation of the maker. Such an indorsement is generally for the purpose of better
securing the payment of the note that is, he lends his name to the maker, not to the holder.
Putting it another way: An accommodation note is one to which the accommodation party has
put 'his name, without consideration, for the purpose of accommodating some other party who is
to use it and is expected to pay it. The credit given to the accommodation party is sufficient
consideration to the accommodation maker." Accordingly, the defendant is not an
accommodation indorser.
(2) Parol evidence is admissible for the purposes named. The prohibition against parol evidence
is to prevent "alteration, change, modification or contradiction of the term Of a written
instrument, admittedly existing, by the use of parol evidence except in the cases specifically
named in the action. The case at bar is not one where the evidence offered varies, alters, modifies
or contradicts the terms of the indorsement admittedly existing. The evidence was not offered for
that purpose. The purpose was to show that no contract of indorsement ever existed; that the
minds of the parties never met on the terms of such a contract ; that they never mutually agreed
to enter into such a contract; and that there never existed a consideration upon which such an
agreement could be founded."
607. Accommodation drawer. A signs as drawer in a bill of exchange with B as payee, without
any valuable consideration being given by B to A, the purpose merely being to lend A's credit to
B.
608. Accommodation Accepto. A desires to borrow money from the PNR. Without any funds in
the hands of C. A asks C to accept a bill drawn by him (A) in favor of himself. C accepts without
any valuable consideration but in order to lend his credit to A. Then A indorses the bill to the
PNB which discounts it.
609.Accommodation acceptor is liable primarily. In a case, the defendant Aruego claims that
he signed as an acceptor as an accommodation party, and as such, should be made liable only
after a showing that the drawer is incapable of paying. Citing Section 29 of the Negotiable
Instruments Law, the Court held that "in lending his name to the accommodated partythe
accommodation party is in effect a surety for the latter. He lends his name to enable the
accommodated party to obtain credit or to raise money. He receives no part of the consideration
for the instrument but assumes liability to the other parties thereto because he .wants to
accommodate an-other. In the instant case, the defendant signed as a drawee/ acceptor. Under the
Negotiable Instruments Law, an acceptor is primarily liable. Thus, the defendant who is a
lawyer, should not have signed as an acceptor/drawee. In doing so, he became primarily and
personally liable for the drafts."
610. Meaning of "without receiving value therefore. Suppose that the one signs for the
purpose of lending his name is given purpose of lending his name is given P150 for and in

109 FOUR-C LAW LIBRARY


consideration of lending his name but not for the instruments he signs. Would he Cease to be an
accommodation party? No, he would still be an accommodation party. "It should be noted that
the phrase without receiving value therefor, as used in Section 29, x x x, means without
receiving value by virtue of the instrument' and not, as it apparently is suppossed to mean,
without receiving- payment for lending his name'.

611 Effect of placing "value received. Suppose that the note contains the phrase "value
received." This will not negative the character of the note as an accommodation paper. "An
accommodation note showing on the face in express terms that it had been issued for no
consideration would be of little or no use to the payee, and for that reason, if for no other,
practically all .accommodation notes are, so drawn as to either exigAssaor imply a valuable
consideration prima facie."

612. Rights and legal position of accommodation party.


(1) The accommodation party is generally regarded as a surety for the party accommodated.
(2) When "the accommodation parties make payment to the holder of the notes, they have the
right to sue the accommodated party for reimbursement since the relation between them is in
effect that of principal and sureties, the accommodation parties being the sureties
613. Accommodated party cannot recover from accommodation party. The accommodation
party cannot recover from the accommodation party. As between them, absence of consideration
is a defense. In fact, as between them, the understanding is that the accommodated party either is
(1) to reimburse the amount which the accommodation party may be obliged to pay, or (2) to pay
the instrument directly to the Wilder. The real debtor is the accommodated party. As between the
accommodated party and the accommodation party, the latter is secondarily liable.

614. But, Want of Consideration Cannot Be Interposed Against Holder For Value. The
Prudential Bank and Trust Co. received a letter from International Asian Co., Inc. applying for
credit facilities in the amount of P15,000. The bank notified International Asian Co., Inc. of the
approval of a discounting line of P15,000 in favor of the latter, available by means of draft drawn
on an acceptable local merchant for a period of 60 days with interest at the rate of 8%.
International Asian Co., Inc., therefore, executed in favor of the bank an exchange draft drawn
against Ramesh Trading Co. The exchange draft was accepted by Ramesh Trading. In an action
brought to recover payment of the exchange draft, Ramesh Trading contends that it cannot be
held liable because the International Asian Co., Inc. as drawer, Ramesh Trading as draweeacceptor, and Prudential Bank as payee, intended that no liability wash to attach the acceptance

110 FOUR-C LAW LIBRARY


of the draft. It contends that there was an agreement that the acceptance was a mere compliance
with the requirements of the bank without any valuable consideration thereof by acceptor and
that the acceptor had no liability whatsoever in the acceptance, such tenor of acceptance being
known to the bank management. HELD: Even if we assume that there was such an agreement
and that the appellant is a mere accommodation-acceptor, it cannot escape liability on that
account. The appellant is still liable under Section 93 of the Negotatiable Instruments Law. The
defense of want of consideration is available against the party accommodated but it may not be
interposed against a holder who has acquired the instrument for value, even if such holder knew
that the acceptor is a mere accommodation acceptor. "In a bill of exchange, failure of
consideration between drawer and drawee is not a defense by the drawee who has accepted the
bill, in an action brought by the payee upon such acceptance."
615. Liability of the accommodation party. Under this section, the accommodation party is
"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." As already stated, the
accommodation party does not receive any valuable consideration for the instrument he signs but
he is liable to a holder for value as if the contract was not for accommodation." Consequently,
where the holder for value knows or has notice of the fact that the accommodation party is an
accommodation party, this means that the holder for value has notice of the fact that the
accommodation party did not receive valuable consideration for the instrument, he is never-the
less considered a holder in due course.

In instruments which are not accommodation papers, the effect of this notice of want of
consideration is to render the holder for value not a holder in due course because he has notice of
a defense of prior parties,'' namely, want of consideration, which is a defense under Section 28.
However, because of the provisions of this section, an accommodation party cannot interpose the
defense of want of consideration between him and the accommodated party against a holder for
value even if the holder for value has notice of the fact that he is an accommodation party and
therefore, has notice that he did not receive any consideration for the instrument which he
signed.

616. Illustration. Thus, suppose that A signs a promissory note as maker to lend his name or
credit to B but without receiving any consideration for the note. The amount is P1,000. And the
date of maturity is December 1, 1951. 13 then indorses the note to the PNB, which discounts the
note on the basis of the signature of A, who has a very good credit standing. The indorsement is
made before maturity and the PNB knows that A is only an accommodation party. On the date of
maturity, A refuses to pay the bank on the ground that he, A, did not receive any consideration
from B, and the PNB, even though a holder for value, is not a holder in due course because it had

111 FOUR-C LAW LIBRARY


notice of the absence of consideration between him and B, and therefore, he, A, can interpose the
defense against the PNB. Is this contention correct? No. Under Section 29, a holder for value can
hold the accommodation party liable even if he knows him to be an accommodation party. "The
law now is that the accommodation party can claim no benefit as such, but he is liable according
to the fact of his unt7aking, the same as if he were himself financially interested in the
transaction. x x x to fasten liability upon an accommodation maker, it is not necessary that any
consideration should move him. The consideration which supports the promise of the
accommodation maker is that parted with by the person taking the note and received by the
person accommodated.'" "The credit given to the accommodation party is sufficient to bind the
accommodation maker."
617. Liability of Accommodation Party. Illustrative Case. Ting issued a check for P4,000
payable to "cash or bearer," with Felipe Angs endorsement in blank. Ang Tiong now presents it
to the drawee bank for payment but the bank dishonored it. Ang Tiong makes a written demand
upon both Ting and F. Ang and when the demand is not heeded, he brings an action against both
of them. F, Ang claims that he signed as a mere accommodation party and not as a general
indorser. HELD: Even if the appellant F. Ang, is a mere accommodation party, as he professes to
be, he is nevertheless liable by a clear mandate of Section 29. on the instrument to a holder for
value, notwithstanding that such holder at the time of the taking of the Instrument knew him to
be only an accommodation party. To paraphrase, the accommodation party is liable to a holder
for value as if the contract was not for accommodation. It is not a valid defense that the
accommodation party did not receive any valuable consideration when he executed the
instrument. Nor is it correct to say that the holder for value Is not a holder In due course merely
because, at the time he acquired the instrument, he knew that the indorser was only an
accommodation party.
The fact that an accommodation Indorser may obtain security from the maker to protect himself
against the danger of insolvency of the latter, cannot in any manner affect his liability to a holder
in due course Said remedy is a matter of concern exclusively between the accommodation
indorser and the accommodated party. So that the fact that the accommodation indorser stands
only as a surety in relation to the maker is immaterial to the claim of the holder in due course and
does not a bit diminish nor defeat the rights of the latter who is a holder for value. The liability of
accommodation theory is to give unwarranted legal recognition to the patent absurdity of a
situation where an indorser, when sued on an instrument by a holder In due course and for value,
can escape liability on his lndorsement by the convenient expediency of interposing ,the defense
is that he is a mere accommodation indorser.
HELD: Even if the appellant F. Ang, is a mere accommodation party, as he professes to be, he is
nevertheless liable by a clear mandate of Section 29. on the instrument to a holder for value,
notwithstanding that such holder at the time of the taking of the Instrument knew him to be only
an accommodation party. To paraphrase, the accommodation party is liable to a holder for value
as if the contract was not for accommodation. It is not a valid defense that the accommodation

112 FOUR-C LAW LIBRARY


party did not receive any valuable consideration when he executed the instrument. Nor is it
correct to say that the holder for value Is not a holder In due course merely because, at the time
he acquired the instrument, he knew that the indorser was only an accommodation party.
The fact that an accommodation Indorser may obtain security from the maker to protect himself
against the danger of insolvency of the latter, cannot in any manner affect his liability to a holder
in due course Said remedy is a matter of concern exclusively between the accommodation
indorser and the accommodated party. So that the fact that the accommodation indorser stands
only as a surety in relation to the maker is immaterial to the claim of the holder in due course and
does not a bit diminish nor defeat the rights of the latter who is a holder for value. The liability of
accommodation theory is to give unwarranted legal recognition to the patent absurdity of a
situation where an indorser, when sued on an instrument by a holder In due course and for value,
can escape liability on his lndorsement by the convenient expediency of interposing ,the defense
is that he is a mere accommodation indorser.
618. Corporations are not liable as accommodation parties even to holders for value. The
provision of the Negotiable Instruments Law which holds an accommodation party liable on the
instrument to a holder for value, although such holder at the time of taking the instrument knew
him to be only an accommodation party, does not include nor apply to corporations which are
accommodation parties. This is because the issue or indorsement of negotiable paper by a
corporation without consideration and for the accommodation of another is ultra vires. Hence,
one who has taken the instrument with knowledge of the accommodation nature thereof cannot
recover against a corporation where it is only an accommodation party. If the form of the
instrument, or the nature of the transaction, is such as to charge the indorsee with knowledge that
the issue or indorsement of the instrument by the corporation is for the accommodation of
another, he cannot recover against the corporation thereon.

619. Officers signing for corporation as accommodation party without authority to do so


for their individual debts or transactions are personally liable thereon. By way of exception,
an officer or agent of a corporation shall have the power to execute or indorse a negotiable paper
in the name of the corporation for the accommodation of a third person only if specifically
authorized to do so. Corollarily, corporate officers, such as the president and vice-president, have
no power to execute for mere accommodation a negotiable instrument of the corporation for their
individual debts or transactions arising from or in relation to matters in which the corporation has
no legitimate concern. Since such accommodation paper cannot thus be enforced against the
corporation, especially since it is not involved in any aspect of the corporate business or
operations, the inescapable conclusion in law and in logic is that the signatories thereof shall be
personally liable therefore, as well as for consequences arising from their acts in connection
therewith.

620. Rights of Accommodation Parties As Against Each Other. Illustrative Case. Sevilla,
Varona, and Sadaya executed a promissory note for P15.000, jointly and severally, in favor of
the Bank of the Philippines or order, payable on demand. Only Varona received the P15.000 with

113 FOUR-C LAW LIBRARY


Sevilla and Sadaya signing as co-makers as a favor to Varona. When P5.746.12 were unpaid, the
bank recovered from Sadaya alone. Varona could not reimburse Sadaya, Sevilla died and this
action is against the intestate estate of Sevilla to recover, on appeal P2,873.06 or 50% of the
P5,746.12 paid by Sadaya to the bank. HELD: Sevilla and Sadaya were joint and several
accommodation makers of the promissory note, their obligation to the bank is no different from,
and no greater and no less than, that contracted by Varona. Where the principal debtor failed to
pay the balance due on a promissory note, either one of the solidary accommodation makers may
be held liable for the said balance. Varona, who received the full value of the note, is obligated
to make full reimbursement to Sadaya who paid the balance due to the bank. On the other hand,
if Verona and not Sadaya had paid the bank, Varona could not have claimed reimbursement from
either Sadaya or Sevilla or both. The two receive nothing from the proceeds of the loan. It can,
therefore, be seen that while the obligation of the three to the bank is joint and solidary, the
obligation of the three among themselves cannot be joint and several. Regarding the claim of
Sadaya against Sevilla, where a solidary accommodation maker paid to the bank the balance due
on a promissory note, he may seek contribution from the other solidary accommodation maker,
In the absence of a contrary agreement between them. This right springs from an implied
promise between the accommodation makers to share equally the burdens resulting from their
execution of the note. Since the Negotiable Instruments Law does not define the right of an
accommodation maker, to seek reimbursement from another accommodation maker, Article
2073 of the New Civil Code applies. Under this article, a solidary accommodation maker (1)
may demand from the principal debtor reimbursement of the amount which he paid on the
promissory note and (2) he may demand contribution from his co-accommodation maker without
first directing his action against the principal debtor provided that (a) be made the payment by
virtue of a judicial demand or (b) the principal debtor is insolvent. In this case, the solidary
accommodation maker (Sadaya) who paid the balance due on a promissory note is not entitled to
demand contribution from the estate of his co-accommodation maker where he made the
payment voluntarily and without any judicial demand and there is no proof the he principal
debtor is insolvent.

621. Holder must otherwise be holder in due course. But the holder for value must otherwise
be a holder in due course, that Is, he must meet all the requisites under Section 52 except notice
of want of consideration, In other words, the holder for value must have acquired the instrument
complete and regular on its face, before it is overdue and without notice that it was previously
dishonored if such be the fact, in good faith. etc. Consequently, a transferee from the
accommodated party, acquiring accommodation paper after maturity, although he gives a
valuable consideration therefore, takes only the title of the transferor and obtains no higher right
against the accommodation party than he would have in the case of the purchase of ordinary
commercial paper under similar circumstances. This is the weight of American authority. In
other words, where the holder is not otherwise a holder in due course, Section 28 will govern and
not
Section
29.
Thus, in the illustration, if the PNB acquired the Instrument after maturity, that Is, after
December 1. 1951. It would not otherwise be a holder in due course because it acquired the note
after it has become overdue. Hence, A can interpose the defense of want of consideration against
it and it cannot recover on the note from A. It has been held that the rule that where
accommodation paper is negotiated after maturity, the accommodation party cannot be held

114 FOUR-C LAW LIBRARY


liable thereon contemplates the case where the accommodation maker draws a note payable, to
the accommodated payee and the payee first negotiates the note after the date of maturity.
However if A signed as an accommodation maker for B who signed as a co-maker of a
promissory note payable to C who indorsed it to D after the maturity of the instrument, D could
collect from A and B. In such case, even If D Is not a holder In due course, he acquired the rights
of C who could have enforced the instrument against A and B.

622. Accommodation party can interpose defense of want of consideration against one not
holder
in
due
course.
Illustrative
case.

PRUDENCIO v COURT OF APPEALS. Facts. The Prudencios, petitioners, signed a promissory


note in favor of PNB, to accommodate a construction company, represented by Toribio and later
by Concepcion and Tamayo, which needed funds on a contract with the Bureau of Public Works.
Prudencio signed the note on the basis of a Deed of Assignment whereby the construction
company assigned all payments to the PNB. But the PNB agreed with the Bureau to make some
payments to the company, and extended he time for payment of one installment, all without the
consent of Prudencio, Issues. Is the PNB a holder In due course? Can Prudencio interpose the
defense of want of consideration against the PNB? HELD. Prudencio can interpose the defense
of its being an accommodation party as the PNB is not a holderr in due course. Not only was
PNB an immediate party or privy to the promissory note, that is, it had dealt directly with the
petitioners knowing fully well that the latter only signed as accommodation makers but more
important, It was the Deed of Assignment executed by the Construction Company in favor of
PNB which principally moved the petitioners to sign the promissory note also in favor of PNB.
Petitioners were made to believe and on that belief entered into the agreement that no other
conditions would alter the terms thereof and yet, PNB altered the same.
PNB approved the Bureaus release of three payments directly to the Company instead of paying
the same to the Bank. This approval was in violation f the Deed of Assignment and without any
notice to the petitioners who stood to lose their property once the promissory note falls due
without the same having been paid because the PNB, in effect, waived payments of the first three
releases. From the foregoing circumstances. PNB can not be regarded as having acted in good
faith which is also one of the requisites of a holder in due course under Section 52 of the
Negotiable Instrument Law. The PNB knew that the promissory note which it took from the
accommodation makers was signed by the latter because of full reliance on the Deed of
Assignment, which. PNB had no intention to comply with strictly. Worse, the third payment to
the Company in the amount of P4.293.60 was approved by PNB although the promissory note
was almost a month overdue, an act which is clearly detrimental to the petitioners.
Respondent PNB is not a holder in due course. Thus, the petitioners can validly set up their
personal defense of release from the real estate mortgage against PNB. The latter, in authorizing
the third payment to the Company after the promissory note became due, in effect, extended the
term of the payment of the note without the consent of the accommodation makers who stand as
sureties to the accommodated party and to all other parties who are not holders in due course or
who
do
not
derive
their
right
from
the
same,
including
PNB,
The mortgage cannot be separated from the promissory note for it is the latter which is the basis
of determining whether the mortgage should be foreclosed or cancelled. Without the promissory

115 FOUR-C LAW LIBRARY


note which determines the amount of indebtedness there would have been no basis for the
mortgage.
True, it the Bank had not been the assignee, then the petitioners would be obliged to pay the
Rank as their creditor on the promissory note, irrespective of whether or not the deed of
assignment had been violated. However, the assignee and the creditor in this case are one and the
same the Bank itself. When the Bank violated the deed of assignment, it prejudiced itself
because its very violation was the reason why it was not paid on time in its capacity as creditor
In the promissory note. It would he unfair to make the petitioners now answer for the debt or to
foreclose on their property.
III NEGOTIATION
SECTION 30, What constitutes negotiation. An instrument is negotiated when It is
transferred from one person to another in such manner as to constitute the transferee the
holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is
negotiated by the indorsement of the holder completed by delivery.

623. Method of transfer. There are three methods of transfer, namely: (1) by assignment. (2) by
operation of law, (3) by negotiation, which may either be by indorsement completed by delivery
or by mere delivery.

624. Assignment. It is the method of transferring a non- negotiable instrument whereby the
assignee is merely placed in the position of the assignor and acquires the instrument subject to all
defenses that might have been set up against the original payee.
625. Mode of assignment. The mode of assignment of non-negotiable instruments differs in no
respect from that of any other contract. Although some sort of written assignment is customarily
employed, ft may be written either on the instrument itself or on a separate piece of paper.

626. Effect of assignment of non-negotiable instruments. The effect of the assignment of a


non-negotiable instrument is that the party holding the right drops out of the contract and another
takes his place. The assignee is substituted in place of the assignor. The assignee and every
subsequent person to whom the instrument comes by assignment may be considered as the
person who made the instrument in the first Instance and as having said and done everything in
making the instrument which the original assignor said or did. Hence, if the original assignor
said or did something which under the ordinary law of such contracts would prevent him from
enforcing the contract or asserting his right against the other party to the original contract, the
assignee, although he knows nothing of the original transaction, may be deemed to have said and
done the same things. And further, if any subsequent assignee from whom, as an assignor, the
holder in turn derives the contract, has done anything to prevent its enforcement against the
original party, the said holder cannot enforce it against the original party. Each assignee takes his
chances as to the exact position in which any party making an assignment of it stands. And, as it

116 FOUR-C LAW LIBRARY


is called in law, the assignee takes the contract subject to equities, that is, to defenses to the
contract which would avail in favor of the original party up to the time the notice of the
assignment is given to the person against whom the contract is sought to be enforced,

627. Assignment of negotiable instruments. A person taking a negotiable instrument by


assignment in a separate piece of paper takes it subject to the rules applying to assignment And
where the holder of a bill payable to order transfers it without Indorsement, it operates as an
equitable assignment
.
628. Transfer by operation of law. The full title to a bill or note may pass without either
assignment, indorsement, or delivery, that is, by operation of law. (1) by the death of the holder,
where the title vests in his personal representative, or (2) by the bankruptcy of the holder, where
title vests in his assignee or trustee, or (3) upon the death of a joint payee or Indorsee, in which
case the general rule is that the title vests at once in the surviving payee or Indorsee.
629. Negotiation. As already stated, negotiation is the transfer of an instrument from one
person to another in such manner as to constitute the transferee the holder thereof. Negotiation
may either be by indorsernent completed by delivery or by mere delivery. Usually, where the
instrument is payable to order, it is negotiated by the indorsement of the holder completed by
dedlivery, and where it is payable to bearer, by mere delivery. But aside from (1) indorsement
plus delivery and (2) mere delivery, it is possible to have a negotiation by means other than
these. The first sentence of the Section 30 states the general method of negotiation and the next
sentence is only illustrative but not exclusive.

630. Is delivery to payee negotiation? There is a division of authorities on this question. The
first view is that issuance or delivery of an instrument to the payee is not negotiation because
negotiation refers to an existing negotiable instrument and, before delivery to the payee, the
instrument is incomplete. The second view is that under this section and Section 191, an
instrument is negotiated when it is delivered to the payee or to an indorsee. Negotiation is not
confined to transfer after delivery to the payec. This seems to be the better view.

631, Argument in support of second view. Briefly, the argument in support of the second view
Is that under Section 191, a holder is a payee (or an indorsee) who is in possession of an
instrument payable to order. Consequently, when an instrument payable to order is delivered to
the payee thereof, the payee becomes a holder or he becomes thereby a payee in possession of
the instrument. In short, the delivery to him of the instrument constitutes him the holder thereof.
And since negotiation is defined under the first sentence of Section 30 as being such transfer of
an instrument as to constitute the transferee the holder thereof, such a delivery to the payee is
negotiation.

SECTION 31. Indorsement; how made. The indorsement must be written on the

117 FOUR-C LAW LIBRARY


instrument itself or upon a paper attached thereto. The signature of the indorser, without
additional words, is a sufficient indorsement.

632. Nature of indorsement. An indorsement is not only a mode of transfer. it is also a contract.
Every indorser is a new drawer and the terms are found on the face of the bill or note. There is an
added obligation upon the instrument aside from what appears upon the face of the instrument.
The indorsement of a bill or note implies an undertaking from the indorser to the person in
whose favor it is made and to every other person to whom the bill or note may afterwards be
transferred, exactly similar to that which is Implied by drawing a bill except that, in the case of
drawing a bill, the stipulations with respect to the drawers responsibility and undertaking do not
apply Thus, the general indorser. in effect, states to every person who follows him: This
instrument will be paid by the maker, if a note, or accepted by the drawee or paid by the
acceptor, if a bill. If it is dishonored by non-payment or non- acceptance and you give me notice
thereof, I will pay it. This, in effect, is the contract of the general indorser.
633. Where indorsement written. The indorsement may be written (1) on the instrument
itself or (2) upon a paper attached thereto. if written on the instrument itself, the indorsement
is usually written on the back thereof. But the indorsement may be written on the face of the
instrument. Where the indorsement is written on a paper attached to the instrument, such paper is
called an allonge. But the allonge must be tacked or pasted on the instrument so as to become a
part of it, and where the separate paper is only temporarily attached. as when clipped or pinned,
it
cannot
be
considered
an
allonge.

634. May allonge be used where there Is room on Instrument for indorsement? It has been held
that the use of an allonge is allowable only when there Is a physical impossibility of writing the
indorsement on the instrument itself, and an indorsement on a separate piece of paper where
there is sufficient space on the instrument for indorsements will be considered a mere
assignment, not a negotiation. This view, however, is questionable. Indorsement on the note
itself are not invalidated because there Is a blank space above them. Why should such a space be
material when some Indorsementa are on the attacbed piece of paper? In neither case does
leaving a blank space facilitate fraud, since nobody would gain any advantage by inserting his
name in the space and rendering him. self liable to those who indorsed below him upon the note
or
the
allonge.5
635. How Indorsement written. As writing includes print, an Indorsement may be
typewritten or made by rubber stamp. But the indorsement does not prove itself; It must be
shown
that
the
means
was
intended
as
an
indorsement.

636. Illustrative cases. The following have been held to be indorsements:


(1) The words payment approved followed by the payees signature.
(2) I hereby assign this note over to X this Nov. 1, 1910. signed by the PRYC on the back of

118 FOUR-C LAW LIBRARY


the
(3) I sign the within note to G,

negotiable

instrument

(4) For value received, I hereby guarantee payment of the within maturity x x x waiving
demand,
notice
of
payment.
and
protest.
(5) For value received, we hereby guarantee payment of the within note, including interest and
costs
at
maturity
or
at
any
time
thereafter
demanded.4

SECTION
32.
Indorsement
must
be
of
entire
instrument.
The Indorsement must be an Indorsement of the entire instrument. An indorsement which
purports to transfer to the indorsee a part only of the amount payable, or which purports
to transfer the instrument to two or more indorsees severally, does not operate as a
negotiation of the instrument. But where the instrument has been paid in part, It may be
indorsed
as
to
the
residue.
637. Indorsement must be of entire instrument. The general rule is that the indorsement must
be of the entire instrument. Accordingly, an indorsement of a part of the instrument does not
operate as a negotiation thereof. Thus, supose that the note is for P1,000 with A, as the maker,
and B, as the payee. It is indorsed as follows: Pay to X P400. (Sgd.) B. This is not valid
negotiation of the instrument.

638. Effect of partial indorsement when unauthorized. It does not operate as an indorsement.
But it may constitute a valid assignmentbinding between the parties. The person to whom the
instrument is indorsed would not be considered an indorsee but merely an assignee and would
therefore take the instrument subject to defenses available between the original parties.44
639. Exception. But where the instrument has been paid in part, it may be indorsed as to the
residue. Suppose that in the illustration, A, the maker has paid P600. B can indorse the
instrument. as to the balance, thus: Pay to X P400. (Sgd.) B.
640. Transfer to two or more indorsees severally. An indorsement which purports x x x to
transfer the instrument to two or more indorsees severally, does not operate as a negotiation of
the instrument. The following is an illustration of transfer to two or more indorsees severally.
Suppose that the note is for P1,000 payable to the order of B. It is indorsed as follows: Pay to C
P600 and to 1) r400, (Sgd.) B. This does not operate as a negotiation of the instrument. But the
following operates as an indorsement. Pay to X and Y. (Sgd.) B.
SECTION 33. Kinds of lndorsement An Indorsement may be either special or in blank;
and it may also be either restrictive or qualified or conditional.

119 FOUR-C LAW LIBRARY

641. Kinds of indorsement. An indorsement may be (1)special, (2) in blank (3) absolute, (4)
conditional, (5) restrictive, (6) qualified, (7) joint, (8) successive, (9) irregular and (10)
facultative.
SECTION 34. Special lndorscment; indorsement In blank. A special indorsement
specifies the person to whom or to whse order, the Instrument is to be payable, and the
Indorsement of such indorsee is necessary to the further negotiation of the instrument. An
indorsement in blank specifies no indorsee and an instrument so indorsed is payable to
bearer and may be negotiated by delivery.

642 Special and blank indorsement. See comments under Section 1, this volume.

643. How further negotiated.


(1) Where the instrument Is originally payable to order and it is negotiated by the payee by
special,indorsernent, it can be further negotiated by the indorsee by indorsement completed by
delivery.
(2) Where the instrument is originally payable to order and it is negotiated by the payee by blank
indorsement. it can be further negotiated by the holder by mere delivery. The reason is that the
effect of a blank indorsement is to make the instrument payable to bearer.
(3) Where the instrument Is originally payable to bearer, it can be further negotiated by mere
delivery, even if the original bearer negotiated it by special indorsement.
SECTION 35 Blank indorsement; how changed to special indorsement. 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.

644. Application of Section 35. Suppose that A makes a note with B as the payee. It is
indorsed as follows: (Indorsement in blank) (Sgd.) B. Delivery to C, holder. C may place above
the signature o .B, Pay to C. so as to make the indorsement thus: Pay to C. (Sgd.) B. This
converts the blank instrument into a special indorsement.

645. Limitation upon conversion of blank indorsement. The holder must not write any
contract not consistent with the indorsement, that is, the contract so written must not change the
contract of the blank indorser. The following have been held to be contracts inconsistent with the
character
of
the
indorsement:
(1)
Pay
to
X
and
Y.
(2)
Demand
and
notice
waived.
(3) I guaranty payment. This will make the indorser a guarantor and deprive him thereby of his

120 FOUR-C LAW LIBRARY


right
(4) Without recourse.

to

demand

notice.

SECTION 36. When indorsement restrictive. An Indorsement is restrictive which either

(a)
Prohibits
the
further
negotiation
of
the
instrument;
or
(b)
Constitutes
the
indorsee
the
of
the
Indorser;
or
(c) Vests the title in the Indorsee In trust for or to the use of some other persons.
But the mere absence of words implying power to negotiate does not make an indorsement
restrictive.

646. Prohibtion of further negotiation. The following are illustrations of an indorsement that
prohibits
the
further
negotiation
of
the
instrument.
(1)
Pay
to
C
only.
(Sgd.)
B
(2)
Pay
to
C
and
no
other
person.
(Sgd.)
The Instrument so indorsed ceases to be negotiable.
647. Indorsee agent of the indorser. This is known as the agency type of restrictive
indorsement. The following is an illustration of an indorsement that constitutes the indorsee an
agent
of
the
indorser:
Pay
to
C
for
collection
(Sgd.)
B
C does not acquire title over the instrument as against B. lie merely becomes the agent of B and
may present the paper, demand and receive payment, and remit the proceeds. hence, any action
the indorsee (agent) may file is subject to defenses available against the indorser (principal), such
as lack of consideration. Thus. where the proof tends to show that the plaintiff held the draft for
collection only, and that the acceptance of it by the defendants was conditional, and that after
such an acceptance, the defendants refused to accept the goods evidenced by the draft, which
were returned to and accepted by the plaintiff, who agreed to release the defendants from any
liability, plaintiff thereafter cannot recover.

648. Indorsements for deposit. An indorsement for deposit constitutes the Indorsee the agent of
the indorser. Thus Pay to C for deposit (Sgd.) B. Such an indorsement, like an indorsement for
collection, constitutes a retention of title in the depositor in the absence of any practice or
agreement to the contrary. In any event, a restrictive indorsement of an instrument for collection
or deposit, or to the use of the indorser and for his benefit, in the absence of any other
circumstances, will not divest the indorser of his title thereto until the money is paid.
Indorsements for deposit only are usually informal. Most are by means of a rubber stamp. A
bank would be justified in accepting a check indorsed for deposit even with only a typed
indorsement,

121 FOUR-C LAW LIBRARY


649. Illustrative Case. In an action brought by an employee to recover unpaid salaries, overtime
pay, separation pay, underpayment, and exemplary damages, the employer tried to prove that the
employee had agreed to and in fact received the sum of P400.00 as full settlement of all claims
against the firm. As proof of payment, the employer presented a check for P400.00 payable to
Francisco Granado, the employee. On the reverse side Is Granados signature and immediately
below it is the notation. For deposit only Riverdale Inc.. HELD: We are at a loss how Mr.
Rivera (manager of the firm) could haw paid Granado the proceeds of the check issued to the
latter when the check itseIf contains the notation for deposit only Riverdale Inc. The notation
for deposit Is a restrictive indorsement and indicates that the indorsee bank is in agent for
collection and not the payee. Indorsement for a cheek by the payee for deposit does not
thereby render it negotiable but prohibits further negotiation for any purpose except for
collection for deposit in the payees account in the bank selected by the payee. By adding the
notation afore- stated, title to the check remained in the name of the firm.

650. Vests title in indorsee in trust for another. The following are illustrations on an
indorsement
which
vests
title
in
the
indorsee
in
trust
for
another.
(1)
Payto
X
in
trust
for-C
(2)
Pay
to
X
for
the
use
of
C
These transfer the title over the instrument to the indorsee. This is the so-called trust type of
restrictive indorsement.

651. Is indorsee subject to defense against indorser?


There
are
two
views
on
the
question:
(1) In the case of Sulbrason-Dickenscn Co. v. Hopkins, an indorsement to A for the benefit of B
was held restrictive under Section 47 of the Negotiable Instruments Law, making the indorsee or
his successors subject to good defenses against the restrictive indorser.
(2) Some learned writers, however, declare this holding to be unsound. Thus, It has been held
that the indorsee of a check indorsed in trust for a third person who is a holder in due course
could recover from the drawer who had a defense of failure of consideration, for while the
restrictive indorsement creating a trust gives notice of this trust to subsequent purchasers, it did
not give notice of defenses obtaining between prior parties.
652. Presumption of consideration in restrictive indorsement. As a general rule, an
indorsement of a negotiable bill which purports to pass the title to the bill to the indorsee,
imports a consideration and the burden of proving want of consideration rests upon the party
alleging it. The restrictive indorsements which are held to negative the presumption of a
consideration are such as to indicate that they are not intended to pass the title but merely to
enable the indorsee to collect for the benefit of the indorser, such as indorsements for collection
or others showing that the indorser is entitled to the proceeds. x x x But an Indorsement to one
person for the use or benefit of another, affords no such indication. The indorser parts with his
whole title to the bill and the presumption is that he does so for a consideration. The only effect

122 FOUR-C LAW LIBRARY


of such an indorsement, by way of restriction, is to give notice of the rights of the beneficiary
named in the indorsement and protect him against a misappropriation.

653. Effect of omission of words of negotiability. Under the law. the mere absence of words
implying power to negotiate does not make an indorsement restrictive. Thus: Pay to X is the
same as Pay to X or order. The omission of the word order does not render the indorsement
restrictive. But while the omission of words of negotiability in the indorsement does not affect
the negotiability of the instrument, such omission in the body thereof will render the instrument
non-negotiable.

SECTION 37. Effect of restrictive Indorsement: rights of indorsee. A restrictive


indorsement confers upon the indorsee the right
(a) To receive payment of the instrument;
(b) To bring any action thereon that the indorser could bring;
(c) To transfer his rights as such indorsee, where the form of the indorsement authorizes
him to do so.
But all subsequent indorsees acquire only the title of the first indorsee under the restrictive
indorsement.

654. Restrictive indorsee may receive payment. A restrictive indorsement confers upon the
indorsee the right to receive payment of the lnstrument. Thus, suppose that A Is the maker of a
note of P1,000 payable to B or his order. It is indorsed thus: Pay to X for deposit., (Sgd.) B
The indorsement passes the legal title over the note to X so as to enable X to demand and receive
payment of the value of the note, P1.000, from A. maker. This is true under any of the forms of
restrictive indorsement.

655. Restrictive indorsee may bring any action. A restrictive indorsement confers upon the
indorsee the right x x x to bring any action thereon that the indorser could bring.'
In a restrictive indorsement for deposit, can the indorsee, such as B in the illustration, bring an
action against the indorser, such as A? Yes, if the indorser received value for said indorsement.

123 FOUR-C LAW LIBRARY


656. Restrictive indorsee may transfer his rights. A restrictive indorsement confers upon the
indorsee the right x x x to transfer his rights as such indorsee, where the form of the indorsement
authorizes him to do so. It is stated that a fair interpretation of the clause in Section 47
declaring a paper negotiable in it origin to continue negotiable until it has been restrictively
indorsed, is that the words until it has been restrlctively indorsed do not contemplate every
restrictive indorsement but a restrictive indorsement that prohibits the further negotiation of the
instrument under subdivision 1 of Sect ion 36 of the Negotiable Instruments Law. It is declared
by these authorities that the purpose of Section 47 of the Negotiable Instruments Law was not to
declare the effects of a restrictive indorsement already provided for in Section, 36 and 37 of that
law but to preserve as far as possible the negotiability of an instrument negotiable in its origin
and that the implication of Section 47 should not be taken as destroying negotiability of an
instrument heretofore universally accepted as negotiable.

657 Extent of negotiability after restrictive indorsement. Another writer, as to restrictive


indorsement, states: Three propositions follow: (1) That all three forms of restrictive
indorsement impose some degree of limitation of negotiability; (2) That they do not all impose
the same degree of limitation; and (3) That the indorsement itself discloses the extent of the
limitation in the particular case.

658. Illustrative cases. Thus, where the indorsement Is Pay to C only, the instrument becomes
non-negotiable. But an indorsement for collection does not destroy the transferability of the
instrument and it can be reindorsed so that the indorsee can sue in his own name. Neither does an
indorsement for deposit only destroy the transferability of the instrument, but the restrictive
indorsee cannot transfer the instrument for his own debt or for his own benefit.

659. Limitation on transfer of right; illustrations. But all subsequent indorsees acquire only
the title of the first indorsee under the restrictive indorsement. The following are illustrations of
this rule: (1) In the indorsement. pay to A for collection. the rights of the subsequent indorsee
are subject to the restrictive indorsement, namely, that he can collect only, for, being a restrictive
indorsee, he acquires only the title of the first indorsee whose right is merely to collect.
(2) Suppose that a note for P1,000 Is Indorsed thus: Pay to B for deposit only.(Sgd.)-A, and
that B owes Y, P1,000. B cannot transfer the note to Y for said debt. Or, suppone that B transfers
the note to another person for P1.000. B cannot use the P1,000 for his personal expenses. He
must safely keep the amount on deposit until A, the indorser, asks for the return thereof.

124 FOUR-C LAW LIBRARY


(3) Thus, also, in the indorsement pay to A for account of B, while the title passes to A, the
indorsement gives notice that the instrument cannot be negotiated by A for his own debt or for
his own benefit.
SECTION 38. Qualified indorsement. A qualified indorsement constitutes the indorser a
mere assignor of the title to the instrument. It may be made by adding to the indorsers
signature the words without recourse or any words of similar import. Such an
indorsement does not impair the negotiable character of the instrument.

660. How qualified indorsement made. A qualified indorsement is made by adding to the
indorsers signature the words without recourse, sans recours indorser not holden; or with
intent to transfer title only, and not to ilwur liability as indorser, at the indorsees own risk.
Thus: Pay to C, at indorsees risk. (Sgd.) B.
661 Effect of qualified indorsement. It constitutes the indorser a mere assignor of the title to
the instrument. Without recourse means without resort to a person who Is secondarily liable
after the default of the person who Is primarily liable. In effect, any one who indorses without
recourse states that all parties to the paper are genuine; I am the lawful holder of that paper, and
I have title to it and know of no reason why you could not recover on it as a valid instrument, but
one thing I do not guarantee; I do not guarantee the financial responsibility of the parties on that
paper but I do say that I hold the title to it just the same as any other personal property.

662. Qualified indorser has limited secondary liability. The qualifiied indorser is not entirely
free from secondary liability. He Is secondarily liable on his warranties as an indoser under
Section 65, that is, the qualified indorser is liable if the instrument is dishonored by nonacceptance or non-payment due to:
(1) forgery: (2) lack of good title on the part of the indorser (3) lack of capacity to indorse on the
part of the prior parties; or (4) the fact that, at the time of the indorsement, the instrument was
valueless or not valid and he knew of that fact.

663. Illustration. Suppose that A makes a note payable to B or his order, and B indorses the note
thus: Sans recours, Pay to C, (Sgd.) B. if C cannot compel A to pay because As signature is
forged, C can recover from B. as B warrants the genuineness of As signature. But if C cannot
compel A to pay because A is not solvent and B did not know of that fact at the time of
negotiation. B cannot be held liable because his indorsement is merely a qualified one.

125 FOUR-C LAW LIBRARY


664. Effect of qualified indorsement on negotiability. A qualified indorsement does not
impair the negotiable character of the instrument.

SECTION 39. Conditional lndorsement. Where an indorsement is conditional, the party


required to pay the instrument may disregard the condition and make payment to the
indorsee or his transferee whether the condition has been fulfilled or not. But any person to
whom an instrument so indorsed is negotiated will hold the same, or the proceeds thereof,
subject to the rights of the person indorsing conditionally.
665. Absolute indorsement. One by which the lndorser binds himself to pay, upon no other
condition than the failure of prior parties to do so and upon due notice to him of such failure.
666 Conditional indorsement. An indorsement subject to the happening of a contingent event,
that is, an event that may or may not happen, or a past event unknown to the parties. Thus,
suppose a note for P1,000 with A, maker, and B, payee. It is then indorsed as follows: Pay to Y,
if he passes the bar examinations (Sgd.) B. This is a conditional indorsement as Y may or may
not pass the bar examinations.

667. Right to disregard condition. Under the first sentence, A, maker, can disregard the
condition and pay to Y, indorsee, even if Y has not passed the bar examinatjons. Such a payment
will discharge him from liability on the instrument. But, of course, A may refuse to pay on the
ground of non fulfillment of condition.

668. Obligation of conditional indorsee. Under the second sentence of this section, Y, indorsee,
holds the note or the proceeds thereof, if he is paid by A, subject to the rights of the indorser, B.
In other words, if A disregards the condition, and pays Y the P1,000 without waiting for the
condition to be fulfilled, Y does not immediately ccquire ownership over the sum. Ymust hold it
in trust while the condition is not fulfilled. It is upon the fulfillment of the condition that such
ownership over the proceeds of the note is absolutely acquired by the conditional indorsee Y. In
case of non-fulfillment, as when Y does not pass the examination, he must turn over the P1,000
to B, the conditional indorser.

669 Effect of conditional indorsement on negotlability. A conditional indorsemcnt does not


render an Instrument non-negotiable. But If the condition is on the face of the instrument,
making the order or promise to pay conditional, the condition renders it non-negotiable as the
promise or order therein would not be unconditional.

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SECTION 40. Indorsement of instrument payable to bearer. Where an instrument,
payable to bearer, is indorsed specially, it may nevertheless be further negotiated by
delivery; but the person indorsing specially is liable as indorser to only such holders as
make title through his indorsement.
670. Application of Section 40. This section applies only to instruments which are originally
payable to bear. It does not apply to instruments originally payable to order, even when they
become payable to bearer because the only or last indorsement is in blank. The section cannot
apply where the paper is originally made payable to order and indorsecl in blank; for by section
9, a note or bill which, upon its face, is payable to order, becomes payable to bearer only when
the last indorsement is in blank; and hence, when a blank indorsement is followed by a special
indorsement, the instrument is not within the terms of Section 9. Thus. It a check drawn to the
order of C it is in bank by the payee and delivered to B, and B indorses It to the order of C, it is
not payable to bearer for the reason that the last indorsement which by Section 9 is made the
test, special indorsement. The reason for making distinction In this respect between instruments
originally drawn payable to bearer and instruments which have become so payable because they
were indorsed in blannk is obvious. In one case, the maker or drawer has expressly provided that
the instrument shall be payable to bearer, and it cannot be made payable to order without
modifying these terms. But where, upon its face, it is payable to order, a transferee taking under
a blank indorsement, does not, by indorsing it specially, change its tenor as originally drawn.

671. Illustration. Thus, suppose that A makes a note payable to the order of B, and B indorses
the note in blank as follows: Sgd.) B, and delivers the same to C. Thereafter. C specially
indorses the note to D as follows: Pay o D (Sgd.) C. Can D negotiate the instrument by mere
delivery? No. because Section 40 applies only to instruments originally payable to bearer. In this
case, the instrument is originally payable to order. D can negotiate it only by indorsement plus
delivery.

672. Negotiation of instrument payable to hearer but specially indorsed. Where an


instrument payable to bearer is indorsed, it may nevertheless be further negotiated by delivery.
This means that an instrument which is originally payable to bearer is always payable to bearer.
Hence, even when specially indorsed, it can be negotiated by mere delivery.
673. Effect on liability of special indorser; illustration. "The person indorsing specially is
liable as indorser only to such holders as make title through his indorsement." Thus, sup-pose anote for P1,000 payable to bearer. A, maker, C, bearer. C delivered it to D. D specially indorsed
it to E, indorsee. E specially indorsed it to F, inclorsee. F delivered it to G, bearer. (1) Is D liable
to G, D being the first who specially indorsed the instrument? No, because G did not take title
through D's indorsement but through delivery of F. Delivery was sufficient to transfer title to- G

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because the instrument is originally payable to bearer and it can always be negotiated by
delivery. D liable To E and F, because they acquired their title over the instrument through D's
indorsement as E and F can trace their title through a series of unbroken indorsements from D,
special indorser. Had F indorsed the note, to G, instead of merely delivering it, D would be liable
also to G, for the same reason.
SECTION 41. Indorsement where payable. to two,or. More persons. - Where' an
Instrument is,payable to the order of two or more payees or indorsees who are not
partners, all must in-dorse unless the one indorsing has authority to indorse for the others.
674. Application of Section 41. 'This section applies only to instruments payable to two or more
payees jointly, such as "Pay to the order of A arid B." It does not apply to instru-ments payable
to two or more payees severally, such as "pay to the order of A or B." These fall under Section 8
(c) and such instruments so payable may be negotiated by the indorse-ment of one payee.3 675.
How indorsement of joint payees made. Where the instrument is payable to two or more payees,
all payees must each indorse in order to negotiate the instrument.3' If only one indorses, he
passes only his part of the instrument. Such an indorsement would not operate as such because it
would not be an indorsement of the entire instrument." But the .following are exceptions to the
rule requiring joint indorsement: (1) where the payee or indorsee indorsing has authority to
indorse for the others, and (2) where the payees or indorsees are partners.
SECTION 42. Effect of instrument drawn or indorsed to a person as cashier. Where an
instrument is drawn or indorsed to a person as "cashier" or other fiscal officer of a bank or
corporation, it is deemed prima facie to be payable to the bank or corporation of which he is such
officer, and may be negotiated by either the indorsement of the bank or corporation or the
indorsement of the officer.
676. Application of Section 42. Suppose that a note for P1,000 is made payable "to the order of
Cashier, Lyceum of the Philippines." The presumption is that the note is payable to the Lyceum
of the Philippines, not to the cashier personally. And the note may be indorsed by any duly
authorized officer of the Lyceum of the Philippines other than the cashier. Thus, if the President
is authorized by the by-laws of the corporation, he may indorse the note. So, where S was cashier
of the C bank, a certificate of deposit issued by the C bank to the order of "S, Cashier" was
indorsed "S, Cashier," and came to the plaintiff, a holder in due course, it was held that the
indorsement was that of the bank, and that it was competent for the bank to show that S acted in
his own interest and in violation of his duty to the bank."
677. Presumption is disputable. However, the presumption established in this section is
disputable. Proof may be adduced to show that the bill is payable to the cashier personally as the
real creditor to the maker.
678. As to municipal or public corporations. An instrument payable to the "Treasurer of the
Town of F," in legal effect, stands on the same footing as if payable to the town which is the real
payee, However, the town treasurer has no authority to indorse the said instrument since
"corporation" in Section 42 does not include cities and towns.

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SECTION 43. Indorsement where name is misspelled, and so forth. Where the name of
a payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as
therein described adding, if he thinks fit, his proper signature.
679. Application of Section 13. An instrument drawn or indorsed to Juan Dytuco
whose real name is Juan Dyjuco,may be indorsed as follows:
(1) Pay to Y
(Sgd.) Juan Dytuco
Juan Dyjuco
or
(2) (Sgd.) Juan Dytuco
680. Illustrative cases. (1) Where the payee on a notewas Stutz Motor Car Co. of
America, Inc. and the indorsement by the intended payee was Stutz Motor Car Co. of America,
Inc.; Stutz Atlanta Motor Co. by Fred S. Wilson, State Distributor. it was held that under the
Negotiable Instrument Law, Section 43, title passed by the indorsement.
(2) In a note where the name of the payee is CascadeCountry Club, and the
indorsement thereon is Cascade Country Club, Inc., W. H. Emrick, Pres., said instrument was
held also as sufficient to pass title in the instrument.
SECTION 44. Indorsement in representative capacity. Where any person is under
obligation to indorse in a representative capacity, he may indorse in such term as to
negative personal liability.
681. How agent must indorse. He must indorse in the same manner as an agent of the
maker, drawer or acceptor should in order to escape personal liability as required under Section
20. In short, (1) he must add words describing himself as an agent; and (2) at the same time
disclose his principal. But it has been held that an agent may indorse by merely signing the name
of the principal. Of course, (3) he must be duly authorized.
SECTION 45. Time of indorsement; presumption. Except where an indorsement
bears date after the maturity of the instrument, every negotiation is deemed prima facie to
have been effected before the instrument was overdue.
682. Application of Section 45. A note payable 30 days after date is dated July 1. 1949. Its date
of maturity, therefore, is July 31, 1949. The payee indorses it without dating his indorsement.
The presumption is that he indorsed the note on or before July 31, 1949, that is, before the note
became overdue. The presumption, however, is rebuttable or disputable. And it can be shown
that actually, the indorsement was made on August 3, 1949, that is, after July 31, 1949. The
burden of proof is on the person alleging indorsement after maturity. Of course, if the
indorsement bears a date, the presumption in this section would not arise. The presumption
would be that state din Section 11, namely, that the date written is the true date.
683. Importance of this provision. This provision becomes important when considered
in connection with Section 52 (b). Under this provision, in order that one may be a holder in due

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course, the instrument must be negotiated to him before it becomes overdue. The indorsement
without date establishes a prima facie presumption that the instrument was negotiated before
maturity, and one who denies that the holder of such instrument is a holder in due course has the
burden of proof. And the fact that an indorsement appears to be in such fresher ink than the face
of a demand note is not sufficient to overcome the presumption that it was indorsed before it was
overdue.
SECTION 46. Place of indorsement; presumption. Except where the contrary
appears, every indorsement is presumed prima facie to have been made at the place where
the instrument is dated.
684. Application of Section 46. A bill is dated thus; Manila, Philippines, July 1, 19.19.
Then, it is subsequently indorsed by the payee without writing the place of indorsement. The
presumption is that the indorsement was made in Manila. The presumption, however, is
rebuttable.
685. Importance of place of indorsement. The place of indorsement sometimes is
material because an indorsement is governed by the laws of the state where it is indorsed,
althoughthe instrument is drawn or made in a different state. So, an indorsement in
Massachusetts of an instrument executed and payable In New York is governed by the law of
Massachusetts as to the contract of indorsement. So also, a married woman, as an
accommodation indorser of a note dated and payable in New York, is estopped as against the
holder in due course to show that the indorsement was made in New Jersey where said
indorsement is void.
SECTION 47. Continuation of negotiable character. An instrument negotiable in
its origin continues to be negotiable until it has been restrictively indorsed or discharged by
payment or otherwise.
686. When negotiable instrument rendered non-negotiable. Under this section, an
instrument originally negotiable can be rendered non-negotiable only by: (1) restrictive
indorsement; or (2) by a discharge thereof by payment or otherwise. But as already noted, some
learned writers opine that the words until restrictively indorsed do not refer to every restrictive
indorsement but only to a restrictive indorsement that prohibits further negotiation of the
instrument under paragraph (a) of Section 36. One writer offers the answer that under Section
47, an instrument restrictively indorsed ceases to be negotiable only to the extent of the
restriction indicated by the indorsement.
687. Negotiability after date of maturity. Does an instrument cease to be negotiable
after maturity? There are two apparently contradictory views:
(1) The first view is that negotiability ceases in the full commercial sense after maturity
that negotiability ceases by the default of the maker in his payment.
(2) The second is that negotiability continues even after maturity.
688. Reconciliation of conflicting views. The mercantile character (1) of the
instrument as a negotiable paper and (2) of the contracts of the several parties to It, continues

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after its maturity and until it is paid except (3) that an indorsee or a transferee after maturity takes
the instrument subject to defenses between original parties, because after maturity such
subsequent parties Lake the instrument after it becomes overdue, and therefore, under paragraph
(b) of Section 52, they are not holders in due course. In short, after maturity, an instrument
originally negotiable continues to be negotiable in the sense that the contracts of the parties to it
continue and are governed by the Negotiable Instruments Law.
On the other hand, after maturity, the instrument ceases to be negotiable in the sense that
a transferee after maturity is not a holder in due course, and, therefore, is not free from defenses
obtaining between prior parties. Transfer to such transferees would be equivalent to n mere
assignment and subject to defenses.
689. Legal position of holder taking overdue instrument. The position of a holder who
takes a bill when overdue is this: He is a holder with notice. He may or may not be a holder for
value and his rights will be regulated accordingly. He is a holder with notice for this reason; he
takes a bill which, on the face of it, ought to have been paid. He is therefore bound to make two
inquiries: (1) Has what ought to have been done really been done. i.e.. has the bill in fact been
discharged?(2) If not, why not? Is there any equity attaching thereto, i.e., was the title of the
person who held it at maturity defective? If his title to the instrument was complete, it is
immaterial that for some collateral reason, e.g., set-off, he could not have enforced the bill
against some one or more of the parties liable thereon.
690. Right of holder not in due course. It does not follow as a legal proposition, that
simply because one is not a holder in due course, he cannot recover on the checks in his
possession. The Negotiable Instruments Law does not provide that a holder who is not a holder
in due course, may not, in any case, recover on the instrument, If B purchases an overdue
negotiable promissory note signed by A. he is not a holder in due course; but the may recover
from A if the latter has no valid excuse for refusing payment. 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.
691. Illustration. Thus, suppose that A issued a note to the order of B who acquired it by
fraud in inducement. It is now in the hands of E, Thereafter, E negotiates the note to F after the
date of its maturity. If E is not a holder in due course, his right to the note would be subject to the
defense of fraud, and F, having acquired the note after maturity is not a holder in due course, and
he gets, only the rights of E. which are subject to the defense of fraud. But if E were a holder in
due course, F would also be free from the defense of fraud. He would be protected by the
strength of his transferors (Es) title.
SECTION 48. 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.
692. When holder may or may not strike out indorsement. A holder may strike out
any indorsement which is not necessary to his title. But where an instrument is transferred by a

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special indorsement, the holder has no right to strike out the name of the person mentioned in
such indorsement and insert his own name in place thereof; nor can he strike out such name and
convert such special indorsement into a blank indorsement. The holder who acquires title
subsequent to the succeeding special indorsement must trace his title not only through the blank
indorsement but through the special indorsement as well.
693. Where indorsement not necessary to title of holder;illustration. Suppose A
makes a note for P1,000 payable to bearer and it Is delivered to B. The following indorsements
appearat the back of the note:
Pay to C, (Sgd.) B (Indorser)
Pay to D, (Sgd.) C (Indorser)
D delivers the note to E without indorsement. In this case, the indorsement of B and C are
not necessary to vest ownership of the note in E. Mere delivery is sufficient. E can therefore,
strike out Bs and Cs indorsement for any of them.
694. Where instrument is originally payable to order; illustration. Suppose that A
draws a bill for P1,000 payable to Bsorder. It is indorsed as follows:
(Blank indorsement): (Sgd.) B
It is delivered to C.
(Special indorsement): Pay to D, (Sgd.) C
D, holder.
Cs indorsement is not necessary to Ds title, as even without it, C could have acquired
ownership of the bill by mere delivery since the last or only indorsement would be in blank,thus:
(Sgd.) B
The holder of a negotiable instrument may at any time strike out any indorsement which
is not necessary to his title; he may strike out all intervening indorsements and aver that the first
blank indorser indorsed immediately to him.
But Bs indorsement in blank is necessary to Bs title, aswithout Bs indorsement, there
would be no valid negotiationof the instrument to C since the instrument is payable to order and
C can not then validly negotiate the bill to D by mere delivery.
695. Effect of striking out. The following are the effects of striking out:
(I) The indorser whose indorsement is struck out s relieved from his liability on the
instrument; and
(2) All subsequent indorsers are also relieved from their liability on the instrument.
In the first illustration, if Bs indrosement is struck out, B, whose indorsement is struck
out, and C, a subsequent indorser, are discharged from liability on the instrument.
SECTION 49. Transfer without indorsement; effect of. Where the holder of an
instrument payable to his order transfers it for value without indorsing it, the transfer

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vests in the transferee such title as the transferor had therein, and the transferee acquires
in addition, the right to have the indorsement of the transferor. But for the purpose of
determining whether the transferee is a holder in due course, the negotiation takes effect as
of the lime when the indorsement is actually made.
696. Application of Section 49. This section applies only to instruments payable to
order. This contemplates a case where there is delivery and payment of value but noindorsement.
There is, therefore, one element lacking for the negotiation of the instrument, namely,
indorsement by the payee or indorsee.This operates as are equitable assignment.
697. Rights of transferee or value. The following are the rights of the transferee for
value;
(1) The transferee acquires only the rights of the transferor. This means that if a defense
is available against the transfer or, that defense is also available against the transferee.
(2) The transferee has also the right to require the transferor to indorse the instrument.
698. Illustration. Thus, in an instrument where A is maker and B is payee, there being no
valuable considerations, B delivers the instrument to C without indorsement, under
circumstances that otherwise would have made holder in due course, such as, that C does not
know the absence of consideration.
(1) Can C, transferee, recover from A, maker? No, because C acquires only Bs rights,
and B cannot collect from A who can set up against him (B) absence of consideration
(2) la the transferee a holder before indorsement? No, because while he is in possession
of the instrument, he is not the indorsee.
699. When transferee becomes holder in due course. The time for determining whether
the transferee is a holder in due course is as of the time of actual indorsernent, not at the time of
the delivery. The reason is that negotiation is completed at the time of indorsement, not at the
time of delivery. Thus in the illustration already given, suppose that B delivered the note to C on
December 1950 and actually indorsed it to C on December 15, 1950. On December 10, 1950,
however, after the delivery but before indorsement, C learned of the absence of consideration. Is
C a holder in due course? No, because on December 15, 1950, the actual date of indorsement, he
already had notice of the absence of consideration, and for the purpose of determining whether or
not he is a holder in due course, the negotiation takes effect as of the time of indorsement. But
suppose C came to know of the absence of consideration on December 16, 1950, one day after
the date of indorsement C would be a holder in due course.
SECTION. 50. When prior party may negotiate instrument.Where an Instrument
Is negotiated back to a prior party, such party may, subject to the provisions of this Act,
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.
700. Right of prior party lo negotiate; illustration. Suppose that A makes a nota for
P1,000 with B as the payee.

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Indorsement from:
B to C
C to Jos Soriano; Jos Soriano to C
C to D
D to E
E to F
F back to Jos Soriano
701. Effect of renegotiation to prior parties. But JoseSoriano cannot enforce the
payment of the note against C, D,E and F, to whom he is liable. This is to avoid circuity of suits.
IV RIGHTS OF THE HOLDER
SECTION 51. Right of holder to sue; payment. Theholder of a negotiable instrument
may to sue thereon in his own name; and payment to him in due course discharges the
instrument.
702. Rights of holder in general. The following are the rights of a holder in general: (1)
he may sue on the instrument in his own name; and (2) he may receive payment andif the
payment Is In due course, the instrument is discharged.
703. Right to sue. The holder of a negotiable instrument may sue in his own name, even if he be
a holder only for collection,5 or as a pledge of the instrument.6 So, where A is the holder of a
bill of exchange, he can file an action in his own name).
704. Right of transferee of unindorsed instrument. There is a conflict of opinion as to whether
the possessor of an unindorsed instrument payable to order may suein his own name. It is
believed, however, that such a possessor may sue in his own name if the transferor could have
done so. Under Section, a transfer for value, but without indorsement, of an instrument which is
payable to order vests in the transferee. Such title as the transferor had therein?
705. Effect of payment to the holder. The payment in due course to the holder of an.
instrument discharges the instrument. Payment in due course is payment made (1) at or after the
maturity of the instrument (2) to the holder thereof (3) in good faith and without notice that his
title is defective.
SECTION 52. What constitutes a holder in due course. A holder in due course. is
holder who has taken the instrument under the following conditions: C(a) That it is
complete and regular upon its face, (b) That he became the holder of it before it was
overdue, and without notice that it had been previously dishonored, if such was the fact; (c)
That he took it in good faith and for value; (d) That at the that it was negotiated to him, he
had no notice of any infirmity in the instrument or defect in the title of the person
negotiating it.
706. Presumption holder is in due course. Under Section 59, generally, every holder is
presumed prima facie to be a holder in due course by one, therefore, who claims otherwise must

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prove that the holder in question acquired the instrument with one or more of the conditions
lacking. Any holder proved to have taken an instrument with one of the conditions enumerated in
this section lacking is not a holder in due course.
707. Acquisition of complete and regular instrument. The instrument must be complete and
regular on its face. The following are not complete and regular on their face:
(1) A trade acceptance dated August 1, 1919 and payable on December 1, without naming the
year of maturity;
(2) An accepted bill where no drawee is named.
(3) A check containing unmistakable face that it had been altered whether innocently or not.
(4) A note payable to two payees when indorsed by only one.
(5) A printed note in which the place of execution and time of payment have been altered in
writing.
(6) A note payable on or before four after date with the blank unfilled
In all the foregoing, one who takes the instrument is not a holder in due course.
708. Where instruments held complete, regular. In the following cases, however, the
instrument in question have been held to be complete and regular:
(1) Where the omission is immaterial, the instrument would be considered complete and regular,
such as follows: (a) The maker fails to insert the word, I in spaces left therefor on the printed
notes. The meaning of the note is plain; and (b) Pay to X or order Pesos, and at the margin is
written P100.00. This was held complete and regular.
(2) Where there is an alteration in the instrument but the court, upon inspecting the same, found
that the alteration was not apparent.
(3) Although a printed name of a payee was stricken out and another payees name inserted in
Writing, but the same is a common practice by the holder bank.
Accordingly, one who takes the instrument in the foregoing cases would be a holder in due
course if the other requisites are present
709. Acquisition before instrument is overdue. The holder of the instrument, must have
become the holder of it before it as, overdue.22 One who has purchased two promissory notes
without the necessary indorsement on the part of the holder, after payment thereof had already
been one year overdue, and without having made inquiries about the solvency of their makers,
cannot be considered a holder in due course? One taking past due paper is chargeable with notice

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of all equities between the original parties, but not with equities between, intermediate indorsers.
Moreover, of the instrument is overdue, it is also a notice that it has been dishonored.
710. When instrument is overdue. An instrument is overdue after the date of maturity. On the
date of maturity, the instrument is not overdue, and a holder who acquires the instrument on that
date is a holder in due course (provided that the other conditions are present) because the
principal debtor has the whole day to pay.
711. As to acceleration instruments. When the instrument constitutes and acceleration clause,
knowledge of the holder at the time of acquisition thereof that one installment or interest, or
both, as the case may be, is unpaid, is notice that the instrument is overdue.
712. As to interest. One who purchases in good faith an instrument upon which the interest is
overdue is a holder in due course.27 But where, by the terms of the instrument, the principal was
to become due upon default of the payment of interest, one who takes the instrum3nt upon which
the interest is overdue is not a holder in due course.
713. Notice that instrument dishonored; illustration. The holder of the instrument must have
become the holder without notice that it had been previously dishonored if such was the fact.
Thus, suppose that A draws a bill for P1,000 payable to - B or order, addressed to X as the
drawee. B presents the bill for acceptance. X refuses to accept. B negotiates the bill to who
knows at the time of negotiation that the bill had been dishonored by non-acceptance. C is not a
holder in. due course.
714. Acquisition in good faith, meaning. The holder must take the instrument in good faith.
Good faith refers to the indorsee or transferee, not to the seller of the paper. So even if the
seller is in bad faith, the transferee may still be a holder in due course. Taking in good faith
means that if the holder does not take in bad faith, his good faith is sufficiently shown, and bad
faith, under Section 56, means that he must have knowledge of facts which render it dishonest
for him to take a particular piece of negotiable paper. Knowledge, not surmise, suspicion, or fear,
is necessary; not knowledge of the exact truth but knowledge of some truth that would prevent
action by those commercially honest men for whom the law is made.
715. Illustration. Suppose that A, draws a check for P1,000 with Y & Co. as payee. B, president
of Y & Co., owes X P1,000. B negotiates the check to X in payment of his (Bs) debt. Y cannot
be a holder in due course because he is in bad faith, as he knows from, the face of the instrument
itself the fact that B does not own the instrument.
716. Meaning of holder in good faith. The term bona fide holder, or holder in good faith,
means a holder without knowledge or notice of equities of any sort which could be set up against
rpi4or holder of the instrument.33 Absence of knowledge f: the defense, when, the instrument
was taken, is the essential element in the matter of good faith.
717. Effect of failure to make inquiry. Ordinarily, failure to inquire after notice of facts
merely sufficient to cause a person of ordinary prudence to make inquiry as to an infirmity in a
negotiable instrument and defect in the holders title, is not evidence of purchasers bad faith so

136 FOUR-C LAW LIBRARY


as to bar him from recovery. In other words, the test for determining whether a holder acquires
an instrument in good faith is not whether he was negligent, such as in failing to make inquiries,
but whether his purpose was dishonest. Even gross negligence in purchase of negotiable
instrument from a holder whose title was defective does not establish bad faith.38 In short, the tet
is subjective test of honesty, not an objective test of due care.
718. When failure to inquire amounts to bad faith. It has, however, been held that failure to
make inquiry, when circumstances strongly indicate defect, renders the holder not a holder in due
course,4 A willful failure of one purchasing a note, with actual knowledge of suspicious
circumstances. to make inquiries, may amount to bad faith.4 And suspicious facts and
circumstances and grossly inadequate price may properly be considered in determining whether a
purchaser acquired notes in bad faith.
719. Circumstances indicating further inquiry to holder, illustrative case. This is an appeal
from a decision of the Court of First Instance of Manila sentencing defendants to pay the plaintiff
P600 plus interest.
FACTS: It appears that defendant Anita C. Gatchalian was offered a car by Manuel Gonzales.
The latter represented to the former that he was duly authorized by the owner of the car, plaintiff
herein, to look for a buyer of said car and to negotiate for its sale. Defendant requested Gonzales
to bring the car and the certificate of registration but Gonzales told her that the owner will not
give the certificate of registration unless there is a showing that the buyer is willing to make such
purchase. -For this purpose, Gonzales requested defendant to give him (Gonzales) a check which
will be shown to the owner as evidence of the buyers good faith, the said check to be for
safekeeping only of Gonzales and to be returned to defendant when Gonzales brings the car and
the certificate of registration. Relying on these representations, defendant, Gatchalian, drew a
check for P600. For failure of Gonzales to bring the car and to return the check, defendant issued
a stop payment order to the drawee bank. This same check was paid to plaintiffs clinic by
Gonzales for hospitalization expenses of his wife. Plaintiff gave Gonzales P158.25, representing
the difference between the face value of the check and Gonzales indebtedness. The present
action was instituted by plaintiff against defendants to recover the value of the check. Judgment
was rendered for plaintiff.
ISSUES: Whether the check is a negotiable instrument under the facts of the case; and whether
appellee is a holder in due course.
HELD: Admitting that the check was delivered to Gonzales to serve merely as evidence of
appellants good faith in their desire to purchase the car being sold to them, it was no fault of
appellee if Gonzales negotiated it. As the check was payable to appellee and was entrusted to
Gonzales, such delivery to the latter, was a delivery by the drawer to his own agent; in other
words, Gonzales was the agent of the drawer insofar as the possession of the check is concerned.
So, when the agent (Gonzales) negotiated the check with the intention of getting its value from
plaintiff, negotiation took place through no fault of the latter unless it can be shown that plaintiff
had notice of the defect in the possession of Gonzales. Resolution of this issue depends on
whether plaintiff may be considered a holder in due course.

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It is not disputed that plaintiff was not aware of the circumstances under which the check was
delivered to Gonzales. But the circumstances such as the fact that appellants had no
obligation with appellee; that the amount of the check did not correspond exactly with the
obligation of Gonzales to the clinic; and that the check is a crossed check, which means that the
check could only be deposited but may not be converted into cash should have put appellee to
inquiry as to the whys and wherefores of the possession of the check by Gonzales, and why he
used it to pay his account. It was payees duty to ascertain from Gonzales what the nature of the
latters title to the check was or the nature of his possession. Having failed in this respect,
appellee was guilty of gross neglect amounting to legal absence of good faith, and it may not be
considered as a holder of the check in good faith. The rule that a possessor of the instrument is
prima facie a holder in due course does not apply because there was a detect in the title of the
holder (Gonzales) because the instrument is not payable to him or to bearer. On the other hand,
the circumstances indicated above show that holders title was defective or suspicious, to say the
least. The burden is on appellee to show that notwithstanding the suspicious circumstances, it
acquired the check in actual good faith. Decision reversed.
720. Acquisition for value. The holder must take the instrument for value.43 Where the
holder gave no valuable consideration for the transfer of the instrument to him, he cannot be a
holder in due course.44 But the fact that a note is purchased at a discount does not of itself raise
an inference that the purchaser is buying a tainted instrument.
721. Effect of inadequacy of consideration. Article 1355 of the New Civil Code provides that
except in cases specified by law, lesion or inadequacy of cause shall not invalidate a contract,
unless there has been fraud, mistake or undue influence. The law presumes that a man is
capable of managing his own affairs and the fact as to whether or not his bargains are wise or
unwise is not a proper question for either a legal or equitable tribunal. While inadequacy of
consideration is not of itself a sufficient ground for either legal or equitable relief, yet it may be
shown as evidence of fraud. Ordinarily, the mere fact of inadequacy of consideration has very
little weight, when standing alone, but coupled with other elements tending to show fraud, it
becomes a very material factor of constructive fraud.
722. Effect where sum is trifling. An amount paid for an instrument, if a trifling sum, may of
itself establish notice. If the amount which the holder offers to take for a negotiable instrument
is insignificant as compared to its face value, it might be, under the circumstances, implied notice
that there was something wrong about it; and taken without inquiry, one should not be protected.
r it is obvious that a bona fide owner would not throw away his property for a trifle and that the
purchaser acted in bad faith when he acquired it for comparatively nothing.47 The
consideration should be so utterly trifling as to bear upon its face the impress of fraud to leave
open no reasonable conjecture but that the purchaser must have known, from the very nature of
the facts, that they could not have originated from any but a corrupt source. The known
insolvency of prior parties would, of course, strengthen the argument of implied notice and bad
faith wherever they were alleged.
723. Illustrations. Thus, inadequacy of price in the following cases justifies the inference that
the purchaser was charged with notice of the defective title of the vendor: (1) where one paid
P125 for a note of P333.33; (2) P50 for a note of P300; (3) P15 for a note of P300, the solvency

138 FOUR-C LAW LIBRARY


of the makers being well known. On the other hand, the purchaser was held not to be chargeable
with notice in the following cases: (1) one who paid P100 for a note of P250; (2) P50 for a note
of P100, and (3) P1,250 for a note of P2,500, the credit and solvency of the signer being in
doubt.
724. Acquisition without notice of defect of title or of infirmity. At the time the instrument is
negotiated to the holder, he had no notice of any infirmity in the instrument or defect of title of
the person negotiating it. Thus, A is the maker of a note with B as the bearer thereof. C steals the
note and on December 1, 1951 negotiates it to D, who knows on that date that C stole the note. D
cannot be considered a holder in due course. But if on December 1, 1951, at the time of the
negotiation, to him of the note, D did not know of the theft by C of the note, D would be
considered a holder in due course, the other conditions being present. And as already stated, the
following may be chargeable with notice: (1) one taking an overdue instrument, and (2) one
acquiring an instrument for a grossly in adequate consideration.
725. Good faith means lack of notice of defect or infirmity. Paragraph (c) of Section 52
requires of a holder in due course that he takes in good faith. It is clear that anyone who
acquired an instrument with notice of an infirmity in it or defect in the title of the person
negotiating it, as these are defined in Sections 55 and 56, would not qualify as a taker in good
faith. If this is the case, then paragraph (d) of Section 52 is really a mere elaboration of what has
already been said in the third subdivision. Defect in title is elucidated by Section 55, while
Section 56 declares what amounts to notice of an infirmity in the instrument or defect in the
title of the negotiator. It appears, then, that Section 52 (d) is an elaboration of Section 52 (c) and
Sections 55 and 56 are in turn elaborations of Section 52 (d).
726. Defects of title. The Negotiable Instruments Law, in defining things that may be wrong with
an instrument uses three terms, namely, (1) defenses, (2) infirmities, and (3) defects of title.1
Defects of the title are defined by Section 55 to other than situations which at common law were
known as equitable defenses, and also to cover those equities of ownership where there was
breach of faith in negotiation. Under Section 55, the defective title of a person over an instrument
may result from the following:
(1) Acquisition of the instrument by fraud;
(2) Acquisition of the instrument by force, duress, or fear;
(3) Acquisition of the instrument by unlawful means;
(4) Acquisition of the instrument for an illegal consideration;
(5) Negotiation of the instrument in breach of faith; and
(6) Negotiation of the instrument under circumstances that amount to fraud.
One acquiring an instrument with knowledge of any of the foregoing defects of title of the person
negotiating, is not a holder in due course.

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727. Defenses. The term defenses seems to include common law defenses, outside of those
covered in Section 55 Defenses then include (1) mistake; (2) absence and failure of
consideration. covered in Section 28; (3) minority and other forms of incapacity to contract
covered in Section 22; (4) lack of authority of an agent covered in Section 19, etc.3 One
acquiring an instrument with knowledge of any of the foregoing defenses is not a holder in due
course.
728. Infirmities. Infirmities must include things that are wrong with the instrument itself as
distinguished from those that are lacking in the contracts on the instrument. Such infirmities are
to be found in situations arising under:
(1) Section 13, wrong date inserted where the instrument is expressed to be payable at a fixed
period after sight is undated;
(2) Sectiqn14 filling up of a blank instrument not strictly in accordance with the authority given
or not within reasonable time, where it was delivered wanting in a material particular;
(3) Section 15, filling up and negotiating without authority an incomplete and undelivered
instrument;
(4) Section 16, lack of valid and intentional delivery of a mechanically complete instrument;
(5) Section 21, agent signing per procuration beyond the scope of his authority;
(6) Section 23, for forgery;
(7) Sections, 124 and 125, material alteration.
Accordingly, notice by the holder of an instrument of any of the foregoing, at the time of the
negotiation of the instrument to him, would render him not a holder in due course.
729. Holder to whom cashiers check is not duly indorsed and negotiated is not holder in due
course Illustrative case
MESINA y INTERMEDIATE APPELLATE COUR Jose Go respondent bought a cashiers
check from the Associated Bank for P800,000.00. He left it on the table of the manager, who
entrusted it to respondent Alberto Uy, who then had a visitor, Alexander Lim. Uy went out to
answer the telephone and went to the mens room. When he returned Lim had left and the check
was missing. Uy advised Go to stop payment. He did so. When the Associated Bank re.eted the
check for clearing, coming from the Prudential Bank, it refused payment twice sending it back to
the Prudential Bank, with the words payment stopped.
Later certain Atty. Lorenzo Navarro demanded payment, by letter, of the check to his client,
whose name he did not disclose. The Prudential Bank also refused to disclose the name of the
person encashing the check. As will be seen, it turned out to be petitioner Mesina. When asked

140 FOUR-C LAW LIBRARY


by the police, how he got the check, he answered that it was paid to him by Alexander Lim in a
certain transaction, but refused to elucidate further. Unsure as to what to_do, Associated Bank
filed an action for interpleader. Later it received summons and copy of a complaint filed by
Mesina for damages, disclosing to the bank the person encashing the check. The trial courts and
the TAC ruled in favor of Go, ordering the Associated Bank to replace the check in favor of Go.
Petitioner contends that a cashiers check cannot be countermanded in the hands of a holder in
due course.
HELD: Petitioner failed to substantiate his claim that he is holder in due course and for
consideration or value as shown by the established facts of the case. Admittedly, petitioner
became the holder of the cashiers check as endorsed by Alexander Lim who stole the check. He
refused say how and why it was passed to him. He had therefore notice of the defect of his title
over the check from the start. The holder of a cashiers check who is not a holder in due course
cannot enforce such check against the issuing bank which dishonors the same. If a payee of a
cashiers check obtained it from the issuing bank by fraud, or if there is some other reason why
the payee is not entitled to collect the check, the respondent bank would, of course, have the right
to refuse payment of the check when presented by the payee, since respondent bank was aware
of the facts surrounding the loss of the check in question. Moreover, there is no similarity in the
cases cited by petitioner since respondent bank (lid not issue the cashiers check in payment of
its obligation. Jose Go bought it from the bank forpurpose of transferring his funds from the
respondent bank to another bank near his establishment realizing that carrying money in this
form is safer than if it were cash. The check was Jose Gos property when it was misplaced or
stolen, hence he stopped its payment. At the outset, respondent bank knew it was Jose Gos
check and no one else since Go had not paid endorsed it to anyone. The bank was therefore liable
to nobody on the check but Jose Go. The bank had no intention to issue it to the petitioner but
only to buyer Jose Go, when the payment on it was therefore estopped, respondent bank was not
the one who did it but Jose Go, the owner of the Check. Respondent bank could not be drawer
and drawee for clearly, Jose Go owns the money it represents and he is therefore the drawer and
drawee in the same manner as if he has a current account and he issued a check against it; and
from the moment said cashiers check was lost and/or stolen no one outside of Jose Go can be
termed a holder in due course because Jose Go had not indorsed it in due course. The check in
question suffers from infirmity of not having been properly negotiated and for value by
respondent Jose Go who as already said is the real owner of said instrument.
730. Buyer finance company, in sale on credit is not holder in due course of promissory
note negotiated to it by seller. Illustrative case.
CPI, petitioner, bought two used tractors from 1PM and issued to IPM a note which is neither
payable to order nor bearer. The tractors were chattel mortgaged to PM, which assigned the
mortgage and promissory note of CPI to WC, respondent, a financing company after said IFC
had paid to 1PM, the price in full of the tractors. The Deed of Sale with. Chattel Mortgage with
Promissory Note, and the Deed of Assignment and the Disclosure of Loan/Credit; Transaction
documents evidencing the sale on installment of the tractors were all executed on the same day
among the buyer, seller and financing company. Before making the purchase, CPI asked 1PM to
inspect the job site to ascertain the extent of work to which the tractors were to be exposed, and
to determine the capability of the Used tractors being offered. After conducting said

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inspection, the seller-assignor assured petitionercorporation that the Used Allis Crawler
Tractors which were being offered were fit for the job, and gave the corresponding warranty of
ninety (90) days performance of the machines and availability of parts. Barely fourteen (14) days
had elapsed after their delivery when one of the tractors broke down and after another nine(9)
days, the other tractor likewise broke down.
Issues: (1) Is CPI, petitioner liable to FC, respondent on the ground that IFC i a holder in due
course?
What,
if
any,
is
the
defense
of
CPI?
Reasons.
(2) Suppose the promissory is a negotiable instrument, would IFC, financing company be a
holder in due course and therefore, be able to hold CPI liable? Reasons.
Held: (1) CPI petitioner is not liable to IFC as the instrument is not negotiable because it is
neither payable to order or to bearer as required for the negotiability of an instrument under
Section 1(d) of the Negotiable Instruments Law. Therefore, it follows that; the respondent can
never be a holder in due course it remains a mere assignee of the mote in question. Thus, the
petitioner may raise against the respondent all defenses available to it as against the seller
assignor, IPM, which In thiscase is failure of consideration as the tractors broke down and
became unserviceable. The documents evidencing the sale, mortgage, promissory note, and
assignment wereall executed on the same day among the buyer, seller and financingcompany,
respondent. Therefore, the respondent had actual knowledge of the fact that the seller-assignors
right to collect the purchase price was not unconditional, and that it was subject. to the condition
that the tractors sold were not defective, The respondent knew that when the tractors turned out
to
be
defective,
it
would
be
subject
to
the
defense of failure of consideration and cannot recover the purchase price from the petitioners.
IPM breached its 90-day warranty, as well as its warranty against hidden defects, as to condition,
quality or fitness of the goods, under Articles 1561, 1562, 1564 and 1566 of the Civil Code.
Moreover, CPI had rescinded its contract with the seller-assignor, 1PM, pursuant to Article 1191
of the Civil Code.
(2) WC would not be a holder in due course even if the promissory note is negotiable. Therefore,
CPI can interpose the defense of failure of consideration and be free from liability. Even
assuming for the sake of argument that the promissory note is negotiable, the respondent, which
took the same with actual knowledge of the foregoing facts so that its action in taking the
instrument amounted to bad faith, is not a holder in due course. As such, the respondent is
subject to all defenses which the petitioners may raise against the seller-assignor. Any other
interpretation would be most iniquitous to the unfortunate buyer who is not only saddled with
two useless tractors but must also face a lawsuit from the assignee for the entire purchase price
and all its incidents without being able to raise valid defenses available as against the assignor.
Section 52 of the Negotiable Instruments Law, defines holder in due course in part as follows:
one who has taken the instrument under the following conditions: x x x (e) That he took it la
good faith and for value; (d) That at the time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the person negotiating it, Under Section 56 of
the same law, to constitute notice of an infirmity in the instrument or defect in the title of the

142 FOUR-C LAW LIBRARY


person negotiating the same, the person to whom it is negotiated must have had actual
knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the
instrument amounts to bad faith.
In a very real sense the finance company was a moving force in the transaction from its very
inception and acted as a party to it. When a finance company actively participates in a
transaction of this type from- its inception, it cannot be regarded as a holder in due course of the
note given in the transaction,
731. May a payee be a holder In due course? There is a serious conflict of authorities on this
point. But there can be no doubt that a proper interpretation of the Act as a whole leads to the
conclusion that a payee may be a holder in due course under any circumstances in which he
meets the requirements of Section 52.
732. Illustrative case of payee-holder in due course. L, an automobile salesman, was indebted
to F for a loan of $950.00 F, after twice receiving Ls personal check and having it returned for
want of funds, pressed for payment. L went to D, the president of a corporation. L told him that
he could secure a used car by F for $950. While F and his attorney were interviewing L in his
salesroom, they saw B come in and give L a check. Immediately thereafter L came to F, and,
saying thatthe man just with him was B, handed F the check, which wasdrawn by B on the
corporation account for $95.0 payable to Fs order. D, of course, issued the check to pay for the
supposed car of F. But F knew nothing of the proposed sale of his car to D and F acted in good
faith. The check was collected and the corporation sued F for the amount. Recovery was refused
on the ground that F was a holder in due course.
733. May the drawee be a holder in due course? The holder refers to one who has taken the
instrument as it passes along in the course of negotiation towards the drawee and not the drawee,
who, on the acceptance and payment of the instrument, thereby strips it of all negotiability and
reduces it to a mere voucher or proof of payment.6 Accordingly, the drawee of a draft is not a
holder in due course under Section 52? And the drawee of a check to whom it is presented for
payment is not even a holder, and therefore, cannot be a holder in due course.
734. May the pledgee be a holder in due course? He pledgee for value in good faith of a
complete unmatured note without notice of equities, is a holder in due course.
SECTION 53. When person not deemed holder in due course. Where an instrument
payable on demand is negotiated an unreasonable length of time after its issue, the holder
is not deemed a holder in due course.
735, Application of Section 53. This section applies to instruments which are payable on
demand. Under paragraph (b) of Section 52, a holder who becomes such after it is overdue is not
a, holder in due course. It obviously applies to an instrument payable at a. fixed or determinable
future time. But suppose that the instrument is payable on demand? Section 53 provides that
where the instrument is negotiated an unreasonable length of time after its, issue, the holder is
not deemed a holder in due course, Thus, one who took the check two and a half years after it
became payable is not a holder in due course. By then, the check was stale.

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736. What constitutes unreasonable length of time. Unreasonable length of time: (1) nine
months delay; (2) negotiation after issue of a note, twenty months, or six months. Practically no
authorities hold that a reasonable time for negotiating a demand note could be extended beyond
year.
But the following have been held not to be negotiation for unreasonable length of time: (1)
Where the note is negotiated thirty days after its issue ;16 (2) where the note is negotiated sixteen
months after issue, if the payments of monthly interests were made to the payee ;h1 (3) and even
three years when interest for demand note is paid is where a certified check which was held for
nearly six months to secure performance of a government contract when negotiated and
presented within a few days after the completion of the contract. It is not negotiation at an
unreasonable length of time from its issue. The reason is that the holder of a certified check is
placed on the same footing as a depositor, and the certifying bank cannot complain of any delay
within the statute of limitations as it is benefited by such delay.
SECTION 54. Notice before full amount paid. Where the transferree receives notice of any
infirmity in the instrument or defect in the title of the person negotiating the same before he has
paid the full amount agreed to be paid therefor, he will be deemed a holder in due course only to
the extent of the amount therefor paid by him.
737. Application of Section 54. A draws a bill for P1,000 with B as payee and X as drawee. B
indorses it to C, who fails to give value thereto. C indorses it to D on July 1, 1950, who, on
maturity date, pays C only P400. On July 5, 1950, D learns that C did not give value for the
instrument. D can be considered a holder in due course only for 400, the amount he paid before
he had notice, even if he pays the balance of P600 afterwards, say on July 7, 1950.
SECTION, 55. When title defective.. The title of a person who negotiates an instrument
is defective within the meaning of this Act when he obtained the instrument, or any
signature thereto, by fraud, duress, or force and fear, or other unlawful means, or for an
illegal consideration, or when he negotiates it in breach of faith, or under such
circumstances as amount to a fraud.
738. Defective title in. general. The title of a person in an instrument becomes defective either:
(1) in the acquisition, or (2) in the negotiation thereof. In the acquisition therefor, the title of a
person becomes defective when he obtains the instrument or any signature thereto by: (1) ,graud,
(2) duress or force and fear, (3) other unlawful means, or (4) for an illegal consideration. In the
negotiation thereof, the title of a person becomes defective when he negotiates. it: (1) with
breach of faith, or (2) under such circumstances as amount to a fraud.
739. Illustration of fraud. A and B, brokers, are employed by C to buy some stocks. They
represent that they had already bought stocks when in fact they have not. On the strength of that
representation, C gives them a check therefor. A and Bs title to the check is defective because
they obtained it by means of fraud.

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740. Illustration of duress, or force and fear. Suppose that A threatens to kill B unless B signs
a check in As favor. So B signs a check payable to the order of A. As title is defective because
he obtained the instrument by duress or force and fear.
741. Illustration of other unlawful means. Where the note is stolen, or, as has been held, where
a person acquires a note by indorsement of a part thereof, he gets title by unlawful means
within this section since the transfer is a contravention of the provisions of this law.
742. Illustration of illegal consideration. A gives a check to B in consideration of Bs
undertaking to beat up C, As rival, within an inch of his life. The consideration is illegal. Hence,
Bs title to the check is defective.
743. Illustrations of negotiation in breach of faith. The following are illustrations of
negotiation in breach of faith:
(1) B, payee, negotiates a note which is already paid.
(2) B, payee, negotiates a note which he holds only as a collateral or security.
(3) B, payee, negotiates a note after he fails to deliver the valuable consideration he agreed to
give in return for the note.
In all the foregoing, Bs title is defective because he negotiated the note in breach of faith.
744. Illustrations of circumstances amounting to fraud.The defendant ordered from Snows,
Ltd. 10 cases of mercerized batiste. The Snows Ltd. drew a draft for the purchase price of the
goods upon the defendant. This draft was then negotiated by said Snows Ltd. It turned out that
when the cases which were supposed to contain batiste were opened, they were found to contain
burlap of little value. This being the case, it was fraud on the part of the Snows, Ltd. to
negotiate the draft. Hence, it had a defective title at the time of negotiation.
SECTION 56. What constitutes notice of defect. To constitute notice of an infirmity in
the instrument or defect in the title of the person negotiating the same, the person to whom
it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of
such facts that his action in taking the instrument amounted to bad faith.
745. Notice of defect of title in general. To constitute notice of defect or infirmity, the
transferee must have actual knowledge, either: (1) of the defect or infirmity, or (2) of such facts
that his action in taking the instrument amounts to bad faith. The clear weight of authority seems
to interpret Section 56 as abolishing the old common law doctrine of constructive notice and that
actual notice of facts is necessary to constitute bad faith. Nevertheless, by Section 56 the rule
that knowledge and bad faith may be established by circumstantial evidence has not been
abolished. This section does not wholly eliminate the duty of inquiry. The circumstantial
evidence may be so strong and decisive that to ignore it would not only be negligence but an act
of bad faith.

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746. Actual knowledge. Knowledge is required, not mere suspicion, surmise or fear.28 But
knowledge of the exact truth, such as, the particulars or even of the nature of the fraud, is not
necessary. Knowledge of some truth such as, that the instrument is tainted in some way, as
would prevent the taking of the instrument by commercially honest men is enough. Knowledge
of agent is knowledge by principal.
747. Taking amounting to bad faith. Bad faith consists in guilty knowledge, or willful
ignorance, showing a vicious orevil mind.30 But even gross negligence, is not bad faith.31 While
mere suspicion is not enough, where there is knowledge of suspicious circumstances, coupled
with means of verifying them, taking the instrument may amount to bad faith. In order to show
that the defendant had knowledge of such facts that his action in taking the instrument amounted
to bad faith, it is not necessary to prove that the defendant knew the exact fraud that was
practiced upon the plaintiff by the defendants assignor, it being sufficient to show that the
defendant had notice that there was something wrong about his assignors acquisition of title,
although he did not have notice of the particular wrong that was committed.
748. Illustrative cases. The following are illustration of taking amounting to bad faith:
(1) A check was indorsed for deposit to credit of A, trustee. A deposits the check with B bank,
and B bank credits the amount of the check to the individual account of A. A then withdraws the
amount for his own use, thereby causingloss to the trust estate. The bank is liable for
participation in breach of trust. The word trustee following for deposit to the credit of A
means danger ahead so to speak.
(2) A drawer. Mariano Roxas Fe, payee. Mariano M. Roxas claimed the check. He indorsed it
thus: Pay to Timoteo Roxas. (Sgd.) Mariano M. Roxas. Timoteo Roxas cashed it with X bank,
who required that We indorsement of the payee be made to correspond to the name written on
the check. So Mariano M. Roxas added Fe to his indorsement. It turned out that Mariano M.
Roxas was not the Mariano Roxas Fe who was intended as a payee. X bank is not a holder in due
course. The fact that the name of the payee of the instrument was different from the name
indorsed as that of the payee was sufficient to put X bank on inquiry as to the identity of the
indorser Mariano M. Roxas.
(3) One hundred thirty two checks were made out in the name of the Insular Drug Co., Inc. They
were brought to the branch office of the Philippine National Bank in Iloilo by Foerster, a
salesman of the drug company, Foersters wife and Foersters clerk. The bank could tell by the
checks themselves that the money belonged to the Insular Drug Co., Inc. and not to Foerster or
his wife or his clerk. When the bank credited those checks to the personal account of Foerster
and permitted Foerster and his wife to make withdrawals without there being any authority from
the drug company to do so, the bank made itself responsible to the drug company for the
amounts represented by the checks. The bank could relieve itself from responsibility by pleading
and proving that, after the money was withdrawn from the bank, it passed to the drug company
which thus suffered no loss, but the bank has not done so. Much more could be said about this
case, but it suffices to state in conclusion that the bank will have to stand--the loss occasioned by
the negligence of its agents.

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SECTION 57. Rights of holder in due course. A holder in due course holds the
instrument free from any defect of title of prior parties, and free from defenses available to
prior parties among themselves, and may enforce payment of the instrument for the full
amount thereof against all parties liable thereon.
749. Rights of a holder in due course. (1) He may sue on the instrument in his own name ;(2)
he may receive payment and if the payment is in due course, the instrument is discharged ;35 (3)
he holds the instrument free from any defect of title of prior parties and free from defenses
available to prior parties among themselves; and (4) he may enforce payment of the instrument
for the full amount thereof against all parties liable thereon.
750. Legal and equitable defenses. The defense referred to in Section 57, from which the holder
in due course is free, are equitable defenses only, not legal defenses, which latter class of
defenses can be set up even against a holder in due course. At common law, the distinction was
well established between real or legal defenses, which prevailed against a holder in due course,
and personal or equitable defenses, which could not be interposed against holders in due course.
751. Equitable or personal defenses. 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, though holding legal title, to enforce it against the defendant, but which are
not available against bona fide purchaser1s for value without notice. They can be set up against
persons not holders in due course but not against holders in due course. They are called personal
defenses because they are available only against that person or a subsequent holder who stands,
in privity with him.
752. Legal or real defenses. Legal or real defenses are those that attach to the instrument itself
and can be set up against the whole world including a holder in due course. They are called real
defenses because they attach to the res, i.e., the instrument itself, regardless of the merits or
demerits of the plaintiff.
753 Nature or real defenses. In real defenses, the right sought to be enforced has never existed
or ceased to exist. It is a defense against everybody against the party who receives it
immediately from the maker, and against all subsequent holders. The case of the real or absolute
defense is presented where the contract was void, not voidable only, as to the defendant in its
inception as where his signature was forged or unauthorized; or he was legally incapable of
making the contract; or his signature was secured by misrepresentation of the kind of paper he
was signing; or the contract was void (not voidable only) under an invalidating statute; or else
the contract has lost its vitality by the occurrence of a subsequent event or by material alteration
without defendants consent, lapse of time, or by discharge by payment in due course, by
bankruptcy proceedings or otherwise.
754. Enforcement of instrument subject to real defense. Does this mean that an instrument
subject to a legal defense can never be enforced? No. It cannot be enforced against the person to
whom the legal defense is available. But it can be enforced against those to whom such a defense
is not available such as, in the case of forgery, persons precluded from setting it up. The real
defense, in many instances, applies only to the person who made the instrument. As a matter of

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fact, we may state it as a general rule that a real defense is a defense which the person against
whom one is endeavoring to recover may set up and that person is usually the person primarily
liable upon the instrument.
755. To whomdefenses are available; illustrations. .A defense available to the makers will
not as a rule be available to the indorser, nor will a defense available to the indorser be available
to the makers.45 Thus, suppose that A is the maker of a note payable to B or order. It is
successively indorsed to C, D, E, and F, holder. B is a minor, and minority is a legal defense,
which is available even against a holder in due course. But only B can interpose that defense
against F. A, maker, cannot set that defense up. Neither can C. D, or E. The defense of minority
is personal to B, that is, it belongs personally to B.
756. Where action against joint debtors; illustration. Where the action is against joint makers, a
defense belonging personally to one of them will not be available to the other co-maker; but
where the defense of one defendant goes to the merits of the case defeating plaintiffs right to
recover, it is available to the benefit of the other defendant. The last statement seems to mean
defenses which are derived from the nature of the obligation. Thus, suppose that A and O are
makers of a note. O is a minor. A cannot interpose the defense of minority which can be
interposed only by O. But suppose that the note made by them is for P1,000. Then B, payee,
altered it to readP4,000, Thereafter he indorses it to C, a holder in due course.Both A and O can
interpose the defense of alteration, and Ccan recover only on the original tenor of the note,
P1,000.
757 Examples of personal defenses.
(1) Absence or failure of consideration, partial or total.
(2) Want of delivery of complete instrument.
(3) insertion of wrong date in an instrument where it is payable at a fixed period after date and it
is issued undated or where it is payable at a fixed period after sight and the acceptance is
undated.
(4) Filling up of blank contrary to authority given or not within reasonable time, where the
instrument is delivered.
(5) Fraud in inducement.
(6) Acquisition of instrument by force, duress, or fear.
(7) Acquisition of the instrument by unlawful means.
(8) Acquisition of the instrument for an illegal consideration.
(9) Negotiation in breach of faith.

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(10) Negotiation under circumstances that amount to fraud.
(11) Mistake.
(12) Intoxication according to better authority.
(13) Ultra vires acts of corporations where the corporation has the power to issue negotiable
paper but the issuance was not authorized for the particular purpose for which it is issued.
(14) Want of authority of agent where he has apparent
authority.
(15) Insanity where there is no notice of insanity on the part of the one contracting with the
insane person.
(16) Illegality of contract where form or consideration is illegal.
758. Absence of consideration; illustration. Absence of consideration is an equitable defense.
Suppose that A makes a note with B as the payee. B gives no valuable consideration to A for the
note. B indorses to C. If C is a holder in due course, he can collect on the note, because absence
of consideration is an equitable defense and under section 57, he holds the note free from
equitable defenses. But if C were not a holder in due course, he cannot collect. Absence of
consideration is a defense against him.
759. Between whom defenses may be raised in notes. In general, want of consideration can be
raised only as between immediate parties. Thus, suppose that A issues a note to B, payee,
without consideration. In general, it is only against B that the defense can be interposed by A.
But the defense may also be raised against any holder who takes the instrument with notice of
the want or failure of consideration. Thus, in the illustration, suppose that B negotiate the note to
C, who knows that B did not give any consideration for the note, A can interpose the defense
against C.
760. Between whom defense may be raised in bills. In a bill of exchange, the want or failure of
consideration may be interposed in an action brought by the payee against the drawer, or by the
indorsee against the payee indorsing, or by the drawer against the acceptor, but not in an action
between the payee and acceptor. In the latter case, the defense is available only if there is no
consideration received by the defendant for his liability and plaintiff must have given no
consideration for his title. Then, suppose that A draws a bill against X, drawee, payable to the
order of B, X accepts the bill.
(1) In an action by B against A, a can show that B did not give any valuable consideration for the
bill if such be the fact.
(2) And in action by A, drawer, against X, acceptor, X can interpose the defense of want of
consideration if A did into give X a valuable consideration for drawing the bill.

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(3) But in the action by B against X, acceptor, X cannot interpose the defense of want of
consideration between him and A, drawer, even if it be a fact that A did not give any valuable
consideration for his drawing of the bill. However, if at the same time that A gave no valuable
consideration to X for drawing the bill, B also gave no valuable consideration to A for the bill, X
can interpose the defense of want of consideration in an action by B against him (X).
761. Want of delivery of complete instrument. Where the instrument is mechanically complete
and is not wanting in any material particular, want of delivery is an equitable defense. As against
persons not holder in due course it can be shown that delivery was made, or that delivery was
conditional or for a special purpose. Where the instrument is stolen, the defense of want of
delivery is equitable. But where the stolen instrument is payable to order, the thief will have to
forge the payees or indorsees signature to negotiate it. In that case, the defense would be
forgery, which is a legal or real defense, not want of consideration.
762. Insertion of wrong date.
Negotiable Instrument Law.

This has already been discussed under Section 13 of the

763. Filling up of blank contrary to authority given. Filling up an instrument in a material


particular not strictly in accordance with the authority given or not within reasonable time is a
personal or equitable defense. In the United States, one who takes a negotiable instrument
knowing that it contained blanks when it was delivered, will not thereby be put on inquiry as to
the extent of the agents authority to fill these blanks, and may recover notwithstanding the
authority given has been exceeded. This is true even when the blanks are filled up in the
transferees presence, or by the transferee himself, by the agent;s authority.
764. Fraud in inducement. There is fraud when, through insidious words of machination of one
of the contracting parties, the other is induced to enter into a contract which, without them, he
would not have agreed to. Fraud in inducement is an equitable or personal defense as it is one of
the modes of acquiring a defective title from which a holder in dur course is free.
765. Fraud in inducement explained. This type of fraud relates to the quality, quantity, or value
of character of the consideration of the instrument. Here the signer is led by deception to
execute what he knows is a negotiable instrument. In fraud in inducement, there is a
misinterpretation of facts touching the inducement or desirability of the contract. Such sort of
fraud does not prevent contract; it onl makes a case in which it is or may be probable that there
would have been no such contract that took place, had the states of things be known to the
defendant. In fraud in inducement as stated above, one knew that he was signing negotiable
paper, and therefore necessarily signed with knowledge that the instrument would probably pass
in to the hands of an innocent purchaser but was deceived into signing of a larger amount than he
intended, or on different terms. Unlike the former situation, he is here consciously launching a
negotiable instrument into the current of trade, and, as is generally held, must at his peril see to
it, so far as innocent purchasers are concerned, that it properly represents his intention. Here, the

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deceit is not in the character of the instrument but in its amount or its term. The question of
simple fraud is also largely one of negligence. Did the person who has signed the instrument and
let it get into the hands of other parties, or into circulation, act with negligence? If he did so act,
it is a personal defense.
766. Acquisition of instrument by force, duress or fear. Duress consists of depriving one of
his will and understanding by threats or unlawful means, so that a promissory note obtained from
him is not his free or voluntary act. Duress is an equitable defense. It is one of the modes of
acquiring defective title from which a holder in due course is free.
767. Acquisition of instrument by unlawful means. See illustration under Section 55.
768. Acquisition of instrument for illegal consideration. See illustration under Section 55.
769. Negotiation in breach of faith. See illustration under Section 55.
770. Negotiation under circumstances amounting to fraud. See illustration under Section 55.
771. Mistake. In order that mistake may invalidate consent, it should refer to the substance of
the thing which is the object of the contract, or those conditions which have principally moved
one or more parties to enter into the contract. Mistake as to identity or qualifications of one of
the parties will vitiate consent only when such identity or qualifications have been the principal
cause of the contract. A simple mistake of account shall give rise to its correction.
772. Intoxication. Drunkenness or intoxication so as to deprive the person sought to be charged
of the exercise of his understanding and reason is only an equitable defense. This is supported by
better authority. As against bona fide holder, it has been determined in some jurisdictions that
intoxication is no defense. The reason underlying this rule is that, when a man has voluntarily put
himself in such a condition that a loss must fall on one of two innocent persons, it should fall on
him who occasioned it. If drunkenness were a defense, it would clog and embarrass the
circulation of commercial paper. There is, however, a contrary view.
773. Ultra vires act of corporations in certain cases. Where the corporation has the power to
issue negotiable paper but the issuance was not authorized for the particular purpose for which it
is issued, such lack of particular authority is not a defense against a holder in due course.
774. Want of authority of an agent in certain cases. Where the agent is without authority,
apparent or real, want of authority of the agent is a legal or real defense, and the principal will
not be bound beyond the authority given to the agent. Where the agent, although actually
unauthorized, has apparent authority, the actual want of authority of the agent is only an
equitable defense.
775. Examples of real defenses.
(1) Alteration.

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(2) Want of delivery of incomplete instrument.
(3) Duress amounting to forgery.
(4) Fraud in factum or fraud in esse contractus.
(5) Minority.
(6) Marriage in a case of wife.
(7) insanity where the insane person has a guardian appointed by the court.
(8) Ultra vires act of corporation, where the corporation is absolutely prohibited by its charter or
statute from issuing any commercial paper under any circumstances.
(9) Want of authority of an agent.
(10) Execution of instrument between public enemies.
(11) Illegality of contract where it is the contract or instrument itself which is expressly made
illegal by statute.
(12) Forgery.
776. Alteration. Alteration is classified by Ogden as a real defense. But under Section 124, a
holder in due course may enforce the instrument according to its original tenor.
777. Spoliation. An alteration made by a stranger to the instrument. Such a change of an
instrument is held in most jurisdictions to have no effect upon it, if the original meaning can be
ascertained. That is, if the alteration made by a stranger to the instrument, the rights of the parties
are not affected. However, Prof. Ames, Judge Brewster and Mr. McKeehan all agree that Section
124 abrogates the American doctrine of spoliation and substitutes the English rule. The effect is,
therefore, the same as where the alteration is made by a party, that a holder in due course can
recover on the original tenor of the instrument. Where a material alteration was innocently
made or was made by a stranger, the instrument is discharged but the debt survives. But where a
material alteration was made by a party and constituted a forgery, the original debt as well as the
instrument is discharged.
778. Want of delivery of incomplete instrument. Where the instrument is mechanically
incomplete and undelivered, want of delivery is a real or legal defense. The defense is available
to parties prior to the delivery.
779. Duress amounting to forgery. As already stated, duress is originally an equitable defense.
However, if there is a physical pressure, as when the defendant himself moves the pen under
coercion through the external facts as imprisonment or fear of injury to life and limb or less
serious pressure which actually overcomes his will, it is more than duress amounting to forgery,
and therefore, such duress is a legal or real defense. But even so, it seems that the negotiation of
an instrument would be under such circumstances as amounted to fraud, and still a holder in
due course should be protected.
780. Fraud in factum or fraud in esse contractus. Fraud in factum or fraud in esse contractus
is considered a real or legal defense. The Negotiable Instruments Law has no provision as to

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fraud in factum. Such fraud was a real defense in common law and is perhaps a real defense by
weight of the present authority. X x x the maker mat however estopped by negligence to deny
knowledge of the character of the instrument which he has signed and if he was not negligent, he
is not liable. In some cases, it is reasoned that the use of which the signature was applied was, in
substance and effect, forgery and consequently analogous to forgery under Section 23 of the
Negotiable Instruments Law. Fraud in factum exists in those cases in which a person, without
negligence, has signed an instrument which was, in fact, a negotiable instrument, but was
deceived as the character of the instrument and without knowledge of it.
781. Essential element of fraud in factum. An essential element of fraud in factum is that the
maker or indorser, as the case may be, must have exercised ordinary diligence and in no manner
contributed negligently to the imposition. In one case, the rule is stated that the test as to whether
an artifice or trick of this character constitutes forgery is whether the signature is procured in
such manner as to be the voluntary act of the signer. It is procured in such manner that it is
without the assent of the signer and not a voluntary act on his part, he is not liable.
782. Reason for the rule. The reason for holding such instruments invalid is on the theory that
he instrument never existed. It is treated as though the defendant had never in fact signed the
instrument and since there is no instrument, the defendant can not be liable upon that which does
not exist and a statute cannot operate upon that which does not exist.
783. Illustrative cases of fraud in factum. The following are illustrations:
(1) Where a note was signed under the belief that he was signing a guardians petition;
(2) Where a note was signed under the belief that it was a petition for the road;
(3) Where a signature was procured by fraudulent use of carbon paper;
784. Minority. Minority is a real or legal defense. A minors contract is voidable but he may
ratify it. The defense is available only to the minor and his indorsement passes title to the
indorsee but does not bind him so as to make him liable thereon. The defense, however, is not
total. Where the minor has kept the whole of the valuable consideration received by him, he
cannot interpose his minority as a defense. Where he has kept only a part, the defense is only to
the extent of the benefit received by the minor.
785. Marriage in case of wife. (1) under the system of conjugal partnership of gains in which
the husband has administration of the conjugal property, marriage is a defense where, without the
consent of the husband, the wife issues an instrument chargeable against the conjugal property;
and (2) under the system of community property in which neither spouse can alienate any
common property without the consent of the other, marriage is also a defense where, without the
consent of the husband, the wife issues an instrument chargeable to community property. The
defense of marriage is available to the husband or his heirs, not to the wife.

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786. Where marriage not a defense. Marriage is not a defense in the following cases:
(1) Where the instrument is issued by the wife chargeable against her paraphernal property,
ownership of which she retains.
(2) Where the instrument is issued against the conjugal property, if she has express authority
embodied in a public instrument to administer same.
(3) When separation of property is agreed upon in the marriage settlement and the instrument
issued by the wife is chargeable against her personal property.
(4) Where the wife is duly authorized to engage in business. Her property and the conjugal
property are bound.
787. Marriage in case of husband. (1) Under the system of conjugal partnership of gains,
marriage of the husband is a defense available to the wife or her heirs, where the instrument is
issued for purposes other than those specified in the Articles 161 and 162, New Civil Code.
Thus, in one case, it was held that the wifes promissory note, in the absence of the allegation
and proof that the loan was a liability of the conjugal partnership, or that the wife incurred it with
the husbands consent or that the money on the note benefited the family, does not bind the
conjugal partnership.
(2) Under the system of absolute community of property, marriage of husband is also a defense
available to the wife or heirs where the husband issued an instrument chargeable against the
common property without the consent of the wife.
788. Insanity. Contracts with a person who has been adjudged judicially insane and for whom a
committee or guardian has been appointed to care for his interests, are not valid and cannot be
enforced if disaffirmed or avoided. This defense is available not only as between immediate
parties but also as against a holder in due course or a bona fide holder for value. In some
jurisdictions, if the insanity of a party to a contract is known, the contract is absolutely void. But
there is a conflict of authority between various jurisdictions as to whether one ignorant of the
incompetency of a person with whom he contracts will be protected. The better opinion would
seem to be that he will be protected if he has acted in good faith and taken no undue advantage of
the afflicted person.
789. Ultra vires act of corporation in certain cases. Where the corporation is absolutely
prohibited by its charter or statute from issuing commercial paper under any circumstance, such
a paper cannot be enforced even by a holder in due course. However, an indorser can not set up
the defense that the execution of the bill or note by a corporation was ultra vires.
790. Want of authority of agent in certain cases. Where the agent is without authority,
apparent or real, want of authority of the agent is a legal or real defense, and the principal will
not be bound beyond the authority given to the agent.

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791. Execution of instrument with public enemy. Instruments executed between enemies in
time of war are void. Hence, that an instrument executed between enemies in time of war, is a
real or legal defense.
792. Illegality of contract in certain cases. Where it is the contract or instrument itself which is
expressly made illegal by statute, not merely the manner of execution thereof, of the
consideration therefor, the illegality of the contract or instrument is a real or legal defense. But
illegality of a contract is an equitable defense where what the law declares to be illegal is not the
instrument itself but merely the manner of the execution of the consideration given. This is true
even when the violation is in direct violation of the law. In other words, a distinction is to be
made between a consideration simply illegal and one which, by statute, expressly made the bill
void. In the former case, a holder in due course can recover; in the latter, even a holder in due
course cannot recover.
793. Usury notes. Under Section 7 of the Usury Law (Act 2655), all covenants and stipulations
contained in bonds, bills, notes, and other contracts or evidences of debts, whereby there shall be
stipulated a higher rate of interest than is allowed by the Usury Law shall be void. It should,
however, be noted that the law avoids merely the agreed interest but does not avoid the
transaction completely. Moreover, under the present rulings of the Supreme Court, the whole
usurious contract is not null and void. Furthermore, Section 7 above cited contains a saving
clause which protects holders in due course. Said section 7 further provides that nothing
contained in said section shall be construed to prevent the purchase by an innocent purchaser of
a negotiable mercantile paper, usurious or otherwise, for valuable consideration before maturity,
where there has been no intention on the part of said purchasers to evade provisions of this Act,
and said purchase was not a part of the original usurious transaction. The defense, therefore, is
equitable.
794. Gambling notes. Article 2014 of the New Civil Code provides that no action can be
maintained by the winner for the collection of what he has won in a game of chance. Section 9
of Act 1757 also provides that no wager or other gambling contract shall be enforceable at law,
and any promissory note, check, order for the payment of money, I.O.U., vale, promise to pay,
chit, or contract or agreement given for money with which to gamble or for money lost at
gambling or as a stake shall be void except as to persons purchasing the same for a valuable
consideration in good faith before maturity and not knowing and having no knowledge of facts
sufficient to put them upon notice that such promissory note, check, order for the payment of
money, I.O.U., vale, promise to pay, chit, or contract or agreement given for money with which
to gamble or for money lost at gambling or as a stake x x x. in other words, as in the case of
usury notes, there is also a saving clause. The defense, therefore, seems to be personal.
795. Confession of judgment. Such stipulations have been declared void by juridical decision.
But they are usually separable from the principal contract which can be enforced.

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796. Sunday notes. Sunday notes are instruments made or drawn on Sundays. That a note
executed on Sunday is not a defense against a holder in due course where there is nothing on the
face of the instrument to indicate that fact.
797. Forgery. Forgery is a real or legal defense. An indorser cannot set up as a defense the
forgery of the signature of the maker, drawer, or indorsers prior or subsequent to him because of
his warranties. Forgery of an indorsers signature, in an instrument payable to order, is also
available to the acceptor or drawer. The reason is that if payee Bs signature is forged, every
indorser thereafter, such as C, D, E and F would not acquire title to the instrument because they
are not the persons to whom the payee B, whose signature is forged, commanded or ordered the
maker or acceptor to pay. The instrument is supposed to be paid according to the order of B, but
payment to C, D, E and F is not the order of B, as his signature is forged.
798. Other possible defenses. The following may also be set up as defenses against liability on
instruments: (1) blank signature; (2) bankruptcy or insolvency; (3) counterclaims and set-offs;
(4) discharge; and (5) lack of revenue stamp.
799. Blank signatures. This is a case where a person signs a piece of paper in blank. Where
there is no intention to issue a negotiable instrument, it amounts to forgery and is a legal or real
defense. Where there is an intention to issue a negotiable instrument but the blank signature is
filled up contrary to the authority or is not filled up within reasonable time, it is an equitable
defense.
800. Bankruptcy or insolvency or party primarily liable. There are two legal situations
involving the defense of bankruptcy or insolvency. It may be the (1) party primarily liable on the
instrument, or (2) he one negotiating who is bankrupt or insolvent. In the first case, where the is
a party liable who is bankrupt or insolvent, it is no defense. Thus, suppose that A is the maker of
the note which is in the hands of F, holder. A is thereafter declared insolvent. As liability on the
note is not extinguished. F, the holder of the instrument may file his claim thereon with the
assignee or trustee in bankruptcy appointed by the Court.
801. Bankruptcy or insolvency or party secondarily liable. Where the party who is insolvent
or bankrupt is the one negotiating, it may or may not be a defense depending upon the time of
indorsement. Where the negotiation is made within thirty (30) days before the filling of a petition
for insolvency by or against him, the negotiation is void, and no title is transferred to the holder
to whom the instrument is negotiated. Bankruptcy or insolvency in this case is a real defense.
802. Illustration. Thus, suppose that A is the maker of a note payable to the order of B. B
negotiates it to C, C to D. Thereafter D becomes insolvent. Within 30 days before the filing of
the petition declaring him insolvent, D negotiates the note to E. can E collect from A? No. A can
interpose the defense that the negotiation made by D is void and therefore, E has no right or title
to the note or its proceeds. But As liability to the instrument is not extinguished. While he is not
liable to E, he is liable to the assignee in insolvency of D, the insolvent. Where, however, the

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note is negotiated by D to E before the thirty day period, as for instance, on the fortieth day
before the filing of the petition for insolvency, the negotiation is valid and the title to the note
passes to E. Consequently, A is liable to E, and A cannot interpose the defense of the bankruptcy
or insolvency of D.
803. Conuterclaims and set-offs. It is opined that the better view seems to be that the term
defense as used in Section 58, from which a holder who is not a holder in due course, is not
free, means technical defenses are distinguished from set-offs. Set-off, by the weight of
authority, is not considered generally as a defense. Between the original parties, however, or
parties whom there is a privity, that is, between maker and payee, drawer and acceptor, indorser
and immediate indorsee, a set-off may be pleaded to ba negotiable instrument the same as it may
be to a non-negotiable instrument. Thus, suppose that A makes a note for P1,000.00 payable to
the order of B, as A owes B P1,000.00. In turn, however, B owes A P600.00. In case of action by
B against A for P1,000.00, A can set off the sum of P600.00 which B owes him. He would then
be liable for P400.00 only.
804. counterclaims as against remote party; holder in due course. But as between remote
parties not holders in due course, the general rule although there is considerable conflict of
authorities is that, in an action by the indorsee, independents demands against the payee cannot
be set-off, but only such entities which arise out of the instrument itself. Tbus, suppose in the
illustration, B negotiates the note to C. In an action by C against A, A cannot set-off the P600.00
which B owes A, against the claim of C, evne if C is not a holder in due course.
Set-off or counterclaim is not available against a holder in due course.
805. Discharge. Before the adoption of the Negotiable Instruments Law, discharge was treated
as a defense but an author opines that it is deemed best to submit to the new classification as
adopted in the law.
If the instrument is discharged, anyone who has been a party to it may set up against a holder a
defense that it has been extinguished as an existing contract and that the holder or payee holds it
as mere receipt or voucher.
806. Discharge as defense between original parties. Discharge is a good defense against
original parties or between parties having only their rights, that is, remote parties not holders in
due course. Accordingly, payment in due course i.e. at or after the date of maturity by the
principal debtor, is a defense against any holder, as any holder who acquires the instrument after
maturity is a holder in due course.
807. Discharge as defense against a holder in due course. But as against a holder in due
course, where the party paying the instrument does not observe the precautions of taking up the
paper or of having the paper made indorser thereon, it is not a defense. Thus, suppose that A
makes a note payable on demand to B or order. B negotiates the note to C.C collects from A but

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A does not get back the note. Thereafter, C negotiates the note to D, who is a holder in due
course. Under the rule above stated, D can still collect from A, who can not interpose the defense
of discharge.
808. Requirement of revenue stamp. The National Internal Revenue Code requires the placing
of documentary stamps on each bank check, draft, or certificate of deposit not drawing interest,
or order for the payment of any sum of money drawn upon or issued by any bank, trust company,
or any person or persons, companies or corporations, at sight or on demand, on all bills of
exchange (between points within the Philippines), drafts or certificates of deposit drawing
interest, or orders for the payment of any sum of money otherwise than at sight of on demand, or
on all negotiable promissory note, except bank notes issued for circulation, and on each renewal
of any such note; upon any acceptance of payment of any bill of exchange or order for
payment of money purporting to be drawn in other country but payable in the Philippines; and
on all foreign bills of exchange and letters of credit including orders, by telegraph or otherwise,
for the payment of money issued by express of steamship companies or by any person or persons
drawn in but payable out of the Philippines in a set of three or more according to the custom of
merchants and bankers.
809. Effect of failure of stamp. Section 283 of the National Internal Revenue Code provide that
an instrument, document or paper which is required by law to be stamped and which has been
signed, issued, accepted, or transferred, without being duly stamped, shall not be recorded, nor
shall it or any copy thereof or any record of transfer of the same ne admitted or used in evidence
on any Court until the requisite stamp of stamps shall have been affixed thereto and cancelled.
The effect, therefore, seems to be to make the instrument unenforceable. An unstamped
commercial paper cannot be proved, as without the stamp it is inadmissible as evidence. But this
defect may be cured affixing the stamp at the time the instrument is presented in evidence.
SECTION 58. When subject to original defenses. In the hands of any holder other than
the holder in due course, a negotiable instrument is subject to the same defenses as if it
were non-negotiable. But 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 holderin respect of all parties prior to the latter.
810. Rights of a holder in due course. (1) He may sue on the instrument in his own name; (2)
he may receive payment and if the payment is in due course, the instrument is discharged; (3) he
holds the instrument subject to the same defenses as if it were non-negotiable. Generally, both
real and personal defenses can be interposed against a person not a holder in due course; (4) but a
holder not in due course who derives his title through a holder in due course and who himself is
not a party to any fraud or illegality affecting the instrument, has all the rights of such former
holder in respect of all parties prior to the latter.

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811. Holder acquiring from holder in due course. The general rule that equitable defenses can
be interposed against a person not a holder in due course has this exception, that 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 to all parties
prior to the latter. Thus, a purchaser from a holder in due course is entitled to recover against
prior parties even though he has notice of the defenses; or notice of maturity of a negotiable
certificate of deposit; or with knowledge of the equities.
In other words, though he is not himself a holder in due course, equitable defenses cannot be
interposed against him by parties prior to the holder in due course from whom he derived his
title. But, of course, real defenses can be interposed against him. It will be noted that there are
two requisites, namely: (1) that he derived his title from a holder in due course, and (2) that he
was not himself a party to any fraud or illegality affecting the instrument.
812. Illustration. A, maker, issued a note to B, payee who induced A to do so by means of
fraud. Successive indorsements to C, C to D, holder in due course. D indorsed to E, who had
notice of the want of consideration but did not take part in it. Want of consideration, an equitable
defense, cannot be set up against E, by parties prior to D, such as C and B, even if E is not a
holder in due course, without taking part in the fraud. The reason is that E acquired all the rights
of D and the rights of D as far as parties prior to D are concerned are that of a holder in due
course. In other words, E is , in effect, a holder in due course, relatively speaking, that is, relative
to C and B, parties prior to D.
813. Burden of proof to show predecessor holder in due course. In order that a holder who
derives his title from a holder in due course may recover the instrument, it is incumbent upon
him to show that the person through whom he derives his title was a holder in due course; and
this must be proven as an independent matter of fact. Thus, in the illustration, suppose E files an
action against maker A. Must E prove that D was a holder in due course or is the presumption
under Section 59, that every holder presumed to be a holder in due course sufficient? E most
prove that D was a holder in due course. The presumption under Section 59, refers to a holder,
hence, one who is a payee or indorsee who has possession of the instrument or the bearer thereof,
and D is not such holder because, while he is an indorsee in the instrument, he is not in
possession thereof, if being in the possession of E.
814. As to one not holder in due course reacquiring from holder in due course. It is a wellknown rule of law that if the original payee of the note unenforceable for lack of consideration
repurchase the instrument after transferring it to a holder in due course, the paper again becomes
subject in the payees hands to the same defenses to which it would have been subject as if the
paper had never passed through the hands of a holder in due course. The same is true where the
instrument is retransferred to an agent of the payee.

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SECTION 59. Who is deemed a holder in due course. Every holder is deemed prima facie
to be a holder in due course; but when it is shown that the title of any person who has
negotiated the instrument was defective, the burden is on the holder to prove that he or
some person under whom he claims acquired the title as holder in due course. But the lastmentioned rule does not apply in favor of a p[arty who became bound on the instrument
prior to the acquisition of such defective title.
815. In whose favor presumption arises. The presumption expressed in this Section arises only
in favor of a person who is a holder in the sense defined in Section 191 of the same law, that is, a
payee or indorsee who is in possession of a draft, or the bearer thereof. Under this definition, in
order to be a holder, one must be in possession of the note or the bearer thereof. However, when
the instrument is not payable to the holder thereof or to bearer, there is said to be a defect in the
title of the holder and the rule that a possessor of the instrument is prima facie a holder in due
course does not apply in favor of a person who is no longer in possession of the instrument.
816. When presumption accrues. Suppose that A is the maker of a note payable to B or order.
B negotiates the note to C, who acquires it by means of fraud. Consequently C has a defective
title. C negotiates to D, D to E, E to F, holder. Thereafter, a civil case is filed by F as plaintiff
against A as defendant. F does not have to prove in the beginning that he acquired the note from
E with all the four conditions under Section 52 present. It is presumed that he acquired the note
under all circumstances required under the said section. But of course, before the presumption
arises, he must prove that he is the holder of the instrument, that is, that he is the indorsee in
possession of the instrument, as it is payable to order.
817. When burden is shifted. But when it is shown that the title of any person who has
negotiated the instrument was defective, the burden is on the holder to prove that he or some
under who he claims,, acquired the title as holder in due course. Thus, suppose that B proves
that Cs title is defective because C acquired the note by mans of fraud, without proving that F
had notice of Cs defective title, the burden of proof shifts to F to prove that he is actually a
holder in due course. The reason for the shift is that it is shown that the title of the person (C)
who negotiated the note was defective, and B is not a party who became bound prior to but
contemporaneous with the acquisition of Cs defective title. Accordingly, it has been held that
where draft was negotiated under circumstances amounting to fraud., it became incumbent upon
the plaintiff to prove that it occupies the position of a bona fide purchaser of said draft for value
and without notice.
818. Presumption not applicable when holders title was defective or suspicious. As holders
title was defective or suspicious, it cannot be stated that the payee acquired the check without
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 acquired the instrument in good faith does not exist. In other
words, instead of the presumption that payee was a holder in good faith, the fact is that ir
acquired possession of the instrument under circumstances that should have put it to inquiry as to

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the title of the holder who negotiated the check. The burden was, therefore, placed upon it to
show that, notwithstanding the suspicious circumstances, it acquired the check in actual good
faith.
819. Reason for the rule. The reason for this salutary rule given by the courts in innumerable
decisions is that the guilty maker or holder of an instrument vitiated by fraud or illegality will
naturally seek to put it in the hands of some other person in order to cut off the defense to which
the instrument is subject, and presumption arises against the bona fide of the transfer. The law
therefore requires the holder of such paper to manifest the most complete candor and show
exactly the circumstances under which the paper was acquired.
820. When burden is not shifted. But the last mentioned rule does not apply in favor of a
party who became bound on the instrument prior to the acquisition of such defensive title. The
last mentioned rule referred to is the shifting of the burden of proof to the holder where it is
shown that there is a defect in the title of any person who had negotiated it. Thus, suppose A
proved C had a defective title, is the burden shifted to F? Under the last sentence, it is not shifted
because the last mentioned rule the shifting of burden of proof upon showing of previous
defective title does not apply in favor of a party who became bound on the instrument prior to
the acquisition of the defective title, and A is such party prior to the acquisition of a defective
title by C. the question is one of substantive law rather than that of burden of proof, that is:
whether a defendant who has no defense of his own, and admits his liability as such, can set up
collateral equities (defenses) existing in favor of other persons.
In short, can A set up the defense of a defective title which is available to B from whom C stole
the instrument? The great weight of authority is that A cannot unless he has been notified by the
rightful owner not to pay the same to the holder. In such a case, two persons would be claiming
ownership of the same thing. The remedy is to file a complaint in interpleader or bring him in as
a party to the action if one has already been instituted. In other words, whether the burden of
proof is shifted or not is immaterial because any way, A cannot interpose the defense of Cs
defective title as against F.
V LIABILITIES OF PARTIES
SECTION 60. Liability of maker. The maker of a negotiable instrument, by making it,
engages that he will pay it according to its tenor, and admits the existence of the payee and
his then capacity to indorse.
821. Maker primarily liable. The engagement of the maker is to pay absolutely the note
according to its tenor. The makers liability is primarily and unconditional. And one who signed
as maker is presumed to have acted with care and to have signed the document in question with
full knowledge of its contents unless, of course, fraud is proved.

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822. Maker must pay according to terms of the note. A debtor signed a promissory note
whereby he bound himself to pay P 3,700.00 on October 31, 1961 to the creditor and, if the same
is not paid on the date, to pay 9% interest per annum until fully paid plus the sum of P370.00 as
attorneys fees in addition to cost. When an action to recover the debt was bought in court, the
debtor tried to escape liability as maker by alleging that he spent the money for medical
treatment of his daughter, who is, in turn, a beneficiary of a trust which is administered by the
creditor as trustee. The Supreme Court ruled that the debtor bound himself to pay personally. He
cannot shift the obligation to another without the consent of the payee. He cannot allege that he
spent the money on expenses which should be charged to a trust administered by the creditor
because it is not payees concern to know how the proceeds should be spent. This is a sole
concern of the maker. The payees interest is merely to see that the note is paid according to its
term.
823. Liability of one who is a mere agent and not the real borrower. An action on a
promissory note is properly dismissed against a defendant who is not the real borrower. The
promissory notes show that Louis F. Rivilla signed some of them merely as agent of Maria Vda.
de Yulo. The complaint itself alleges that Mrs. Yulo, for herself and through the other defendants
including Rivilla, obtained several loans from the former Bank of Taiwan. The fact that it was
solely Mrs. Yulo who owed the loans is further corroborated by the allegation that the chattel
mortgage to secure then was signed by her and was constituted on her exclusive property.
824. Liability of two or more makers. When two or more makers sign jointly and severally,
each of them is individually liable for the payment of the full amount of their obligation even if
one of them did not receive part of the value given therefor, as he would be considered an
accommodation party) But suppose the note runs thus: We promise to pay, etc., (Sgd.) A & B.
Are they jointly liable only because under the New Civil Code,2 joint and several liability cannot
be presumed? It must be expressly stipulated. But see liability of joint indorsers.
825. Payees existence, etc. Aside from engaging to pay the instrument according to its tenor,
the maker also admits the existence of the payee and his then capacity to indorse. Thus, without
expressly stating it in the note, the maker, by merely signing his name ina note as such, without
more, represents to the world that the payee is an existing person with the then capacity to
indorse. The maker consequently is precluded from setting up the following defenses: (1) that the
payee is a fictitious person because, by making the note, he admits that the payee exists; and (2)
that the payee was insane, a minor, or a corporation acting ultra vires because, by making the
note, he admits the then capacity of the payee to indorse.
826. Illustration. Thus, suppose that A makes a note payable to B who is insane. B indorses to
C, C to D. Thereafter, D, as plaintiff, files an action against A, as defendant. Can A interpose the
defense that Bs indorsement did not pass title because B had no capacity to indorse? No,

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because A, by making the note, admits the capacity of B to indorse. Moreover, Bs indorsement
passes title under Section 22.
SECTION .61. Liability of drawer. The drawer by drawing the instrument admits the
existence of the payee and his then capacity to indorse; and engages that, on due
presentment the instrument will be accepted or paid, or both, according to its tenor, and
that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will
pay the amount thereof to the holder or to any subsequent indorser who may be compelled
to pay it. But the drawer may insert in the instrument an express stipulation negativing or
limiting his own liability to the holder.
827. Drawer secondarily liable. The drawer does not engage to pay the bill absolutely. He
engages merely that the bill will be accepted or paid or both, according to its tenor, and that he
will pay only when: (1) it is dishonored; (2) and the necessary proceedings of dishonor are duly
taken. The liability of the drawer is therefore, subject to these two conditions and attaches only
upon their fulfillment. Thus, without expressly stating it in the bill, the drawer, by merely
drawingthe bill and signing his name in the-bill as such drawer, without more, impliedly engages
to be so secondarily liable, as, if he has incorporated the provisions of Section 61 in the bill.
Accordingly, if a bill is not paid, the drawer becomes liable for the payment of its value to the
holder provided; that noticeof dishonor is given In the absence of due presentment, the drawer is
not liable. And a person in whose favor a bank sells a telegraphic exchange on a foreign bank
may, in case payment is refused by the bank of destination, maintain an action against the bank
selling the exchangewiithout regard to whether such payee was an immediate party to the
purchase of the exchange or not.
828. To whom drawer secondarily liable. The secondary liability of the drawer is in favor of:
(1) the holder, or (2) if any of the, indorsers intervening between the holder and the drawer is
compelled to pay by the holder, the drawer will be liable to that indorser, so compelled to pay.
Thus, suppose that A draws a bill against X, as drawee payable to B or order. B negotiates to C,
C to D, D to E and E to F.
(1) A, drawer, is liable to F, holder, if X dishonors the bill either by non-acceptance or nonpayment and the necessary proceedings of dishonor are duly taken.
(2) If D is made to pay F, holder, D can recover what he has paid F from A, drawer.
829. Is drawer of unaccepted bill primarily liable? It has been held that until the bill has been
accepted, The drawer is the primary debtor and after acceptance, the drawee or acceptor is the
principal debtor and the drawer becomes secondarily liable. His liability is the same as that of a
first indorser. It may be pointed out, however, that under Section 61, whether the bill is accepted

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or not, the drawer is not absolutely required to pay. Therefore, strictly speaking, under Section
192, which defines a person primarily liable as one who by the terms of the instrument is
absolutely required to pay the same, the drawer is not primarily liable thereon even if the bill is
unaccepted.
830. Payees existence. Like the maker, the drawer, by merely signing his name on the bill as
drawer, also admits the existence of the payee and his then capacity to indorse.
831. Negatives his liability. The law allows the drawer to negative or limit his liability by
express stipulation, as by adding to his order to pay the words: (.1) without recourse, (2) I
shall not be liable in case of non-payment or non-acceptance.
832. Drawer of checks should pay for their value to paying bank where drawee bank did
not debit account of paying bank. In a. case where a depositor of a bank (PNB herein),
encashed checks with the bank, but the drawee bank (PBC herein) did not debit the account of
the payingbank (PNB),the depositor should pay their value to the paying bank (PNB).This
controversy boils down to the fundamental legal and equitable proposition that no one should
enrich himself at the expense of another.
SECTION 62. Liability of acceptor. The acceptor, by accepting the instrument, engages
that he will pay it according to the tenor of his acceptance and admits:
(a) the existence of the drawer, the genuineness of his signature, and his capacity and
authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
833. Acceptor primarily liable. The acceptor engages to pay absolutely according to the tenor
of his acceptance. His liability is not subject to any condition. Thus, without expressly stating it
on the bill, the acceptor, by merely signing the bill as such, engages to pay unconditionally the
bill according to the tenor of his acceptance. It is to be noted, however, that as already stated, the
acceptor is a drawee who accepts the bill. Before acceptance, the drawee is not liable on the bill.
The drawee by acceptance becomes liable . to the payee or his indorsee, and, also to the drawer
himself, His acceptance immediately places a legal liability on him for the payment of the bill
in favor of one who became a holder thereof after acceptance, and if he wants to escape liability,
it is up to him to show that he is a mere agent of the drawer, or allege and prove any other
defense which he has to the liability.
The prevailing view is that the same rule found in Section 62 applies in the case of a drawee who
pays a bill withouthaving previously accepted it.

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834. Effect of mortgage executed by acceptor. Where being unable to pay certain bills of
exchange which the drawee has accepted, the latter makes a mortgage in favor of the holder of
said bills upon certain merchandise the value of which is sought to be collected through said
bills, in order to secure the payment of said amount if the merchandise is sold and the integrity
thereof while the sale is not effected, the execution of said mortgage does not constitute any
novation of the obligation represented by said accepted bills unless it is so expressly stated in
said mortgage.
835. Acceptor to pay according, to tenor of his acceptance.It is to be noted that while the
maker of a note engages to pay according to the tenor of the note, an acceptor engages to pay
according to the tenor of his acceptance, not of the bill he, accepts. This is an important
distinction, for the tenor of the acceptors acceptance may be different from the tenor of the bill,
as the acceptor may accept the bill with qualifications. But, of course, if his acceptance is
general, the tenor of the bill is the same tenor as the tenor of his acceptance. Thus, suppose that
the bill is payable 30 days after sight and the drawee accepts it but payable 60 days after
sight He engages to pay the bill 60 days after sight, which is the tenor of his acceptance, not
30 days after sight, the tenor of the bill. Suppose that the bill is for P1,000 and the acceptor
accepts it for P600, he would be liable only for P600, the tenor of his acceptance, not P1,000, the
tenor of the bill.
836. Where original tenor is altered before acceptance.Suppose the bill is originally for
P1,000. Before the drawee X accepts it, it is altered by the payee. B to P4,000. Then X accepts it.
How much is X liable to a holder in due course? Before the adoption of the Negotiable
Instruments Law, at common law, an acceptor was liable according to the tenor of the bill. Since
the adoption of the Negotiable Instruments Law, adiversity of opinion has arisen as to the effect
of Section 62)
837. View that altered tenor is tenor of acceptance. According to one view, X is liable for
P4,000 not P1,000. The reason is that the tenor of Xs acceptance is for P4,00O. Since an
acceptor, by Section 62 engages to pay the bill according to the tenor of his acceptance, he
must pay to the innocent payee or subsequent holder the amount called for by the time he
accepted, even though larger than the original amount ordered by the drawer. Moreover, he
would be a party who has himself assented to the alteration.
838. Illustrative cases (first view). (1) In a leading case which presents this view,19 a bank of
St. Louis drew a draft upon the plaintiff payable to a Pittsburgh concern. The draft was stolen
from the mails by one Manning who erased the name of the payee named in the d1t, 4nserted his
own, and indorsed the instrument. He tendered the draft in payment for certain jewelry which he
purchased, and, its certification having been secured, the jewelry was delivered to him. The
jeweler delivered the draft at the defendant bank to which it was paid through the clearing house.

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The drawee, having discovered the alteration, sought to recover the amount paid. In denying a
recovery, the court said: In its last analysis, the question presented for decision is the liability
of the acceptor of a negotiable instrument under Section 62 of the Negotiable Instruments Law.
This section declares that the acceptor, by accepting the instrument; engages that he will pay the
instrument which he has accepted according to the tenor of his acceptance, and admits the
existence of the payee and his then capacity to indorse. The instrument which appellee accepted
was payable to the order of Andrew H. Manning. By its acceptance, it admitted that Andrew H.
Manning, at the time of acceptance, was not suffering any legal disability which would affect
his ability to pass title to the instrument accepted by means of indorsement. According to the
plain language of this section, appellee, by its general acceptance, bound itself to pay a draft for a
certain sum payable to the order of Andrew H. Manning. After the draft was accepted by
appellee, the indorser was discharged from liability therefrom. WhWhen appellant took the draft,
it was complete and regular upon its face. It had been duly accepted by the drawee. It was taken
in good faith and for value, and appellant was therefore a holder in due course. It relied upon the
general acceptance of appellee and, under the Negotiable Instruments Law, was protected by it.
This construction of Section 62 is in accordance with that sound principle which declares that,
where one of two innocent parties must suffer a loss, the law will leave the loss where it finds it.
(2) In a California case,2 the Supreme Court of that state, in approving the Illinois decision,
stated that it was not the legislative intent that the obligation of the acceptor should be limited to
the tenor of the instrument as drawn by the maker, as was the rule at common law, but that it
should be enforceable in favor of a holder in due course against the acceptor according to its
tenor at the time of its acceptance or certification. The wording of the Act suggests that a change
in the common law was intended. A careful reading of the law independent of any common law
influence, requires that the words according to the tenor of its acceptance, be construed as
referring to the instrument as it was at the time it came into the hands of the acceptor for
acceptance, for he accepts no other instrument than the one presented to him the altered form
and by it alone, he engages to pay.
839. View that original tenor is tenor of acceptance. A learned writer21 takes the opposite
view and he is supported by some decisions. He suggests that the Illinois view overlooksother
pertinent sections of the Negotiable Instruments Law and that Section 62 should be paraphrased
to state that the liability of the acceptor depends upon the terms of his acceptance, that is,
whether it is a general acceptance or a qualified acceptance or an acceptance for honor. He
suggests that all three of these acceptance contracts are within the purview of the provision of
Section 62 that the acceptor, by accepting the instrument, engages that he will pay it not
according to the tenor of the bill since this would deny him the right to qualify the acceptance or
to accept for honor but according to the tenor of his acceptance.

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840. Effect of Section 124. Under the first view, what is the effect of Section 124 which
provides that a holder in due course can recover only the original tenor of the instrument? It
seems that this refers to the original tenor of the instrument taken from the standpoint of the
person principally liable, in the first illustration, from Xs standpoint. In other words, the original
tenor of the instrument is 4,000, which is the tenor of Xs acceptance. If after his acceptance, a
subsequent indorsee alters the bill to read 9,000, then X could beliable only for 4,000, the
original tenor of his acceptance, even as to a holder in due course.
841. Admission of drawers existence, etc. The acceptor, by his acceptance, admits: (1) the
drawers existence, (2) the genuineness of the drawers signature; and (3) the capacity and
authority of the drawer to draw the instrument. But he does not admit the genuineness of the
indorsers signature. Thus, without adding any word to his acceptance, the acceptor, by signing
the bill as such, represents that the drawer exists, that his signature is genuine, and that he has the
capacity and authority to draw the bill.
842. Where Drawers Signature Forged. Illustrative case.The PCIB received for deposit in a
current account a GSIS check drawn against the PNB. The latter bank paid the amount of the
check to the PCIB. Later, it was proved that the check is fraudulent because the signatures of the
General Manager and Auditor of the GSIS on the check, as drawer, are forged. The PNB argues
that since the signatures of the drawer are forged, so must the signatures of the supposed
indorsers be. (Payee Mariano D. Pulido indorsed to Manuel Go who indorsed to Augusto Lim,
who in turn, deposited it in his current account at the PCIB). HELD: If the signatures of the
drawer are forged, it does not necessarily follow that the signatures of the supposed indorsers are
also forged. This must be proved by evidence and the PNB has not even tried to prove that the
aforementioned indorsements are spurious. Again, the PNB refunded the amount of the check to
the GSIS, on account of the forgery in the signatures, not of the indorsers or supposed indorsers,
but of the officers of the GSIS as drawers of the instrument. The question whether or not the
indorsements have been falsified is immaterial to the PNBs liability as a drawee or to its right to
recover from the PCIB, for, as against the drawee, the indorsement of an intermediate bank does
not guarantee the signature of the drawer since the forgery of the indorsement is not the cause of
the loss.
843. Effect of acceptors admissions. (1) The acceptor is consequently precluded from setting
up the defense that the drawer is non-existent or fictitious because of his admission of the
drawers existence;
(2) Neither can he claim that the drawers signature is a forgery because he admits the
genuineness of the drawers signature.

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(3) Neither can the drawee escape liability by alleging want of consideration between him and
the drawer as, by accepting the bill, he admits the capacity and authority of the drawer to draw
the bill. For the same reason, the better rule seems to be that the acceptor is liable on the bill even
if the drawer has overdrawn his account.
844: Payees existence. Like the maker and drawer, the acceptor, by accepting the instrument x
x x admits the existence of the payee and his then capacity to indorse.
SECTION 63. When a person deemed indorsers, A person placing his signature upon an
instrument otherwise than as maker, drawer, or acceptor, is deemed to be indorser unless
he clearly indicates by appropriate words his intention to be bound in some other capacity.
845. When person deemed indorser. In the absence of any indication in what capacity a person
whose signature is written on the instrument intends to be bound, he shall be deemed an indorser.
But one making a note payable to his own order does not, by indorsement thereof, assume
liability as indorser.
846. Illustrative Case. Lorenzo Ting issued Philippine Bank of Communication Check for the
sum of P4,000 payable to cash or bearer. With Felipe Angs signature (indorsement in blank) at
the back thereof, the instrument was received by Ang Tiong who presented it to the drawee bank
for payment. The bank dishonored it. Felipe Ang claimed that he is a mere accommodation party.
HELD: Nothing in the check in question indicates that the appelant is not a general indorser
within the purview of Section 63 which makes a person placing his signature upon an
instrument otherwise than as a maker, drawer, or acceptor a general indorser unless he
clearly indicates by appropriate words his intention to be bound in some other capacity which
he did not do. He is covered by the provision of Section 66 regarding the warranty which every
indorser who indorses without qualification, makes for all subsequent holders in due course.
847. Indication to be bound otherwise than as indorser.And one who signs otherwise than as
maker, drawer or acceptor, will not be deemed an indorser if he indicates by appropriate words
his intention to be bound in some other capacity. Accordingly, an indorser upon a promissory
note or bill of exchange who indorses for the purpose of identifying the person only and not for
the purpose of incurring any liability as to the payment of such promissory note or bill of
exchange, incurs no liability. His indorsement or guaranty, however, must clearly indicate that it
is for the purpose of identification only.
But anyone who assumes the responsibility of identifying the payee of a check is answerable to
the bank cashing the check if the bank pays its amount to such payee so identified. But where a
party signed his name on the back of the check below the clause for identification of payees
signature and payment guaranteed, stamped immediately after a signature appearing thereon as

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last indorsee, and thereafter the agents of the bank encashed the check in favor of the drawee and
not in favor of the person so identified, such agents are guilty of negligence, and the bank is
liable to the drawer for the amount ofcheck.
848. Other illustrative cases. In the following cases, the persos signing is not bound as indorser
but as indicated:
(1) A person who adds to his signature the words as guarantor or as surety.
(2) A stranger who indorses on the back of the note, I hereby guarantee payment of the
within note, indicates his intention to be bound as guarantor, not as indorser.
(3) The intent to be bound in some other capacity may be found on the face of the
instrument, such as, the case when the note reads, We, the signers, indorsers, sureties,
and all of us in solido, promise to pay, etc. The signers on the back of the instrument
before delivery were held to be bound in solido, not as indorsers, and therefore, not
entitled to notice of dishonor.
849. Admissibility of parol evidence. Section 63 is a statutory command that the legal effect of
a blank indorsement cannot be changed by parol proof or by evidence from other sour!e?4 So
that, under this section, one who indorses in blank cannot show by parol that he signed merely as
agent for a prior party and was not individually liable. He is an indorser. Also the intent to be
bound in some other capacity than as an indorser must be indicated in the indorsement or on the
face of the instrument and cannot be shown by parol.
SECTION 64. Liability of irregular indorser. Where a person, not otherwise a party to an
instrument, places thereon his signature in blank before delivery, he is liable as indorser in
accordance with the following rules.
(a) If the instrument is payable to the order of a third person, he is liable to the payee and
to all subsequent parties.
(b) If the instrument is payable to the order of the maker or drawer, or is payable to
beiirer, he is liable to all parties sub sequent to the maker or drawer.
(c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to
the payee.
850. Irregular indorser.Based on the first sentence of Section 64, an irregular or ?nornalous
indorser is a person who, not otherwise a party to an instrument, places thereon his signature in
blank before delivery. In order, therefore, that a person may be considered an irregular indorser,
the following three requisites must be present:(1) he must not otherwise be a party to the

169 FOUR-C LAW LIBRARY


instrument, that is, he must not be a maker, drawer, acceptor or regular indorsee thereon; (2) he
must sign the instrument in blank; and (3) he must sign, before delivery.
851. Reason for use of term. Such a party so signing is called an irregular or anomalous
indorser because he indorses in an unusual, singular or peculiar manner. His name appears where
we would naturally expect another name. Thus, where an instrument is payable to B or order, Bs
name should appear on the back of the instrument as the first indorser, but instead, we find the
name of say Y as the first indorser. In such a case, Y is an irregular indorser.
852. Meaning of before delivery. The law uses the word delivery Does this mean the initial
delivery or every delivery from one party to another in the course of the negotiation of the
instrument? In dealing with irregular indorsers, Ogden uses the word initial to modify
delivery. On the other hand, under a case 9 delivery seems to include not only the original
delivery to the payee but also every delivery from the party accommodated to a subsequent party.
853. Application of Section 64. Where a person puts his signature on the instrument after
delivery, this section does not apply. It is Section 17 (f) and Section 63 which apply. This section
applies where the signature in blank is placed on the instrument before delivery.4 And this
section deals only with the liability of the irregular indorser to the payee but does not fix the
rights of various irregular indorsers as between themselves which shall be governed by Section
68, under which evidence is admissible as to the, order in which they are to be liable.
854. Illustration of instrument payable to the order of a third person. Where the instrument
is payable to the order of a third person, lie (irregular indorser) is liable to the payee and to all
subsequent parties.43 Thus, suppose that A makes a note payable to B or order. Suppose that B
is not willing to rely on the financial ability of A, maker, and is not willing to take the instrument
payable to his order unless Ys credit was back of it. A then secures the signature of Y in blank.
Thereafter, It is delivered by A to B, who HOW takes it because of Ys signature. Y here is an
irregular indorser and would appear as the first indorser of the instrument. In this case, to whom
is Y liable? Here B, the payee, is a-third person. Where B negotiates the note to C, and C to D,
Y, as an irregular indorser, is liable to B, the payee, and to C and D, subsequent parties.
855. Illustration of instrument payable to order of maker or drawer, or bearer. Where the
instrument is payable to the order of the maker or drawer or is payable to bearer, he (irregular
indorser) is liable to all subsequent parties to the maker or drawer.4 Thus, suppose that A draws
a bill payable to his own order but he cannot circulate the bill without the name of Y being
hidrsed thereon. Y then signs the back of the bill in blank. Thereafter, A negotiates it to B. Y
is an irregular indorser. Suppose that A, drawer and payee, negotiates the bill to B, B to C, and C
to D. To whom is Y liable? Y is not liable to A, the drawer, but is liable to B, , C and D,
subsequent parties to the drawer. This is true also where the instrument is payable to bearer.
856. Illustration of irregular indorser signing for accommodation of payee. Where the
irregular indorser signs for the accommodation of the payee, he is liable to all parties
subsequent to the payee. Thus, suppose that A makes a notepayable to B or order. i wants to
discount it with a bank but the bank is not willing to rely on the financial ability of A and B
alone. B then obtains also the signature of Y in blank, Y not receiving any valuable consideration

170 FOUR-C LAW LIBRARY


therefor but signs only for the purpose of lending his name or credit to B. Y is also an irregular
indorser and appears on the instrument as a second indorser with B as the first. In such a case, to
whom is Y liable? Y is not liable to B but to the bank and other parties subsequent to B.
SECTION 65. Warranty where negotiation by delivery and forth. Every person
negotiating an instrument by delivery or by a qualified indorserment warrants:
(a) the instrument is genuine and in all respects what it purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the validity of the
instrument or render it valueless.
But when the negotiation is by delivery only, the warranty extends in favor f no holder
other than the immediate transferee.
The provisions of subdivision (e) of this section do not apply to a person negotiating public
or corporation securities other than bills and notes.
857. Application of Section 65. This section treats of the warranties or liabilities of: (1) a person
negotiating by mere delivery, and (2) a person negotiating by qualified indorsement. It is, of
course, to be understood that one negotiating by qualified indorsement completes the process
with delivery. The first refers to instrument payable to bearer, either originally or when the only
or last indorsement is in blank. But the indorsing in blank is not referred to here, as he negotiates
by indorsement (although blank) completed by delivery, riot by delivery only, The second refers
to instrument payable to order. Thus, suppose that A makes note payable to B or order. Then B
negotiates it by a qualified indorsement to C. The liabilities incurred by B by so negotiating the
note are also stated in this section.
858. Liability of person negotiating by delivery. Suppose that A. makes a note payable to
bearer and delivers the same to B. Then B negotiates the note to C by mere delivery. What is the
liability of B in so negotiating? By merely delivering the instrument to C, without saying more,
B warrants all the matters and things mentioned in paragraphs (a), (b), (c), and (d) of Section 65
and his liability is limited only to these warranties. Thus, a person negotiating by mere delivery
becomes liable to the holder only when the holder cannot obtain payment from the person
primarily liable by reason of the fact that any of the warranties of the person negotiating by
delivery is or becomes false.
859. Warranty as to genuineness. Suppose that the instrument is altered or the makers
signature is forged, for which reason the holder cannot collect from the maker. The
partynegotiating by mere delivery is liable to the holder because he warrants that the instrument
is genuine and in all respects what it purports to be.
860. Warranty as to good title. Suppose that the title of the party negotiating by delivery is
defective as he acquired the instrument by means of fraud, for which reason the holder cannot

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collect from the maker or acceptor. The party negotiating by delivery is liable to the holder
because he warrants that he has a good title to the instrument.
861. Warranty as to capacity to contract. Suppose that the maker is a minor, a lunatic or other
cases of incompetency, a married woman, or a corporation acting ultra vires, for which reason
the holder cannot collect from the maker. The partynegotiating by delivery is liable to the holder
because he warrants that prior parties have capacity to contract. But under the last paragraph, a
party negotiating public or corporation securities other than bills and notes, do not warrant the
capacity of prior parties to contract.
862. Warranty as to Ignorance of certain facts. Suppose that the maker was insolvent at the
time of the negotiation of the instrument. This fact renders the instrument valueless, and for this
reason, the holder cannot collect on the instrument against the insolvent maker. (1) If the party
negotiating by delivery knew that the matter was insolvent, and he concealed that fact, he would
be liable because he warrants that he is ignorant of any fact that would render the instrument
valueless, and it turns out that he knew. But if the party negotiating did not know of the makers
insolvency, he would not be liable. (2) The party negotiating by delivery would also be liable, if
he knew but concealed that the instrument is not valid for want of consideration because he
warrants that he does not know of any fact which would impair the validity of the instrument.
But if he did not know the fact, he would not be liable, as he does not warrant that the instrument
is valid.
863. To whom warranties extend; illustration. The warranties of a person negotiating by mere
delivery extend in favor of no holder other than the immediate transferee. Thus, suppose that B
is the bearer of the note payable to bearer. He negotiates it by delivery to C, C to D and D to E. B
and C are not liable to E even if their warranties are or become false because E is not their
immediate transferee. It is D only who is liable to E. B, however, is liable to C but not to D, and
C is liable to D.
864. Warranties not exclusive. The four warranties expressed in this section are not exclusive
but may be extended by analogy to like situations. So that, when an indorser, without recourse of
a note secured by a lien, released the lien after he had indorsed it to the holder said indorser is
liable for breach of warranty. The Negotiable Instruments Law, Section 65, does not state the
only warranties and under said section, by analogy, the person negotiating by delivery or
indorsing qualifiedly warrants also that he will do no act to prevent the indorsee from collecting
the note.
865. Liability of qualified indorser. The qualified indorser has the same warranties as those of
a person negotiating by mere delivery. The only difference is that, while the person negotiating
by mere delivery is liable only to his immediate transferee, the person negotiating by qualified
indorsement is liable to all parties who derive their title through his indorsement.
866. Nature of liability. It is clear from the foregoing that a qualified indorser or a persons
negotiating by mere delivery are secondarily liable, and that their secondary liability is limited,
namely, to their warranties. In other words, they are secondarily liable only when the person
primarily liable cannot pay because of the violation of any of the four warranties but they will

172 FOUR-C LAW LIBRARY


not be liable if the person primarily liable cannot pay for any other reason than the violation of
the four warranties.
SECTION 66. Liability of general indorser. Every indorser who indorses without
qualification, warrants to all subsequent holders in due course:
(a) The matters and things mentioned in subdivision (a), (b), and (c) of the next
preceding section; and
(b) That the instrument is, at the time of his indorsement, valid and subsisting;
And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both,
as the case may be, according to its original tenor, and that if it be dishonored and the
necessary proceedings of dishonor be duly taken, he will pay the amount thereof to the
holder, or to any subsequent indorser who may be compelled to pay it.
867. Application of Section 66. This section deals with liability or warranties of one negotiating
by general indorsement, as distinguished from qualified indorsers or persons negotiating by mere
delivery. It has been held that this section includes an indorser for collection. This holding seems
correct where the indorser for collection receives value from the bank so that he can be
considered a seller. Under such circumstance, the restrictive nature of indorsement should not
negative the usual warranties of a seller of an instrument, for, on correct principles, it merely
adds the promise that on presentation, it will be honored, and is an obligation to protect
subsequent holders for value from loss on the manner as if there was no trust.
866. Liability of a general indorser. The general indorser, by merely placing his signature on
the instrument as such, without adding any words to his signature, warrants as follows:
(1) that the instrument in genuine and in all respects what it purports to be;
(2) That he has a good title to it;
(3)-that all prior parties had capacity to contract;7 and
(4) . That the instrument is, at the time of his indorsement, valid and subsisting.
It will be noted that the first three warranties of a general indorser are the same as those of a
qualified indorser or of a person negotiating by mere delivery.
869. Fourth warranty of general indorser and qualified indorser, distinguished. The fourth
warranty of the general indorser is different from that of a qualified indorser or person
negotiating by delivery. While the qualified indorser or person negotiating by delivery warrants
that he is ignorant of any fact that will render the instrument valueless or impair its validity, the
general indorser warrants that the instrument he is indorsing is valid and subsisting regardless of
whether he is ignorant of that fact or not. But the fourth warranty of ageneral indorser does not
run in favor of holders who are parties to the illegal transaction.
870. Illustration. Thus, suppose A makes a note payable to B or order. The consideration given
by B is illegal, rendering the note void. B indorses to C, who does not know that the
consideration of the note is illegal. C indorses to D. D files a civil action with D, as plaintiff and

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C as defendant. Can C set up the defense that the note is void-because the consideration was
illegal? No, because C, as a general indorser, warrants that the instrument is valid and subsisting,
even if he did not know of the illegality of the consideration. But if C were a qualified indorser,
he would not be Able because he does not violate his warranties and he does not warrant that the
instrument is valid and subsisting but merely that he does not know of any fact that renders the
instrument valueless or impairs its validity, and he, C, did not know of the illegality o f
consideration.
871. To whom warranties extend. The law extends the warranties only to subsequent holders in
due course. But a person negotiating by delivery is liable only to his transferee, while a qualified
indorser is liable to all parties who can trace their title to his indorsemant, whether such parties
are holders in due course or not. However, an opinion is expressed that there seems to be no
reason for the warranties of a general indorser should not run in favor of any person to whom the
instrument is negotiated as in Section 65. The law does not use the word only. Thus, it is silent
as to the rights of a holder not in due course. Accordingly, the warranties of a general indorser
extend to the following:
(1) Subsequent holders in due course.
(2) Persons who derive their title from holders in due course.
(3) Immediate transferees, even it they are not holders in due course. Otherwise, the
transferee of a qualified indorser would have greater rights than the transferee of a general
indorser.
872. Warranties do not extend to drawee. The indorser of a check does not warrant the
genuineness of the drawers signature to the drawee who pays it since the drawee is not a holder
in due course under Section 52 nor a holder under Section 191.16 The warranties provided for in
Sections 65 and 66 do not run in favor of the drawee in respect to the genuineness of the
drawers signature but only in favor of subsequent holders in due course, inasmuch as the drawee
is not such holder nor is the presentation for payment to him a negotiation.
873. Illustrative Case. One Augusto Lim deposited in his current account at the Philippine
Commercial and Industrial Bank, GSIS Check in the sum of 57,415.00, drawn against the PNB.
The check was forwarded for clearing through the Central Bank to the PNB. PNB retained the
check, paid its account to the PCIB, as well as debited it against the account of the GSlS in the PNB. Subsequently, the PNB had to recredit the -P57,415 to the GSIS account because the
signatures of the Manager and the Auditor of the GSIS on the Check, as drawer, are forged.
Query Is the PCIB liable to the PNB by virtue of the formers warranty on the back of the
check which reads A prior indorsements and/or lack of endorsement guaranteed, Philippine
Commercial and Industrial Bank?HELD: It should be noted that the PCIB guaranteed all prior
indorsements, not the authenticity of the signatures of officers ofGSIS who signed on its
behalf, because the GSIS is not an indorser of the check but its drawer. Said warranty is
irrelevant, therefor, to the PNBs alleged right to recover from the PCIB. It could have been
availed of by a subsequent indorsee or a holder in due course subsequent to the PCIB but the
PNB is neither, it having had previous notice of the infirmity of the check when it came into its
possession. Indeed, upon payment by the PNB as drawee, the check ceased to be a negotiable
instrument and became a mere voucher or proof of payment.

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874. Other liability of general indorser. In addition to his four (4) warranties, a general
indorser, by merely signing his name as such on an instrument and without expressly stating it on
the instrument, engages that, on due presentment, it shall be accepted or paid, or both, as the
case may be, according to its tenor, and that if it be dishonored and the necessary proceedings of
dishonor be duly taken, he will pay the amount to the holder, or to any subsequent indorser who
may be compelled to pay it.8 This is similar to the secondary liability of the drawer.
875. General indorser is secondarily liable. The general indorser is secondarily liable. Under
the last paragraph, his secondary liability is not limited only to the four warranties. He is liable
if, for any reason, the person primarily liable cannot pay, as distinguished from the limited
secondary liability of the qualified indorser. or of the person negotiating by mere delivery under
Section 65. This is to say that he is secondarily liable if the instrument is dishonored. And, in a
Philippine case, it has been held that the law does not require that the reason for the dishonor be
established. It is sufficient that there was dishonor. Moreover, being a holder in due course does
not defeat the liability of an indorser and his warranties as set forth in Sections 65 and 66.
Accordingly, where a co-accused in a malversation of public funds indorsed a check not covered
by funds, in order to cash the same from public funds in the hands of the, other accused, said
indorser, as such and as an accommodation party, is liable to the government for the amount
malversed, even if said co-accused was acquitted in the criminal case, under Sections 57, 63, 66
and 29 of the Negotiable instruments Law.
876. Indorsers liability where person primarily liable is insolvent. Where the person
primarily liable is insolvent, the general indorser is liable, even if he neither knew nor concealed
that fact because he engages to pay if the person primarily liable cannot pay. Accordingly,
where a person makes an unqualified indorsement of a promissory note, the Negotiable
Instruments Law specifies and defines his liability and parol testimony is not admissible to
explain or defeat such liability.
877. When parol evidence admissible as to extrinsic agreement of indorser. It has, however,
been held that any prior or contemporaneous conversation in connection with a note or its
indorsement may be proved by parol evidence, and that an extrinsic agreement between indorsers
and indorsee which cannot be embodied in the instrument without impairing its credit is provable
by parol provided that such extrinsic agreement should not vary, alter or destroy the obligations
attached by law to the indorsement. Accordingly, the Court held that the oral assurances of the
indorser of a cheek that the drawer has funds and that he would refund the amount of the check if
the drawer had no funds are precisely the ordinary obligations of an indorser, and such obt1ons
are, under the law, considered discharged by an unreasonable delay in the presentation of the
check for payment, as there is no express obligation assumed by the indorser that the drawer
would always have funds, or that he would refund the amount of the check even if there is delay
in its presentation.
878. Unqualified indorsement by a bank for clearing to the Clearing house Corporation
estoppel from claiming that the checks under consideration are not negotiable instruments.
Petitioner bank with which a check was indorsed under a forged signature was deposited,
indorsed the check to the Philippine Clearing Home Corporation (PCHC) for clearing by

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stamping upon said check, all prior indorsements and/or lack of it guaranteed. can petitioner
claim that the check is not negotiable? Held: No. The petitioner having stamped its guarantee of
all prior endorsements and/or lack of endorsements is now estopped from claiming, that the
checks under consideration are not negotiable instruments. The checks were accepted for deposit
by the, petitioner bank, stamping thereon its guarantee, in order that it can clear the said checks
with the respondent Lank. By such deliberate, and positive attitude of the petitioner it has for all
legal intents and purposes treated the said checks as negotiable instruments and accordingly
assumed the warranty of the endorser when it stamped its guarantee of prior endorsements at the
back of the checks. It led the said respondent to believe that it was acting as endorser of the
cheeks and on the strength of this guarantee said respondent cleared the cheeks in question and
credited the account of the petitioner. Petition is now barred from taking an opposite posture by
claiming that the disputed checks are not negotiable instrument.
879. Summary of distinctions between liabilities of persons negotiating. (1) As to the party
negotiating by delivery, his warranties extend only to the immediate transferee, while as to the
qualified indorser and the general indorser, they extend to parties subsequent to them. As
between a qualified indorser and a general indorser, the warranties of the first extend to all
subsequent parties who acquire title through his indorsement, regardless of whether they are
holders in due course or not, while as to the second, his warranties extend only to subsequent
holders in due course, subsequent parties deriving their title from holders in due course and hs
immediate transferee.
(2) Under Section 65, the party negotiating by delivery or by qualified indorsement warrants
only that he is ignorant of any fact which would impair the validity of the instrument or render it
valueless, while under Section 66, the general indorser warrants that the instrument is valid and
subsisting.
(3) Under Section 65, the party negotiating by delivery or qualified indorsement does not engage
to pay the instrument if it is dishonored by non-acceptance or non-payment except when such
dishonor arises from his four warranties. In other words, his secondary liability is limited. Under
Section 66, the general indorser engages to pay the holder or any intervening party who may be
compelled by the holder to pay if the instrument is dishonored either by non-acceptance or nonpayment, whether such dishonor arises from the warranties or from other causes such as
insolvency. In other words, his secondary liability is not limited to the four warranties.
880. Liability of assignor. The vendor in good faith shall be responsible for the existence and
legality of the credit at the time of the sale unless it should have been sold as doubtful but not for
the solvency of the debtor unless it has been so expressly stipulated or unless the insolvency was
prior to the sale and of common knowledge.
Even in these cases he shall be liable for the price received and for the expenses specified in
No. 1 of Article 1616.
The vendor in bad faith shall always be answerable for the payment of all expenses, and
damages.

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The expenses enumerated in Article 1616 are (1) the expenses of the contract and other
legitimate payments made by reason of the sale; and (2) the necessary and useful expenses
made
on
the
thing
sold.
In case the assignor in good faith should have made himself responsible for the solvency of the
debtor and the contracting parties should not have agreed upon the duration of the liability, it
shall last for one year only from the time of the assignment if the period had already expired.
If the credit should be payable within a term or period which has not yet expired, the liability
shall cease one year after maturity.
881. Liability of indorser and assignor compared. Thus, itwill be seen that, ordinarily, like the
qualified indorser or person negotiating by delivery, but not like the general indorser, an assignor
is not responsible for the insolvency of the principal debtor and will not be liable to the assignee
if for that reason the assignee cannot collect from the principal debtor. On the other hand, unlike
the qualified indorser and person negotiating by delivery, but like the general indorser, the
assignor warrants the existence and legality of the credit assigned and will, therefore, be liable to
the assignee in case the assignee can not collect from the principal debtor where the credit
assigned is illegal or non-existent. As in the case of general indorser, this liability of the assignor
exists whether or not he knows of the illegality or non-existence of the credit he assigned.
SECTION 67. Liability of indorser where paper negotiable by delivery. Where a person
places his indorsement on an instrument negotiable by delivery, he incurs all the liability of
an indorser.
882. Illustration of Section 67. The following illustrates the application of this section. A makes
a note payable to bearer which is delivered to B, bearer. B can negotiate the note by mere
delivery and his liability and warranties would be those stated in Section 65. But if he indorses
the note, his liabilities and warranties would be: (1) as stated in Section 66, if he indorses
generally; or 2) as stated in Section 65, if he indorses qualifiedly.
SECTION 68. Order in which indorsers are liable. As respects one another, indorsers
are liable prima facie in the order in which they indorse; but evidence is admissible to show
that, as between or among themselves, they have agreed otherwise. Joint payees or joint
indorsees who indorse are deemed to indorse jointly and severally.
883, Application of Section 68. This rule applies only with respect to an indorser as against
another but not as against a holder in due course. Under this rule, every indorser is liable to all
indorsers subsequent to him but not those prior to him whom he in turn makes liable. This
section contemplates successive negotiations of the instrumej3rj successive indorsements. It does
not determine the order of liability of joint indorsers among themselves.
884. Illustration. Successive indorsement: From B to C, to D, to E, to F, holder. If D is made to
pay by F. D can file an action against C and B, indorsers prior to him (D) but not against E, an
indorser subsequent to him (D) because indorsers are presumed among themselves to be liable in
the order in which they indorse.25 But, of course, as among themselves, D can prove even by

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parol evidence that their agreement was that E should be held liable first as the law says that
evidence of such a fact is admissible.
885. Liability as against holder. The rule that indorsers are liable in the order they indorse is
only as between or among themselves but not as against the holder. As to the holder, they are
liable in any order. So, F, holder, can file an action against any one of them in any order and
none of them can set up against him an agreement among themselves that one indorser should be
held liable first.
886. Joint and several liability of joint payees. Joint payees or joint indorsees are deemed to
indorse jointly and severally. Thus, suppose that A makes a note for P1,000 with A and B as
payees. It is indorsed: To C, (Sgd.) A and B. A and B are deemed jointly and severally liable,
that is, C canmake any one of them pay the whole, P1,000.
887. Effect of lack of notice of dishonor, etc. One of the joint indorsers cannot escape liability
because proper notice of dishonor was not given to his joint indorser.28 Consequently, when the
holder expressly releases the first indorser, the second indorser will be discharged.29 However, if
one of the joint indorsers pays the instrument, the second joint indorser is prima facie liable to
contribute and the burden of proof to show release from such liability is upon the second
indorser? Under the New Civil Code, in joint and several obligations, he who made the payment
may claim from his co-debtors only the share which corresponds to each, with interest for the
payment already made.
SECTION 69. Liability of an agent or broker. Where a broker or other agent negotiates
an instrument without indorsement, he incurs all the liabilities prescribed by Section sixtyfive of this Act, unless he discloses the name of his principal and the fact that he is acting
only as agent.
888. Application of Section 69. This section seems to refer to instruments which are payable to
bearer. The liability and warranties of the agent are those stated in Section 65.32 To escape
personal liability as a party negotiating by delivery, the agent must (1) disclose his principal; and
(2) state that he is acting only as an agent. But paroi evidence is not admissible to relieve an
agent whose indorsement brings him within
VI PRESENTATION FOR PAYMENT
SECTION 70. Effect of want of demand on principal debtor. Presentment for payment is
not necessary in order to charge the person primarily liable on the instrument; but if the
instrument is, by its terms, payable at a special place, and he is able and willing to pay it
there at maturity, such ability and willingness are equivalent to a tender of payment upon
his part. But except as herein otherwise provided, presentment for payment is necessary in
order to charge the drawer and indorsers.
889. Meaning of presentment for payment. By presentment is meant the production of a bill
of exchange to the drawee for his acceptance, or to the drawee or acceptor for payment or the
production of a promissory note to the party liable for payment of the same. Presentment for

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payment consists of a (1) personal demand for payment at the proper place (2) with the bill or
note in readiness to exhibit it if required, and to receive payment and surrender it if the debtor is
willing to pay. A mere informal task asking payment of a note, not accompanied with a
presentment of it or intended as a formal presentment and demand, is not sufficient to put the
note in dishonor. A demand over the telephone is not sufficient presentment to charge the
indorser unless the maker, by word or conduct, waives the right to ask for an exhibition of the
note.
890. Presentment not necessary to charge persons primarily liable; illustration.
Presentment for payment is not necessary in order to charge the person primarily liable. Thus,
suppose that -A draws a bill payable to B or order. X, drawee, accepts the bill which is due on
March 31, 1950. B negotiates the bill to C, C to D, D to E, E to F, now holder. On April 1, 1950,
the bill is still unpaid. But F failed to make presentmentfor payment to X, acceptor. Can F file an
action against X and hold him liable on the bill? Yes, because presentment for payment is not
necessary to charge the person primarily liable on the instrument. This rule applies also to the
maker. It cannot be validly claimed that it is the presentment for payment of the bill to the
acceptor which is the operative act that makes the acceptor liable under his acceptance. Before he
accepts, the drawee is a stranger to the bill but from the moment of his acceptance, he becomes
bound as a party primarily liable on the instrument Union Guaranty Co y Jing Kee & Co. 44
Phil 533 Anglo, etc. Nat. Bank y. Jacobson Co. 187 N.Y. Supp. 508) He is bound according to
the tenor of his acceptance ad he cannot show, as against the payee, that there was a subsequent
agreement between him and the drawer modifying the terms of the acceptance.
891. Payable at a special place. This does not mean that the instrument is payable at a specified
city, but at, say a bank, such as the Philippine National Bank.39 If the bill in the illustration is
payable at the PNB, is it necessary to make presentment for payment to X in order to charge
him? No. The rule is the same. The only effect is that if, X is able and willing to pay the bill at
the PNB at maturity, it is equivalent to a tender of payment on the part of X, and the holder F
loses his right to recover interest due subsequent to maturity and costs of collection but he can
still hold X liable.
892. Rule applicable to demand notes. The rule that presentment for payment is not necessary
to charge the person primarily liable on the instrument applies to instruments payable on
demand.
893. Presentment necessary to charge persons secondarily liable. Presentment for payment to
the person primarily liable is necessary to charge the person secondarily liable. Otherwise, they
are discharged except as otherwise provided for. In the illustration, if the holder F fails to make
presentment for payment to X, acceptor, the il et A, and the indorsers B, C, D and E are
discharged and cannot file an action against them. Hence, only one debtor X would be left
against whom he can enforce the bill.
Section 71, read in connection with the last sentence of Section 70 which provides that But,
except as herein otherwise provided, presentment for payment is necessary in order to charge the
drawer and indorsers, simply means that the instrument must be presented for payment on the
date and peed therein mentioned to charge the persons secondarily liable such as drawers and

179 FOUR-C LAW LIBRARY


indorsers. And the instrument must be presented on the date of maturity, if it is payable on a
fixed date, or within a reasonable time after issue, if it is a promissory note, or within reasonable
time after last negotiation, if it is a bill of exchange, otherwise the drawer and indorsers are
discharged from liability.
894. Necessary steps to charge persons secondarily liable in bills of exchange. If one of the
following steps is not taken, the persons secondarily liable are discharged and only the person
primarily liable is left to answer for the payment of the instrument:
(1) In the three cases required by law, presentment for acceptance to the drawee or negotiation
within reasonable time after acquisition unless excused. In other cases aside from the three, there
is no need for presentment for acceptance.
(2) If the bill is dishonored by non-acceptance, (a) notice of dishonor by non-acceptance must be
given to persons secondarily liable44ii-n-less excused45 and, in case of foreign bills, (b)
protest for dishonor by non-acceptance must be made46 unless excused.
(3) But if the bill is accepted, or if the bill is not required to be presented for acceptance, it must
be presented for payment to the persons primarily liable48 unless excused.
(4) 1f the bill is dishonored by non-payment, (a) a notice of dishonor by non-payment must also
be given to person secondarily liable unless excused, and, in case of foreign bills, (b) a protest
for dishonor by non-acceptance must be made unless excused.
895. Necessary steps to charge persons secondarily liable in promissory notes. (1)
Presentment for payment must be made within the period required2 to the person primarily liable
unless excused;3 and (2) if the note is dishonored by non-payment, notice of dishonor by nonpayment must be given to the persons secondarily liable4 unless excused.
896. Necessary steps to charge persons secondarily liable in other cases. (1) Protest for nonpayment by drawee is necessary to charge an acceptor for honor6 or a referee in case of need.
And (2) protest -for non-payment by the acceptor for honor is also required.
SECTION 71. Presentment where instrument is not payable on demand and where payable
on demand. Where the instrument is not payable on demand, presentment must be
made on the day it falls due. Where it is payable on demand, presentment must be made
within a reasonable time after its issue, except that in the case of a bill of exchange,
presentment for payment will be sufficient if made within a reasonable time after the last
negotiation thereof.
897. When payable at a fixed or determined time. When must presentment for payment be
made? It depends upon whether the instrument is payable at a fixed or determinable future time
or on demand. Where the instrument - is payable at a fixed or determinable future time, the
presentment must be made on the date of maturity. In the illustration under Section 70, F must
present the bill for payment to X on March 31, 1950. A presentment before maturity is not
proper.

180 FOUR-C LAW LIBRARY

898. When payable on demand in case of notes. Where the instrument is payable on demand,
the time for presentment depends upon whether the instrument is a bill or a note. If the
instrument is a note, it must be presented for payment within reasonable time for issue. Thus,
suppose that A makes a note payable to B or order. B negotiates to C, C to D, D to E, and E to F.
The date of the issuance of the note is April 1, 1950. F, the holder, must present the note for
payment to A, maker, within reasonable time after April 1, 1950, the date of issue.
899. When payable on demand in case of bills. If the instrument is a bill, it must be presented
for payment within reasonable time from last negotiation, not from issue, as in the case of notes.
Thus, suppose that A issues a bill to B or order on April 1, 1950. The date of its last negotiation
is December 31, 1950. The presentment must be made within reasonable time after December
31, 1950, not after April 1, 1950. The last negotiation means the last transfer for value, and
subsequent transfers between banks for purposes of collection are not negotiations within this
section. Consequently, the requirement of reasonable time begins to run from the last taking for
value.
900. What constitutes reasonable time. The term reasonable time is relative.
SECTION 72. What constitutes a sufficient presentment. Presentment fr payment, to be
sufficient, must be made
(a)By the holder, or by some persons authorized to receive payment on his behalf;
(b) At a reasonable hour on a business day;
(c) At a proper place as herein defined;
(d) To the person primarily liable on the instrument, or if he is absent or inaccessible, to
any person found at the place where the presentment is made.
901. Application, of Section 72. This section establishes the requisites for a sufficient
presentment for payment. If the presentment made does with any of these requisites, it is not
sufficient. The effect the same as if no presentment is made, namely, the persons secondarily
liable are discharged.
902. Who makes presentment. Presentment for payment must be made by the holder of the
instrument or by some person authorized to receive payment on his behalf. A presentment for
payment of a promissory note by a bank having it for collection is sufficient. In the illustration
under Section 70, F holder, or his agent duly authorized to receive payment, can make the
presentment for payment.
903. Time for making presentment. Presentment must be made, at n reasonable hour on a
business day. What is reasonable hour on a business day depends upon the general custom at
the place of the particular transaction.3 Presentment for payment cannot be made on a Sunday
or holiday.

181 FOUR-C LAW LIBRARY

904. Where presentment is made. The proper place is as defined in Section 73.
905. To whom presentment is made. Presentment for payment is to be made to the maker, if a
note, or to the acceptor, if a bill, not to the person secondarily liable. A clerk found at the
counting room of the acceptor or promisor is a competent party for presentment for payment to
be made to, without special authority given him. So also where a note is payable at a certain
store, presentment for payment at such a store to a person connected therewith is sufficient and
no personal demand on the maker is necessary.
SECTION 73. Place of presentment. Presentment for payment is made at the proper
place

(a) Where a place of payment is specified in the instrument and it is there presented;
(b) Where no place of payment is specified but the address of the person to make payment
is given in the instrument and it is there presented;
(c) Where no place of payment is specified and no address is given and the instrument is
presented at the usual place of business or residence of the person to make payment;
(d) In any other ease if presented to the person to make payment wherever he can be found,
or if presented at his last known place of business or residence.
906. Place specified; illustration. A makes a note in the following terms: I promise .to pay at
the PNB, Manila, to X or order P1,000. The proper place for making presentment for payment
is at the PNB, Manila, the place specified.7 And where the name of the bank on the check has
been changed, presentment for payment at the bank the name of which had been substituted and
not at the original named bank, is also sufficient. But where a note is payable at a designated
branch of a trust company, presentment at the principal office or at any other branch of the
company is not sufficient.
907. Address given; illustration. In a promissory note made by Y, no place is specified for
payment but it is signed as follows: (Sgd.) Y, 404 Regina Bldg., Manila. The proper place for
making presentment for payment is 404 Regina Bldg., Manila.
908. Usual place of business, etc., illustration. The note does not specify a place for payment.
Neither is the address of the person to pay given. But the maker or acceptor resides in 12
Quiricada St. and has a business office at 240 Calvo Bldg., Manila. Either place is proper for
making presentment for payment.
909. Any other place; illustration. When the holder meets the maker or acceptor while waiting
at
the
Escolta,
presentment
may
properly
be
made
there.

182 FOUR-C LAW LIBRARY


SECTION 74. Instrument must be exhibited. The instrument must be exhibited to the
person from whom payment is demanded, and when it is paid, must be delivered up to the
party paying it.
910. Necessity of exhibition of instrument. Presentment includes not only demand for payment
but also the exhibition of the instrument. The purpose of exhibition is to enable the debtor: (1) to
determine the genuineness of the instrument and the right of the holder to receive payment; and
(2) to enable him to reclaim possession upon payment No valid presentment and demand can be
made by any person without having the note in his possession at the time, so that the maker may
receive it in case he pays the amount due unless special
circumstances, such as the loss of the note or its destruction are shown to excuse its absence.
911. Demand by telephone. Is demand by telephone sufficient? No, because exhibition of the
instrument is not possible. So where F, holder, merely demands payment from X,acceptor,
without exhibiting the bill, there is no presentment for payment, and the drawer and indorsers are
discharged.
912. When exhibition excused. Actual exhibition is not necessary in the following cases:
(1) When the debtor does not demand to see the instru ment but refuses payment on some other
grounds, and
(2) When the instrument is lost or destroyed.
SECEION 75. Presentment where instrument payable at bank.Where the instrument is
payable at a bank, presentment for payment must be made during banking hours, unless
the person to make payment has no funds there to meet it at any time during the day, in
which case presentment at any hour before the bank is closed on that day is sufficient.
913. Application of Section 75. This section applies to an instrument which is payable at a bank,
such as a bill which reads: Pay to B or order P1,000.00 at the PNB. (Sgd.) A, to X. The
banking hours are from 9:00 A.M. to 2:30 P.M. from Monday to Friday. There are no banking
hours on Saturday. Consequently, in the illustration, presentment for payment must be made
between 9:00 A.M. to 2:30 P.M. on ordinary days. Otherwise, the presentment would not be
sufficient, and persons secondarily liable on the bill are discharged. But the person to make
payment has until the close of banking hours of the bank where the instrument is made payable
in which to pay it, and if before the close of such hours, he deposits funds there enough to pay it,
a demand earlier in the day is premature.
914. When presentment may be made after banking hours. But where X -has no funds
sufficient to meet the bill on the day of presentment, the presentment may be made before 4:00
P.M., and such presentment would be sufficient as at any ratesthe bill cannot be paid even if
presented during banking hours.
SECTION 76. Presentment where principal debtor is dead. Where the person primarily
liable on the instrument is dead and no place of payment is specified, presentment, for

183 FOUR-C LAW LIBRARY


payment must be made to his personal: representative, if such there be, and if, with the
exercise of reasonable diligence, he can be found.
SECTION 77. Presentment to persons liable as partners. Where the persons primarily
liable on the instrument are liable as partners and no place of payment is specified,
presentment for payment may lie made lo any one of them, even though there has been a
dissolution of the firm.
SECTION 78. Presentment to joint debtors. Where there are several persons not
partners, primarily liable on the instrument and no place of payment is specified,
presentment must he made to them all.
915. Sections 76 to 78 not applicable where place specified.It is W be noted that the rules
stated in all of these sectionsapply to cases where no place for presentment is specified. Ifthere
is.. a place specified, these actions are inapplicable an presentment should be made at the place
specified.
916. Where person primarily liable dead. In the case of the death of the person primarily
liable, presentment for payment may be made to his executor or administrator, (1) if there be
one, and (2) if he can be found. The holder must use diligence to find the personal representative,
if there be one. Although the indorser himself be the personal representativepresentment has
been held necessary. And, calling two or three times at the banking office of the administrator of
a deceased maker and again seeking him at a railroad station near the seat of his other business
interests at a time when he might be expected to be there, warrants a finding of reasonable
diligence to present a note for payment.
917. Where persons primarily liable are partners. Presentment for payment may be made to
any one of the partners, even if their partnership has been dissolved. The reason is that each
partner is an agent of the partnership. Accordingly, in case of death of one of the makers who are
partners, presentment shall not be made to his personal representative but to the surviving
partner.
918. Where persons primarily liable are joint debtors. But if the persons primarily liable are
not partners, presentment must be made to all of them. Thus, an informal demand on one of the
joint makers is not a basis for charging indorsers. Of course, if one of them is duly authorized by
the others for the purpose, presentment
to
him would be sufficient.
SECTION 79. When presentment not required to charge the drawer. Presentment for
payment is not required in order to charge the drawer where he has no right to expect or
require that the drawee or acceptor will pay the instrument.
SECT1ON 80. When presentment not required to charge the indorser. Presentment is not
required in order to charge an indorser where the instrument was made or accepted for his
accommodation dud he has no reason to expect that the instrument will be paid if
presented.

184 FOUR-C LAW LIBRARY


919. Application of Sections 79 and 80. These sections give two exceptions to the general rule
that if no presentment for payment is made, the persons secondarily liable are discharged.
However the exceptions herein stated are relative Only the drawer or indorser referred to in these
sections is not discharged, but all other parties secondarily liable are relieved of their liability.
920. When drawer need not be given notice. Where A, drawer, withdraws his funds from X,
drawee, so that they are not sufficient to pay the bill, he has no right to expect or require that the
drawee or acceptor would pay the instrument? Accordingly, where F, holder, does not make a
presentment to X, A, drawer, wou1d not be discharged by such failure. But the other parties
secondarily liable are discharged. Where, however, the drawer made arrangement with the
drawee for the payment of the bill, presentment is still necessary to charge him.
921. Illustrative cases. Presentment is not required to charge the drawer in the following cases:
(1) In case of a check upon which payment has been stopped.
(2) Where the drawers balance is less than the amount of the check.32 However, the mere fact
that the drawer has no funds in the drawees hands at the time he draws, does not render
presentment unnecessary if he still has reasonable grounds to believe that the instrument will be
paid, particularly when provision has been made for payment of any bill drawn by the drawer on
the drawee.
(3) Where the drawer of a bill containing the words Pay from balance had no money on
deposit with the drawee but expected to arrange with the broker to cover drafts?
922. When indorser need not be given notice. A makes a note for the accommodation of B,
payee. B indorse to C, Cto D, D to E, E to F. F need not make presentment for payment to A, in
order to charge B, indorser. The reason is that as B did not give value to A, B has no reason to
expect that the note will be paid upon presentment. But C, D, and E are discharged as no
presentment has been made. In effect, the accommodated party is the person primarily liable.35
Hence, following the rule that failure to make presentment for payment will not discharge the
persons primarily liable, the accommodated payee-indorser, being in effect the person primarily
liable, is not discharged even if no presentment for payment is made.
SECTION 81. When delay in making presentment is excused. Delay in making
presentment for payment is excused when the delay is caused by circumstances beyond the
control of the holder and not imputable to his default, misconduct, or negligence. When the
cause of delay ceases to operate, presentment must be made with reasonable diligence.
923. Application of Section 81. What is excused here is not the making of presentment but only
the delay in making presentment. After the cause of delay must be made with reasonable
diligence. Excusable circumstances are those events which could not be foreseen, or which
tough foreseen, are inevitable.
924. Excuses for delay. Delay in presentment is excused by overwhelming calamity, malignant
diseases, interruption of trade negotiations by political circumstances, war between makers and

185 FOUR-C LAW LIBRARY


holders countries, suspension of commercial intercourse by public enemy, occupation of
country where parties reside or where instrument is payable, or by public and positive
interdictions and prohibitions of state, and impracticability of finding maker or his place of
residence.
SECTION 82. When presentment for payment is excused. Presentment for payment is
excused:
(a) Where, after the exercise of reasonable diligence, presentment, as required by this Act, cannot
be made;
(b) Where the drawee is a fictitious person;
(c) By waiver of presentment, express or implied.
925. Application of Section 82. Under this section, what is excused is the failure to make
presentment for payment, not mere delay, as under Section 81. Under Section 82, the law does
not require presentment at any time. Under Section 81, the law requires presentment when the
cause of the delay has ceased.
926. Reasonable diligence exercised. Where the bill is payable in the United States, after the
occupation of the Philippines by Japan, presentment for payment is dispensed with. No amount
of reasonable diligence will enable the holder to make presentment for payment under these
circumstances. Reasonable diligence implies active search. In other words, the holder must take
all steps likely to discover the whereabouts of the party to whom presentment IS tobe made. For
example, he must inquire of the indorsers or other parties to the instrument. So that the
testimony of a constable that he failed to locate the maker of a note under a warrant for his arrest
is not sufficient evidence that presentment of the note could not reasonably be made, when the
holder offered no testimony that he was ignorant of the makers whereabouts or that he made any
effort to find him. An insolvency of the maker, even if known to the indorser, will not excuse
presentment for payment.
927. Where drawee fictitious. Presentment for payment is not required as there is no one to
whom presentment is to be made.
928. Waiver. Waiver may be express or implied. The following contains an express waiver:
Payable to B or order P1,000.00. Presentment waived.
To X (Sgd.) Y
Thus, where the maker expressly waived demand, presentment, protest and notice of protest and
non-payment of the note, he cannot question the failure of the holder to exhibit to him his
promissory note.
929. Implied waiver. Implied waiver of presentment may be manifested by any language or
conduct or any agreement between the parties reasonably calculated to lead the holder to believe

186 FOUR-C LAW LIBRARY


that presentment is waived or to mislead or prevent him from treating the bill as he otherwise
would.
930. Illustrative cases of implied waiver. The following constitutesimplied waiver:
(1) declarations, acts or conduct which mislead the holder and induce him from taking the
necessary steps to make presentment.
(2) Drawer A tells holder F that he will take care of collecting the bill. This is waiver on his
(As) part, and if F fails to make presentment, A is not discharged.
(3) Holder failed to make presentment to the drawee. Thereafter, the drawer paid part of the bill
and promised orally to pay the rest. This is implied waiver of presentment.
(4) Where the maker before maturity of the note, was adjudged a bankrupt partly upon his
written admission of inability to pay the debts with a willingness that he be adjudged a bankrupt.
(5) Where the indorsers of a note payable at a bank, had assured the holder that it could not be
paid at maturity and knew that the maker, a corporation, had no money to pay for it.
(6) Where the indorser assured the holder, before maturity of the note, that a note for the same
amount with his indorsement will be given in renewal, such assurance, if relied by the holder.
(7) When the maker on the day of maturity of the note telephoned the holder that he could not
then pay the note and the holder then telephoned the maker consenting in giving further time to
the maker.
931. Summary of rules as to presentment for payment.
(1) Presentment for payment is not necessary to charge persons primarily liable.
(2) But it is necessary to charge person secondarily liable except: (a) as to drawer, under Section
79; (b) as to indorser, under Section 80; (c) when dispensed with under Section 82; and (d) when
the instrument has been dishonored by non-acceptance.
SECTION 83. When instrument dishonored by non-payment. The instrument is
dishonored by non-payment when:
(a) It is duly presented for payment and payment is re fused or cannot be obtained; or
(b) Presentment is excused and the instrument is overdue and unpaid.
932. When payment refused, etc. Under this paragraph:
(1)

the

instrument

must

be

u1y.presnted

for

payment;

187 FOUR-C LAW LIBRARY


(2) Payment is either refused or cannot be .obtained. Thus, suppose that F holder makes
presentment for payment to X, acceptor, and X refuses to pay, or F cannot obtain payment as
although X is willing to pay, he has no money to pay; or where X fails to pay on the date of
maturity but promises to pay five days later.
933 When presentment excused. Under paragraph (b) it is necessary that (1) presentment for
payment be excused; (2) the instrument be overdue, and (3) it be unpaid. Thus, suppose that
presentment is waived and the 1rnrtdue on March 1, 1950. The bill is deemeddishonored when,
on March 2, 1950, it is not paid even if the holder such as F did not make a presentment. But if
the presentment is not excused, the bill is not dishonored by the mere fact that the bill is overdue
and unpaid.
SECT1ON 84. liability of person secondarily liable, When instrument dishonored.
Subject to the provisions of this Act, when the instrument is dishonored by non-payment,
an immediate right of recourse to all parties secondarily liable thereon accrues to the
holder.
934. After dishonor, indorsers, etc. primarily liable. As to the holder, after an instrument is
dishonored by non-payment, the persons secondarily liable thereon cease to be secondarily
liable. They become principal debtors and their liability becomes the same as that of the original
obligors. This is, of course, provided that notice of dishonor is given to them, they are
discharged. In other words, notice of dishonor must be given to them first, after which the holder
can bring an action against any one of them, without necessity of first bringing an action against
the person primarily liable. But where persons secondarily liable are charged by dishonor and
notice, while it is true that they become principal debtors as to the holder, yet as among
thepersons secondarily liable are presumed liable in the order they become parties to the
instrument. Hence, using the illustration, if F, holder, ollect from D, D can collect from Cbut
not
from
E.
SECTION 85. Time of maturity. Every negotiable instrument is payable at the time
fixed therein without grace. When the day of maturity falls upon Sunday or a holiday, the
instruments falling due or becoming payable on Saturday are to be presented for payment
on the next succeeding business day except that instruments payable on demand may, at
the option of the holder, be presented for payment before twelve oclock noon on Saturday
when
that
entire
day
is
not
a
holiday.
935. Payment where instrument payable at fixed time. Where, for instance, the instrument is
payable on June 16, 1950, no glace is to be granted. Hence, presentment must be made on that
date. . But where June 16, 1950 falls on a Sunday or a holiday, it is payable on Monday or the
succeeding business day. Presentment must, therefore, be mad on that succeeding business day.
936. Falling due on a Saturday. Where a bill is payable on June 16, 1950, which happens to be
a Saturday, the bill is said to be instrument falling due on a Saturday.

188 FOUR-C LAW LIBRARY


937. Becoming payable on a Saturday. Where a bill is payable on June 16, 1950, which falls
on a Friday, and supposing that Friday is a holiday, the bill is said to have become payable on a
Saturday.
938. When presentment to be made. Where the instrument falls due on a Saturday or becomes
payable on a Saturday, when must presentment be made? The time for making presentment
depends upon whether the , instrument is payable at a fixed determinable future time or on
demand. Where the instrument is payable at a fixed or determinable future time, in both cases,
presentment must be made on the . next succeeding business day that is, in the illustration, on
Monday, June 19, 1950. Where instrument is, payable on demand in both cases,
presentmentmust he made on Saturday, June 17, 1950, befor12:& noon or on Monday, June
19, 1950, at the option of the holder.
SECTION 86. Time: how computed. When the instrument is payable at a fixed period
after date, after sight, or after the happening of a specified event, the time of payment is
determined by excluding the day from which the time is to begin to run, and by including
the date of payment.
939. Illustration of Section 86. The following illustrates the application of this section. A draws
a bill dated March 1, 1950, thus: To X: 30 days from date, to pay B or order P1,000.00. (Sgd.)
A. To compute the period, exclude March 1, then count 30 days, and include the 30th day,
March 31, 1950, the date of payment. But one dated January 31 and payable one month after date
will mature on February 28, or February 29, if it is a leap year.9 It must be remembered that on
the day of payment, the party liable is entitled to the whole of that day within which to make
payment. Thus, if the due date was July 5, 1923, an actIon dated July 5, 1923 was held to be
prematurely brought.
SECTION 87. Rule where instrument payable at bank. Where the instrument is made
payable at a bank, it is equivalent to an order to the bank to pay the same for the account
of the principal debtor thereon.
940. Illustration of Section 87. This section applies only where the instrument is payable at a
particular named bank. The following illustrates the application of this section. A makes a note
as follows: I promise to pay to B or order P1,000.00 at the PNB. (Sgd.) A. This is equivalent to
an order to pay addressed to PNB by A, maker. The PNB may charge the amount of the note
from the account of A without further authority from A.
941. Effect of failure to make presentment for payment. But suppose that B or any
subsequent holder fails to make a presentment for payment at the PNB, is A, maker, discharged?
There is a conflict of authorities. But the better view seems to be that A is not discharged
because he is primarily liable.
SECTION 88. What constitutes payment in due course. Payment is made in due course
when it is made at or after the maturity of the payment to the, holder thereof in good faith
and without notice that his title is defective.

189 FOUR-C LAW LIBRARY


942. .Requisites for payment in due course. There are three requisites: (1) payment must be made
at or after the date of maturity; (2) payment must be to the holder; and (3) payment must be made
by the debtor in good faith and without notice that the holders title is defective. Thus:
(1) If payment is made before maturity, it would constitute a negotiation back to the person
primarily liable and he can re-negotiate it.12 The payment does not discharge the instrument.
(2Payment to indorsee who is not in possession of the instrument is not payment in due course,
as he is not the holder. So that the payment to the person other than the holder is at the risk of the
party so paying if the person was not authorized by the holder to receive payment. So also, the
payment to the original payee after the note had been transferred by him to a holder in due course
does not discharge the note.
(3) Payment to a person by the debtor who knows that such person stole it, is not payment in dee
course, as such payment is not in good faith. The maker of a note or the acceptor of a bill must
satisfy himself, when it is presented for payment, that the holder traces his title through genuine
indorsements, and if there is a forged indorsement, it is a nullity and no right passes by it.
943. Payment must be made to possessor of instrument. The party making payment must
insist on the presentment of the paper by the party demanding payment in order to make sure
that it is at the time in his possession and not outstanding in another. A receipt taken will be no
protection. If at the time he makes payment, the instrument is outstanding and held by a holder in
due course, he will be liable to pay it again. The possession of notes by the maker is presumptive
evidence that the notes are paid. But the payees possession of the instrument raises the
presumption that they are not paid.
944. Medium of payment. The New Civil Code provides that: the payment of debts in money
shall be made in the currency stipulated, and if it is not possible to deliver such currency, then in
the currency which is legal tender in the Philippines. The delivery of promissory notes payable to
order or bills of exchange or other mercantile documents shall produce the effect of payment
only when they have been cashed, or when, through the fault of the creditor, they have been
impaired. In the meantime, the action derived from the original obligation shall be held in
abeyance. In case of extra ordinary inflation or deflation of the currency stipulated should
supervene, the value of the currency at the time of the establishment of the obligation shall be the
basis of payment, unless there is an agreement to the contrary.22 The foregoing is, of course,
subject to the provisions of Republic Act 529.
945. Payment in other than legal tender. When payment of a bill or note is made by giving
another note or bill other than notes treated as legal tender, as a general rule, such payment will
not be considered absolute until the paper given in payment has been itself paid except where the
parties expressly or impliedly agree that the claim shall be discharged by such payment.24 A
new bill or note given in renewal of an old one retained-by the payee also constitutes but a
suspension of the old one until the new oneis paid. The authorities agree that the taking of a
renewal note is not a payment of the original.

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946 Payments through banks. A bank to which a note is sent for collection is the agent of the
owner. It is immaterial that the maker has requested the holder to send the note to this bank for
collection..
947. Crediting of account constitutes payment. Where a check is presented by the payee or
holder to the bank on which it is drawn, and received as a deposit and credited to his account,
this amounts, in the absence of fraud, to a payment of the checks, just as if currency had been
paid over the counter and immediately redeposited.
VII NOTTCE OF DISHONOR
SECTIQN 89. To whom notice of dishonor must be given. Except as herein otherwise
provided, when a negotiable instrument has been dishonored by non-acceptance or nonpayment, notice of dishonor must be given to the drawer and to each indorser, and any
drawer or indorser to whom such notice is not given is discharged.
948. Meaning of notice.By notice of dishonor is meant bringing either verbally or by writing, to
the knowledge of the drawer or indorser of an an instrument, the fact that a specified negotiable
instrument, upon proper proceedings taken, has not been accepted or has not been paid, and that
the party notified is expected to pay it.
949. Necessity and purpose of notice. When an instrument is dishonored by (1) non-acceptance
(bill) or (2) non-payment (both bill and note), notice of such dishonor must be given to persons
secondarily liable, namely, the drawer, (in a bill), and indorsers, as the case may be (in both a bill
and a note). Otherwise, such parties are discharged.
950. Illustration. Thus, suppose that A makes a note pay able to F or order. B negotiates to C, C
to D, D to E, E to F. F makes a presentment for payment to A, maker, on the date of maturity. A
refuses to pay. If F does not give notice of dishonor to B, C, D, and E and prove the same, they
are discharged and F cannot file an action against them.
951. Burden of proof. Under the law of procedure, it will be incumbent upon the plaintiff who
seeks to enforce the defendants liability upon a negotiable instrument as indorser to establish
said liability by proving that notice was given to the defendant within the time and in the manner
required by the law that the instrument in question had been dishonored. Where these facts are
not proven, the plaintiff does not sufficiently establish the defendants liability. Where there is no
proof in the record tending to show that plaintiff gave any notice whatsoever to the defendant
that the instrument in question had been dishonored, said plaintiff has not established its cause of
action.
952. Persons primarily liable need not be notified. Persons primarily liable, such as,
makers or acceptors, need not be given notice of dishonor because they are the very ones who
dishonor the instrument. Thus, a joint maker, though a surety, is not an indorser and is primarily
liable, and therefore, is not entitled also to notice of dishonor.3 Even an accommodation maker
is not entitled to notice.

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953. Instrument payable in installments. Does failure to give notice of the dishonor of a
previous installment to persons secondarily liable also discharge them on the succeeding
installments? It depends upon whether the instrument contains an acceleration clause or not.
954. Rule where no acceleration clause. Where the instrument contains no acceleration clause,
failure to give notice of dishonor on a previous installment does not discharge drawers and
indorsers as to the succeeding installments, and therefore, the holder can file an action against
them for such succeeding installment provided that, as to such succeeding installments, notice is
given. The reason is that each installment is equivalent to a separate note.
955. Rule where instrument contains acceleration clause.Where the instrument contains an
acceleration clause, it depends upon whether the clause is optional or automatic. Where the
acceleration clause is not optional but automatic, failure to give notice of dishonor as to a
previous installment will discharge the persons secondarily liable as to the succeeding
installments. Where the acceleration clause is optional and it is not exercised, the rule would be
the same as where there is no acceleration clause. If it is exercised, the rule would be the same as
where the installment contains an automatic acceleration clause.
956. Exceptions to requirement of notice. The law provides for some exceptions to the rule
that failure to give notice to the drawer and indorser will discharge them.
SECTION 90. By whom given. The notice may be given by or on behalf of the holder, or
by or on behalf of any party to the instrument who might 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.
957. By whom notice is given. Notice of dishonor may be given by: (1) the holder; or (2)
another in behalf of the holder; or (3) any party to the instrument who may be compelled to pay
it to the holder. However, such a party cannot give notice of dishonor to everybody. He can give
notice only to another party against whom he has a right of reimbursement should such party
giving notice pay the instrument; and (4) another person in behalf of such party.
958. Illustrations. A makes a note payable to the order of 8. B negotiates it to C, C to D, D to E,
E to F.
(1) F, the holder, can give notice.
(2) X, a stranger, can give notice on Fs behalf. If X isa notary public, he may give notice as
agent.
(3) C, D and E can give notice of dishonor because any of them may be compelled by F to pay
(provided that notice of dishonor has been given by F to them). C can give notice only to B
because it is only B whom he can hold liable, but not to D and E whom he cannot hold liable but
to whom he is liable instead. D can give notice of dishonor to C and B. E can give notice of
dishonor to D, C and B.

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(4) Y, a stranger, can give notice of dishonor in behalf of B, C, or D to the persons to whom each
can give notice.
(5) Suppose that F notifies only D. Can D notify E? No, because D, upon taking up the note,
would not have the right of reimbursement from E. The effect is to. discharge E. Whom can D
notify? C and B because he would have .a right of recourse against any of them if he is
compelled to pay the note by F, holder.
(6) Can E give notice of dishonor in his own behalf? No, because upon discharge, he becomes a
stranger, and a total stranger cannot give notice in his own behalf.
(7) Can A, maker, give notice in his own behalf? No. But E or A can give notice, as agents in
behalf of those who are entitled to give notice, such as F, the holder, or D, an indorser who was
notified by F.
SECTION 91. Notice givenby agent. Notice of dishonor may be given by any agent
either in his own name or in the name of any patyntit1ed to give notice, whether that party
be his principal or not.
959. Notice of agent. Under this section, notice of dishonor may be given by an agent. And it is
not necessary that the agent be authorized by the principal. Notice may be given by him (1) in
the name of any party entitled to give notice such as, in the illustration, F, the holder, or D, an
indorser to whom notice was given.; or (2) in his (the agents) own name. Thus, a collecting bank
may give notice, and, where it has done so, no notice from the owner is necessary.43 And where
the cashier of the drawee bank which had refused to pay a check gave the check to a notary to
protest, which was done, it was held that the possession of the check by the cashier was evidence
of his agency f the holder to present it for protest.
SECTION 92. Effect of notice on behalf of holder. Where notice is given by or on behalf
of the holder, it inures to the benefit of all subsequent holders and all prior parties who
have a right of recourse against the party to whom it is given.
960. Meaning of benefit. The benefit referred to here is the right to charge the person
secondarily liable who received notice. In other words, the party to whom this benefit inures can
charge the party receiving notice of dishonor, even if he himself did not give the notice. Notice
of dishonor given by or on behalf of a holder inures to the benefit of: (1) all parties prior to the
holder, who have a right of recourse against the party to whom the notice is given; and (2) all
holders subsequent to the holder giving notice.
961 Illustration. A makes a note payable to B, or order. B negotiates to C, C to D, D to E and E
to F. F notifies B, C, D and E.
(1) The notice by F to B inures to the benefit of C, D and E, as they are parties prior to F, holder,
who have a right of recourse against B. And even if they do not give notice to B, B is not
discharged as to them and they can hold B liable on the basis of the notice given by F. If any of

193 FOUR-C LAW LIBRARY


them is compelled to pay, he can sue B without having the necessity of giving B another notice
of dishonor.
(2) The notice by F to C inures to the benefit of D and E, for the same reason but not for the
benefit of B because while B is a party prior to F who gave the notice, B does not have a right of
recourse against C. On the other hand, it is C who can hold B liable.
(3) The notice by F to D inures to the benefit of E only but not to C and B. Suppose that after
giving notice, F, holder, further negotiates the instrument to G; then G to H; H to L The notice
given by F will inure to the benefit of all of them: G, H and L And they need not give another
notice of dishonor to B, C, D and E to hold them liable.
SECTION 93. Effect where notice is given by party entitled thereto. Where notice is
given by or on behalf of a party entitled to give notice, it inures to the benefit of the holder
and all parties subsequent to the party to whom notice is given.
962. Application of Section 93. The principle involved here is the same as under Section 92.
The notice, however, is given, not by the holder F but by a party entitled to give notice under
Section 90, namely, by a party to the instrument who might be compelled to pay it to the holder,
and who, upon taking it up, would have a right of reimbursement from the party to whom notice
is given. Such notice inures to the benefit of:(1) the holder, and (2) all parties. subsequent f the
party to whom notice is given.
963. Illustrations. Suppose that in the illustration given under Section 92, F gives notice only to
E. E then gives notice to B, C and D.
(1) Such notice inures to the benefit of F, the holder, and F can hold B, C and D liable even if he
himself has not given them notices of dishonor. As to F, B, C and D are not discharged.
(2) Es notice to B inures to the benefit of C and D because G and D are parties subsequent to B.
As to C and D, even if they themselves do not give notice to B, B is not discharged and they can
hold him liable.
(3) Es notice to C inures to the benefit of D for the same reason but not to B because B is not a
party subsequent to C.
SECTION 94. When agent may give notice. Where the instrument has been dishonored
in the hands of an agent may either himself give notice to the parties liable thereon o he
may give notice to his principal. If he gives notice to s principal, he must do so within the
same time as if he were the holder, and the principal, upon the receipt of such notice has
himself the same time for giving notice as if the agent had been an independent holder.
964. When agents notice must be given. Where an instrument is dishonored in the hands of an
agent, he can do either of the following: (1) directly give notice to the persons secondarily liable
thereon; or (2) give notice to his principal. If the agent chooses to give notice to his principal, he

194 FOUR-C LAW LIBRARY


must give notice within the time allowed by law as if he were a holder. The principal has also the
same time to give notice to the parties secondarily liable.
965. Illustration. F is the holder. X is his agent. B, C, D, and E are the persons secondarily
liable. X makes presentment of payment to A, maker, on August 1, 1950.
(1) Under Section 104, notice must be given within the next day following, August 2, 1950. X
can give notice of dis honor to B, C, D, and E directly, after dishonor and within August 2, 1950.
(2) But X can give notice to his principal F. Such notice must be given after dishonor and within
August 2, 1950.
(3) F holder, has in turn until August 3, 1950, the next day following August 2, 1950, (the day he
was given notice) to give notice to B, G D and E.
SECTION 95. When notice sufficient. A written notice need not be signed and an
insufficient written notice may be supplemented and validated by verbal communication. A
misdescription of the instrument does not vitiate the notice unless the party to whom the
notice is given is in fact misled thereby.
SECTION 96. Form of notice. The notice may be in writing or merely oral and may be
given in any terms which sufficiently identify the instrument, and indicate that it has been
dishonored by non-acceptance or non-payment. It may in all cases be given by delivering it
personally or through the mails.
966. Form and contents of notice. Notice of dishonor may be (1) oral or (2) in writing. Whether
written or oral, the notice must contain the following: (1) sufficient description of the instrument
to identify it; (2) a statement that it has been presented for payment or for acceptance, and that it
has been dishonored. (If protest is necessary, the notice must also contain a statement that it has
been protested); and (3) a statement that the party giving notice intends to look for the party
addressed for payment.
967. Effect of defects in notice. (1) Suppose that the notice, if written, is not signed? That fact
would not invalidate.
(2) Suppose that the notice, if written, does not contain 2 and 3 above-stated, what may be done?
The insufficiency can be supplemented by oral communication stating the things lacking. And
failure to state the date of the making and maturity of a note and the name of the payee does not
invalidate the notice. A notice which contains a copy of the note and declares that payment has
been demanded and refused, is sufficient. But a mere statement that the note was payable and
due is insufficient notice.
(3) Suppose that there is a misdescription of the instrument, such as, as to the date, or to the
amount, or the names of some parties, or the date of maturity, does such misdescription vitiate
the notice? No, if the person to whom the notice is addressed is not misled thereby. Thus, though
notice on its face was to the maker if it was in an envelope addressed to the indorser and was

195 FOUR-C LAW LIBRARY


opposed by the latter, the said indorser has sufficient notice.2 But if he is misled, the notice is
vitiated, such as, where both notice and the envelope containing it were addressed to another
party.
968 Notice by phone. Can notice be given by phone? Yes, because notice can be given orally.5
However, it must be clearly shown that the party to be notified was really communicated with,
that is, fully identified as the party at the receiving end of the line.
969. Manner of giving notice. Notice of dishonor may be given (1) by personal delivery, or (2)
by mail,1 The word may in the last sentence of Section 96 is held to mean that a choice is
allowed for the service of notice.8 In a personal service, the evidence must show either actual
personal service, or an ordinarily intelligent, diligent effort to make personal service upon the
indorser at his place of business during business hours or at his residence if he has no place of
business; but if he be absent, it is not necessary to call a second time, and the notice may, in that
event, be left with anyone left in charge, or if there be no one in charge, or no one there, then
giving notice isdeemed to be waived.5 But leaving the notice at the window ofthe cashier of a
hotel corporation was held to be insufficient where no one was shown to be present.
SECTION 97. To whom notice may be given. Notice of dishonor may be given either to
the party himself or to his agent in that behalf.
970. Parties to be given notice. Notice may be given (1) to the party himself, or (2) to his agent
in that behalf. Accordingly, an accommodation indorser is entitled to notice. An irregular
indorser must also be given notice if he is to be charged.2 And if notice is to be given to an
agent, he must be duly authorized to receive notice of dishonored. If he is not, the notice is not
valid.
971. Agent distinguished from person present in absence of party. Notice to agent must be
distinguished from notice attempted to be given to the party himself where he is absent at his
place of business or residence. In such a case, the notice may be left with anyone found in charge
therein. Notice left with a clerk or person in charge at the partys place of business in his absence
or his place of business, without proof as to the person with whom it was left, is sufficient, and
proof that such person was not the partys agent has been held irrelevant, notice being left at the
right place. Hence, leaving it with his private secretary at his public office is sufficient. If service
be sought on the party at his dwelling, it is sufficient to leave notice with his wife or with any
other person on his premises.
SECTION 98. Notice where party is dead. When any party is dead and his death is
known to the party giving notice, the notice must be given to a personal representative, if
there be one, and if with reasonable diligence, he can be found. If there be no personal
representative, notice may be sent to the last residence or last place of business of the
deceased.
972. Requisites for notice to representative. When the person to be given notice of dishonor is
dead, notice must be given to his personal representative, provided that: (1) his death is known to
the party giving notice; (2) there is a personal representative; and (3) if with reasonable diligence

196 FOUR-C LAW LIBRARY


he could be found. Accordingly, where the holder knew the indorser to be dead, he must use
reasonable diligence to find out the indorsers personal representative and his identity.15 And a
notice mailed in due course to the indorser in care of the executor at his address with postal
prepaid, after the party or hisagent received information that the indorser was dead, was held to
be a proper notice although it was not the correct address of the executor named in the will.
When notice may be sent to last residence or place of business. But although the party is dead,
(1) if his death is not known to the party giving notice, (2) or although his death is known to the
party giving notice but there is no personal representative, or (3) if there be one but he cannot be
found with reasonable diligence, then notice may be sent to the last residence or last place of
business of the deceased. Thus, it has been held where the notary did not know of the death of
the indorser and the notice was sent to the last residence of the deceased, the notice is sufficient.
SECTION 99. Notice to partners. Where the parties to be notified are partners, notice to
any one partner is notice to the firm, even though there has been a dissolution.
974. Reason for rule. The reason for the rule stated in this section is that each partner is an agent
of the partnership of which he is a member. Accordingly, notice to one is notice to the others.
SECTION 100. Notice to persons jointly liable. Notice to joint persons who are not
partners must be given to each of them unless one of them has authority to receive such
notice
for
the
others.
975. Application of Sectin 100. The provisions of this section do not apply to joint payees or
joint indorsees who indorse as, under Section 68 o-f the Negotiable Instruments Law, such joint
indorsers are deemed jointly and severally liable, and joint indorsers to whom notice of dishonor
has been given are not discharged by reason of failure to give notice to the other joint indorsers.
Accordingly, this section applies to joint parties other than joint payees and joint indorsees who
indorse, such as, to drawers who sign a bill jointly, or to joint accommodation indorsers who are
not jointly and severally liable under Section 68 as they are neither payees nor indorsee.
SECTION 101. Notice to bankrupt. Where a party has been adjudged a bankrupt or an
insolvent, or has made an assignment for the benefit if creditors, notice may be given either
to the party himself or to his trustee or assignee.
976. Application of Section 101. This section contemplates any of the folio-wing situations: (1)
where the party secondarily liable has been declared a bankrupt or an insolvent; and (2) where he
has made an assignment of his properties for the benefit of creditors. In such cases, notice may
be given either (1) to the party himself, or (2) to his trustee or assignee.
SECTION 102, Time within which notice must be given. Notice may be given as soon as
the instrument is dishonored and, unless delay is excused as hereinafter provided, must be
given within the time fixed by this Act.
977. When notice may be given. The time or giving notice is fixed in Sections 103, 104 and
107.

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978. May notice of dishonor be given before the date of maturity? No. Such notice would be
insufficient, because an instrument cannot be said to be dishonored for non-payment unless
presented, and presentment must be made on the date of maturity unless, of course, presentment
is excused. But even in such cases, the instrument cannot be said to be dishonored by nonpayment unless it is overdue and unpaid.5 Notice of dishonor can be given only after the
instrument has been actually dishonored, and notice given before the paper becomes due is
premature and insufficient, regardless of the indorsers knowledge that the maker was in default.
979. May notice of dishonor be given on the date of maturity? It is provided that the
instrument has been presented for payment and it has been dishonored.5 But if the instrument is
payable at a bank, it is not dishonored if the maker deposits the amount of the instrument before
the close of banking hours.26 Hence, notice of dishonor must be given after the close of banking
hours on the date of maturity.
980. Purpose of prompt notice. The purpose of giving prompt notice is to give the persons
secondarily liable everyopportunity to secure themselves5 such as, to enable the partyto be
charged to preserve and protect his rights against prior parties.
SECTION 103. Where parties reside in same place. Where the person giving and the
person to receive notice reside in the same place, notice must be given within the following
times:
(a) If given at the place of business of the person to receive notice, it must be given lf ore the
close of business hours on the day following.
(b) If given at his residence, it must be given before the usual hours of rest on the day
following.
(c) If sent by mail, it must be deposited in the post-office in time to reach him in usual
course
on
the
day
following.
SETION 104. Where parties reside in different places. Where the persons giving and
the person to receive notice reside in different places, the notice must be given within the
following times:
(a) 1f sent by mail, it must be deposited in the post-office, in time to go by mail the day
following the day of dishonor, or if there be no mail at a convenient hour on last day, by the
next mail thereafter.
(b) If given otherwise than through the post-office, then within the time that notice would
have been received in due course of mail, if it had been deposited in the post-office within
the time specified in the last subdivision.
981. Time for giving notice in general. The law provides a different period for giving notice of
dishonor depending upon whether: (1) the party giving notice and the party to receive notice

198 FOUR-C LAW LIBRARY


reside in the same place; or (2) the party giving notice and the party to receive notice reside in
different places.
982. Meaning of the same place. The same place refers to the corporate limits of a town or
city where the presentment is made or where the holder resides.3 Under this, if A and B reside
in Manila, they are said to reside in the same place. But if A resides in Manila and B resides in
Quezon City, even if they are neighbors, they do not reside in the same place.
983. Notice when parties reside in the same place. F, holder, and D indorser, reside in Manila.
The instrument is dishonored on August 1, 1950. Under Section 103:
(1) If given at the place of business of D, the notice must be given after dishonor but not later
than August 2, 1950, before the close of business hours on that day.32 Otherwise, notice would
be too late. Thus, where the holder of a demand note presented it to the maker on the 17th of the
month and was told to return on the 22nd for payment but on the 22nd, the maker had absconded,
the notice given on the 22nd to theindorser was held not within the time limit, the dishonor
having occurred in the 17th.33 So lso, where the holders agent called at the indorsers place of
business to give notice of dishonor of the note but he was absent from the duty and after calling
again in four or five days, he saw the indorser and gave him the notice, it was held that notice
was not given on time. Notice could have been given by mail.
(2) If given at his residence, notice must be given after dishonor but not later than August 2,
1950 before the usual hours of rest on that day.
(3) If sent by mail, the notice must be deposited at the mailbox at such time as would enable D to
receive the notice not later than August 2, 1950 in due course of mail. This means that even if,
due to the fault or other acts of postal authorities, the notice does not reach the party to be given
notice on the day following the day of dishonor, the notice would still be considered on time.
Thus, it has been held that a note placed in a mail chute on the day of protest but not postmarked
until the next day at noon, is mailed in time and it will be presumed, in the absence of any
contrary evidence, that the notice reached its destination on the day following before the close of
business hours.
984. Notice when parties reside in different places. F, holder, resides in Manila, and C, an
indorser, resides in Zamboanga City and the instrument is dishonored on August 1, 1950. Under
Section 104:
(1) If sent by mail, the notice need not reach C on August 2, 1950, but the notice must be
deposited in the mails not later than August 2, 1950, the day following the day of dis honor. But
if there is no mail at a convenient hour on August 2, 1950, the notice may be deposited in the
mails by the next mail thereafter. Thus, suppose that there is no mail on August 2, 1950, or if
there is, it leaves at 3:00 oclock A.M., and the next mail is 3:00 oclock A.M. on August 3,
1950, the notice may be deposited at &:00 P.M. of August 2, 1950, in time for the 3:00 oclock
mail on August 3, 1950. But if the departure for the mail on August 2, 1950 is at 10:00 oclock
A. M. there is mail at a convenient time, and the deposit of the notice at 6:00 P.M. on that date s
too late.

199 FOUR-C LAW LIBRARY

(2) If sent otherwise than by mail, as by personal messenger, the notice must be sent at such time
as to enable C to receive the notice within the time he would have received it had it been
mailed. Suppose that had the notice been mailed to him under paragraph (a) herein, the notice
would have been received by him (C) on August 4, 1950. The personal messenger must deliver
the notice to him not later than August 4, 1950, otherwise, the notice would be too late.
985. Effect of notice given out of time. Unless excused, notice given out of time would be
considered not to have been given. Hence, the party to receive notice would be discharged.
SECTION 105. When sender deemed to have given due notice. Where notice of dishonor
is duly addressed and deposited in the post-office, the sender is deemed to have given due
notice, notwithstanding any miscarriage in the mails.
986. Application of Section 105. A party giving notice is deemed to have given due notice
where: (1) the notice of dishonor is duly addressed, and (2) deposited in the post-office,even
when there is miscarriage of mail. The notice must beproperly addressed, stamped and mailed.
Otherwise, the no tice, even though mailed, is not proper, arid the indorser will be discharged
from liability, such as, where a notice addressed to other than the one given on the note, or
without sufficient postage prepaid.
987. Is the presumption conclusive? It has been held that when the notice by letter is duly
stamped, addressed and mailed, the sender is deemed to have given due notice which is
presumed to be received by the addressee, notwithstanding any miscarriage in the mails, and the
addressees (indorsers) evidence that he had not received the notice will be excluded. But, in a
Philippine case, it was held that where copy of the protest is sent by mail in good season
addressed to the drawer, the presumption is now conclusive that the latter received it, not
having been rebutted, or at least, contradicted.43 It would seem, therefore, that the presumption
is conclusive if not rebutted, or at least, contradicted.
SECTION 106. Deposit in post-office; what constitutes. Notice is deemed to have been
deposited in the post-office when deposited in any branch post-office or in any letter box
under the control of the post-office department.
988. Deposit in letter box. The letter box must be under the control of the post-office
department. Otherwise, notice would not deemed to have been deposited in the post-office. Thus;
a notice of protest properly addressed and left in a place in the notarys office where mail was
usually collected by the postman, was held not a mailing of the notice as required by the statute.
SECTION 107. Notice to subsequent party; time of. Where a party receives notice of
dishonor, he has, after the receipt of such notice, the same time for giving notice to
antecedent parties that the holder has after the dishonor.
989. Illustration of Section 107. Suppose that F, holder gives notice to E on August 2, 1950. E
is a party entitled to give notice to D, a prior indorser. if D resides in the same place as E, E must
give notice to D not latter than August 3, 1950, the day following Es receipts of notice.45 If E

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and D reside in different places, notice must be given within the period provided for under
Section 104.
SECTION 108. Where notice must be sent. Where a party has added an address to his
signature, notice of dishonor must be sent to that address; but if he has not given such
address, then the notice must be sent as follows:
(a) Either to the post-office nearest to his place of residence or to the post-office where he is
accustomed to receive hisletters; or
(b) If he lives in one place and has his plac of business in another, notice may be sent to
either place; or
(c) funs sojourning in another place, notice may be sent to the place where he is so
Sojourning. But where the notice is actually received by the party within the time specified
in this Act, it will be sufficient, though not sent in accordance with the requirement of this
section.
990. Where address added to signature. E, an indorser adds to his signature his address, 20
West Point St., Q.C. Notice may be sent to that address. Thus, a notice addressed to an indorser
at a place which at the time of the execution of the note was stated by him to be his residence
was sufficient. The same is true where the notice is addressed at the place where the note was
dated and where the indorser lived although he moved from said place sometime not stated.
991. Where address not given. Notice must be sent to the places stated in the law. Under
paragraph (c), if E is vacationing in Baguio, notice may be sent to him. But what is important is
that the party to receive actually receives it on time. Consequently, if F, holder, meets E at the
Escolta, and delivers to E the notice within the time required by law, the notice would be
sufficient. The phrase, his place of business, does not comprehend every place a person may
transact any business, or place where he occasionally carries business but refers to the place
where he carries business as merchant, tradesman, professional man, or other similar trade or
uatling.49
SECTION 109. Waiver of notice. Notice of dishonor may he waived either before the
time of giving notice has arrived or after the omission to give due notice, and the waiver
may be expressed or implied.
992. When waiver may. be made. Waiver of notice of dishonor may be made (1) before the
time of giving notice, such an express waiver in the body of the instrument or added to the
signature of a party; or (2) after omission to give due notice. Waiver is the intentional
abandonment of a right. It may be expressed or implied.
993. Express waiver. The following illustrates express waiver: Y draws a bill as follows: To X,
Pay to X, or order P1.000. Notice of dishonor waived. (Sgd.) Y

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994. Implied waiver. Waiver may be implied from acts, declarations or silence. Thus, where F is
the holder of a note. He fails to give notice to D, an indorser. If D declares after wards that he
would pay the note, there is implied waiver of notice of dishonor.50 There is also implied waiver
if A admits his liability afterwards and authorizes plans for the settlement of the note or
extension of time for payment.1 But if D merely advises F on how to collect, that act does not
constitute waiver of notice of dishonor.
SECTION 110. Whom affected by waiver. Where the waiver is embodied in the
instrument itself, it is binding upon all parties; but, where it is written above the signature
of an indorser, it binds him only.
995. Whom affected by waiver in general. The persons affected by waiver depends upon
whether the waiver is in the instrument itself or is written above the signature of an indorser. If
the waiver is embodied in the instrument itself, it is binding upon all parties. If the waiver is
written above the signature of an indorser, it binds him only.
996. Where waiver in instrument itself. Thus: Pay to X or order P1,000. Notice of diFhon-or
waived. To C (Sgd.) Y. 1f X, payee indortbe bill to C, C to D, D to E, and E to F, all parties
are bound, namely, X, C, D and E. It is not, therefore, necessary for F to give them notice of
dishonor to charge them.3 The effect is to make the subsequent indorsers unconditionally liable
and in this sense, unconditional debtors. But such a- waiver does not make the indorsers liable as
co-makers since their obligation to pay is still a contingent liability.
997. Waiver on back of instrument. A printed waiver on the back of the instrument above the
indorsements is a waiver embodied in the instrument itself.6 The effect is to make all the
subsequent indorsers unconditionally liable and, in this sense, unconditional debtors.7 But such a
waiver does not make the indorsers liable as co-makers since their obligation to pay is still a
contingent liability.8 Accordingly, all indorsers appearing below it are bound and the holder
need not give them notice to hold them liable.
998. Where waiver written above signature of indorser. Suppose the instrument reads as
follows: I promise to pay to B or order P1,000. (Sgd.) A. The indorsement at the back of the
note are as follows:
To C, (Sgd. B)
To D, Notice of dishonor waived (Sgd. C)
To E, (Sgd. D)
To F, (Sgd. E)
Only C is bound by the waiver. F must give notice to B, D and E to charge them. If no notice is
given to them, they are discharged.
SECTION 111. Waiver of protest. A waiver of protest, whether in the case of a foreign
bill of exchange or other negotiable instrument, is deemed to be a waiver not only of a
formal protest b.it also of presentment and notice of dishonor.

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999. Application of Section 111. Under this section, where protest is waived, the following are
included and are deemed waived also: (1) presentment, and (2) notice of dishonor. Where
presentment for payment is waived, notice of dishonor is also waived.2 But where notice of
dishonor is waived, presentment is not waived.
SECTION 112. When notice is dispensed with. Notice of dishonor is dispensed with
when, after the exercise of reasonable diligence, it cannot be given to or does not reach the
parties sought to be charged.
1000. When noticed excused. When political disturbancesinterrupt and obstruct the ordinary
negotiations of trade, they constitute a sufficient excuse for want of presentment or notice, upon
the same principle that controls in cases of military operations or interdictions of commerce.5
So, the prevalence of a malignant, contagious, or infectious-disease, such as the cholera, yellow
fever, the plague, - or smallpox, which has become so extensive as to suspend all commercial
business and intercourse or to render it very hazardous to enter into the infected districts, is
recognized by the text writers as a sufficient excuse for not doing any act which would require an
entry into such districts.
SECTION 113. Delay in giving notice; how excused. Delay in giving notice of dishonor is
excused when the delay is caused by circumstances beyond. the control of the holder and
not imputable to his default, misconduct, or negligence. When the cause of delay ceases to
operate, notice must be given with reasonable diligence.
1001. When delay in giving noticed excused. Delay caused by making inquiries as to
the address of the party to receive notice is excusable where the holder does not know the
address. But where the holders agent called at the defendants place of business to give him
notice of dishonor but he was absent from the city, delay will not be excused since notice by mail
was practicable.
SECTION 114. When notice need not be given to drawer. Notice of dishonor is not
required to be given to the drawer in either of the following cases:
(a) Where the drawer and drawee are the same person;
(b) When the drawee is a fictitious person or a person not having a capacity to
contract;
(c) When the drawee is the person to whom the instrument is presented for
payment;
(d) Where the drawer has no right to expect or require that the drawee or acceptor
will honor the instrument;
(e) Where the drawer has countermanded payment.
SECTION 115. When notice need not be given to indorser. Notice of dishonor is
not required to be given to an indorser in either of the following cases:

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(a) When the drawee is a fictitious person or person not having capacity to contract,
and the indorser was aware of that fact at the same time he indorsed the
instrument;
(b) Where the indorser is the person to whom the instrument is presented for
payment;
(c) Where the instrument was made or accepted for his accommodation.
1002. When notice relatively excused. The rules established under Section 114 and 115
may be generalized as follows: As to a particular person secondarily liable on an instrument,
such as the drawer or an indorser, notice of dishonor to him is not necessary: (1) where he has
knowledge of the dishonor by means other than through a formal notice, as when he is both the
drawee and drawer or when presentment is made to him; and (2) where he has no reason to
expect that the instrument will be honored, as when he has countermanded payment or where the
drawee is fictitious or without capacity to contract. These sections apply only to the drawer or
indorser concerned. Failure to give due notice to the other parties secondarily liable will
discharge them.
1003. Illustration of drawer and drawee the same. Suppose A is both the drawer and
drawee of the bill. Since drawee A dishonored the instrument, he has knowledge of such
dishonor. Hence, A, as drawer, does not have to be notified to charge him. Furthermore, under
Section 130, the holder may treat the instrument as a promissory note, in which case the drawer
becomes the maker, and therefore, the person primarily liable thereon, to whom notice of
dishonor is not necessary.
1004. Illustration of fictitious drawee. X, appears to be the drawee on a bill drawn by
A, drawer. F is the holder. If X is a fictitious person or a minor, F can treat the bill as a note, in
which case A becomes the maker, to whom notice is not necessary.
1005. Illustration of drawer to whom presentment is made. A is the drawer of bill
payable to B, payee, X is the drawee. Bill is payable at the office of A. B indorses to C, C to D,
D to E, E to F, holder. F makes presentment of payment at As office. X drawee is not there but
A is there. So under Section 72 (d), F can make the presentment on A who is the person found at
the place of presentment. F need not give notice to A, drawer, as A knows already of the
dishonor.
1006. No right to require or expect payment as to drawer. The drawer has no right to
expect or require payment, in the following cases: (1) where the drawer of a check has no
account with the drawee bank; (2) when the drawer of a check payable abroad has no funds with
the drawee bank to meet it; and (3) when the knowledge that previous drafts on the same
consignee had been dishonored. In the foregoing cases, the drawer has no right to a notice of
dishonor.

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1007. Illustrative case, where notice is required. However, in the following case, the
defendant was held to be entitled to notice of dishonor: The plaintiff purchased from the
defendant bank a draft drawn by it on a bank in Lomza, Poland. The defendant had no funds in
the Lomza Bank but maintained a deposit in a bank in Warsaw, of which the Lomza Bank a
correspondent. The defendant notified the Lomza Bank that the draft has been drawn and asked it
to charge the amount against the Warsaw Bank. The defendant had followed the procedure in
previous drafts on the Lomza Bank and it was the regular practice in New York banks with
relation to drafts on smaller foreign towns. The draft was dishonored and no notice was given to
the defendant bank. Accordingly, it was discharged as it was entitled to notice.
1008. Drawer has countermanded payment. A, drawer, tells the drawee X not to pay
the bill. F, holder, need not give notice to A, drawer. An allegation that payment of a check had
been countermanded is sufficiently set out where the check was set forth with the indorsement
across the face, Pyt. stopped.
1009. Drawee fictitious, etc. as to indorsers. The indorser must be aware of the fact that
the drawee is fictitious or one not having capacity to contract. Otherwise, nnotice of dishonor
must be given to such indorser to charge him. But the fact that the indorser knew the maker to be
insolvent or that the instrument was dishonored does not dispense with the necessity of notice.
1010. Illustration of indorser to whom presentment made. A note is made payable at
the office of B, payee. The note is indorsed successively to C, D, E and F, holder. F makes
presentment for payment at Bs office but A, maker, is not there while B is there. So F makes
presentment for payment to B, under Section 72 (d). in this case, there is no need to give notice
to B, indorser, to charge him. Thus also, when the note of a corporation was indorsed by its chief
executive officer, they were not entitled to notice of dishonor. And where notes made by a
corporation were indorsed for its accommodation by its president who had the sole power to
draw checks for the company, notice to him of dishonor of the instrument was not required since
he was the person to whom it was to be presented for payment.
1011. Illustrative cases where section not applicable. But Section 115 does not apply
in the following cases:
(1) Where the maker of the instrument is a partnership and the indorser sought to be
charged is a member thereof;
(2) Where no presentment was actually made;
(3) Where the indorser was treasurer of the maker corporation, not active in its
management, and signed the note in behalf of the corporation.
Accordingly, in the foregoing cases, the indorser is entitled to notice of dishonor and is
discharged if not notified.

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1012. Indorser as accommodated party. See comments under Section 80. Where the
notes in question were made for the accommodation of the payee but he died before maturity, it
was held that presentment to his administrator was not necessary.
SECTION 116. Notice of non-payment where acceptance refused. Where due
notice of dishonor by non-acceptance has been given, notice of a subsequent dishonor by
non-payment is not necessary unless in the meantime the instrument has been accepted.
1013. Illustration of Section 116. A bill is payable on December 31, 1950. F, the holder,
presents it for acceptance to X, drawee, on December 1, 1950. X refuses to accept the bill. F then
gives notice of dishonor to the drawer A and to the indorsers B, C, D and E. under Section 151,
there is no necessity for presentment for payment, and under Section 116, F need not give notice
of dishonor by non-payment. But suppose that X, drawee, accepts the bill on December 15, 1950.
F must present the bill for payment to X, drawee, on December 31, 1950. If X refuses to pay, F
must give notice of dishonor to A, B, C, D, and E, indorsers, in order to charge them, as in the
meantime the instrument has been accepted.
SECTION 117. Effect of omission to give notice of non-acceptance. An omission to
give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due
course subsequent to the omission.
1014. Illustration of section 117. A is the drawer of a bill addressed to X, drawee, with
B as payee. The bill is payable on December 31, 1950. It is successively indorsed to C, D, E, and
F, holder. X refuses to accept the bill. F fails to give notice to B, C, D, and E. F then negotiates
the note to G, a holder in due course. As to G, are B, C, D, and E discharged also? No, because
under Section 117, omission to give notice of dishonor, by non-acceptance does not prejudice the
rights of a holder in due course subsequent to the omission.
1015. Summary as to notice of dishonor. (1) Like presentment for payment, notice of
dishonor need not be given to persons primarily liable in order to charge them.
(2) But aside from presentment for payment to persons primarily liable, notice of
dishonor to persons secondarily liable is necessary to charge the latter except: (a) when notice is
waived; (b) when dispensed with under Section 112; (c) as to drawer, under Section 114; (d) as
to indorser, under Section 115; (e) where due notice of dishonor by non-acceptance has been
given; and (f) as to a holder in due course without notice.
SECTION 118. When protest need not be made; when must be made, - Where any
negotiable instrument has been dishonored, it may be protested for non-acceptance or nonpayment, as the case may be; but protest is not required except in the case of foreign bills
of exchange.

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1016. When protest necessary. Protest is necessary for foreign bills of exchange. Protest
for other negotiable instruments is optional. The mere fact of protest is not conclusive upon the
dishonor of the instrument and due notice to the indorser; other evidence is competent on these
questions. In many states, statutes make the certificate of the notary prima facie evidence of the
facts of presentment, demand, non-payment and notice of dishonor. Therefore, while protest is
not required in cases of promissory notes and inland bills; it is usual to protest these instruments
also when dishonored since the notarys certificate of protest is the most convenient and certain
mode of proving the facts.
VIII DISCHARGE OF NEGOTIABLE INSTRUMENTS
SECTION 119. Instrument; how discharged. A negotiable instrument is
discharged:
(a) By payment in due course by or on behalf of the principal debtor;
(b) By payment in due course by the party accommodated, where the instrument is
made or accepted for his accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract for the payment of
money;
(e) When the principal debtor becomes the holder of the instrument at or after
maturity in his own right.
1017. Payment by principal debtor. In order to discharge the instrument, the payment
must be (1) a payment in due course; (2) a payment made by the principal debtor, if payment is
made before the date of maturity, the instrument is not discharged as the payment is not in due
course. It will merely constitute a negotiation back to the principal debtor who can renegotiate
the instrument. Where payment is made by a party who is not the primary obligor or an
accommodation party, his payment only conceals his own liability and those who are obligated
after him. All prior parties primarily or secondarily liable on the bill, are liable to such a prayer,
and the prayer may cancel indorsements subsequent to his own and re-issue the paper, and it will
be valid as against the prior parties.
1018. Payment by third persons. If payment is made by a third person, the instrument is
not discharged because payment is not made by the person principally liable. When one who is
not a party to a negotiable paper pays his money for it and it takes up the paper, the presumption
is that he has bought it and not paid it off. it must be understood that not any one who desires
may pay the instrument and then recover of the maker. He must be a person who has in some
way made himself liable for the payment of the instrument. There is however one exception to
this, and that is where an instrument has been protested and some one voluntarily makes

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payment supra protest or for honor. And if the intention was to give money in payment, the
instrument is discharged. Under the new Civil Code, a third person can make payment for an
obligor.
1019. Summary of discharge by payment. One textwriter summarizes discharge by
payment under Section 119 and 121 as follows:
(1) Payment by the person ultimately liable, whatever his position on the paper, is a
discharge of the instrument.
(2) Payment by an accommodation party is not a discharge of the instrument, whatever
his position thereon i.e., whether as sole or joint maker or acceptor (parties primarily liable)
and whether the indorsement be a regular or anomalous.
(3) Payment by the (non-accommodation) drawer or indorser (parties secondarily liable)
is not a discharge of the instrument.
1020. Meaning of principal debtor. The better view is that the term principal debtor
refers to the person ultimately bound to pay the debt. This is true whether he is a party to the
instrument or not, or whether he appears to be liable primarily or secondarily in the instrument.
1021. Payment by check or other negotiable paper. The delivery of mercantile
documents shall produce the effect of payment only (1) when they have actually been cashed or
(2) when. Through the fault of the creditor, they have been impaired. A creditor is not bound to
accept a check in satisfaction of his demand because a check, even if good when offered, does
not meet the requirements of a legal tender.
1022. Waiver of objection to tender of payment by check. It is the general rule that an
objection to a tender must, to be available to the creditor, be made in good time and that the
grounds for objection must be specified; and that an objection to tender on one ground is a
waiver of all other objections which could have been made at that time. It is ordinarily required
of one to whom payment is offered in the form of check, that he makes his objection at the time
to the offer of a check, instead of an offer of payment in money. Payment by check has become
so generally recognized as acceptable in business transactions that it has been held that omission
to make objection to a check s tender of payment is regarded as a waiver of the right to demand
payment in money. x x x Thus, where the plaintiff refused tender of payment made by check on
the ground that it believed that it could not be forced to accept the payment prior to the date
specified in the contract, but did not refuse payment by check as tendered, for insufficiency of
funds in the bank, or on account of the medium in which payment was made, it is deemed to
have waived such grounds.
1023. Reason for the rule. The reason for this rule is to afford the debtor an opportunity
to secure the specific money which the law prescribe shall be accepted in payment of debts.

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Undoubtedly, the non-observance of this duty would mislead the debtor and might inflict a loss
which could be avoided if the creditor had objected to the form and character of the tender.
Considering the fact that the great bulk of business is transacted through the medium of checks,
draft, and other negotiable instruments, it would be a dangerous rule, which could easily be
turned into an engine of oppression, that a tender of payment, especially where it involves the
maturing of obligations not then due, could not be made by check where no questions was raised
as to the value of the check tendered.
1024. Payment by accommodated party. As between the accommodation party and the
accommodated party, the one ultimately liable on the accommodation instrument is the latter.
Hence, his payment in due course discharges the instrument as if payment was made by the
principal debtor under the paragraph (a). The following are illustrative cases:
(1) Suppose that A and another signed a note as co-makers with S for Ss
accommodation, payable to the order of a bank. At the maturity of the note, S paid the amount of
the note to the bank with a check drawn by his wife on funds placed to her credit by S in another
bank. The note was then transferred to Ss wife. In this case, the note was discharged and the
wife could not recover from A thereon.
(2) Where an accommodation note, after being once negotiated, is paid at maturity by the
accommodated party, it is thereby discharged and ceases to have any legal existence at least as to
the accommodation parties.
(3) A straw man who, acting for K, took title to land and signed the purchase note and
mortgage, was an accommodation maker of the note, and K was the accommodated party
although his name did not appear on the instrument. When K paid the note, it was discharged
under Section 119 (b).
1025. Intentional cancellation. The cancellation must be (1) intentional and (2) made by
the holder. Cancellation may be done by tearing the instrument up, burning it or writing across it
the word cancelled. Thus, where the payee of a note bears it up with the intention of destroying
and cancelling it, this is a discharge of the note. Thus, also, where the note was intentionally
burned by an agent of the payee, the note is discharged.
1026. Cancellation must be intentional. There must be an intention to cancel the
negotiable instrument by the holder thereof as such intention is an essential element of discharge
on a negotiable instrument and a negotiable note in a torn condition is presumed cancelled by the
holder thereof. Thus, the instrument is not discharged where the cancellation is made under a
mistaken belief that it has been fully paid when as a matter of fact there is a failure of such
payment, or where cancellation is induced by fraud.
1027. Any other act. Under Section 196, the acts which will discharge a simple contract
are to be determined by existing legislation, as Section 119 does not specify those acts. Novation

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would discharge the instrument. It has, however, been opined as being the best reasoning that
paragraph (d) of Section 119 is meaningless and inoperative in the light of the other inclusive
provisions of Section 119, and that consequently the provision has not altered the unwritten rule
as to discharge of negotiable instruments, either as between the parties or with respect to holders
in due course.
1028. Will an extension of time granted by the holder to the debtor discharge the
instrument? No, according to the majority view. Because while this ground is not omitted in
Section 120, it is omitted in Section 119. This shows the legislative intent to that an extension of
time by the holder will not discharge the instrument. Thus, suppose that one of the persons
principally liable on the note secures the note by a mortgage without the knowledge of the other.
Is the instrument discharged? It was jeld that the instrument was not discharged.
1029. Principal debtor acquires instrument. In order to discharge an instrument under
paragraph (e), reacquisition must be (1) by the principal debtor, (2) in his own right, and (3) at or
after the date of maturity.
1030. Meaning of in his own right. This has been interpreted to mean not in a
representative capacity. So if, A, maker, buys from the last indorsee, F, his own note, not in his
own behalf but as agent of a third person, X, this would not discharge the instrument. Thus, also
the instrument is not discharged if the maker or acceptor becomes the executor of the holder of
the instrument, though the executor had to account for the amount as assets of the estate; or
where the note was transferred to the maker as collateral for a separate debt due the maker; or
where the maker of the note reacquires the old note in exchange of a new note in payment
thereof if the new note proves to be invalid.
1031. When instrument reacquired before maturity. A reacquisition by the principal
debtor in his own right but before maturity will not discharge the instrument. It will merely
constitute a negotiation back to the principal debtor who, under authority of Section 50, may
renegotiate the instrument.
1032. Discharge by operation of law. An instrument may be discharged by operation of
law. If a judgment is obtained on a bill or note, the bill or note is thereby extinguished and
merged in the judgment, but the judgment alone, without actual satisfaction, is not
extinguishment as between the plaintiff and other parties not jointly liable with the original
defendant, whether those parties be prior or subsequent to the defendant.
A discharge in bankruptcy, unless otherwise provided by statute, releases a bankrupt from
all his provable debts, and therefore will discharge the bankrupt on all bill accepted, or notes
made by him but will not discharge the other parties.
SECTION 120. When persons secondarily liable on the instrument are discharged.
A person secondarily liable on the instrument is discharged:

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(a) By any act which discharges the instrument;
(b) By the intentional cancellation of his signature by the holder;
(c) By the discharge of a prior party;
(d) By a valid tender of payment made by a prior party;
(e) By a release of the principal debtor unless the holders right of recourse against
the party secondarily liable is expressly reserved;
(f) By any agreement binding upon the holder to extend the time of payment or to
postpone the holders right to enforce the instrument unless made with the
assent of the party secondarily liable or unless the right of recourse against such
party is expressly reserved.
1033. Effect of Section 120 in suretyship. The cases and authorities are at variance as to
the matter of the extent to which the principles of suretyship of the law merchant have been
modified or abrogated by the Negotiable Instrument Law. It appears that generally the courts
regard Section 120 of the Negotiable Instrument Law as exclusive, that is, as a complete
codification of the law of discharge of secondary parties by the six methods therein set forth. It
seems that this interpretation is sound in the light of the general purpose of the law to protect the
rights of a holder in due course.
1034. Acts discharging instrument. Any of the acts that will discharge an instrument
under Section 119 will discharge the parties secondarily liable thereon, such as, by payment in
due course by the maker. This discharges the indorsers of the note.
1035. Intentional cancellation. A, maker B, payee. The note is successively indorsed to
C, D, E, and F, holder. F then intentionally cancels the signature of D. D is discharged. No
consideration is necessary to support a discharge by intentional cancellation of an indorders
signature by the holder.
1036. Discharge of prior party. The intentional cancellation of Ds signature also
discharges E, as D is a party prior to E. And according to this paragraph, the discharge of a prior
party discharges parties subsequent thereto. The reason is that if E were not discharged by the
discharge of D, and he is made to pay by F, holder, he would not be able to enforce his right of
recourse against D who has been discharged by the holder. It is but just, therefore, that Ds
discharge should also discharge E.
1037. Discharge by operation of law not included. It should, however, be noted that the
discharge of a prior party referred to herein must be one that arises from the act of the holder. It
does not refer to a discharge by operation of law, such as (1) a discharge by reason of

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bankruptcy; (2) a discharge of a party not given due notice of dishonor; (3) a discharge by the
Statute of Limitations. Each of these is a discharge by operation of law.
1038. Valid tender of payment. In the illustration, if D, an indorser, validly tenders
payment, and F, the holder, refuses without any justification, D is discharged. That the
instrument is not paid will then be due to the holders fault. Tender of payment means the act by
which one produces and offers to a person holding a claim or demand against him the amount of
money which he considers and admits to be due, in satisfaction of such claim or demand without
any stipulation or condition. But where an instrument is payable at a bank and the indorser
waived protest, the fact that the maker had money on deposit in the bank at maturity was held not
sufficient tender under Section 70 and 87 to discharge an indorser. Notice of that fact must be
brought to the holder.
1039. Release of principal debtor. In the illustration, if the holder, F, releases A, maker,
the persons secondarily liable, B, C, D, and E, are also discharged, as (1) this discharges the
instrument and (2) deprives them of their right of recourse against A, maker. But if on releasing
A, maker, the holder F reserves his right of recourse against the parties secondarily liable, they
are not discharged. The reason is that the effect of such reservation is the implied reservation of
their right of recourse against A, maker. In other words, while the holder can not hold A liable,
he can hold B, C, D, and E liable, but they in turn can hold A liable should any of them be made
to pay by F. This reservation of the right of recourse can not be implied from acts and conduct
but must be express.
1040. Release must be act of holder. As under paragraph (c), the release must be a
voluntary act of the holder, not by operation of law.
1041. Release must be for value. And if the release is not for value, it is not a discharge
of secondary parties.
1042. Effect of release on accommodation maker or acceptor. As to an
accommodation maker or acceptor, the general rule is that he is not discharged by the holders
release of the principal debtor even if the release be made with knowledge of the true relation of
the parties and conversely, the release of an accommodation maker or acceptor does not
discharge the principal debtor though the latter occupies the position of a party secondarily
liable on the instrument.
1043. Extension of time. In the illustration, if the holder F agrees to extent the time of
payment, the indorsers B, C, D and E are discharged. The following, however, are exceptions:
(1) where the extension of time is consented to by the party secondarily liable, he is not
discharged, and (2) where the holder expressly reserves his right of recourse against the party
secondarily liable, the latter is not discharged.

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1044. Requisites of agreement for extension of time. The following are the requisites
of the agreement for extension of time in order to discharge the parties secondarily liable: (1) it
must be a binding contract, supported by a valuable consideration, and for a definite period; and
(2) it must be made with the principal debtor, not with a third party.
SECTION 121. Right of party who discharges instrument. Where the instrument
is paid by a party secondarily liable thereon, it is not discharged; but the party so paying it
is remitted to his former rights as regard all prior parties, and he may strike out his own
and all subsequent indorsements and again negotiate the instrument, except:
(a) Where it is payable to the order of a third person and has been paid by the
drawer; and
(b) Where it was made or accepted for accommodation and has been paid by the
party accommodated.
1045. Illustration of section 121. A is the drawer of a bill addressed to x, drawee,
payable to the order of B. the bill is successively indorsed by B to C, D, E, and F, holder.
Suppose that D, one of the indorsers, pays the bill. What are the effects?
(1) The first effect is that the instrument is not discharge but it discharges D, the party
paying.
(2) The second effect is that D is remitted to his former rights against parties prior to him,
such as C, B and A. If D was formerly a holder in due course, even if at the time of payment he
already had notice of defects of title, he can enforce his rights against any of them free from
defenses, as he is remitted to his former rights. But it is a well-known rule of law that if the
original payee of a note unenforceable for lack of consideration repurchases the instrument after
transferring it to a holder in due course, the paper again becomes subject in the payees hands to
the same defenses to which it would have been subject if the paper had never passed through the
hands of a holder in due course. This is true where the instrument is retransferred to an agent of
the payee.
(3) The third effect is that D can strike out his indorsement and the subsequent
indorsements to E and F.
(4) The fourth effect is that D can renegotiate the instrument.
1046. Exceptions to right to renegotiate. While there is a slight ambiguity in this
section on this point, the exceptions would seem to apply only to the right to renegotiate but not
to the rule that the instrument is not discharged. Accordingly, where a drawer of a certified check
was required to take up the check because of the failure of the drawee bank, the instrument is not
discharged and he is subrogated to the rights of the payee. In the following cases, the party
secondarily liable who pays cannot negotiate the instrument:

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(1) If instead of D, it is A, drawer, who pays and as the bill is payable to the order of a
third person, B, A can no longer negotiate the instrument.
(2) Or if B, payee, is an accommodated party, and B pays, he cannot negotiate the bill, as
B is the ultimate person to pay it and he does not have a right of recourse against either X,
drawee or A, drawer.
SECTION 122. Renunciation by holder. The holder may expressly renounce his
rights against any party to the instrument before, at, or after its maturity. An absolute and
unconditional renunciation of his rights against the principal debtor made at or after the
maturity of the instrument discharges the instrument. But a renunciation does not affect
the rights of a holder in due course without notice. A renunciation must be in writing
unless the instrument is delivered up to the person primarily liable thereon.
1047. Application of Section 122. While there are decisions to the contrary, it has been
held that this section, considered in connection with Section 119 and 120, applies only to
renunciation by a unilateral act of the holder without consideration and in cases where the
instrument is not delivered up to the person intended to be released. Section 119 (e) would cover
the case of an oral release with consideration. In general, the term renunciation describes the
act of surrendering a right or claim without recompense but it can be applied with equal propriety
to the relinquishing of a demand upon an agreement supported by consideration. Therefore, this
term includes the release of a claim by virtue of an accord and satisfaction as well as a gratuitous
waver of liability.
1048. Form of renunciation. The renunciation must be (1) express and (2) in writing.
However, if the instrument is delivered to the person primarily liable, the renunciation may be
oral. This section does not apply to, or prevent discharge by, oral novation under which the
obligation of other persons is accepted in lieu of that of the maker of a note. Similarly, it does not
prevent an oral gift of an indebtedness by the payee to the makers coupled with an intentional
destruction of the notes.
1049. Time for making renunciation. Renunciation may be made by the holder (1)
before maturity (2) at maturity or (3) after maturity.
1050. When renunciation discharges instrument. Renunciation discharges the
instrument when it is (1) absolute and unconditional, (2) it is made in favor of the person
primarily liable and (3) it is made at or after maturity. This section requires an absolute and
unconditional renunciation, so the indorsement as follows was not a renunciation of the
instrument even thought the payee died first.: If the payee of this note does not survive the
maker hereof, then, this note is not to be paid but is to be cancelled and surrendered.
1051. As to holder in due course. In the illustration given, suppose that E, holder,
absolutely renounces his rights against X, drawee-acceptor of a bill payable on demand. This has

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the effect of discharging the instrument. Then E negotiates the bill to f, a holder in due course
without notice of the renunciation. Can F enforce the instrument? Yes, because under the law, a
renunciation does not affect the rights of a holder in due course without notice.
SECTION 123. Cancellation; unintentional; burden of proof. A cancellation made
unintentionally or under a mistake or without the authority of the holder, is inoperative
but where an instrument or any signature thereon appears to have been cancelled, the
burden of proof lies on the party who alleges that the cancellation was made
unintentionally or under a mistake or without authority.
1052. Meaning of cancellation. Cancellation signifies not only the drawing of crisscross lines but also tearing, obliterations, erasures, or burning. It may be made by any other
means by which the intention to cancel the instrument may be evident.
1053. When cancellation is inoperative. Cancellation is inoperative (1) when made
unintentionally, (2) when made under mistake, or (3) when made without the authority of the
holder. The following respectively illustrate the foregoing: (1) cancellation is unintentional
where the notes were physically multilated by the payee who acted in an outburst of temper
without intent to cancel the said notes. (2) Cancellation is made under a mistake where the note
was cancelled under the supposition that it was fully paid when in fact it is not. And (3)
cancellation is made without authority where an agent for collection, without authority, accepted
from the acceptor of the bill less than the amount claimed by the holder and allowed the acceptor
to cancel his signature.
1054. Burden of proof. But where an instrument or signature thereon appears to have
been cancelled, the party claiming that the cancellation is inoperative must prove his allegations.
Thus, where it appeared that the date and the signature of the maker of a note were destroyed by
burning, the presumption was that the burning was intentional and done for the purpose of
cancelling the instrument, and the burden was on the holder to prove the contrary.
SECTION 124. Alteration of instrument; effect of. Where a negotiable instrument
is materially altered without the assent of all parties liable thereon, it is avoided, except as
against a party who has himself made, authorized, or assented to the alteration and
subsequent indorsers.
But when an instrument has been materially altered and is in the hands of a holder
in due course not a party to the alteration, he may enforce payment thereof according to its
original tenor.
1055. Rights of one not holder in due course. Where a negotiable instrument is
materially altered without assent of all parties liable thereon, it is avoided except as against a
party who has himself made, authorized or assented to the alteration and subsequent indorsers.
Under this provision, where a negotiable instrument is materially altered, it is avoided in the

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hands of one who is not a holder in due course as against any prior party who has not assented to
the alteration. Thus, suppose that A makes a note for P1,000 payable to the order of B, who then
negotiates it to C. With the consent of B, C alters it to P4,000 an thereafter negotiates it to D, D
to E and E to F, who is not a holder in due course. F cannot collect on the instrument as it is
avoided in his hands as against A.
1056. Where instrument not avoided as to holder not in due course. However, the law
makes certain exceptions. The instrument is not avoided as against (1) a party who has made the
alteration, (2) a party who authorized or assented to the alteration, and (3) subsequent indorsers.
In the illustration, B would be liable for P4,000 to F as he assented to the alteration. C is liable to
F for P4,000 as he is the party who made the alteration. D and E would also be liable to F for
P4,000 as they are subsequent indorsers.
1057. Rights of holder in due course. But when an instrument has been materially
altered and is in the hands of a holder in due course not a party to the alteration, he may enforce
payment thereof according to its original tenor. In the illustration, if F were a holder in due
course, he could recover from A P1,000, the original tenor of the note. Of course, F can recover
P4,000 from B, as B assented to the alteration; also from C, as C made the alteration; and from D
and E, as they are subsequent indorsers.
1058. No distinction between fraudulent and innocent alteration. At common law,
there was a distinction between a material alteration made fraudulently and one made innocently.
If made fraudulently, the obligation was rendered wholly void even in the hands of a bona fide
holder. This has been changed, however, by Section 124 of the Negotiable Instrument Law. The
law now does not make the distinction. It seems to include innocent changes as one changing
innocently seems to be as much a party to the alteration as one changing fraudulently.
Accordingly, under the second sentence of Section 124, the rule now seems to be that a holder in
due course can enforce the instrument according to its original tenor regardless of whether the
alteration was innocent or fraudulent.
1059. Right to collect on original consideration. Where the instrument is materially
altered, it is generally avoided. Does this mean that the holder may not collect on the original
consideration? When the alteration was not made fraudulently, it will not relieve the parties from
their original obligation. Mr. Justice Alawrence, in the case of Elliott v. Blair, said: If the
alteration was material but not fraudulently done, the party may recover upon the original
consideration.
1060. Alteration as a crime. The penalty of prision correctional in the medium and
maximum periods and a fine of not more than 5, 000 pesos shall be imposed upon any private
individual who shall commit any of the falsification enumerated in the preceding Article 171 in
any x x x letter of exchange or any other kind of commercial paper; x x x. The falsifications,
pertinent to alteration of negotiable instruments, as enumerated in Article 171 are: x x x (2)

216 FOUR-C LAW LIBRARY


causing it to appear that persons have participated in any act or proceeding when they did not in
fact so participate; x x x (5) altering true dates; (6) making any alteration or intercalation in a
genuine document which changes its meaning; x x x.
1061. Where drawee bank pays altered amount, drawer has right to have his
account debited with correct amount only. In a case, it was held that when a drawee bank pays
a check with its amount altered and increased after it was issued by the drawer, it should be
allowed to debit the amount of the drawer only for the correct amount. Said the Court of
Appeals: As between the bank and its depositors, the payment of forged or altered checks by it
is made at its peril and cannot be charged against the depositors account unless some negligent
act or conduct of his has contributed to induce such payment, the bank itself being free from
negligence. x x x When the bank is guilty of negligence, that is to say, when, by exercise of
proper care, it could have discovered the forgery, it must bear the loss, the fact that the depositor
failed in his duty to examine the statement of his account notwithstanding.
1062. Paying bank must clear check with drawee bank before paying. Illustrative
case.
BANCO ATLANTICO v AUDITOR GENERAL
Facts: Petitioner Atlantico is the paying bank. The Philippine Embassy, Spain is the
drawer. The PNB New York is the drawee bank. Drawer issued three checks, first to Azucena
Pace, consular clerk for her salary in amount of $109.10; the second to Virginia Boncn, embassy
finance officer, for $75.00; and another one to her, for $90,000.00 when cashed. The checks
were apparently altered, the first to $10,109.10, the second to $35,075.00, and the third to
$90,000.
Without clearing the check with the drawee bank, the paying bank paid the checks to
Virginia Boncan. The $90,000 was on demand, but Boncan attached a letter asking that it be not
presented for payment until a later date.
When paying bank, petitioner presented the check for payment to drawee bank, PNB,
New York, the latter dishonored the check by non-acceptance on the ground that payment had
been stopped.
Petitioner claims to be a holder in due course and therefore is entitled to collect.
Held: 1) The petitioner paid the amount of the three (3) checks in question to Virginia
Boncan without previously clearing the said checks with the drawee bank, Philippine National
Bnk, New York. This is contrary to normal or ordinary banking practice specially so where the
drawee bank is a foreign bank and the amounts involved were large. The drawer of the
aforementioned checks was not even a client of a petitioner. There is a showing that Virginia
Boncan enjoyed special treatment from the employees and chiefs of the petitioners foreign

217 FOUR-C LAW LIBRARY


department. It was probably because of this special relationship that the petitioner, in disregard
of the elementary principles that should attend banking transactions cashed the three (3) checks
in question without prior clearances from the drawee bank. In view of the foregoing, the
Philippine Embassy in Madrid as drawer of the three (3) checks in question, cannot be held
liable.
(2) The Court quoted the Auditor General who concurred in the following views of the
Philippine Ambassador, Luis Gonzales: When claimant bank gave Miss Boncan special
treatment as a privileged client in disregard of the elementary principles of prudence that should
attend banking transactions, they should stand to suffer the loss that was due to their own
negligence and the fact that the amount involved was quite big and it was the payee herself
who made the request that the same not be presented for collection until a fixed date in the future
was proof of a glaring infirmity or defect in the instrument. It loudly proclaims, Take me at your
risk. The interest of the payee was the immediate encashment of the check of which she was the
beneficiary and not the deferment of the presentment for collection of the same to the drawee
bank. This being the case, Banco Atlantico was not a holder in due course as defined by Section
52 of the N.I.L. because it was obvious that it had knowledge of the infirmity or defect of the
check.
3) It is apparent that the said three (3) checks were fraudulently altered by Virginia
Boncan as to their amounts and, therefore, wholly inoperative. No right of payment thereof
against any party thereto could have been acquired by the petitioner, the paying bank.
1063. Banks bound by 24 hour clearing house rule, and must notify collecting banks
within 24 hours of alteration of checks. Illustrative case.
Facts.A certain company (Cunanan& Co.) drew a check against FNCB (First National
City Bank) in the amount of P50.00 with Manila Polo Club as payee. Thereafter, the check was
altered by increasing the amount to P50,000 and superimposing the word Cash on the name of
the payee. Subsequently, a certain Sales presented it for payment to Metro Bank in which he
opened a deposit account of P500.00. Metrobank paid him and he deposited the proceeds in his
deposit account but rapidly withdrew said deposit within a short period of time. Meanwhile upon
payment of the check, Metro Bank sent the check immediately to the clearing house of the
Central Bank with the following indorsement on the back of the check: Metropolitan Bank and
Trust Company Cleared (illegible) office. All prior endorsements and/or lack of endorsement
Guaranteed. On September 3, 1964, or nine days after, FNCB drawee returned the check to
Metro Bank upon discovering that the check had been altered. Central Bank Circular No.9
(February 17, 1949) as amended by Circular No. 138 (January 30, 1962) and Circular No. 169
(March 30, 1964), requires the drawee bank receiving the check for clearing from the Central
Bank Clearing House must return the check to the collecting bank within the 24-hour period if
the check is defective for any reason.
Issue: Which bank should suffer the loss?
Held:

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1) The validity of the 24-hour clearing house regulation has been upheld by this Court in
Republic vs. Equitable Banking Corporation, 10 SCRA 8 (1964). As held therein, since both
parties are part of our banking system, and both are subject to the regulations of the Central
Bank, they are bound by the 24-hour clearing house rule of the Central Bank.
In this case, the check was not returned to Metro Bank in accordance with the 24-hour
clearing house period, but was cleared by FNCB. Failure of FNCB, therefore to call the attention
of Metro Bank to the alteration of the check in question until after the lapse of nine days, negates
whatever right it might have had against Metro Bank in the light of the said Central Bank
Circular. Its remedy lies not against Metro Bank but against the party responsible for changing
the name of the payee and the amount on the face of the check.
2) As to the liability of Metro Bank (collecting bank) on its clearing house endorsement,
such an indorsement must be read together with the 24-hour regulations on clearing House
Operations of the Central Bank. Once that 24-hour period is over, the liability on such an
indorsement has ceased.
1064. When drawee bank fails to return a forge or altered check to the collecting
bank within the 24-hour clearing period, collecting bank is absolved for liability.
Illustrative case:
In a case, SMC drew a check for P240.00 with Delgado as payee and FNCB as drawee.
After delivering to Delgado, the check was altered to P9,240.00. The check was deposited on
March 14, 1966 in Republic Bank. Republic, collecting bank, indorsed it to FNCB stamping at
the back all prior and/or lack of indorsement guaranteed. FNCB paid Republic throught the
Central Bank Clearing House on March 15, 1966.
On April 19, 1966, SMC notified FNCB of the material alteration. On May 19, 1966,
FNCB notified Republic of the alteration of the checks and forgery of Delgados indorsement.
On August 15, 1966, FNCB demanded form Republic the refund of the P9,240.00 it had
previously paid.
Issue : Is the Republic protected from liability by the 24-hour clearing house rule?
Held :Yes. The 24-hour clearing house rule is a valid rule applicable to commercial
banks.
It is true that when an endorsement is forged, the collecting bank or last endorser, as a
general rule, bears the loss (Banco de Oro Savings & Mortgage Bank vs. Equitable Banking
Corp., 157 SCRA 188). But the unqualified endorsement of the collecting bank on the check
should be read together with the 24-hour regulation on the clearing house operation. Thus, when
the drawee bank fails to return a forged or altered check to the collecting bank within the 24-hour
clearing period, the collecting bank is absolved from liability.
1. Duty of banks to examine checks.
Every bank that issues checks for the use of its customers should know whether or not the
drawers signature thereon is genuine, whether there are sufficient funds in the drawers account
to cover checks issued, and it should be able to detect alterations, erasures, superimpositions or
intercalations thereon, for these instruments are prepared, printed and issued by itself, it has

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control of the drawers account, and it is supposed to be familiar with the drawers signature. It
should possess appropriate detecting devices for uncovering forgeries and/or alterations on these
instruments.
Both plaintiff-collecting, defendant-drawee banks are part of the banking system and both
are subject to the regulation of the Central Bank. Defendant collecting bank is not liable on his
indorsement during clearing house operations.
2. Duration of collecting banks clearing house indorsement.
The indorsement, itself, is very clear when it begins with the words For clearance, clering office
x xx. In other words, such an indorsement must be read together with the 24-hou regulation on
the Clearing House Operations of the Central Bank. Once that 24-hour period is over, the
liability on such an indorsement has ceased.
3. Remedy of drawee bank. Unless an alteration is attributable to the fault or negligence
of the drawer himself, such as when he leaves spaces on the check which would allow the
fraudulent insertion of additional numerals in the amount appearing thereon, the remedy of the
drawee bank that negligently clears a forged and/or altered check for payment is aginst the party
responsible for the forgery or alteration otherwise, it bears the loss. It may not charge the amount
so paid to the account of the drawer, if the latter was free from blame, nor recover it from the
collecting bank if the latter made payment after proper clearance from the drawee. There is
nothing inequitable in such a rule for if in the regular course of business the check comes to the
drawee bank which, having the opportunity to ascertain its character, pronounces it to be valid
and pays it, it is not only a question of payment under mistake, but payment in neglect of duty
which the commercial law places upon it, and the result of its negligence must rest upon it.
Section 125. What constitutes a material alteration. Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of payment is specified, or any
other change or addition which alters the effect of the instrument in any respect, is a
material alteration.
1065. When alteration is material. An alteration is said to be material if it alters the
effect of the instrument. The following are illustrations of material alterations:
(1) Substituting the words or bearer for order.
(2) Writing protest waived above blank indorsements.
(3) A change in the date from which interest is to run.
(4) A check was originally drawn as follows: Iron County Bank, Crystal Falls, Mich.
Aug. 5, 1901. Pay to G. L. or order $9 fifty cents CTR. The insertion of the figure 5 before the
figure 9, the instrument being otherwise unchanged.
(5) Adding the words with interest with or without a fixed rate.

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(6) An alteration in the maturity of a note, whether the time for payment is thereby
curtailed or extended.
(7) An instrument was payable First Natl Bank, the plaintiff added the word Marion.
(8) Plaintiff, without the consent of the defendant, struck out the name of the defendant as
payee and inserted the name of the maker of the original note.
(9) Striking out the name of the payee and substituting that of the person who actually
discounted the note.
(10) Substituting the address of the maker for the name of a co-maker.
1066. Illustrative cases of immaterial alterations.
(1) Changing I promise to pay to We promise to pay, where there are two makers.
(2) Adding the word annual after the interest clause.
(3) Adding the date of maturity as a marginal notation.
(4) Filling in the date of actual delivery where the makers of a note gave it with the date
in blank, July . . . .
(5) An alteration of the marginal figures of a note where the sum stated in words in the
body remained unchanged.
(6) The insertion of the legal rate of interest where the note had a provision for interest
at . . . . . per cent.
(7) A printed form of promissory note had on the margin the printed words, Extended to
. . . .. The holder on or after maturity wrote in the blank space the words May 1, 1913, as a
reference memorandum of a promise made by him to the principal maker at the time the words
were written to extend the time of payment.
(8) Where there was a blank for the place of payment, filling in the blank with the place
desired.
(9) Adding to an indorsees name the abbreviation Cash when it had been agreed that
the draft should be discounted by the trust company of which the indorsee was cashier.
(10) The indorsement of a note by a stranger after its delivery to the payee at the time the
note was negotiated to the plaintiff.
(11) An extension of time given by the holder of a note to the principal maker, without
the consent of a surety co-maker
BILLS OF EXCHANGE
IX FORM AND INTERPRETATION
Section 126. Bill of exchange defined. A bill of exchange is an unconditional order
in writing addressed by one person to another, signed by the person giving it, requiring the
person to whom it is addressed to pay on demand or at a fixed or determinable future time
a sum certain in money to orde or to bearer.
1067. Types of bill of exchange. They are (1) draft, (2) trade acceptance, (3) bankers
acceptance, (4) treasury warrant, (5) money orders, (6) clean bills of exchange, (7) documentary

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bills of exchange, (8) D/A bills of exchange, (9) D/P bills of exchange, (10) time or usance bills,
(11) bills in set, (12) inland bills, and (13) foreign bills.
1068. Draft, defined. A common term for all bills of exchange and they are used
synonymously.
1069. In bank drafts, drawer and drawee bank are liable to purchaser of draft for
not complying with his instructions. Stripped of the complicated facts on procedural matters, in
this case, S purchased from Citytrust, petitioner, a bank draft for $40,000.00 with T Airways as
payee and corresponding bank in the U.S. MM as drawee. Later, S executed a stop payment
order of the bank draft instructing Citytrust to inform MM of the order by telex. Citytrust did by
telex and by cable. But MM paid the bank draft and Citytrust debited the account of S. What are
the liabilities of City trust and MM to S? Held :Citytrust and Marine Midland were not in privity
with each other in a transaction involving payment through a bank draft. A bank draft is a bill of
exchange drawn by a bank upon its correspondent bank, x xxissed at the solicitation of a
strangers who purchases and pays therefor (Kohler v. First National Bank, 289 P 47, 49, 157
Wash 417 (1930). It is also defined as an order for payment of money. (Polotsky v. Artisans
Savings Bank, Del. 180 A. 791, 792, 7 WW. Harr 142 (1935). The drawee bank acting as a
payor bank is solely liable for acts not done in accordance with the instructions of the drawer
bank or of the purchaser of the draft. The drawee bank, MM, has the burden of proving that it did
not violate. Meanwhile, the drawer, Citytrust if sued by the purchaser of the draft is liable for the
act of debiting the customers, S, account despite an instruction to stop payment. The drawer has
the duty to prove that he complied with the order to inform the drawee. Both were held jointly
and severally for $40,000.00 plus attorneys fees of P10,000.00 with MM pinpointed as the
source of the injury to S and for MM to reimburse what Citytrust is made to pay S.
1070. Trade acceptance, defined. The term has been variously defined as : (1) A bill of
exchange payable to order and at a certain maturity, drawn by a seller aginst the purchaser of
goods as drawee, for a fixed sum of money, showing on its face the acceptance of the purchaser
of goods and that it has arisen out of a purchase of goods by the acceptor; (2) A draft or bill of
exchange drawn by the seller on the purchaser of goods sold and accepted by such purchaser.
1071. Nature of trade acceptance. The trade acceptance states upon its face that the
obligation of the acceptor arises out of purchase of goods from the drawer, while the ordinary
bill of exchange does not state upon its face the transaction out of which giving of the instrument
arose. The trade acceptance is confined to credit obligations arising from the sale of goods and
must have a definite maturity, while the ordinary bill of exchange may6 cover various kinds of
transactions and may be payable on demand, at sight or at the end of a stated time.
1072. How trade acceptance handled. The seller or merchandise sends with the good or
the invoice a filled-in trade acceptance form, often in duplicate to enable the buyer to retain a
copy for his files. The buyer accepts the bill by signing his name across its face, with date, and
designating the bank where it is payable. It is returned to the seller who may hold it against
maturity or may discount it at his bank. At maturity, it is collected exactly as if it were a check.
Under the Negotiable Instruments Law, a bill made payable at a bank is equivalent to an order on

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the bank, to pay it and to charge to the account of the acceptor. Usually, the buyer of goods is
given a cash discount and other options besides the acceptance privilege.
1073. Tradeacceptance not much used. Trade acceptances, despite the fact that they
furnish an efficient means of financing mercantile transactions, have not been more widely used
in the United States. There seems to be some misunderstanding on the part of some of the
authors who have written on the subject of trade acceptance which proceeds from their having
confused trade acceptance with the bankers acceptance x xx it cannot be said that an open
market has been established for trade acceptance on any scale comparable to the open market for
bankers acceptances. A contrary opinion is expressed by another author.
1074. Bankers acceptance, defined. A draft or bill of exchange of which the acceptor
is a bank or banker engaged generally in the business of granting bankers acceptance credit. A
bankers acceptance is similar to a trade acceptance, the fundamental difference being that the
bankers acceptance is drawn against a bank instead of the buyer. Bankers acceptance originates
chiefly in financing international trade.
1075. Illustrations of the use of bankers acceptances. (1) B, importer, makes an
application with the PNB for the issuance to A, exporter, of a letter of credit, if the PNB is
satisfactory to A, exporter. B, the originator of the letter of credit is variously called the (a)
accredited buyer, or (b) the consignee, or (c) the account of the importer. The PNB which
undertakes the credit of his account, is called the opening bank. A, exporter, is termed the
beneficiary or accreditee.
(2) If the PNB is willing, it issues the letter either by mail or by cable. If by cable, the
PNB instructs its correspondent bank in New York City to notify A, exporter. Scuh
correspondent bank is called notifying bank. If by mail, the PNB may send the notification
directly to A, or through B, importer.
(3) A, exporter, then draws a draft or bill of exchange against the PNB pursuant to the
letter of credit. When A ships the goods to B, A receives a bill of lading from the shipping
company. He attaches this document to the draft or bill of exchange. The draft with the document
attached is called a documentary bill and so long as the document is attached to the bill, the
holder of the bill has title to the goods and is protected to the value thereof.
(4) A, exporter, then discounts the bill with his bank X, in New York. X bank is then
called the negotiating bank.
(5) Through a correspondent bank in Manila, X bank, then presents the draft or bill to the
PNB for acceptance.
(6) Then, the PNB accepts the draft or bill. The draft or bill then becomes a bankers
acceptance. The PNB then detaches the documents attached to the bill, if A, exporter, so
authorizes. A bill with such authority is called a documentary acceptable bill. The PNB,
acceptor, has the document for its protection. It may deliver them to B, importer, in whole or in
part, without security, or under a trust receipt, by which the bank receives a first claim upon the
funds received in case ofsale of the goods involved in the transaction. If on the other hand, A,

223 FOUR-C LAW LIBRARY


exporter, authorizes the removal of the documents only upon payment of the bill, it is called a
documentary payment bill.
1076. Trust receipt defined. The term shall refer to the written or printed document
signed by the entrustee in favor of the entruster containing terms and conditions substantially
complying with the provisions of this Decree. No further formality of execution or authentication
shall be necessary to the validity of a trust receipt.
Thus, whenever a merchant has signed a form of receipt for goods, documents of
title, or securities, wherein it is recited that he is holding such matters in trust for the person from
whom he has received such matters in trust for the person from whom he has received such
matters, we say that the merchant has executed a trust receipt. The merchant is called the
entrustee. The person or institution in whose favor the receipt runs is called the entruster.
Presidential Decree No. 115 defines :
(a) Entrustee as the person having or possession of goods, documents or instruments
under a trust receipt transaction, and any successor in interest of such person for the purpose or
purposes specified in the trust receipt agreement.
(b) Entruster as the person holding title over the goods, documents, or instruments
subject of a trust receipt transaction, and any successor in interest of such person.
1077. Trust receipt, explained. As in all in trust operations, the legal title to the matter
entrusted remains in the entruster but the entruster gives to the trustee a form of title which is
good and legal against everybody except the entruster. As between the entruster and the trustee,
the entruster is always the legal owner of the matter involved. As between the trustee and the rest
of the world, the trustee is the legal owner and whenever he sells the goods to a third party who
has no knowledge of the existence of the trust receipt, such third party is protected and the
entruster loses his legal ownership of the goods. However, there are exceptions to this broad
statement.
Thus in example, the legal title or ownership is the PNB, entruster, but the PNB gives A,
entrustee, a form of title which is good and legal against other persons, but not against the
entruster, PNB. Thus A can sell the goods say to B, a third person who does not know about the
trust receipt, B is protected and PNB has ownership of the goods.
1078. Entrustee not entruster is real owner in trust receipt. The entruster such as a
bank in a trust receipt arrangement, does not become the real owner of the goods covered by it. It
is merely holder of a security title for the advances it has made under the letter of credit to the
entrustee, the importer, the goods purchased by the entrustee through the financing of the
entruster remain the property of said entrustee, and he holds the goods at his own risk. A trust
receipt arrangement does not convert the entruster into an investor but remains as a lender and
creditor. Accordingly, even where the entustee fails to sell the goods, offers them to the
entruster, deposits them in court, and is acquitted from the charge of estafa said entrustee is liable
to the entruster for the advance made by the latter to the former.
But where the importer fails to comply with the terms of the trust receipt, particularly to
pay his obligation to the entruster, or to turn over to saidentruster the goods covered by the trust

224 FOUR-C LAW LIBRARY


receipt if they were not sold, the entrustee is guilty of estafa. As between the entrustee and the
entruster, the goods belong to the entruster.
1080. Liability of entrustee to entruster is ex contractu not ex delicto. In case of
breach of the letter of credit-trust receipt transaction, the entrustee (importer) is liable ex
contractu to the entruster-bank for such breach, whether or not he misappropriated, misapplied or
converted the merchandise covered by the transaction. His liability does not arise ex delicto, the
action for the recovery of which would have been deemed instituted with the criminal action
(unless waived or reserved) and where acquittal based on a judicial declaration that the criminal
acts charged do not exist would have extinguished the civil action.
1081. Illustrative case on trust receipt, its nature and purpose: (1) SAMO,
petitioner, vs. PEOPLE, respondent (1962) Review by certiorari of a decision of the Court of
Appeals convicting petitioner of the crime of estafa.
FACTS: Petitioner is the importer. To facilitate the importation of canned goods, she
opened letters of credit with the Bank of the Philippine Islands. Upon the arrival of the goods,
the bank paid the balances due in order that the goods could be released and required petitioner
to execute two trust receipts in its favor as a condition for the turning over of their possession to
her. Petitioner executed said trust receipts wherein she acknowledged having received in trust
from the bank the goods and obligated herself to hold them in trust for the latter. The document
authorized her to sell the goods for the account of the bank under the obligation to remit tot the
latter the proceeds thereof despite demands, criminal cases for estafa were instituted against her.
After joint trial, the Court of First Instance of Manila convicted petitioner. The decision was
affirmed by the Court of Appeals.
ISSUE: Whether the violation of the terms of the trust receipts constituted estafa.
HELD: A trust receipt is considered as a security transaction intended to aid in financing
importers and retail dealers who do not have sufficient funds or resources to finance the
importation or purchase of merchandise, and who may not be able to acquire credit except
through utilization, as collateral, of the merchandise imported or purchased. (53 Am. Jur. 961). x
xx Trust receipts, as contracts, in a certain manner partake of the nature of a conditional sale, . .
. that is, the importer becomes absolute owner of the imported merchandise as soon as he has
paid its price. The ownership of the merchandise continues to be vested in the owner thereof or
in the person who has advanced payment, until he has been paid in full, or if the merchandise has
already been sold, the proceeds of the sale be turned over to him by the importer or by his
representative or successor in interest. (PNB vs. Vda. De Hijos de Angel Jose, 63 Phil. 814-15) x
xx passing upon the issue whether a party who fails to comply with the terms of a trust receipt
executed by him, particularly to make payment of his obligation thereunder, could be prosecuted
for estafa, we said that such failure would be a good ground for prosecution. In the present case
petitioner does not deny that she executed the two trust receipts mentioned heretofore and the
Court of Appeals found that, notwithstanding repeated oral and written demands by the bank,
petitioner had failed either to turn over to the latter the proceeds of the sale of the goods covered
by the trust receipts, or to return said goods, if they were not sold. Consequently, we believe that

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said court correctly found her to be guilty of having violated the provisions of Art. 315, 1-(b) of
the Revised Penal Code. The fact that, subsequent to the filing of the cases in the Court of First
Instance, petitioner made partial payments on account does not alter the situation. Payment does
not extinguish criminal liability for estafa. Decision affirmed.
(2) Vintola v IBAA
Facts. Spouses TirzoVintola and LoretaDyVintola, hereinafter referred to as
VINTOLA'S, are the proprietors of Dax Kin International, a company engaged in the
manufacture of raw Us into finished products. applied for, and were granted, a commercial letter
of credit with the Insular Bank of Asia and America (IBAA for short), Cebu City. The letter of
credit authorized the bank to negotiate for their account, drawn in favor of one of their suppliers,
EfrenAlani, on Dax Kin International in the amount of P35,000.00 to represent a shipment of a
variety of puka and olive shells. For their part the VINTOLAS promised and agreed to pay the
bank at maturity Id amount together with the usual charges. To secure the release of the raw
seashells, on the same day the VINTOLAS executed in favor of IBAA a trust receipt agreement
which was to mature on October 19, 1975. On January 9, 1976 IBAA demanded from the
VINTOLAS payment of the P35,000.00, the latter having failed to make good their obligation.
The VINTOLAS offered to return the raw seashells to IBAA as they were unable to dispose of
the same. IBAA refused to accept them. As found by the Regional Trial Court, the VINTOLAS
made several promises to IBAA to settle their account. But due to their failure to pay their
obligation, on August 4, 1977 IBAA was constrained to institute Criminal Case No. CU-2928 for
estafa under Art.315 No. 1(b) of the Revised Penal Code in relation to Pres. Dec. No. 115 (The
Trust Receipts Law). During the trial of the criminal case, the VINTOLAS deposited in court the
various puka and olive shells. Subsequently, the VINTOLAS were acquitted for insufficiency of
evidence. Thereafter IBAA brought Civil Case No. R-21103, subject of this appeal, to recover
from the VINTOLAS the P35,000.00 plus interest and other charges. The trial court ruled in
favor of IBAA. Hence, this appeal.
Issues: 1) Whether or not the lower court was correct in holding that the VINTOLAS still
owe IBAA even though the goods held in trust were not sold and IBAA never demanded for
their return and even if the VINTOLAS deposited them in court because the bank refused to
accept their return. The VINTOLAS argue that their return of the goods amounted to recovery by
IBAA and to order them to further make payment would be tantamount to double recovery. The
VINTOLAS take the position that their obligation to IBAA has been extinguished inasmuch as,
through no fault of their own, they were unable to dispose of the seashells, and that they have
relinquished possession thereof to the IBAA, as owner of the goods, by depositing them with the
Court.
2) Is there double recovery on the part of IBAA? Explain.
Held :Under letter of credit-trust receipt arrangement,a bank extends a loan covered by
the Letter of Credit, with the trust receipt as a security for the loan. In other words, the
transaction involves a loan feature represented by the letter of credit, and a security feature which
is in the covering trust receipt.

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Contrary to the allegation of the VINTOLAS, IBAA did not become the real owner of the
goods. It was merely the the holder of appeals security title for the advances it had made to the
VINTOLAS the goods the VINTOLAS had purchased through IBAA financing remain their own
property and they hold it at their own risk. The trust receipt arrangement did not convert the
IBAA into an investor; the latter remained a lender and creditor.
... for the bank has previously extended a loan which the L/C represents to the importer,
and by that loan, the importer should be the real owner of the goods. If under the trust
receipt, the bank is made to appear as the owner, it was but an artificial expedient, more
of a legal fiction than fact, for if it were so, it could dispose of the goods in any manner it
wants, which it cannot do, just to give consistency with the purpose of the trust receipt of
giving a stronger security for the loan obtained by the importer. To consider the bank as
the true owner from the inception of the transaction would be to disregard the loan
feature thereof. ...
The reliance of the Vintolas on Article 2177 of the Civil Code is erroneous. As correctly
argued by IBAA, there is no double recovery since the bank has not yet recovered from them,
The VINTOLAS' deposit in court of the puka and olive shells does not amount to recovery by
IBAA.
Repossession by creditor of goods subject of letter of credit a trust receipt transaction is
not payment to creditor, not bar to foreclosure of debtors property.
1082. Holder of trust receipt who does not pay to issuing bank proceeds of sale of
goods is liable for estafa.Where the holder of a trust receipt who disposed of the goods covered
thereby and, in violation of its terms, failed to deliver to the bank the proceeds of the sale as
payment of the debt secured by the trust receipt, We hold that even if the accused did not
receive the merchandise for deposit, he is nevertheless, covered by article 315 (1) (b) because
after receiving the price of the sale, he did not deliver the money to the bank or, if he did not sell
the merchandise, he did not return it to the bank.
1083. Treasury warrants.A treasury warrant bearing on its face the words "payable
from the appropriation for food administration," is actually an order for payment out of "a
particular fund," and is not unconditional, and does not fulfill one of the essential requirements
of a negotiable instrument. (Section 3 last sentenced and section 1[b] of the Negotiable
Instruments Law.) In the United States, government warrants for the payment of money are not
negotiable instruments nor commercial proper.
1084. Money order not negotiable. Illustrative case:
PHILIPPINE EDUCATION CO., INC., vs. MAURICIO A. SORIANO, ET AL., (June
30, 1971.) A certain Enrique Montinola sought to purchase from the Manila Post Office ten (10)
money orders of P200.00 each payable to E.P. Montinolawithaddress at Lucena, Quezon. After
the postal teller had made out money ordersnumbered 124685, 124687-124695, Montinola
offered to pay for them with a private checks were not generally accepted in payment of money
orders, the teller advised him to see the Chief of the Money Order Division, but instead of doing

227 FOUR-C LAW LIBRARY


so, Montinola managed to leave building with his own check and the ten(10) money orders
without the knowledge of the teller. On the same date, April 18, 1958, upon discovery of the
disappearance of the unpaid money orders, an urgent message was sent to all postmasters, and
the following day notice was likewise served upon all banks, instructing them not to pay anyone
of the money orders aforesaid if presented for payment. The Bank of America received a copy of
said notice three days later.
On April 23, 1958 one of the above-mentioned money orders numbered 124688 was
received by appellant as part of its sales receipts. The following day it deposited the same with
the Bank of America, and one day thereafter the latter cleared it with the Bureau of Posts and
received from the latter its face value of P200.00.
Among the conditions laid down in the letter of the Director of Posts, October 26, 1948,
the condition is imposed that "in cases of adverse claim, the money order or money orders
involved will be returned to you (the bank) and the, corresponding amount will have to be
refunded to the Postmaster, Manila, who reserves the right to deduct the value thereof from any
amount due you if such step is deemed necessary."
Appellant filed a complaint against the appellee to recover the P200. In due course, the
complaint was dismissed by the trial court. Hence this appeal.
HELD: It is not disputed that our postal statutes were patterned after statutes in force in
the United States. For this reason, ours are generally construed in accordance with the
construction given in the United States to their own postal statutes, in the absence of any special
reason justifying a departure from this policy or practice. The weight of authority in the United
States is that postal money orders are not negotiable instruments (Bolognesi vs. U.S. 189 Fed.
395; U.S. vs. Stock Drawers National Bank, 30 Fed. 912), the reason behind this rule being that,
in establishing and operating a postal money order system, the government is not engaging in
commercial transactions but merely exercises a governmental power for the public benefit. It is
to be noted in this connection that some of the restrictions imposed upon money orders by postal
laws and regulations are inconsistent with the character of negotiable instruments. For instance,
such laws and regulations usually provide for not more than one endorsement; payment of
money orders may be withheld under a variety of circumstances (49 C.J. 1153).The conditions
thus imposed in order to enable the bank to continue enjoying the facilities theretofore enjoyed
by its depositors, were accepted by the Bank of America. The latter is therefore bound by them.
That it is so is clearly referred from the fact that, upon receiving advice that the amount
represented by the money order in question had been deducted from its clearing account with the
Manila Post Office, it did not file any protest against such action. Decision affirmed.
1086. Clean and documentary bills of exchange. Clean bill of exchange is one to
which are not attached documents of title to be delivered to the person against whom the bill is
drawn when he either accepts or pays the bill. Documentary bill of exchange is one to which
are attached documents of title to be delivered and surrendered to the drawee when he accepts or
pays the bill.

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1087. D/A and D/P bills of exchange. Documents against payment bill, abbreviated
D/P bill, is a sight or time billone to which are attached documents to be delivered and
surrendered to the drawee when he has paid corresponding bill. Documents against acceptance
bill, abbreviated D/A bill, is a time bill to which are attached documents to be delivered and
surrendered to the drawee when he accepts the bill.
1088. Time or usance bills. Sight bills are bills which are payable upon presentation or
at sight or on demand. These are bills which are payable at a fixed future time or at a
determinable future time.
1089. Aval. See comments under Article 486 of the Code of Commerce.
Section 127. Bill not an assignment of funds in hands of drawee. - A bill of itself does
not operate as an assignment of the funds in the hands of the drawee available for the
payment thereof, and the drawee is not liable on the bill unless and until he accepts the
same.
1090. Illustration of section 127. Where X, drawee, has not accepted the bill drawn
against him, F, holder, cannot enforce it against him, even if A has sufficient funds in the hands
of X to pay for the bill. Thus, an unaccepted draft cashed by a bank at the drawers request is not
an assignment of the drawers funds in the hands of the drawee. And a holder in due course of a
dishonored bill has no cause of action against the drawee either at law or in equity as an assignee
of the drawers contractual rights underlying the bill.
1091. demand drafts not credits subject to escheat under Act 3936.
Section 128. Bill addressed to more than one drawee. - A bill may be addressed to
two or more drawees jointly, whether they are partners or not; but not to two or more
drawees in the alternative or in succession.
1092. Illustration of Section 128. Under this section, a bill may be addressed to two or
more drawees jointly, thus: To X and Y. But a bill cannot be addressed to two or more drawees
alternatively. Hence the following is not allowed: To X or Y. Neither may a bill be addressed
to two or more drawees in succession. Hence, the following is not allowed: To X, or in his
absence Y.
Section 129.Inland and foreign bills of exchange. - An inland bill of exchange is a bill
which is, or on its face purports to be, both drawn and payable within the Philippines. Any
other bill is a foreign bill. Unless the contrary appears on the face of the bill, the holder
may treat it as an inland bill.
1093. Inland and foreign bill. An inland bill of exchange is a bill which is, or on its face
purports to be, both drawn and payable within the Philippine Islands. A foreign bill of exchange
is a bill which is, or on its face purports to be, both drawn and payable outside the Philippine
Islands.
1094. Illustration of foreign bill. The following is a foreign bill of exchange as on its
face, it is not both drawn and payable within the Philippines.

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Washington, D.C.
January 1, 1950
Pay to B or order P 1,000.00 at the PNB, Manila.
(Sgd.) A

But even if the bill is drawn in Washington, D.C. if the place where it is drawn does not
appear thereon, as when Washington, D.C. are omitted, the holder may treat it as an inland bill,
as the contrary does not appear thereon.
1095. Importance of distinction. The distinction is important in (1) that foreign bills are
required to be protested. Failure to protest foreign bills will discharge persons secondarily liable
thereon. (2) The distinction is also important for the determination of the law applicable.
Section 130.When bill may be treated as promissory note. - Where in a bill the
drawer and drawee are the same person or where the drawee is a fictitious person or a
person not having capacity to contract, the holder may treat the instrument at his option
either as a bill of exchange or as a promissory note.
1096. When bill may be treated as note. A bill may be treated by the holder at his
option as a note in the following cases:
(1) Where the drawer and the drawee are the same person such as, in a draft drawn by an
agent on his principal by authority of the principal. Another example is a draft drawn by a bank
on its branch.
(2) Where the drawee is a fictitious person.
(3) Where the drawee has no capacity to contract.
In all these cases, notice of dishonor need not be given to the drawer to charge him.
Treating the bill as a note would constitute the drawer, the maker. Thus, considered as maker, the
drawer would then be a party primarily liable on the instrument to whom notice of dishonor need
not be given. Furthermore, the holder need not prove presentment for payment or present the bill
to the drawee for acceptance.
Section 131. Referee in case of need. - The drawer of a bill and any indorser may
insert thereon the name of a person to whom the holder may resort in case of need; that is
to say, in case the bill is dishonored by non-acceptance or non-payment. Such person is
called a referee in case of need. It is in the option of the holder to resort to the referee in
case of need or not as he may see fit.
1097. Illustration of Section 131. This insertion is rarely found in English or American
bills. The following is a bill which contains a referee in case of need:
Pay to B or order P 1,000.00. In case of need, apply to Y,
220 Regina Bldg., Escolta, Manila.
(Sgd.) A
To X
216 Regina Bldg.
Escolta, Manila

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The bill is successively indorsed to C, D, E and F. If X dishonors the bill, F may, if he
wants to, apply to Y for payment after, of course, protesting the bill. But he may, if he wants to,
immediately go against A, drawer, C, D, or E, indorsers. This is, of course, after due proceedings
of dishonor have been taken by him. If the referee, Y, pays, he may recover the amount from the
drawer (or indorser) who has named him as referee in case of need.
X ACCEPTANCE
Section 132. Acceptance; how made, by and so forth. - The acceptance of a bill is the
signification by the drawee of his assent to the order of the drawer. The acceptance must be
in writing and signed by the drawee. It must not express that the drawee will perform his
promise by any other means than the payment of money.
1098. Acceptance, defined.The signification of the drawee of his assent to the order of
the drawer. It is an act by which a person on whom the bill of exchange is drawn (called the
drawee) assents to the request of the drawer to pay it. Acceptance may be: (1) actual; (2)
constructive; (3) general; or (4) qualified.
1099. Requisites of actual acceptance. Actual acceptance must be in writing, and signed
by the drawee. In addition, it must not express that the drawee will perform his promise by any
other means than the payment of money, and it must be communicated or delivered to the holder.
1100. Acceptance must be in writing. The acceptance cannot be made orally. The
reason is that: sound public policy requires that some substantial and tangible evidence of
contract, and more reliable in is nature than the statement or recollection of witnesses. An oral
acceptance is not binding on the drawee. Thus, acceptance by telephone is not acceptance.
1101. Acceptance, how made. It is usually done by writing across the face of the bill the
word accepted followed by the signature of the drawee. But any words written by the drawee
not negativing directly the order of the drawer, would constitute sufficient acceptance, such as,
holder, presented, or seen: or honored or I will pay this bill or the signature of the
drawee, without more. Acceptance by telegram has been held sufficient. And such acceptance by
telegram when the bill is properly identified seems entirely unobjectionable and accords with the
best interest of the business world.
1102. When acceptance not required.In general, acceptance in the sense in which the
term is used in the Negotiable instruments Law is not required for checks, for the same are
payable on demand.
1103. The drawee must sign. Without the signature of the drawee, he would not be
bound, pursuant to the principle enunciated in Section 18.
1104. Payment in money. The acceptance must be expressed to be payable in money
only. Hence, the following is not a good acceptance: Accepted payable in palay. (Sgd.) X.
1105. Necessity of delivery. The acceptance is incomplete until delivery or notification.
And the acceptor or draweewho has not communicated his acceptance or transmitted the
accepted bill to the holder, may revoke an acceptance before delivery and cancel the written
acceptance.

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1106. Effect of acceptance. Upon acceptance, the drawee becomes liable on the bill. The
bill becomes in effect a note, the acceptor standing in the place of the maker, and the drawer, in
the place of the first indorser. But should the drawee refuse to accept, the payee or other holder
has no recourse against him but only against the drawer and indorsers if any.
1107. Payment not acceptance. Is payment equivalent to acceptance? No. The
payment of a check does not include or imply its acceptance in the sense that this word is used in
Section 62 of the Negotiable Instruments Law.
In general, acceptance in the sense in which this term is used in the Negotiable
Instruments Law, is not required for checks, for the same are payable on demand. Indeed,
acceptance and payment are within the purview of said law, essentially different things, for
the former is a promise to perform an act whereas the latter is the actual performance
thereof. In the words of the law, the acceptance of a bill is the signification by the drawee of his
assent to the order of the drawer, which, in the case of check, is the payment on demand of a
given sum of money. Upon the other hand, actual payment of the amount of a check implies not
only an assent to said order of the drawer and recognition of the drawees obligation to pay the
aforementioned sum, but also a compliance with such obligation.
Section 133. Holder entitled to acceptance on face of bill. - The holder of a bill
presenting the same for acceptance may require that the acceptance be written on the bill,
and, if such request is refused, may treat the bill as dishonored.
Section 134.Acceptance by separate instrument. - Where an acceptance is written on
a paper other than the bill itself, it does not bind the acceptor except in favor of a person to
whom it is shown and who, on the faith thereof, receives the bill for value.
Section 135. Promise to accept; when equivalent to acceptance. - An unconditional
promise in writing to accept a bill before it is drawn is deemed an actual acceptance in
favor of every person who, upon the faith thereof, receives the bill for value.
1108. Where acceptance may be written. Acceptance may be made on the bill itself, or
on a separate paper; and if on a separate paper it may be acceptance as to an existing bill; or it
may be an acceptance as to a non-existing bill. If the bill is non-existent, the acceptance on a
separate paper must comply with the following requirements:
(1) That the contemplated drawee shall describe the bill to be drawn, and promise to
accept it.
(2) That the bill shall be drawn within a reasonable time after such promise it is written;
and
(3) That the holder shall take the bill upon the credit of the promise.
1109. Right to require acceptance on bill. Under section 133, the holder has the right to
require that the acceptance must be written on the bill itself. If the drawee refuses, the holder
may treat the bill as dishonored, and he must, therefore, give notice of dishonor. Otherwise,
persons secondarily liable are discharged. This section is not confined to sight bills but is
applicable to all bills of exchange.

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1110. Illustration of Section 134. B, the payee of a bill writes to X, drawee, asking him
whether he would accept the bill. X writes back (or telegraphs) stating that he accepts the bill.
But a telegram that a draft is good in answer to a telegram asking a bank if it would pay the
draft is not an acceptance nor an agreement to accept. The court reasons that good constitutes
an acceptance if written on the bill or check but not when written in a collateral document such
as a telegram. So also, a telegram by a drawee bank that it had funds to pay a specified draft was
held not to be an acceptance of that draft.
1111. Illustration of Section 135. Before the bil is drawn, B, prospective payee, writes
to X, prospesctivedrawee, if he would accept As bill for P1,000 to cover cost of goods
purchase.X writes (or telegraphs) yes. The promise to accept must be in writing. But although
the acceptance of a bill may be conditional, a collateral written promise to accept a bill upon a
condition is not an acceptance.
1112. Effect of acceptance on separate paper. Suppose that B, the payee, indorses the
bill to C who neither saw nor knew of the letter of acceptance. C indorses the bill to D who saw
the letter, and, on faith thereof, received the bill, giving value therefor. Can C enforce the bill
against A, drawee? No, because the acceptance binds X only in favor of those to whom it is
shown and who, on faith thereof, receive the bill for value, and C neither saw nor knew of the
acceptance. But B and D can enforce the bill against X because they received the bill for value
on faith of the separate acceptance.
1113.Variance between Sections 134 and 135. The variance in wording between
Sections 134 and 135 should, however, be noted. Section 134 provides that an extrinsic
acceptance must be in writing and is good only to persons to whom it is shown; while Section
135 provides that a promise to accept is good to any person who upon faith thereof receives the
bill for value. Accordingly, under Section 135, it does not seem necessary that the separate
acceptance be shown. It is enough that the bill is received on faith of the separate acceptance.
Section 136. Time allowed drawee to accept. - The drawee is allowed twenty-four
hours after presentment in which to decide whether or not he will accept the bill; the
acceptance, if given, dates as of the day of presentation.
1114. Illustration of Section 136. A bill is payable 30 days after sight. B, the payee,
presents it for acceptance on January 2, 1950, to X, drawee. X has 24 hours to accept the bill. But
even if he accepts the bill in January 3, 1940, the acceptance will date back to January 2, 1950.
Hence, the date of maturity of the bill would be February 1, 1950, not February 2, 1950. The
time allowed begins from the time of delivery and not after demand for a return of the bill and
the time for returning the bill to holder does not begin to run from the demand for its return but
from the date of its delivery.
1115.Section 136 not applicable to checks. But a drawee bank is not entitled to 24 hours
to decide whether to pay a check or not since a check is presented for payment, not acceptance.
But, of course, if the check is presented for certification, this ruling will not apply, as
certification is equivalent to acceptance.

233 FOUR-C LAW LIBRARY


1116. Negligence of Drawee. The drawee bank contends that the collecting bank is
guilty of negligence in not discovering that the signatures of the drawer are forged. Assuming
this to be true, the drawee bank is guilty of a greater degree of negligencebecause it had been
lost, with the request that payment thereof be stopped. The collecting bank did not cash the check
upon its presentation by the last indorer; it merely deposited it in the current account of the
indorser and on the same day sent it for clearing through Central Bank. The drawee bank did not
return the check and said failure to return the check implied that it considered the check good
and would honor it, as it in fact did honor and pay. The drawee bank may not recover from the
collecting bank.
Section 137.Liability of drawee returning or destroying bill. - Where a drawee to
whom a bill is delivered for acceptance destroys the same, or refuses within twenty-four
hours after such delivery or within such other period as the holder may allow, to return the
bill accepted or non-accepted to the holder, he will be deemed to have accepted the same.
1117. Constructive acceptance.Section 137 treats of constructive acceptance. This class
of acceptance is not it writing. There is constructive acceptance where the drawee to whom the
bill is delivered for acceptance destroys it; or where the drawee refuses, within 24 hours after
such delivery, or within such time as is given him, to return the bill accepted or not accepted. In
any of these cases, the drawee will be deemed to have accepted the bill even if there is no actual
written acceptance by him. Accordingly, the drawee will be primarily liable as an acceptor.
1118. Drawee not entitled to keep bill. The drawee is not entitled to keep the bill while
he makes up his mind. Section 136 makes no such provision. The bill is at all times the property
of the holder and he is entitled to have it when he wants it, and Section 137 so provides. If the
holder should demand its return before twenty-four hours, the drawee would be required to
comply on pain of being held as an acceptor; but in return within twenty-four hours unaccepted
would not be a dishonor. The drawee could still accept by notification within the twenty-four
hours. Here, an extrinsic acceptance under Section 134 would play an important part. If the
drawee, after returning the bill, still refused to act after the expiration of the time allowed, the
holder then would be required to treat the bill as dishonored or lose his rights against prior
parties.
1119. Mere retention is equivalent to acceptance. There is conflict of authority as to
whether mere retention of a bill by the drawee is acceptance or not. But the overwhelming
weight of authority is to the effect that mere failure to return the bill within twenty-four hours is
an acceptance. Thus, it has been held that the presentation for acceptance is a demand for
acceptance which, if the bill is retained by the drawee, implies a demand for its return if
acceptance is declined. It was further held that under Section 185 a check was subject to the
same rules, and that failure to return within twenty-four hours a check sent to drawee bank for
payment was an acceptance of the check upon which the holder could recover against the bank,
although the delay was due to the neglect of the notary public to whom the check was handed by
the drawee bank to protest on the day of its receipt by the bank.

234 FOUR-C LAW LIBRARY


1120. Sections 136 and 137 cover presentment for acceptance and payment. Sections
136 and 137 expressly cover only presentment for acceptance and presentment for payment is
not mentioned. But it does not necessarily follow that because the law is silent as to presentment
for payment that the result should be different from the case of presentment for acceptance. The
consideration involved in both cases are the same. Although the law is silent on the point of how
long the drawee may take to pay, the rule of the Wisner case fills this gap by requiring
promptness on the part of the drawee. Thus, he must return the instrument or be liable for its face
value as acceptor. This rule forces uniform treatment of instruments whether presented for
payment or acceptance and establishes certain and predictable results where it is not clear for
which purpose the instrument was presented.
Section 138.Acceptance of incomplete bill. - A bill may be accepted before it has
been signed by the drawer, or while otherwise incomplete, or when it is overdue, or after it
has been dishonored by a previous refusal to accept, or by non-payment. But when a bill
payable after sight is dishonored by non-acceptance and the drawee subsequently accepts
it, the holder, in the absence of any different agreement, is entitled to have the bill accepted
as of the date of the first presentment.
1121. When acceptance may be made. Acceptance may be made before the bill has
been signed by the drawer; even when the bill is otherwise incomplete; even when the bill is
overdue; or even after it has been dishonored by non-acceptance or by non-payment.
1122. Illustration of acceptance after previous dishonor by non-acceptance. A bill is
payable 30 days after sight. F, holder, presents it for acceptance on January 2, 1950. X,
drawee,refuses to accept. X, drawee may accept it afterwards and if he accepts the bill on
January 15, 1950, F can have the bill accepted as of January 2, 1950, the date of the first
presentement. Hence, the date of maturity is February 1, 1950, not February 14, 1950. But, of
course, if there is a different agreement, the agreement will be followed.
Section 139.Kinds of acceptance. - An acceptance is either general or qualified. A
general acceptance assents without qualification to the order of the drawer. A qualified
acceptance in express terms varies the effect of the bill as drawn.
Section 140. What constitutes a general acceptance. - An acceptance to pay at a
particular place is a general acceptance unless it expressly states that the bill is to be paid
there only and not elsewhere.
Section 141.Qualified acceptance. - An acceptance is qualified which is:
(a) Conditional; that is to say, which makes payment by the acceptor dependent on
the fulfillment of a condition therein stated;
(b) Partial; that is to say, an acceptance to pay part only of the amount for which the
bill is drawn;
(c) Local; that is to say, an acceptance to pay only at a particular place;
(d) Qualified as to time;
(e) The acceptance of some, one or more of the drawees but not of all.

235 FOUR-C LAW LIBRARY


1123. Other kinds of acceptance. An acceptance may also be general, or qualified. A
general acceptance is one that assents without qualification to the order of the drawer. The
following is a general acceptance: Accepted, (Sgd.) X. A qualified acceptance is one which in
express terms varies the effect of the bills as drawn.
1124. Payment at a particular place. But the mere fact that the acceptance is to pay at a
particular place does not make the acceptance qualified. The following is a general acceptance.
Accepted, payable at the PNB. But the following is qualified: Accepted, payable at the PNB
only.
1125. Illustrations of qualified acceptance.
(1) Conditional. Accepted, if Y marries Z. (Sgd.) X. A telegram stating We will
honor draft for carload of pigs at eight and quarter cents, is also conditional as the acceptance
depended upon the carload being pigs. So also is an acceptance to pay as soon as proceeds of
sale of hardware is available which I will do. But mere reference to the consideration for which
the bill is accepted is not sufficient to make the acceptance conditional.
(2) Partial. Bill is for P1, 000. Accepted, for P500.00 only.(Sgd.) X.
(3) Local. Accepted, payable at PNB only (Sgd.) X.
(4) Qualified as to time. Bill is payable 30 days after sight. Accepted, payable 60 days
after sight (Sgd.) X.
(5) One or more drawees, etc. The drawees of a bill are X and Y, and it is accepted only
by X.
Section 142.Rights of parties as to qualified acceptance. - The holder may refuse to
take a qualified acceptance and if he does not obtain an unqualified acceptance, he may
treat the bill as dishonored by non-acceptance. Where a qualified acceptance is taken, the
drawer and indorsers are discharged from liability on the bill unless they have expressly or
impliedly authorized the holder to take a qualified acceptance, or subsequently assent
thereto. When the drawer or an indorser receives notice of a qualified acceptance, he must,
within a reasonable time, express his dissent to the holder or he will be deemed to have
assented thereto.
1126.Right of holder to require general acceptance. The holder has the right to require
the drawee to accept the bill without qualification. If the drawee refuses, the holder can treat the
bill as dishonored by non-acceptance. Accordingly, the holder must give notice of dishonor.
1127. Effect of taking qualified acceptance. Where the holder takes a qualified
acceptance, the drawer indorses are discharged the reason for this is that the drawer and the
indorsers warrant that the bill would be paid as drawn or as indorsed by them, and a qualified
acceptance would vary their contract without their consent.
But, of course, if the drawer and the indorsers expressly or impliedly give their consent to
the qualified acceptance, they are not discharged. And a drawer on an indorser will be
condidered to have consented it, after receiving notice of the qualified acceptance, he does not
express his dissent thereto within a reasonable time.
XI - PRESENTMENT FOR ACCEPTANCE

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Section 143.When presentment for acceptance must be made. - Presentment for
acceptance must be made:
(a) Where the bill is payable after sight, or in any other case, where presentment for
acceptance is necessary in order to fix the maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence or place of
business of the drawee.
In no other case is presentment for acceptance necessary in order to render any
party to the bill liable.
Section 144. When failure to present relcases drawer and indorser. - Except as
herein otherwise provided, the holder of a bill which is required by the next preceding
section to be presented for acceptance must either present it for acceptance or negotiate it
within a reasonable time. If he fails to do so, the drawer and all indorsers are discharged.
1128. Presentment for acceptance, defined.it is the production of a bill of exchange to
thedrawee for his acceptance.
1129. General rule as to presentment for acceptance. The general rule stated in these
sections is that presentment for acceptance is not necessary to render any party to the bill liable
except for the three cases enumerated in Section 143. In those three casesto charge persons
secondarily liable it is necessary (1 ) to make presentment for acceptance or (2) to negotiate the
bill within reasonable time. So, even when no presentment foracceptance is made, if the bi1 is
negotiated within a reasonable time, the persons secondarily liable thereon are not discharged.
Of course, there is nothing wrong in making a presentment or acceptance in the other
cases. Indeed, it is a usual courseto present such bills for acceptance. And if the bill is dishonored
by non-acceptance, the holder may treat the bill as if it had required acceptance.
1130. Illustration of Section 143.
(1) Where the bill is payable after sight. A bill is payable 30 days after sight. The law
requires this bill to be presented for acceptance. The date of maturity will not be fixed if the bill
is not presented.
(2) Where there is express stipu1ation. The bill contains a stipulation that it must be
presented for acceptance. Such a bill must be presented for acceptance.
(3) Where bill is drawn elsewhere than at the residence of drawee: The bill read as
follows:
Pay to B or order P 1,000.00 at the PNB, Manila.
(Sgd.) A
To X
Davao City

This bill must be presented for acceptance in order to inform the drawee X of the
existence of the bill so that he can make arrangements for its payment at the PNB, Manila.
Section 145. Presentment; how made. - Presentment for acceptance must be made
by or on behalf of the holder at a reasonable hour, on a business day and before the bill is

237 FOUR-C LAW LIBRARY


overdue, to the drawee or some person authorized to accept or refuse acceptance on his
behalf; and
(a) Where a bill is addressed to two or more drawees who are not partners,
presentment must be made to them all unless one has authority to accept or refuse
acceptance for all, in which case presentment may be made to him only;
(b) Where the drawee is dead, presentment may be made to his personal
representative;
(c) Where the drawee has been adjudged a bankrupt or an insolvent or has made an
assignment for the benefit of creditors, presentment may be made to him or to his trustee
or assignee.
1131. Time for making presentment for acceptance. Presentment for acceptance must
be made: (1) before the bill is overdue, and (2) within reasonable time after acquisition thereof.
Thus, where it appears that the first and second ofexchange of a bill in set, as well as the bills of
lading and other shipping documents, reached the New York office of the holder as early as
September 21, 1939, but they were not delivered to the drawee, or at least the bill of exchange
until October 26, 1939, it is clear that there was an unreasonable delay in the delivery of the bill
of exchange to the drawee for acceptance, and consequently, the drawer and indorsers are
discharged.
1132. To whom presentment made. Generally, presentment must be made to the drawee
or some person authorized to accept or refuse acceptance on his, behalf. Where there are two or
more drawees, presentment must be made to both of them unless (1) one is duly authorized to
accept or refused acceptance, or (2) they are partners, subject to the limitations set forth in our
partnership law. Under Section 141 (e) acceptance by one drawee where -there are two or more
is a qualified acceptance. Paragraph (b) of Section 145 seems to be merely permissive since, by
Section 148 (a) presentment is excused where the drawee is dead. As to paragraph(c), since there
is no section which excuses presentment in case the drawee has been adjudged bankrupt or an
insolvent or has made an assignment for the benefit of creditors, the word may in said
paragraph indicates merely a permission to adopt either one of the two alternative methods of
presentment stated not permission to omit presentment altogether.20
Section 146. On what days presentment may be made. - A bill may be presented for
acceptance on any day on which negotiable instruments may be presented for payment
under the provisions of Sections seventy-two and eighty-five of this Act. When Saturday is
not otherwise a holiday, presentment for acceptance may be made before twelve o'clock
noon on that day.
1133. Section 146 compared with Sections 72 and 85. The only difference between
Sections 72 and 85 is that under Section 146, there is no distinction between instruments payable
at a fixed or determinable future time and itis instruments payable on demand. Where
presentment is for acceptance, it may be made for all kinds of bills before 12:00 oclock noon on
Saturday provided that day is not a holiday.

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Section 147.Presentment where time is insufficient. - Where the holder of a bill
drawn payable elsewhere than at the place of business or the residence of the drawee has
no time, with the exercise of reasonable diligence, to present the bill for acceptance before
presenting it for payment on the day that it falls due, the delay caused by presenting the
bill for acceptance before presenting it for payment is excused and does not discharge the
drawers and indorsers.
1134. Illustration of Section 147.
Manila, P.I.
Jan. 2, 1950
Pay to B or order at the PNB Manila P 1,000.00 on Jan. 5,
1950.
(Sgd.) A
To X, Washington, D.C.

This is a bill payable at a place other than the residenceor place of business of thedrawee.
Under Section 143 (c), B must present the bill for acceptance to X, drawee, who is in
Washington, and under Section 71, B must also present the bill for payment at the PNB on
January 5, 1950. However, under the circumstances, as B has to send the bill for acceptance to X,
B would not be able to make the presentment for payment on January 5, 1950. He will, therefore,
be delayed in making his presentment for payment. This delay, however, is excused.
Section 148.Where presentment is excused. - Presentment for acceptance is excused
and a bill may be treated as dishonored by non-acceptance in either of the following cases:
(a) Where the drawee is dead, or has absconded, or is a fictitious person or a person
not having capacity to contract by bill.
(b) Where, after the exercise of reasonable diligence, presentment can not be made.
(c) Where, although presentment has been irregular, acceptance has been refused
on some other ground.
1135. Application of Section 148.
(1) Where the drawee is dead, presentment for acceptance is not necessary. Hence, it
seems that under Section 145 (b) the presentment mentioned there to be made to the personal
representative of the deceaseddrawee is merely optional. Presentment is excused in this case and
in case the drawee has absconded, or is fictitious or a person not having capacity to contract
because it would then be futile.
(2) Where presentment cannot be made notwithstanding the exercise of reasonable
diligence, presentment is excused.
(3) An irregular presentment in which acceptance is refused on some other ground is
where presentment is made on a Sunday, and therefore, it is irregular but the acceptance is
refused on the ground that the drawer has no funds in the hands of the drawee.
Section 149. When dishonored by nonacceptance. - A bill is dishonored by nonacceptance:(a) When it is duly presented for acceptance and such an acceptance as is
prescribed by this Act is refused or can not be obtained; or

239 FOUR-C LAW LIBRARY


(b) When presentment for acceptance is excused and the bill is not accepted.
1136. Illustration of paragraph (a). An illustration of paragraph (a), is where the
drawee refuses to accept on the bill itself, or refuses to give a general acceptance.
Section 150.Duty of holder where bill not accepted. - Where a bill is duly presented
for acceptance and is not accepted within the prescribed time, the person presenting it
must treat the bill as dishonored by nonacceptance or he loses the right of recourse against
the drawer and indorsers.
1137. Duty of holder where bill dishonored by non-acceptance. Where the bill is
dishonored by non-acceptance, the holder must give notice of dishonor and protest, when
required. Otherwise, the drawer and the indorsers will be discharged.
Section 151.Rights of holder where bill not accepted. - When a bill is dishonored by
nonacceptance, an immediate right of recourse against the drawer and indorsers accrues to
the holder and no presentment for payment is necessary.
1138. Rights of holder where bill dishonored by non-acceptance. When a bill is
dishonored by non-acceptance, there is no necessity of making a presentment of the bill for
payment. But, of course, if after previous: non-acceptance, the bill is subsequently accepted,
presentment for payment is necessary when the bill has been accepted for honor, to charge the
acceptorfor honor, presentment for payment is also necessary.
The holder, after giving notice of dishonor, and protesting when required can
immediately file an action against the parties secondarily liable on the bill. This is true even
when the bill is payable at a fixed or determinable future time and the date of maturity has not
yet arrived. The holder need not wait for that day to arrive.
XII PROTEST
Section 152. In what cases protest necessary. - Where a foreign bill appearing on its
face to be such is dishonored by non-acceptance, it must be duly protested for
nonacceptance, by nonacceptance is dishonored and where such a bill which has not
previously been dishonored by nonpayment, it must be duly protested for nonpayment. If it
is not so protested, the drawer and indorsers are discharged. Where a bill does not appear
on its face to be a foreign bill, protest thereof in case of dishonor is unnecessary.
1139. Necessity of protest. Protest is required only for foreign bills, but not for inland
bills or notes. However, they may also be protested if desired.Omission of protest, where protest
is required, will discharge the drawer and the indorsers.Protest is required: (1) where the foreign
bill is dishonored by nonacceptance, (2) here the foreign bill is dishonored by non-payment, it
not having been previously dishonored by non-acceptance, (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; or (4) where the bill contains a referee in case of need it must be protested for nonpayment before it is presented for payment to the referee in case of need.
1140. Meaning of protest. By protest is meant a formal statement in writing made by a
notary under his seal of office at the request of the holder of a bill or note, in which it isdeclared

240 FOUR-C LAW LIBRARY


that the same was on a certain day presented for payment (or acceptance as the case may be), and
such payment (or acceptance) was refused, whereuponthe notary protests against all parties to
such instrument and declares that they will be held responsible for all loss or damage arising
from its dishonor. In its popular sense, it means ale the steps or acts accompanying the dishonor
of a bill or note necessary to charge an indorser.
Section 153. Protest; how made. - The protest must be annexed to the bill or must
contain a copy thereof, and must be under the hand and seal of the notary making it and
must specify:
(a) The time and place of presentment;
(b) The fact that presentment was made and the manner thereof;
(c) The cause or reason for protesting the bill;
(d) The demand made and the answer given, if any, or the fact that the drawee or
acceptor could not be found.
1141. Procedure for protest. Where the instrument is presented for payment and
payment is refused. The instrument may be taken by a notary public to the party and the party
may state that he refuses to pay it: the notary makes a statement to that effect and attaches his
seal that it has been dishonored, and that he has protested it for non-payment. The notary keeps
this or he may send his sworn copy to one person and one to the other. This is the protest. It is
not the notice of protest. The protest is a solemn declaration made by the notary public that the
paper has been disnonored.
1142. Certificate of protest as evidence. When suit is brought on the paper, it is
absolutely necessary that proof be shown. So when one comes to prove his case as the holder of
an instrument he must prove that there has been a protest of the instrument, that it has been
presented for payment or acceptance to the person liable and that it has been refused. That is part
of his case. And at the trial, this statement of the protest by the notary is a part of his case It is the
same as a deposition.
This certificate is generally accepted as evidence of the facts set forth in its terms, and
its production obviates the necessity of proof of these facts by witnesses in open court. The main
purpose of the protest, therefore, is to furnish to the holder legal testimony of presentment,
demand, and notice of dishonor, to be used in an action against the drawer and indorsers.
And the notarys certificate of protest is only evidence of those facts which are stated
therein which it is the duty of the notary to note in making presentment and demand for payment.
Collateral facts noted by the certificate must be proved by other evidence.
1143. Form of- certificate of protest.
REPUBLIC OF THE PHILIPPINES)
MANILA ) ss.
By this Public Instrument of Protest, be it known: That on this ______________ , in the
year of Our Lord 19__ , I, a Notary Public in and for the City of Manila, aforesaid by lawful
authority duly commissioned and sworn, residing in ______________________, in the City
aforesaid, at the request of _______________________, holder of the original ____________,

241 FOUR-C LAW LIBRARY


did present the original ____________________ which is hereunto annexed, to ____________,
and did demand _____________________. The said________________________ did refuse to
_____________________the same (here insert reason, if any, why. payment or acceptance was
refused.)
Whereupon I did protest; and by these presents do publicly and solemnly protest as well
against the drawer and indorsersof the said _________________________as against all others
whom it doth or may concern for exchange, reexchangeand all costs, charges, damages and
interest heretofore incurred or to be hereafter incurred for want of the ____________________
of the same; and I do hereby certify that on the ________ day of __________, one thousand nine
hundred _______________, I did give due and written notice, signedby me, of the presentment
and protest of the foregoing to the respective indorsers of the said instrument, and informing
______________ that _________________ held liable for the payment of said ______________;
and on the same day, in the evening, I deposited the same in the post office at _____________,
contained in a securely sealed postpaid wrapper, duly directed and subscribed to said _________
as follows, towit: to _________________________________________________________.
The above-named places and addresses being the reputed place of the residence and address of
the person to whom such notice was so addressed and the post office nearest thereto.
This done and protested in the City of ______________________ aforesaid in the
presence of _____________________________ and _______________________________,
witnesses.
In testimony whereof, I have hereunto set my hand and affixed by official seal this
_______day of ______ 19___.
Notary Public
Until Dec. 31, 19 ___
FEES
(SEAL)
Doc. No. ____
Page No.____
Book No.___
Series of 19__
________________________________________________________________________
Protest__________________
Record__________________
Notices__________________
Postage__________________
Total ________P_________
1144. Notice of protest. After the notary protests the instrument, he sends notice to all
the parties on the instrument. He can do this in several ways. He might send it to the person who
sent the paper in for collection. Then the notary public would send his notice of protest for the
other parties on the instrument, to the last person on the instrument, and he would say, Notices

242 FOUR-C LAW LIBRARY


enclosed herewith to be sentto the, other parties. If the holder has sent notice to all the parties
he is entitled to come in and recoverbecause he has performed his contract. He has sent notice to
all the parties on the instrument that he intends to recover againstthem. If the indorsee is D and
he hassent notice to all the other indorsers, he can proceed against all or any one of them. C gets
the notice and he sends out notices to those who preceded him and that holds them but they will
be held already by the notices sent them by the other party. It is just performing the contract
which was entered into in the way a merchant would do it. It is performing the contract which
was entered into originally so that he may comewithin its terms,
1145. Form of notice of protest.
REPUBLIC OF THE PHILIPPINES)
MANILA
) ss.
_______________________, 19 _____
To_________________________________
__________________________________________
You will please take notice that a _______________________for ______________ pesos, dated
_____________
payable
__________________
after
_______________drawn by
____________________ in favor of ____________________ on ______________(accepted by)
endorsed by you and due __________________________ has been protested by me on this day
for an ______________________ after having made legal demand for the same.
I hereby, at the request of _________________, the holder thereof, notify you that the
said holder looks to you for payment, damages, interest and costs as indorser thereof.
Very respectfully,
Notary Public
Until Dec. 31, 19__
(SEAL)
1146 Reasons for requiring protest. Protest is required: (1) for uniformity n.
international transactions because most countries require it and (2) in order to furnish authentic
andsatisfactory evidence of the dishonor to the drawer who, from his residence abroad, may
experience difficulty in verifying the matter and may be forced to rely on the representations of
the holder.
1147. Measure of damages. As the Negotiable Instruments Law does not fix the
damages, under Section 196, the law merchant will govern. Under the law merchant, the
damages are: (1) the face value of the bill; (2) interest thereon; (3) protest fees; (4) re-exchange,
being the additional expense of procuring a new bill for the same amount payable in the same
place on the day of dishonor.
Section154. Protest, by whom made. - Protest may be made by:
(a) A notary public; or
(b) By any respectable resident of the place where the bill is dishonored, in the
presence of two or more credible witnesses.

243 FOUR-C LAW LIBRARY


Section 155.Protest; when to be made. - When a bill is protested, such protest must
be made on the day of its dishonor unless delay is excused as herein provided. When a bill
has been duly noted, the protest may be subsequently extended as of the date of the noting.
1148. Meaning of duly, noted. By the term duly noted is meant that the notary public
jots down a note the bill, or a paper attached thereto, or in his registry book, consisting of his
initials or signature and those matters required to be stated in Section 153, The noting must be
made on the day of dishonor but it may be extended into a formal protest afterwards. The protest
may even be made at the trial. Thus, suppose that a bill is dishonored on April 26, 1950. The
protest need not be made on April 26, 1950. But it must at least be noted. After that is done,
the formal protest may be made on May 10, 1950.
Section 156. Protest; where made. - A bill must be protested at the place where it is
dishonored, except that when a bill drawn payable at the place of business or residence of
some person other than the drawee has been dishonored by nonacceptance, it must be
protested for non-payment at the place where it is expressed to be payable, and no further
presentment for payment to, or demand on, the drawee is necessary.
1149. Place for making protest. Generally, the protest must be made at the place where
the instrument is dishonored. The exception is where the bill is payable at a place other than the
residence of the drawee.
1150. Illustration of exception. Thus, suppose that the drawee X, resides in Washington,
D.C., but the bill is payable in Manila. B, payee, presents the bill for acceptance to X in
Washington, D.C. and X dishonors the bill by non-acceptance. B must protest the bill for nonpayment in Manila, and no further presentment for payment to X in Washington, D.C. is
necessary, X has been held that where the domicile and place of payment are different, it may be
protested at either place.
Section 157. Protest both for non-acceptance and non-payment. - A bill which has
been protested for non-acceptance may be subsequently protested for non-payment.
1115.Protest for non-payment optional after protest for non-acceptance. Where a bill
has already been protested for non-acceptance, protest for non-payment is merely optional.
Under Section 151, after a bill has been dishonored by non-acceptance, presentment for payment
is not necessary.
Section 158. Protest before maturity where acceptor insolvent. - Where the acceptor
has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of
creditors before the bill matures, the holder may cause the bill to be protested for better
security against the drawer and indorsers.
1152. Protest for better security. One made by the bolder against the drawer
andindorsers where the acceptor has been adjudged a bankrupt or an insolvent or has made an
assignment for the benefit of creditors before the bill matures. Such a protest is not necessary to
charge the drawer and the indorsers. It is optional on the part of the holder.

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1153. When protest for better security made. A protest for better security must be
made: (1) after acceptances (2) but before the date of maturity, and (3) when the acceptor has
been adjudged bankrupt or insolvent or has made an assignment for the benefit of creditors.
1154. Purpose of protest for better security. When the acceptor is declared bankrupt;
he probably would not be able to pay for the bill Theprotest for better security is to give notice to
the drawer and the indorsers of this fact in order to enable them to make the necessary
arrangements so that they will not be held liable thereon and prevent loss of re-exchange.
Section 159.When protest dispensed with. - Protest is dispensed with by any
circumstances which would dispense with notice of dishonor. Delay in noting or protesting
is excused when delay is caused by circumstances beyond the control of the holder and not
imputable to his default, misconduct, or negligence. When the cause of delay ccases to
operate, the bill must be noted or protested with reasonable diligence.
1155. Illustrative cases. Protest of a check payable abroad is dispensed with if the
drawer has no funds with the drawee to pay the check. Neither is protest necessary where the
draweewas a non-existent bank, or the drawer has countermanded payment. Butprotest of a
check payable abroad is not dispensed with if the drawer bona fide believed a sufficient credit
had been established at the drawee bank to pay the check.
Section 160. Protest where bill is lost and so forth. - When a bill is lost or destroyed
or is wrongly detained from the person entitled to hold it, protest may be made on a copy
or written particulars thereof.
1156. Effect of loss or destruction of bill. Loss or destruction of the bill does not excuse
the making of protest. In a case, checks indorsed without restriction and deposited in the
defendant bank which credited the amount to the depositors account and mailed them to its
correspondent for collection, were lost and not found until after the drawer became bankrupt.
They were not dishonored due to the failure of defendant to attempt to collect them as lost paper.
It was held that the bank must stand the loss and cannot charge the amount of the checks to the
depositors account.
XIII ACCEPTANCE FOR HONOR
Section 161.When bill may be accepted for honor. - When a bill of exchange has
been protested for dishonor by non-acceptance or protested for better security and is not
overdue, any person not being a party already liable thereon may, with the consent of the
holder, intervene and accept the bill supra protest for the honor of any party liable thereon
or for the honor of the person for whose account the bill is drawn. The acceptance for
honor may be for part only of the sum for which the bill is drawn; and where there has
been an acceptance for honor for one party, there may be a further acceptance by a
different person for the honor of another party.
1157. Acceptance for honor. An acceptance of a bill made by a stranger to it before
maturity, where the drawee of thebill has refused to accept it, and the bill has been protested for
non-acceptance, or where the bill has been protested for better security. Such an acceptance is
also called acceptance supra protest. This is a peculiar kind of acceptance. It most frequently

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happens when the original drawee refuses to accept the bill, in which case a stranger may accept
the bill for the honor of some one of the parties thereto, which acceptance will insure to the
benefit of all the parties subsequent to him for whose honor it was accepted.
1158. Purpose of acceptance for honor. An acceptance for honor is done to save the
credit of the parties to the instrument or some party to it, as the drawer, drawee, or indorser, or
somebody else. Someone desires to save the credit of another on the bill and he does so by
writing accepted on the bill. The court holds that the consideration is presumed and the
presumption is that he does have funds or money of the party for whose honor he accepts.
1159. Requisites for acceptance for honor. The following are the four requisites
established by law in order that an acceptance for honor may validly be made:
(1) The bill must have been previously protested (a) for non-acceptance or (b) for better
security.
(2) The bill is not overdue at the time of the acceptance for honor.
(3) The acceptor for honor must be a stranger to the bill. If he is a party, his acceptance
for honor would not give anyadditional security to the holder, as such a party is alreadyliable
thereon.
(4) The holder must give his consent.
Section 162. Acceptance for honor; how made. - An acceptance for honor supra
protest must be in writing and indicate that it is an acceptance for honor and must be
signed by the acceptor for honor.
1160, How acceptance for honor made. Like an ordinary acceptance, acceptance for
honor must be: (1) in writing and indicate that it is an acceptance for honor and (2) signed by the
person making the acceptance) Thus: Accepted for the honor of B. (Sgd.) Y.
1161. Acceptor for honor must appear before notary. It is essential that the acceptor for
honor appear before a notary public and declare that he accepts the protested bill in honor of the
drawer or indorser, as the case may be, and that he will pay it at the appointed time. An
acceptance for honor, then, is properly made by the acceptor appearing before a notary public
and declaring his intention to accept for the honor of sorneone or more of the parties and
subscribing to some such expression of his intention as accepted for the honor of A.
Section 163. When deemed to be an acceptance for honor of the drawer. - Where an
acceptance for honor does not expressly state for whose honor it is made, it is deemed to be
an acceptance for the honor of the drawer.
1162. Illustration of Section 163. Suppose the acceptance for honor reads as follows:
Accepted for honor. (Sgd.) Y. This is deemed to have been made for the drawer, as it does not
specify for whose honor the acceptance is made.
Section 164.Liability of the acceptor for honor. - The acceptor for honor is liable to
the holder and to all parties to the bill subsequent to the party for whose honor he has
accepted.
Section 165.Agreement of acceptor for honor. - The acceptor for honor, by such
acceptance, engages that he will, on due presentment, pay the bill according to the terms of

246 FOUR-C LAW LIBRARY


his acceptance provided it shall not have been paid by the drawee and provided also that is
shall have been duly presented for payment and protested for non-payment and notice of
dishonor given to him.
1163. To whom acceptor for honor liable. Suppose that A is the drawer of a bill with B
as payee, and X as drawee. It is successively indorsed to C, D. E, and F, holder. X, drawee,
refuses to accept the bill and F protests it. Before the date of maturity, Y, as stranger, accepts the
bill for the honor of C, indorser. Subject to Section 165, Y is liable to F, holder, andto D and E,
parties subsequent to U, the party for whose honor V accepted the bill.
1164. Contract of acceptor for honor. The liabi1ity of an acceptor for honor is
secondary not primary or absolute. He agrees to pay if: (1) presentment for payment has been
made; (2) the drawee does not pay; (3) the bill is protested for nonpayment; and (4) notice of
dishonor is given to him.
Section 166.Maturity of bill payable after sight; accepted for honor. - Where a bill
payable after sight is accepted for honor, its maturity is calculated from the date of the
noting for non-acceptance and not from the date of the acceptance for honor.
1165. Illustration of Section 166. A bill is payable 30 days after sight. It is presented for
acceptance on January 2, 1950. X, drawee, refuses to accept it. A notary public duly notes the
non-acceptance on January 2, 1950. On January 15, 1950, Y, a stranger to the bill, accepts the
bill for the honor of the drawer, A. The date of maturity is on February 1, 1950, not February 14,
1950, as the 30 days must be counted from January 2, 1950, the day of the noting.
Section 167. Protest of bill accepted for honor, and so forth. - Where a dishonored
bill has been accepted for honor supra protest or contains a referee in case of need, it must
be protested for non-payment before it is presented for payment to the acceptor for honor
or referee in case of need.
Section 168. Presentment for payment to acceptor for honor, how made. Presentment for payment to the acceptor for honor must be made as follows:
(a) If it is to be presented in the place where the protest for non-payment was made,
it must be presented not later than the day following its maturity.
(b) If it is to be presented in some other place than the place where it was protested,
then it must be forwarded within the time specified in Section one hundred and four.
Section 169. When delay in making presentment is excused. - The provisions of
Section eighty-one apply where there is delay in making presentment to the acceptor for
honor or referee in case of need.
Section 170. Dishonor of bill by acceptor for honor. - When the bill is dishonored by
the acceptor for honor, it must be protested for non-payment by him.
1166. Necessity of protest. The holder must protest for non-payment by the acceptor for
honor in order to fix the liabilities of the indorsers.
XIV PAYMENT FOR HONOR

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Section 171. Who may make payment for honor. - Where a bill has been protested
for non-payment, any person may intervene and pay it supra protest for the honor of any
person liable thereon or for the honor of the person for whose account it was drawn.
Section 172. Payment for honor; how made. - The payment for honor supra protest,
in order to operate as such and not as a mere voluntary payment, must be attested by a
notarial act of honor which may be appended to the protest or form an extension to it.
Section 173.Declaration before payment for honor. - The notarial act of honor must
be founded on a declaration made by the payer for honor or by his agent in that behalf
declaring his intention to pay the bill for honor and for whose honor he pays.
1167. Requisites for payment for honor.The following are the requisites established by
law in order that a payment for honor may validly be made: (1) the bill has been protested for
non-payment; and (2) any person, even a party thereto, may pay supra protest. This is
distinguished from acceptancefor honor in which theacceptor must be a stranger to the bill.
1168. Form for payment for honor. (1) The payment mustbe attested by notarial act
appended to the protest, or form an extension to it; and (2) the notarial act must be based on a
declaration by the payer for honor.
1169. Procedure for payment for honor. The following is the procedure in payment for
honor:
(1) The payer or his agent goes to a notary public and declares his intention to pay the bill
and for who honor he pays,
(2) The notary then records the declaration in the protest or in a paper attached to it.
(3) Thepayor then notifies the person for whose honor he pays withinreasonable time.
If these formalities are not followed, the payment will operate as a mere voluntary
payment and the payor acquires only the rights stated in Articles 1236 to 1237 of the New Civil
Code and not those stated in Section 175.
1170. Purposes of payment for honor. Instead of simple negotiation to the person
desiring to pay, payment for honor may be availed of when the holder does not want to indorse
the bill and thereby incur the liabilities of an indorser or of one negotiating by mere delivery.
Section 174.Preference of parties offering to pay for honor. - Where two or more
persons offer to pay a bill for the honor of different parties, the person whose payment will
discharge most parties to the bill is to be given the preference.
Section 175.Effect on subsequent parties where bill is paid for honor. - Where a bill
has been paid for honor, all parties subsequent to the party for whose honor it is paid are
discharged but the payer for honor is subrogated for, and succeeds to, both the rights and
duties of the holder as regards the party for whose honor he pays and all parties liable to
the latter.
1171. Illustration of effect of payment for honor. A draws a bill payable t-o B or order
wth X, as the drawee. The bill is successively indorsed to C, D, E and F, holder. X does not pay
and F has duly protested non-payment. Y pays for the honor of C.

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(1) D and E, parties subsequent to C, for whose honor the payment is made, are
discharged; and
(2) Y, the payer for honor, acquires the rights of F, holder, as against C and A, B. and X,
parties who are liable to C. But the payer for honor shall notify, within a reasonable time, the
party for whose honors he pays. Otherwise, said party will not he bound to refund.
1172. Preference of parties offering to pay.In the illustration, if Z offers to pay for the
honor of B, he is to be preferred, as Zs payment for the honor of B will discharge C, D and E,
while Ys payment for C would discharge only D and E.
Section 176.Where holder refuses to receive payment supra protest. - Where the
holder of a bill refuses to receive payment supra protest, he loses his right of recourse
against any party who would have been discharged by such payment.
1173. Illustration of Section 176. In the illustration under Section 175, suppose X offers
to pay for the honor of B, and F refuses. F, by his refusal, loses his right to hold C, D and E
liable, as had he accepted Zs offer, they would have been discharged.
Section 177.Rights of payer for honor. - The payer for honor, on paying to the
holder the amount of the bill and the notarial expenses incidental to its dishonor, is entitled
to receive both the bill itself and the protest.
1174. Rights of payer for honor. (1) He acquires the rights of the holder under Section
175, and in addition, (2) the payer for honor has also the right to receive both the bill and the
protest. This is to enable him to enforce his right against those who are liable to him under
Section 175.
XV BILLS IN SET
Section 178. Bills in set constitute one bill. Where a bill is drawn in a set, each
part of the set being numbered and containing a reference to the other parts, the whole of
the parts constitutes one bill.
1175. Bill in set. One composed of various parts, each part being numbered, and
containing a reference to the other parts, all of which parts constitute but one bill.
1176. Illustration of a bill in set consisting of two parts:
First Part
Exchange for P2,000
First
Manila, Philippines
Jan. 2, 1950
30 days after sight of this First of Exchange (Second part
unpaid) pay to the order of B, P2,000.00.
(Sgd.) A
To X
48 Exchange Place
Ney York City

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Second Part
Exchange for P2,000
Second
Manila, Philippines
Jan. 2, 1950
30 days after sight of this Second of Exchange (First part
unpaid) pay to the order of B, P2,000.00.
(Sgd.) A
To X
48 Exchange Place
Ney York City

These two parts constitute only one bill for P2,000. B is entitled only to P2,000.00, not
P4,000.00.
1177. Purpose of bill in set. Bills in set are for the purpose of increasing the probability
of the bill reaching its destination. For this reason, each part is sent by different conveyances. B,
the payee, is supposed to negotiate only one part, or if he is paid on one, he cannot be paid on the
second part.
Section 179.Right of holders where different parts are negotiated. - Where two or
more parts of a set are negotiated to different holders in due course, the holder whose title
first accrues is, as between such holders, the true owner of the bill. But nothing in this
section affects the right of a person who, in due course, accepts or pays the parts first
presented to him.
1178. Illustration of Section 179. In the illustration given under Section 178, suppose
that B, payee, wants to raise P4,000. In violation of his rights, he negotiates the first part of the
bill to C and the second part to D, both of whom are holders in due course. Who is the true
owner of the bill? If B negotiates to C on January 3, 1950 and to D on January 5, 1950, C is the
true owner, as Cs title, accrues first. But if D succeeds in presenting his part of the bill for
acceptance or payment, and X the drawee, accepts or pays the second part in clue course, X is
protected and X can refuse to accept Cs part of the bill.
Section 180.Liability of holder who indorses two or more parts of a set to different
persons. - Where the holder of a set indorses two or more parts to different persons he is
liable on every such part, and every indorser subsequent to him is liable on the part he has
himself indorsed, as if such parts were separate bills.
1179. Liability of holder who indorses two or more parts.Under Section 180 in the
illustration, B is liable on both parts as if there are two bills, on the first to C and on the second to
D. In other words, as a result of his negotiation of the two parts, B is liable for a total of P4,000,
But A, the drawer, or X, the drawee, is liable only on one part or for P2,000 unless the drawee
accepts both parts. Suppose that C and D respectively negotiate the parts they have to E, the first
part, and F, the second part. C is liable to E for the part he indorsed to E, and D is liable to F for
the part he indorsed to F.

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Section 181.Acceptance of bill drawn in sets. - The acceptance may be written on
any part and it must be written on one part only. If the drawee accepts more than one part
and such accepted parts negotiated to different holders in due course, he is liable on every
such part as if it were a separate bill.
1180. Drawee must accept only one part. The drawee X must accept only one part. But
if he accepts both parts and they are negotiated to holders in due course, he is liable on every
such part as if it were a separate bill, that is, for a total of P4,000. But he can ask for
reimbursement from A, drawer, only on one part, that is, P2,000, because the order of the drawer
to him is to pay only one part, not both parts.
Section 182.Payment by acceptor of bills drawn in sets. - When the acceptor of a bill
drawn in a set pays it without requiring the part bearing his acceptance to be delivered up
to him, and the part at maturity is outstanding in the hands of a holder in due course, he is
liable to the holder thereon.
1181. Illustration of Section 182. Suppose that X accepts only the first part. Then, he
pays the second part without requiring the first part to he surrendered to him. On the date of
maturity, X would still be liable to the holder of the first pin on which appears his acceptance.
Section 183.Effect of discharging one of a set. - Except as herein otherwise provided,
where any one part of a bill drawn in a set is discharged by payment or otherwise, the
whole bill is discharged.
1182. Effects of discharge of one part. Subject to the exceptions in Sections 180, 181
and 182, if one part is discharged, the whole bill is discharged. The reason is that the bill
constitutes only one bill. Thus, suppose that in the illustration, X the acceptor, pays the first part
which he accepted. The second and third parts are also discharged.
XVI PROMISSORY NOTES AND CHECKS
Section 184. Promissory note, defined. - A negotiable promissory note within the
meaning of this Act is an unconditional promise in writing made by one person to another,
signed by the maker, engaging to pay on demand, or at a fixed or determinable future time,
a sum certain in money to order or to bearer. Where a note is drawn to the maker's own
order, it is not complete until indorsed by him.
1183. Requisites for negotiable promissory note.
1184. Illustration of maker as payee. The following is a note drawn to the makers own
order: I promise to pay to the order of myself P1,000.(Sgd.) A. To be complete, it must be
indorsed by A.
1185. Illustrative cases.
(1) Notes payable to the maker without indorsement were incomplete as negotiable
instruments, and, therefore not entitled to the statutory presumption under Section 11 that they
were signed on the day of their date, but they were entitled to the benefit of the common law
presumption that facts which usually and regularly co-exist in business affair co-exist in the
particular case in the absence of evidence to the contrary.

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(2) A transfer of a note payable to the makers own order and not indorsed by him is not a
transfer in due course of business and the transferee is not a holder in due course.
(3) Where two comakers sign a note payable to themselves and only one indorses, the
transferee can not recover from the one who did not indorse.
1186. Rule applicable to bills of exchange. The same reasoning applies to bill of
exchange payable to the drawers order; no obligation arises and the bill is incomplete until the
drawer indorses and delivers it to some other person. But this principle should not apply after the
drawee accepts since an obligation has then arisen.
1187. Is maker liable as indorser? There is a conflict of authority on this point. In one
case, it was held that A, maker, who indorses a note payable to himself, is liable both as indorser
and as maker? The maker of a note payable to himself who indorses it is not liable as indorser
but only as maker. In another case, the defendant who was induced by fraud to indorse a note
payable to himself was held not tobe liable as an indorser to a remote transferee, so that he
didnot warrant under Section 66 that the instrument was valid and subsisting. The usual burden
of proof was, therefore, on the plaintiff to show that he was a holder in due course.
A note in 22 Mich. L. Rev. 728 points out that if a contrary decision had been made, it is
difficult to see what defenses other than forgery, etc., would be open to a maker of an instrument
payable to the order of himself. Since the indorsement by the maker-payee is not part of a sale of
the note, it should not give rise to any warranty. In the absence of such warranties, it seems
immaterial whether the defendant issued as an indorser or as a maker since, in either event, be
may set up the defense of fraud against the plaintiff unless the latter is a holder in due course.
1188. Special types of promissory notes. The following are special types of promissory
notes: (1) certificate of deposit; (2) bonds, (3) bank notes; and (4) due bills.
1189. Certificate of deposit, defined; negotiability. A certificate of deposit is a written
acknowledgement by a bank of the receipt of money on deposit which the bank promises to pay
to the depositor, bearer, or to some other person or order. A certificate of deposit is not ipso facto
a negotiable instrument. To be such, it must conform to Section 1 of the Negotiable Instruments
Law.
1190. Bonds. defined; negotiability. A promise, under seal, to pay money. But since all
bonds of a single issue are grouped together under a supplemental agreement known as trust in
denture or bond indenture, bonds may be defined as a series of instruments representing units of
indebtedness regarded as parts of one entire debt. The bond certifies that the issuing company is
indebted to the bondholder for the amount specified on the face of the bond, and contains an
agreement of the company to pay the sum at a specified time in the future, andmeanwhile, to pay
a specified interest on the principal amount at regular intervals, , generally six months apart.
Bonds are negotiable if they conform withthe Negotiable Instruments Law, particularly Section 1
thereof.
1191. Bonds distinguished from ordinary promissory notes.Bonds are evidences of
indebtedness of the issuer and are usually sold to raise capital. They are really elaborate
promissory notes. The following are distinctions between an ordinary promissory note and a

252 FOUR-C LAW LIBRARY


bond: (1) a bond is more formal in character than the ordinary promissory note; (2) a bond runs
for a longer period of time than an ordinary promissory note; and (3) a bond is issued under
different legal circumstances.
1192. Classes of bonds. There are various methods of classifying bonds. The most
important seems to be according to the security of tile bond, as it is in this that bonds differ
fundamentally among themselves. Based on the bond security, some of the important classes of
bonds are: (1) mortgage bonds, (2) equipment bonds, (3) collateral trust bonds, (4) guaranteed
bonds, (5) debentures, and (6) income bonds. In addition, it may be stated that like shares, bonds
may also be (7) convertible, (8) redeemable, (9) registered bonds, and (10) coupon bonds.
1193. Mortgage bonds. Those that are secured by a mortgage constituted on corporate
physical property. The property is conveyed to a trustee for the benefit of the bondholders in case
the interest or principal is defaulted.
1194. Equipment bonds.Those that are secured by a mortgage or pledge of corporate
movable equipment, such as, in the case of railroads, their rolling stock. This is a form of special
lien bonds employed for the most part by railroads in order to obtain money at low rates by
pledging their movable equipment.
1195. Collateral trust bonds. Those that are not secured by a lien on physical property
of the corporation but by a lien on securities deposited with a trustee as collateral. Such securities
may consist of shares or bonds issued by the subsidiaries of the corporation issuing the collateral
trust bonds. It may also consist of bonds of small operating company which the issuing holding
corporation controls. Finally, it may consist of shares or bonds of any corporation issuing the
collateral trust bond.
1196. Guaranteed bonds.One that is secured by the guaranty of a corporation other than
the one issuing it. It implies, therefore, a double obligation, that of the issuing corporation and
that of the guaranteeing corporation.
1197. Debentures. Those that are not secured by any specific mortgage, lien or pledge on
specific corporate property but by the general credit of the corporation and restrictive agreement.
They are usually issued under a trust indenture, and for a shorter term than mortgage bonds. The
disadvantage of debenture bonds is that they rest on the general credit of the corporation rather
than on the security of specific corporate assets. Frequently, they are protected by negative
pledge clauses which are agreements against new mortgages on the corporate assets or those of
subsidiary companies which do not equally secure the debenture.
1198. Income bonds. One the principal of which may or may not be secured by a
mortgage but the interest is payable only out of net profit. The interest on income bonds whichis
payable out of earnings only, may be cumulative or non-cumulative. It is thus seen that the
position of the holder ofan income bond resembles that of the holder of preferred shares,and that
income bonds are the weakest of all obligations resting on general credit.
1199. Convertible bonds. One which confers on the holderthe option of exchanging it
for a more speculative class ofsecurity, such as, for preferred shares or common shares.
Theconvertible bond and the convertible share are classed together as convertible securities.

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Generally speaking, convertiblesecurities are issued in a more secure and less speculative form,a
form of security with a fixed or limited income return, andare convertible at the owners request
and under clearly specified conditions into some less secure, more speculative form ofsecurity,
carrying a possibility of an increased income return.Accordingly, bonds are made convertible
into preferred andcommon stocks, secured bonds into debenture bonds and stocks, referred
stocks into common stocks.
1200. Redeemable bonds.Those that give the privilegeto the issuing corporation to pay
off the bonds even beforethe date of maturity. Without a provision for redemption, thedebtor
corporation would have no right to pay off the bondsand get rid of the restrictions of the
mortgage or indenture before the bonds fell due.
1201. Registered bonds. Those which are issued to a specified person named therein and
the fact of issuance to himis registered in the books of the issuing corporation. They arepayable
only to the person whose name is thus registered andtransferred only on presentation at the
obligors office witha written assignment duly executed by the registered owner.They are,
therefore, generally not negotiable.
1202. Coupon bonds. Those to which are attached a sheetof dated, numbered and
similarly printed coupons which thebondholder may cut off when due or thereafter. Such
couponsmay be served and deposited in a bank, negotiated before thematurity of the interest they
represent, and transferred justlike any commercial paper. They are negotiable promissorynotes if
they conform to the requirements of the Negotiable Instruments Law.
1203. Bank notes, defined. Bank notes are the promissory notes of the issuing bank
payable to bearer on demand and intended to circulate as money. They are regarded as cash and
pass from hand to hand without any evidence of title in the holder than that which arises from
possession. However, they are not money.
1204. Due bill, defined; negotiability. A due bill is an instrument whereby one person
acknowledges his indebtedness to another. Thus: Due B, P200.00, payable to his order.
(Sgd.)A. If it conforms with Section 1 of the Negotiable Instruments Law, a due bill is
negotiable.
1205. Clearing house due bill. It is a device of clearing house associations to save
inconvenience and labor incident to the settling of balances between the members of the
association. The certificates or due bills are issued, instead of the actual payment of money, by
one member of the association to another. They are not merely certificates of deposit creating a
contract of bailment but are as negotiable as checks payable to bearer, or as promissory notes
payable to order or bearer. Another term used is clearing house certificate.
Section 185. Check defined. A check is a bill of exchange drawn on a bank
payable on demand. Except as herein otherwise provided, the provisions of this Act
applicable to a bill of exchange payable on demand apply to a check.
1206. Check defined. Section 185 defines the term check. Acceptance is not required
for checks for the same are payable on demand.

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1207. Check distinguished from promissory note; used as substitute for money;
effect of worthless checks on trade circles and banking community. Unlike a promissory
note, acheck is not a mere undertaking to pay an amount of money.It is an order addressed to a
bank and partakes of a representation that the drawer has funds on deposit against which
thecheck is drawn, sufficient to ensure payment upon its presentation to the bank. There is
therefore an element of certaintyor assurance that the instrument will be paid upon
presentation.For this reason, checks have become widely accepted as a mediumof payment in
trade and commerce. Although not legal tender,checks have come to be perceived as convenient
substitutes for,currency in commercial and financial transactions. The basisor foundation of such
perception is confidence. If such confidence is shaken, the usefulness of checks as currency
substitutes would be greatly diminished or may become nil. Any practice therefore tending to
destroy that confidence should be deterred, for the proliferation of worthless checks can only
create havoc in trade circles and the banking community.
1208. Issuing check without funds as estafa. Issuing a check without sufficient funds in
the drawee bank constitutes estafa if it is done as a means of obtaining money and merchandise
but not if the check is given for a pre-existing debt.
1209. Batas PambansaBlg. 22
SECTION 1. Checks without sufficient funds.Any person who makes or draws and,
issues any check to apply on account or for value, knowing at the time- of issue that he does not
have sufficient funds in or credit with the drawee bank for the payment of such check in full
upon its presentment, which check is subsequently dishonored by the drawee bank for
insufficiency of funds or credit or would have been dishonored for the same reason had not the
drawer, without any valid reason, ordered the bank to stop payment, shall be punished by
imprisonment of not less than thirty days but not more than one (1) year or by a fine of not less
than but not more than double the amount of the check which fine shall in no case exceed Two
Hundred thousand Pesos, or both such fine and imprisonment at the discretion o-f the court. The
same penalty shall be imposed upon any person who, having sufficient funds in or credit with the
drawee bank when he makes or draws and issues a check, shall fail to keep sufficient funds or to
maintain a credit to cover the full amount of the check if presented within a period of ninety (90)
daysfrom the date appearing thereon, for which reason it is dishonored by the drawee bank.
Where the check is drawn by a corporation, company or entity, the person or persons who
actually signed the check in behalf of such drawet shall be liable under this Act.
SECTION 2. Evidence of knowledge of insufficient funds.The making, drawing and
issuance of a check payment of which is refused by the drawee because of insufficient funds in
or credit with such bank, when presented within ninety (90) days from the date of the check,
shall be prima facie evidence of knowledge of such insufficiency of funds or credit unless such
maker or drawer pays the holder thereof the amount due there on, or makes arrangements for
payment in full by the draweeof such check within five (5) banking days after receiving notice
that such check has not been paid by the drawee.

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SEC. 3. Duty of drawee; rides o evidence.it shall be the duty of the drawee of any
check, when refusing to pay the same to the holder thereof upon presentment, to cause to be
written, pitted, or stamped in plain language thereon, or attached thereto, the reason for drawees
dishonor or refusal to pay the same. Provided that where there are no sufficient funds in or credit
with such drawee bank, each fact shall always be explicitly stated in the notice of dishonor or
refusal. In all prosecutions under this Act, the introduction in evidence of any unpaid and dishonored check, having the drawees refusal to pay stamped or written thereon or attached
thereto, with the reason therefor as aforesaid, shall be prima facie evidence of the making
issuance of said check, and the due presentment to the drawee for payment and the dishonor
thereof, and that the same was properly dishonored for the reason written, stamped or attached
by the drawee on such dishonored check. Notwithstanding receipt of an order to stop payment,
the drawee shall statflh the notice that there were no sufficient funds in or credit with such bank
for the payment in full of such check, if such be the fact.
SEC. 4. Credit construed.-The word credit- as used herein shall be construe to mean
an arrangement or understanding with the bank for the payment of such check.
SEC. 5. Liability under the Revised Penal Code.Prosecution under this Act shall be
without prejudice to any liability for violation of any provision of the Revised Penal Code.
SEC. 6.Separability clause.If any separable provision of this Act he declared
unconstitutional, the remaining provisions shall continue to be in force.
SEC. 7Effectivity.Thjs Act shall take effect fifteendays after publication in the Official
Gazette. Approved, April 3, 1979.
1210. June 29, 1979, date of affectivity of Batas PambansaBIg. 22. In People y.
Veridiano II, the accused issueda check on the second week of May 1979, which was
dishonoredon September 26, 1979. Batas PambansaBlg. 22 was printedin the April 9, 1979 issue
of official Gazette seven days beforethe accused issued the check, but which official Gazette
wasofficially released for circulation on June 14, 1979. HELD:The penal statute in question was
made public only on June 14,1979 and not on the printed date April 9, 1979. Differentlystated,
June 14, 1979 was the date of publication of BatasPambansaBilang 22. Before the public may be
bound by itscontents especially its penal provisions the law must be published and the people
officially informed of its contents and/orits penalties. For, if a statute had not been published
beforeits violation, then in the eyes of the law there was no such law tobe violated and,
consequently, the accused could not have committed the alleged crime.
The effectivity clause of Batas PambansaBilang 22 specifically states that This act shall
take effect fifteen days after publication in the Official Gazette. The term publication in such
clause should be given the ordinary accepted meaning, that is, to make known to the people in
general. If the BatasangPambansa had intended to make the printed date of the issue of the
Gazette as the point of reference in determining the effectivity of the statute in question then it
could have so stated in the special effectivity provision of Batas PambansaBilang 22.
1211. BP Blg. 22 constitutional; not violative of prohibition against imprisonment
for debt, freedom of contract; equal protection of law, prohibition against undue delegation

256 FOUR-C LAW LIBRARY


of power; and prohibition against amendments on third reading. In a case, the
constitutionality of the Bouncing Checks Law(BP Blg. 22) on the following grounds:
(1) It is violative of the constitutional prohibition against imprisonment for debt. The
offense under BP 22 is consummated only upon the dishonor or non-payment of the check when
it is presented to thedraweebank, the statute is really a bad debt law rather than a bad check
law. What it punishes is the non-payment of the check, not the act of issuing it.
(2) BP 22 impairs freedom of contract.
(3) It denies equal protection of the laws or is discriminatory, since it penalizes the
drawer of the check, but not the payee. It is contended that the payee is just as responsible crime
as the drawer of the check, since without the indispensable participationofthepayee by his
acceptance of the checkthere would be no crime.
(4) It constitutes undue or improper delegation of legislative powers, on the theory that
the offense is not completedby the sole act of the maker or drawer but is made to depend on the
will of the payee.
(5) It violates the constitutional prohibition against the introduction of amendments
during the period of amendments.
Held:
(1) The enactment of BF 22 is a valid exercise of the police power and is wit repugnant to
the constitutional inhibition against imprisonment for debt. The gravamen of the offense
punished by BP 22 is the act of making and issuing a worthless check or a check that is
dishonored upon its presentation for payment. It is not the non-payment of an obligation which
the law punishes. The law is not intended or designed to coerce a debtor to pay his debt. The
thrust of the law is to prohibit, under pain of penal sanctions, the making of worthless checks and
putting them in circulation. Because of its deleterious effects on the public interest, the practice
is proscribed by the law. The law punishes the act not as an offense against property, but an
offense against public order.
(2) BP 22 does not impair the freedom of contract. The freedom of contract which is
constitutionally protected is freedom to enter into lawful contracts. Contracts which
contravenes public policy are not lawful. Besides, we must bear in mind that checks can not be
categorized as mere contracts. It is a commercial instrument which, in this modern day and age,
has become a convenient substitute for money; it forms part of the banking system and therefore
not entirely free from the regulatory power of the state.
(3) It does not deny the equal protection of the laws. The equal protection clause does not
preclude classification of individuals, who may be accorded different treatment under the law as
long as the classification is not unreasonable or arbitrary. BP 22 need not punish both the
swindler and the swindled.
(4) There is no undue or improper delegation of power. What cannot be delegated is the
power to legislate, or the power to make laws, which means, as applied to urn present case, the
power to define the offense sought to be punishedand to prescribe the penalty. By no stretch of
logic or imagination can it be said that the power to define the crime and prescribe the penalty

257 FOUR-C LAW LIBRARY


therefor has been in any manner delegated to the payee. Neither is there any provision in the
statute that can be construed, no matter how remotely, as undue delegation of executive power.
The suggestion that the statute unlawfully delegates its enforcement to the offended party is
farfetched.
(5) There is no merit to this fifth objection. It is clear from the records that the text of the
second paragraph of Section 1 of BP 22 is the text which was actually approved by the body on
Second Reading on February 7, 1979, as reflected in the approved Minutes for that day. In any
event, before the bill was, submitted for final approval on Third Reading, the Interim Batasan
created a Special Committee to investigate the matter, and the Committee in its report, which
was approved by the entire body on March 22, 1979, stated that the clause in question was an
authorized amendment of thebill and the printed copy thereof reflects accurately the provision in
question as approved on Second Reading.
1212.Issuing checks without, or with insufficient, funds under Batas PambansaBlg.
22. There are two acts punished under section 1 of Batas PambansaBlg. 22, namely:
1) Issuing a checkwith knowledge of insufficiency of funds to pay for the check, (b) and
the check is subsequently dishonored by the drawer bank for insufficiency of funds or credit or
would have been dishonored for the same reason had not the drawer, without any valid reason,
ordered the bank to stop payment.
2) Issuing a check with sufficient funds or credit to pay for the same, but with failure to
keep sufficient funds or maintain a credit to cover the full amount of the check if presented
within 90 days from the date appearing thereon, for which reason the check is dishonored.
1213. Elements of the offense of issuing bouncing checks. The elements of the offense
are:
1. The making, drawing and issuance of ally check to apply to account or for value.
2. The maker, drawer or issuer knows at the time of issue that he does not have sufficient
funds in or credit with the drawee bank for the payment of such check in full upon its
presentment and
3. The check is subsequently dishonored by the drawee bank for insufficiency of funds or
credit or would have been dishonored for the same reason had not the drawer, without any valid
reason, ordered the bank to stop payment.
1214. Issuance of bum checks giverise to prima facie presumption of knowledge.
Under Sec. 2 of the law, the presence of the first and third elements of the offense constitutes
prima facie evidence that the second element exists. The makers knowledge of the insufficiency
of his funds is legally presumed from the dishonor of his check for insufficiency of funds.
1215. Issuing a bum check, malumprohibitum serious offense. The gravamen of the
offense under B.P. Blg. 22 is the act of making and issuing a worthless check or a check that is
dishonored upon its presentment for payment. The law has made the mere act of issuing a bum
check a malumprohibitum, an act proscribed by legislature for being deemed pernicious and
inimical to public welfare.

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Violation of BP..Blg. 22 is a serious criminal offense which affects public interest and
public order; it is a crime involving moral turpitude, hence, conviction of such crime justifies
petitioners suspension from the practice of law of the culprit.
1216. Batas Blg. 22 penalizes act of making or drawing and issuance of bouncing
checks, not only dishonor. The law penalizes the act of making or drawing and issuance of a
bouncing check and not only the fact of its dishonor. Accordingly, where the bouncing check
was issued before the effectivityof Batas Pambansa 22, but dishonored after such effectivity, the
accused who issued the bouncing check did not commit a violation thereof as there was no law to
be violated.
1217. Knowledge by maker or drawer of check of insufficiency of funds essential
element of offense. Illustrative case. Spouses PMD, wife and ND, husband are owners of a
family business, managed by ND. In a transaction, with EA. ND issued to EA checks that
bounced due to insufficiecy of funds. She had no knowledge of the dishonor of the checks
issued by her husband with EA. But PMD signed the questioned checks in blank together with
her husband without any knowledge of its issuance, much less of the transaction and the fact of
dishonor. They were both criminally charged under the Bouncing Checks Law (BP Blg, 22).
Held: PMD was acquitted. An essential element of the offense is knowledge on the part of the
maker or drawer of the check of the insufficiency of his funds.
The gravamen of the offense punished by BP 2.is the act of making and issuing a
worthless check or a check that is dishonored upon its presentation for payment. It is not the nonpayment of an obligation which the law punishes.
1218. Filing of action to annul deed of sale on which bouncing check issued, not
prejudicial question. In a case where the complaint filed by the seller was for the violation of
the Bouncing Check Law on a bouncing check issued by the buyers of a parcel of land, who had
previously filed a case seeking the annulment of the deed of sale on the ground of fraud, the
court held that filing by buyer of complaint for annulment of deed of sale on ground of fraud of
the seller is not a prejudicial question to the criminal case for violation of Anti-Bouncing Check
Law (Batas Blg. 22) filed by seller for dishonored checks paid for price of land sold.
The two (2) essential elements for a prejudicial questionto exist are: (a) the civil action
involves an issue similar or intimately related to the issue raised in the criminal action; and (b)
the resolution of such issue in the civil action determines whether or not the criminal action may
proceed. The checks issued by the buyers (petitioners) in the sellers favor were dishonored for
lack of funds upon due presentment to the drawee bank. Undeniably, at the time of said dishonor,
petitioners obligation to pay sellers (private respondents) pursuant to the deed of sale, continued
to subsist. And because petitioners checks were dishonored for lack of funds, petitioners are
answerable under the law for the consequences of their said acts, and even if the deed of sale
would be annulled, such declaration would be of no material importance in the determination of
the guilt or innocence of petitioners-accused.
1219. Issuance of check lo guarantee or secure payment of obligation not a defense.
Ministry of Justice Circular No. 12 dated August 8, 1984, has amended Memorandum

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CircularNo, 4, dated December 15, 1981, in effect reversing the previous ruling on the subject
matter. Said amendatory Circular No.12 ruled that henceforth, conformably with the rule that an
administrative agency having interpretive authority may reverse its administrative interpretation
of a statute, but that its new interpretation applies only prospectively,in all cases involving
violation of Batas PambansaBlg. 22 wherein the check in question is issued after this date, the
claim that the check is issued as a guarantee or part of an arrangement secure an obligation or to
facilitate collection will no longer be considered as a valid defense.
Thus it has been held that Batas PambansaBlg. 22 applies even in cases where dishonored
checks are issued merely in the form of a deposit or a guarantee. The enactment in question does
not make any distinction as to whether the checks within its contemplation are issued in payment
of an obligation ormerely to guarantee the said obligation. In accordance withthe pertinent rule
of statutory construction, inasmuch as the law has not made any distinction in this regard, no
such distinction can be made by means of interpretation or application.
1220. Foreign checks covered by Bouncing Checks Law. The check was issued and
delivered in Makati by the drawer but was drawn against his dollar account in a foreign country.
Is the check covered by the Bouncing Check Law? Yes. The law does not distinguish the
currency involved in the case. Under the Bouncing Checks Law (BP. BIg. 22), foreign checks,
provided they are either drawn or issued in the Philippines Though payable outside thereof are
within the coverage of said law
1221. Accused may be held guilty of both violating Batas Pambansa 22 and estafa.
Where the accused issued a postdated check covering the whole amount of the investment of the
complainant plus 30% profit, which he simultaneously delivered to the complainant, with the
assurance that said check was fully funded, well knowing that said check was not fully funded
for which reason the same was dishonored when presented for payment the accused is guilty of
both the violation of Batas PambansaBlg. 22 and for Estafa under Article 315 of the Revised
Penal Code.
1222. As element of violation of Bouncing Checks Law knowledge of insufficiency is
continuing eventuality from issuance to dishonor. Two checks were drawn, signed and
delivered in Iloilo City. They were deposited in Bacolod City, but dishonored inIloilo City for
insufficiency of funds. When the two checks were issued, the drawers knew at the time of issue
that they did not have enough funds in the drawee bank to cover the checks. The criminal case
was filed in Bacolod City, not in Iloilo City. The case was dismissed on the ground that it should
have been filed in IloiloCity. Is the dismissal correct? Held: No, Knowledge of insufficiency of
funds as an essential ingredient of the offense charged and as defined in the statute, is, by itself, a
continuing eventuality, whether theaccused be within one territory or another. Being so, it is
sufficient to confer jurisdiction upon the trial court. The Court further said that jurisdiction or
venue is determined by the allegations of the information. In the case, the information states that
the offense was committed in Bacolod City.
1223. Violation of Bouncing Checks Law is transitory or continuing crime (as is
estafa by issuing bouncing check) and its venue is any of places where in part committed.

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Citing Section 14a of Rule 110 of Court, the Supreme Court said: In transitory or
continuing offenses in which some acts material and essential to the crime and requisite to its
consummation occur in one province and some in another, the Court of either province has
jurisdiction to try the case, it being understood that the first Court taking cognizance of the Case
will exclude the others. However, if all the acts material and essential to the crime and requisite
of its consummation occurred in one municipality or territory, the Court of that municipality or
territory has the sole jurisdiction to try the case. The Bouncing Checks Law penalizes not only
the fact of dishonor of a check but also the act of making or drawing and issuance of a bouncing
check. The determinative factor (in determining-venue) is the place of the issuance of the check.
However, knowledge on the part of the maker or drawer of the check of the insufficiency of his
funds, which is an essential ingredient of the offense, is by itself a continuing eventuality,
whether the accused be within one territory or another.
Accordingly, where G executed a bouncing check in Sta. Maria, Bulacan with PDB as
drawee and SMC as payee, said check having been received inGuiguinto, Bulacan, by the SMC
supervisor and subsequently delivered to the SMC Finance officer who deposited said check
with BPI in San Fernando, Pampanga, and said check dishonored by PDB, drawee bank, for
insufficiency of funds. The case could have been filed in Bulacanas well as in Pampanga based
on the knowledge of accused Grospe of the insufficiency of funds as a continuing eventuality.
1224. Is issuance of check for preexisting debt defense under BP Blg. 22. Under the
cases, the issuance of a check without or with insufficient funds is not estafa where it is issued
for a preexisting debt. But would the issuance of such check for a preexisting debt be a defense
under Batas PambansaBIg. 22? Section 1 of said law in making, drawing or issuance of a check
under the circumstances stated in the law a crime, uses the words to apply on account or for
value.
The ordinary commercial usage of the word account is to refer to a claim or demand
growing out of the sale of goods, performance of services and the like is equivalent to the
word claim or demand, when referring to an indebtedness arising out of contract or some
fiduciary relation. It would seem therefore that account means a preexisting debt.
Consequently, issuance of a check for a preexisting debt appears not to be a defense under Batas
PambansaBlg. 22.
1225. Jurisdiction on Bouncing Checks Law violation is determined by allegations in
information, place of issuance of checks. The information under consideration specifically
alleged that the offense was committed in Makati, Metro Manila and therefore, the same is
controlling and sufficient to vest jurisdiction upon the Regional Trial Court of Makati. The Court
acquires jurisdiction over the case and over the person of the accused upon the filing of a
complaint or information in court which initiates a criminal action. &
1226.When postdating check not estafa.
(1) A check may validly be postdated. A person who is sues a postdated check, believing
in good faith that he would be able to deposit in. the bank sufficient funds to pay said check

261 FOUR-C LAW LIBRARY


when presented for collection, and who, foreseeing his inability to pay said check at maturity,
makes arrangement with his creditor to pay it little by little, is not guilty of the crime of estafa.
(2) Under the Revised Penal Code, postdating a check, or issuing it in payment of an
obligation, the offender knowing that at the time he had no funds in the bank, or the funds
deposited by him in the bank were not sufficient to cover the amount of the check, and without
informing the payee of such circumstances (Posfechandouncheque, o librandolo contra un banco
en pago de unaobligacion, sabiendoque el tiempo de hacerlo no teniafondos, o no los
teniasufucientes en dichobanco, sin advertir de tales circurnstancial al tomador) is not a crime in
itself as estafa.
However, under Batas Pamban.sa Blg. 22, such issuance of a check would be a crime,
where subsequently, the check is dishonored for insufficiency of fund or credit, or would have
been dishonored for the same reason had not the drawer, without any valid reason, ordered the
bank to stop payment.
(3) If the payee was informed that the check was not covered by adequate funds and it is
expected that such funds would be available when the check became due, the drawer is not guilty
of bad faith in issuing it. Where a person issued a post-dated check without funds to cover it and
informs the payee of that fact, he is not guilty of estafa because there was no deceit.
(4) Accused issuing unfunded check but with OD or DAUD privilege not guilty of
fraudulent intent. In a case it was held that where it is established that a lady bank depositor had
been granted overdraft COD) or drawn against uncollected deposit (DAUD) privileges by the
BPI, no criminal fraudulent intent can be inferred from her deposit of her personal checks in the
Bank of the Philippine Islands which were drawn pay to order of cash against her other current
account at the Rizal Commercial Banking Corporation which were then paid by BPI but later
dishonored by RCBC for lack of sufficient funds.
1227. Drawing of a check with insufficient fund is not falsification. The act of an
accused in drawing checks which have no corresponding deposit to cover them in the
drawee bank is not falsification. The amount written on a check is not a narration of facts made
by the drawer representing that he has money in the bank but rather a check is an order in writing
addressed to the drawee bank to pay the holder of the check the amount written thereon (See
Sections 126 and 185, Negotiable Instruments Law). The untruthful statement must refer to a
narration of facts and by narration of facts is meant a recital of things accomplished, of deeds,
occurrence or happening, Thus, a statement expressing an erroneous conclusion of law
cannot be considered as falsification (People v. Yanza, 107 Phil. 88) and more certainly, as in
this case, neither is an order to pay a narration of facts .
1228. When postdating check a crime. The payee or the person receiving the check must
be defrauded by the act of the offender. To defraud is to deprive of some right, interest, or
property by a deceitful device, and No. 2 of Article 316 provides that the false pretenses or
fraudulent acts therein mentioned must be executed prior to or simultaneously with the
commission of the fraud.
1229. Illustrative cases of criminal postdating of check as estafa

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(1) The defendant-appellant Velasco obtained postdated checks from certain persons who
warned him not to negotiate the same until after a certain date fixed by them. Notwithstanding
this warning, he deposited the checks in his current account in the National Bank, Due to the
confidence of the employees of the National Bank in Velasco, said bank received the checks and
credited it to his current account. Thereafter, he withdrew the total amount of the checks
deposited by him. It was held that without question, the means employed by the appellant to
obtain money from the National Bank was fraudulent, for he very well knew that the checks
which he deposited had no value and because through an abuse of the confidence which the
employees of the hank had in him, by means of false representation, he obtained from that
banking institution the amount fraudulently represented by said checks, all to the injury and
prejudice of the National Bank which hasbeen deprived for one month of the possession and use
of the amount of which it was swindled.
(2) Facts: Appellant bought some jewelry from the complainant and issued eight
postdated checks with a total amount of P122,000 in payment of the same. She knew at the time
of the issuance of the checks that she did not have sufficient funds to cover them. Defendant
contended that the sale of jewelries was null and void since complainant
PuritaCommandantewas not the owner of those items and, therefore, Appellant was under no
obligation to pay, and committed no deceit in issuing the rubber checks. These checks, the
defense adds, were intended merely as security or guaranty for the eventual sale of the
jewelries.
Held:.(1) The elements of the crime of Estafa committed by means of bouncing checks
defined under Article 315, paragraph 2(d) of the. Revised Penal Code, are the following: (1)
postdating or issuance of a check in payment of an obligation contracted at the time the check
was issued; (2) lack or insufficiency of funds to cover the check; and (3) damage to the payee
thereof.
There is no question that Appellant issued the postdated checks to Complainant in
payment for the jewelries handed to them on the same occasion and not as mere guaranty or
security for their return or eventual sale.
There is no question either about the presence of deceit. Were it not for the issuance by
Appellant of checks, which she falsely pretended to be covered by sufficient funds, Complain ant
would not have parted with the jewelry. Insufficiency of funds to cover the checks was
substantiated by the evidence which showed that some of the postdated checks in question were
dishonored by the drawee banks for having been drawn against insufficient fund and others for
no arrangement .
(2) Ownership is not a necessary element of the crime of Estafa. As aptly pointed out by
the Court of Appeals: x xInestafa, the person prejudiced or the immediate victim of the need not
be the owner of the goods. Thus, Article 315 of the Revised Penal Code provides that Any
person who shall defraud another (it does not say owner) by any of the means mentioned
hereinbelow shall he punished x y y. All that is necessary is that the loss should have fallen on
someone other than the perpetrators of the crime.

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1230. Signing by wife of her deceased husbands, name in indorsing checks not
falsification if done in good faith and no damage caused.
1231. Distinction between estafa consisting of issuing checks without funds and
violation of Bouncing Checks Law.In the crime of Estafa by postdating or issuing a bad check,
deceit and damage are essential elements of the offense and have to be established with
satisfactory proof to warrant conviction.
For violation of the Bouncing Checks Law, on the other hand, the elements of deceit and
damage are not essential norrequired. An essential element of that offense is knowledgeon the
part of the maker or drawer of the check of the insufficiency of his funds. The Anti-Bouncing
Checks Law makes the mere act of issuing a worthless check a special offense punishable
thereunder. Malice and intent in issuing the worthless check are immaterial, the offense being
malumprohibitum. The gravamen of the offense is the issuance of a check, not the non-payment
of an obligation.
1232. Theft of checks. Checks are personal property and can be subject to theft even
when they are unindorsed.
1233. Special types of checks. The following are special types of checks: (1) cashiers
checks; (2) managersP; (3) memorandum checks, (4) certified checks; and (5) crossed checks.
1234. Cashiers check, defined. The term has been defined as; One drawn by the cashier
of a bank in the name of the bank against the bank itself payable to a third person or order.
1235. Cashiers check distinguished from demand draft. A demand draft, like a bill of
exchange, does not operate as an assignment of funds in the hands of the draweewho is not liable
on the instrument until he accepts it. The cashiers check is different. It is a primary obligation of
the bank which issues it and constitutes its written promise to pay upon demand. It is in effect a
bill of exchange drawn by a bank on itself and accepted in advance by the act of its issuance.
1236. Nature and use of cashiers check. The mere issuance of it is considered an
acceptance thereof, and under Section 130 of the Negotiable Instruments Law, the holder has the
option of treating it is a promissory note or bill of exchange. They are commonly used by
banks in meeting their expenses or in the payment of collections made for persons who are not
customers. Time depositors who cannot draw checks against their accounts also frequently by
cashiers checks when they have out of town payments to be made.
1237. Managers check, defined.A check drawn by the manager of a bank in the name
of the bank against the bankitself payable to a third person. It is similar to the cashiers check as
to effect and use.
1238. Memorandum check, defined. The term has been variously defined as: (1) A
check on which is written the word memorandum, memo, and mcm, signifying that the
drawer engages to pay the bona fide holder absolutely and not upon a condition to pay upon
presentment and non-payment. (2) A check given by a borrower to a lender for the amount of a
short loan with the understanding that it is not to be presented at the bank but will be redeemed
by the maker himself when the loan falls due and which understanding is evidenced by writing
the word memorandum, memo, or mem on the check.

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1239. Ordinary and memorandum checks compared. The word memorandum
written or printed upon the check describes the nature of the contract with precision. In form and
appearance, a memorandumcheck does not differ from an ordinary check except that the word
memorandum, mem, or memo is written upon the face of the check. Such a check is given
by the drawer to the payee more in the nature of a memorandum of indebtedness than as
payment. In the case of a regular check demand for payment and a refusal on their part of the
bank are necessary steps before the holder can maintain action against the drawer, while in the
case of a memorandum check, the drawer may be sued the same as upon a promissory
note.Although a memorandum check may bea valid agreement as between the parties, if passed
to a third person, the check will be valid in his hands like any other check. By one view, it is a
contract whereby the maker engages to pay the bona fide holder absolutely without any condition
concerning the presentment. By the other view, the making of a check in this manner is merely
for the purpose of indicating that it is not to be presented immediately for payment.
1240. Certified check, defined. The term has been variously defined as (1) A check on
which the drawee bank has written an agreement whereby it undertakes to pay the check at any
future time when presented for payment, such as, by stamping on the check the word certified
and underneath it is written the signature of the cashier.2 (2) A depositors check recognized and
accepted by bank officers as valid appropriationof the amount specified and as drawn against
funds held by a bank.
1241. Crossed checks. In English, the system of crossed checks has long been
recognized as valid. By that system, there is stamped across the face of the check the name of a
certain banker through whom it must be presented for payment, and if presented by anyone else,
it will not be honored. In the Philippines, it is authorized by Article 541 of the Code of
Commerce.
1242. How crossing of check done. Crossing of the check is usually done by drawing two
parallel lines transversally on the face of the check. A check may be crossed (1) specially, or (2)
generally.
1243. Crossing specially. A check is crossed specially when the name of a particular
banker or a company is written between the parallel lines drawn transversally on the face of the
check.
1244. Effect of crossing specially, illustrative case: CHAN WAN y. TAN KIM &
CHEN SO. This is an appeal from adecision of the Court of First Instance of Manila denying
plaintiffs right to collect on the eleven commercial documents.
FACTS: This suit concerns the collection of all checks. The checks payable to cash or
bearer and drawn by defendant Tan Kim upon the Equitable Banking Corp., were all presented
for payment by Chan Wan to the drawee bank but they were all dishonored due to insufficient
funds and/or cause attributable to the drawer. Tan Kim declared without contradiction that the
checks had been issued to two persons named Pinong and Muy for some shoes the former had
promised to make and were intended as mere receipts. The court declined to order payment
because plaintiff failed to prove he was a holder in due course, and the checks, being crossed

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checks, should not have been presented to the drawee for payment, but should have been
deposited instead with the bank mentioned in the crossing.
ISSUE: Whether plaintiff is entitled to collect on the eleven checks:
HELD: The Negotiable Instruments Law regulating the issuance of negotiable checks, the
rights and the liabilities arising therefrom, does not mention crossed checks.Article 541 of the
Code of Commerce refers to such instruments. (1) The Bills of Exchange Act of England of 1882
contain several provisions about them and (2) in Phil. National Bank vs. Zulueta, 55 Off. Gaz.
222, this Court applied some provisions of said Bills of Exchange Act because the Negotiable
Instruments Law, originating from England and codified in the U.S.,permits resort thereto in
matters not covered by it and local legislation.
Eight of the checks here in question bear across their face two parallel transverse lines
between which these words are written: non-negotiable China Banking Corporation. These
checks have, therefore, been crossed specially to the China Banking Corporation, and should
have been presented for payment by China Banking and not by Chan Wan. (4) Inasmuch as Chan
Wan did present them for payment himself, there was no proper presentment, and theliability did
not attach to the drawer. It must be remembered, at this point, that the drawer, in drawing the
check, engaged that on due presentment, the check would be paid. and that if it he dishonored x
xx he willpay the amount thereof to the holder. (5) Wherefore, in the absence of due
presentment, the drawer did not become liable. Nevertheless, on the backs of the checks, there
were endorsements which apparently show that they had been deposited with the China Banking
and were, by the latter, presented to the drawee bank for collection, but as drawer had no funds,
they were unpaid and returned, some of them stamped account closed.
While the record does not show how the checks reached the hands of plaintiff, the trial
court surmised that he got them after they had been thus returned because he presented them in
court with such account closed stamped. Naturally and rightly, the lower court held plaintiff
not to be a holder in due course under the circumstances since he knew, upon taking them up,
that the checks had already been dishonored. Yet it does not follow as a legal proposition, that
simply because plaintiff was not a holder in due course, Chan Wan could not recover on the
checks. The Negotiable Instruments Law does not provide that a holder who is not a holder in
due course may not, in any case, recover on 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. As to what defenses defendant Tan Kim proved, the lower courts decision
did not mention any. Considering the deficiency of important details on which a fair adjudication
of the parties rights depends, in the interest of justice, the record of the case should be and is
hereby returned to the court below for additional evidence. Defendants not having appealed, their
counterclaim must be and is hereby definitely dismissed.
1245. Crossing generally. A check is crossed generally when only the words and
company are written between the parallel lines, or when nothing is written at all between the
parallel lines. Thus:

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& Co
Face of check, same as above

In this case, the payment must be made through the intervention of any company which is
duly authorized. Otherwise the payment will not be valid. In actual practice, the holder of the
crossed check merely deposits it for collection with the bank indicated between the parallel lines
or with any bank where he keeps an account in the case of a check crossed generally. The
depositary then takes charge of the collection.
1246. Under crossed check, payee has duty to ascertain holders title to checks.
Admittedly, the Negotiable Instruments Law regulating the issuance of negotiable checks as well
as the rights land liabilities arising therefrom does not mention crossed checks. But this Court
has taken cognizance of the practice that a check with two parallel lines in the upper left hand
corner means that it could only be deposited and may not be converted into cash. Consequently,
such circumstance should put the payee on inquiry and upon him devolves the duty to ascertain
the holders title to the check or the nature of his possession. Failing in this respect, the payee is
declared guilty of gross negligence amounting to legal absence of good faith and as such the
consensus of authority is to the effect that the holder of the check is not a holder in good faith.
Accordingly, petitioner, to whom three crossed checks were assigned and rediscounted, is not a
holder in due course as he knowingly violated the avowed intention of crossing the check.
Furthermore, his failure to inquire from the payee the purpose for which the three checks were
crossed, despite the warning of the crossing, prevents him from being considered in good faith
and thus he is not a holder in due course. Being not a holder in due course, plaintiff is subject to
personal defenses, such as lack of consideration between appellants and New Sikatuna Wood
Industries. Note that under the facts the checks were postdated and issued only as a loan to New
Sikatuna Wood Industries, Inc. if and when deposits were made to back up the checks. Such
deposits were not made, hence no loan was made, hencethe three checks are without
consideration (Sec. 28, Negotiable Instruments Law)
But the Negotiable Instruments Law does not provide that a holder who is not a holder in
due course may not in any case recover on the instrument for in the case at bar, petitioner may
recover from the New Sikatuna Wood Industries, Inc. if the latter has no valid excuse for
refusing payment. The only disadvantage of a holder who is not in due course is that the
negotiable instrument is subject to defenses as if it were non-negotiable.
1247. Drawee should not encash a crossed check but merely accept the same for
deposit. Under usual practice, crossing acheck is done by placing two parallel lines diagonally

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on the lefttop portion of the check. The crossing may be special whereinbetween the two parallel
lines is written the name of a bankor a business institution, in which case the drawee should
payonly with the intervention of that bank or company, or crossing may be general wherein
between two parallel diagonallines are written the words and Co. or none at all as in thecase at
bar, in which case the drawee should not encash the samebut-merely accept the same for deposit.
It was petitioner to whom the crossed checks were assigned and discounted and who
deposited said checks which were dishonored.
1248. Where other than payee of crossed checks presentedit for payment, there is no
proper presentment and drawer is not liable thereon. The three subject checks in the case at
bar had been crossed generally and issued payable to New Sikatuna Wood Industries, Inc.which
could only mean that the drawer had intended the same for deposit only by the rightful person,
i.e., the payee who presented the same for payment and therefore, there was no proper
presentment, and the liability did not attach to the drawer. Thus, in the absence of due
presentment, the drawer did not become liable. Consequently, no right of recourse is available to
petitioner against the drawer of the subject cheks, private respondent wife considering that
petitioner is not the proper party authorized tomake presentment of the checks in question.
1249. Advantages of crossing a check. It is a good precaution when it is to be forwarded
by mail or when it is entrusted to an agent and the drawer wants to be sure that it will be paid, to
the rightful owner.
1251. Letters of credit. See comments under Article 567 of the Code of Commerce.
Sec. 186. Within what time a check must be presented. - A check must be presented
for payment within a reasonable time after its issue or the drawer will be discharged from
liability thereon to the extent of the loss caused by the delay.
1252. When check to be presented for payment. A check must be presented within a
reasonable time after its issueThe whole theory and use of a check points to its immediate
payability. A depositor places money with his bank or banker, where it is subject at any time to
his order; and by his check or order, he desires to appropriate so much of it to another person,
and the bank or banker, in consideration of its temporary use of the money, agrees to pay it in
whole, or in parcels, to the depositors order when demanded. But he does not agree to contract
to pay at a future day by acceptance and the depositor cannot require it. Although under Section
185, a check is a bill of exchange payable on demand it is intendedfor immediate use and not to
circulate as a promissory note. Therefore, the transfer of a check to successive holders, where it
is drawn and delivered in the place where the drawee bank is located, does not extend the time
for presentment. If the check is delivered on one day and is not presented before the close of
banking hours the next business day, the drawer is discharged to the extent of any loss suffered
from the failure to present.
1253. Reasonable time. What is reasonable time is already stated. The test: Did the
payee employ such diligence as a prudent man exercises in his own affairs. Thus, the payees
failure to present a check to the drawee bank and who did not present the check for one week
after its receipt, was held to have delayed presentment for an unreasonable time as a matter of

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law? Where a farmer residing eight miles out of town received a check on Tuesday and took it
to town on his regular trip on Saturday, it was held that drawer was not discharged to the extent
of the loss by the intervening failure of the drawee bank.
1254. Failure to present on time does not totally wipe out all liability. Illustrative
Case.Estacio signed, issued, and delivered to Verhomal a check for P4,000.00 drawn to cash
upon the Philippine Bank of Commerce. Ten days later, she signed, issued, and delivered to
Verhomalunother check for P5,400.00also to cash upon the same hank. Not having been cashed
and neither collected, plaintiff brought this case for collection a little more than a year later.
Plaintiff alleges that they were not deposited orencashed because of the request of the defendant
herself as she claimed that she did not have sufficient funds to cover the amount. The defendant
alleges that, under Sec. 71 of the Negotiable Instruments Law where the instrument is payable on
demand, presentment must be made within a reasonable time after its issue and, in the absence of
due presentment, the drawer did not become liable. The Court held that this argument of the
defendant is wrong. A holder who does not present the check for payment has no standing as a
holder in due course but it does not follow that simply because he was not a holder in due course,
he could not recover on the checks. The only disadvantage of a holder not in due course is that
the negotiable instrument is subject to defenses as if it were non-negotiable. In this particular
case, the party to whom the checks had originally been issued and delivered is Verhomal
himself. There can be no question on whether or not he was a holder in due course at all. He was
in truth the original payee and he was seeking to recover against the original promissor and
drawer of the check. Where a party draws a check and delivers it to another, the legal situation is
nothing less than an acknowledgment on his part of his liability to the second in the sum stated in
the check. It is an original instrument of indebtedness, only that payment is ordered to be made
through drawers bank. If the check remains unpaid, whether because dishonored or not
presented at all, the original obligation to pay certainly cannot be erased, for it is a written
promise to pay. It is a written acknowledgment of an obligation to pay, so that for it to lapse
there must have to pass the ordinary prescriptive period governing written obligations.
1257. Stale check. One which is not presented for payment within reasonable time after
its issue.
1258. Effect of delay on liability of drawer. Under the law, when a check is not
presented for payment within a reasonable time after its issue, the drawer is discharged but only
to the extent of the loss caused by the delay. Hence, if no loss or injury is shown, the drawer is
not discharged. The only injury which would be sustained by the drawer in case presentment was
not made within a reasonable time would be caused by the failure of the bank subsequent to the
delivery and prior to the presentment of the check. Justice Story states the rule in the following
language:
If a bank or banker still remains in good credit and is able to pay the check, the drawer
will still remain liable to pay the same, notwithstanding many months may have elapsed since
the date of the check and before the presentment for payment and notice of the dishonor. So; if

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the drawer, at the date of the check or at the time of the presentment of it for payment, had no
funds in the bank or bankers hands, or if, after drawing the check and before its presentment for
payment and dishonor, he had withdrawn his funds, the drawer would remain liable to pay the
check, notwithstanding the lapse of time.
1259.Illustration. Suppose F, holder of a check, delays the presentment of payment and
when lie presents it for payment the drawer has already withdrawn his deposits. In this case,
there is no loss or injury to the drawer as he benefited from the money which he withdrew.
Hence, he is not discharged. But suppose that the bank fails and as a result of such failure the
drawer loses 3/4 of his deposit in that bank. The drawer is discharged to the extent of the loss.
Suppose that the total deposit is P4,000 and the value of the check is P800.00. Because of the
failure of the bank, the drawer is credited with only 1/4 of his deposit or P1,000, thereby causing
him to lose to the extent of 3/4, or P3,000. He is discharged to the extent of P600, 3/4 of the
value of the check, the extent of the loss.
1260. Effect of failure to give notice to drawer. Of course, where the check is
dishonored by non-payment, and the drawer is not given notice of dishonor, the drawer is totally
discharged from liability on the instrument. But the drawer may be held liable by the payee on
the basis of the original consideration between him and said payee.
1261. Holders of stale checks. A learned writer states: But it is clear that the maturity
of the check for purpose of presentment for payment and of dishonor in order to bind parties to
it, is not identical with the maturity which will charge subsequent holders with notice of defect of
title or infirmities in the instrument. In applying the rule, the courts are disposed to be governed
rather by the circumstances underwhich the plaintiff received the check than by the precise ageof
the instrument that is, the good or bad faith exercised the prime consideration. The result is
that the plaintiff has been treated as a holder in due course of checks transferred several months
after their issue.
1262. Effect of delay as to indorsers. In a Philippine case, it was held that an
unreasonable delay in the presentment of a check for payment will discharge the indorsers there
on, whether or not he is injured by the delay as the law presumes that he is prejudiced. The bases
of the decision are Sections 84 and 186 of the Negotiable Instruments Law. The Court: further
held that Sections 143 and 144 of the Negotiable Instruments Law are not applicable to checks
because these provisions have to do with the presentment for acceptance of ordinary bills of
exchange.
SECTION 187.Certification of check; effect of. Where a check is certified by the
bank on which it is drawn, the certification is equivalent to an acceptance.
1265. Certification of check. A certification is an agreement whereby the bank against
whom a check is drawn, under takes to pay it at any future time when presented for payment. But
a bank is not obligated to the depositor to certify checks. And the drawee is not liable to the
holder for refusal of the bank to certify a check. The refusal of a bank does not dispense with the
requirement of presentment for payment since a check is of right presentable only for payment at
the bank on which it is drawn.

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1266. Form of certification. No particular form is required but it must be in writing. So,
a telephone message is not a good certification. But a telegram sent by a bank that it would pay a
certain check has been held to be a certification. The usual method, by stamping on the check the
word certified and underneath it the signature of the cashier, or by writing upon the check the
word good with the date of certification and signature of the officer of the bank having the
express or implied authority to certify checks, has been held to be a sufficient certification.6 But
the letters O. K., with the initials of the cashier of a bank do not constitute a sufficient
certification under modern banking practice.
1267. Effect of certification. Certification (1) is equivalent to acceptance and is the
operative act that makes thedrawee bank liable furthermore, (2) it orates as an assignment of the
funds of the drawer in the hands of the draweebank and, (3) if obtained by the holder, it
discharges persons secondarily liable thereon.
1268. Certification equivalent to acceptance. Certification is equivalent to acceptance
in that the drawee bank is bound on the instrument upon certification. And it is immaterial to
such liability in favor of a holder in due course whether thedrawer bad funds or not in bank or
the drawer was indebted to the bank for more than the amount of the check. Thus a certifying
bank has all the liabilities stated in Section 62.
1269. Implication of certification of check. By the law merchant, the certificate of the
bank of a check is equivalent to acceptance. It implies that the check is drawn upon sufficient
funds in the hands of the drawee, that they have been set apart for its satisfaction, and that they
shall be so applied whenever the check is presented for payment. It is an understanding that the
check is good then, and shall continue good, and this agreement is as binding on the bank as its
notes oncirculation, a certificate of deposit payable to the order of thedepositor, or any other
obligation it can assume. The object of certifying a check as regards both parties, is to enable the
holder to use it as money. The transferee takes it with the same readiness and sense of security
that he would take the notes of the bank. It is advisable also to perform its important function
until, in the course of business, it goes back to the bank for redemption and is extinguished by
payment. It can not be doubted that the certifying bank intended these consequences and it is
liable accordingly. To hold otherwise would render these important securities only a snare and a
delusion. A bank incurs no greater risk in certifying a check and in giving a certificate of deposit.
In well-regulated banks, the practice is at once to charge the check to the account of the drawer,
to credit it in a certified check account, and, when the check is paid, to debit that account with
the amount. Nothing can be simpler or safer than this process.
1270. Implication of certification further explained. The bank virtually says, that
check is good; we have the money of the drawer here ready to pay it. We will pay it now if you
will receive it. The bolder says, No, I will not take the money; you may certify the check and
retain the money for me until the check is presented. The law will not permit a check, when due,
to be thus presented, and the money to be left with the bank for the accommodation of the holder
without discharging the drawer, The money being due and the check presented, it is his own fault
if the holder declines to receive the payment, and for his own convenience has the money

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appropriated tothat check subject to its future presentment at any time within the statute of
limitations.
l271Function of certified checks. Although a check does not call for acceptance and
the holder can present it only for payment, the certification of cheeks is a means in constant and
extensive use in the business of banking and its effects and consequences are regulated by the
law merchant. Checks drawn upon banks or bankers, thus marked and certified, enter largely into
the commercial and financial transactions of the country; they pass from hand to hand, in the
payment of debts, the purchase of property, and in the transfer of balances from one house and
one bank to another. In the great commercial centers, they make up no inconsiderable proportion
of the circulation and thus perform a useful, valuable, andan almost indispensable office.
1272. Purpose of procuring checks to be certified. The purpose of procuring a check to
be certified is to impart strength and credit to the paper by obtaining an acknowledgment from
the certifying bank that the drawer has funds there in sufficient to cover the check and securing
the engagement of the bank that the check will be paid upon presentation. A certified check has a
distinctive character as a species of commercial paper and performs important functions in
banking and commercial business. When a check is certified, it ceases to possess the character,
or to perform the functions, of a check, and represents so much money on deposit, payable to the
holder on demand. The check becomes a basis of credit an easy mode of passing money from
hand to hand and answers the purposes of money.
1273. Payment neither includes nor implies acceptance. Acceptance and payment
are entirely different. If thedrawee accepts the paper after seeing it, and then permits itto go into
circulation as genuine, on all the principles of estoppel, he ought to be prevented from setting up
forgery to defeatliability to one who has taken the paper on the faith of theacceptance, or
certification. On the other hand, mere paymentof the paper at the termination of its course does
not act asanestoppel. Payment is the final act which extinguishes abill. Acceptance is a promise
to pay in the future and continues the life of the bill. The rule supported by the majority of the
cases, that payment of a check on a forged or unauthorized indorsement of the payees name, and
charging the same to the drawers account, do not amount to an acceptance so as to make the
bank liable to the payee, is supported by all of the recent cases in which the question is
considered.
1274.Right of holder to sue drawer where check not certified. The drawer of a check
contracts that it will be paidon presentment but not that it will be certified. This is thetheory on
which the law discharging the drawer and indorsersupon certification is based. Accordingly,
certification differsfrom acceptance in that the refusal of the drawee bank to certify does not
amount to a dishonor of the check. There is,therefore, no necessity of notice of dishonor by nonacceptanceor non-certification, and it is still necessary to make presentment for payment which is
not necessary in the case of non-acceptance. But the case is adversely criticized.
SECTION 188.Effect where the holder of check procures it to be certified. Where
the holder of a check procures it to be accepted or certified, the drawer and all indorsers
are discharged from liability thereon.

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1275. Effect where holder obtains certification. When the certification is obtained by
the holder, the drawer and the indorsers are discharged. The certification has the, same effect as
if the holder had drawn the money redeposited it and taken a certificate of deposit for it. Only the
indorsers at the time of the certification are discharged. indorsers subsequent to the certification
are not discharged. In the Philippines, the practice is to certify only at the request of the drawer.
1276. Reason for the rule. The reason for the rule that a certification obtained by the
holder discharges the drawer and indorsers is that the moment the check is certified, the funds
cease to be under the control of the original depositors and pass under the control of the person
who procures the certification of the check drawn in his favor.
1277. Effect where certification obtained by others. Where the certification is not
obtained by the holder but by others such as the drawer and indorsers, they are not discharged.
Thus, in the following cases, the drawers and indorsers are not discharged:
(1) Where the certification is obtained by the drawer, even when the drawer procures the
certification at the instance of the payee; or
(2) Where the certification is obtained by a person who is neither holder nor drawer.
SECTION 189.When check operates as an assignment. A check of itself does not
operate as an assignment of any part of the funds to the credit of the drawer with the bank,
and the bank is not liable to the holder unless and until it accepts or certifies the check.
1278. Certification operates as assignment of funds. When the holder procures the
check to be certified the check operates as an assignment of a part of the funds to the credit of
the drawer with the bank.
1279. Duration of transfer of fund. As stated, by the certification of a check, the funds
represented by the check aretransferred from the credit of the drawer to that of the payeeor
holder, and for all intents and purposes, the payee or holder becomes the depositor of the drawee
bank with rights and duties of one in such relation. But where the certification states the check is
to be void if not presented for payment within 90 days from date of acceptance, the transfer of
the corresponding funds from the credit of the depositor to that of the payee is co-extensive with
the life of the check, which in this case is 90 days. If the check is not presented for payment
within that period, it becomes invalid and the funds are automatically restored to the credit of the
drawer though not as a current deposit but as a special deposit.
1280. Uncertified check not assignment of funds. A check of itself is not an assignment
of the funds of the drawer in the bank. It has been held in a Philippine case that a general
deposit in a bank is so much money to the depositors credit; it is a debt to him by the bank,
payable on demand to his order, not property capable of identification and specific appropriation.
A check drawn upon the bank in the usual form, not accepted or certified by its cashier to be
good, does not constitute a transfer of any money to the credit of the holder; it is simply an order
which may be countermanded and payment forbidden by the draweeat any time before it is
actually cashed. It creates no lien on the money which the holder can enforce against the bank. It
does not of itself operate as an equitable assignment.

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1281. Illustration. Thus, suppose that A draws a check against X bank, drawee, in favor
of B, payee. Before the check could be presented for payment, X bank failed and was placed
under a receiver. Can B claim priority as to the amount of the draft over other creditors of X
bank? No, because the check of itself is not an assignment of the funds of A in X bank.
1282. Drawee bank not liable to holder on check unless accepted or certified. Before
acceptance or certification, the bank is not liable and the holder has no right to sue the drawee
bank on the check.
On this question, we conclude that the general rule is that an action cannot be
maintained by a payee of the check against the bank on which it is drawn, unless the check has
been certified or accepted by the bank in compliance with the statute, even though at the time the
check is that an action cannot be maintained by a payee of the drawer of the check out of which
the check is legally payable; and that the payment of the check by the bank on which it is drawn,
even though paid on the un authorized indorsement of the name of the holder (without notice of
the defect by the bank); does not constitute a certification thereof, neither is it an acceptance
thereof; and without acceptance or certification, as provided by statute, there is no privity of
contract between the drawee bank and the payee, or holder of the check. Neither is there an
assignment pro tantoof the funds where the check is not drawn on a particular fund, or does not
show on its face that it is an assignment of a particular fund. The above rule as stated seems to
have been the rule in the majority of the states even before the passage of the Uniform
Negotiable Instruments Act in the several states.
1283. Relation between depositor and bank. The contract between a banker and a
depositor is that of deposit. It is a separate contract from that stated in the check that may be
drawn by the depositor against the depository bank. The Civil Code contains provisions
regarding compensation (set off) and deposit. These portions of Philippine law provide that
compensation shall take place when two persons are reciprocally creditor and debtor of each
other. In this connection, it has been held that the relation existing between a depositor and a
bank is that of creditor and debtor. The implied contract between them being that the bank shall
discharge the indebtedness by honoring such checks as the latter may draw upon it and cannot
debit the depositors account with payment not made by his order or direction.
1284. Duties owed by the bank to the depositor. By virtue of the contract of deposit
between a banker and its depositor, the banker agrees to pay checks drawn by the depositor
provided that the said depositor has money in the hands of the bank. And as to a depositor who
has funds sufficient to meet payment of a check drawn by him in favor of a third party, it has
been held that he has a right of action against the bank for its refusal to pay such a check in the
absence of notice to him that the bank has applied the funds so deposited in extinguishment of
past due claims held against him. And the depositor may maintain an action against the bank not
only for a breach of contract but also for a tort; in the latter case, he would be entitled to recover
damages for injury to his credit or any other injury that he might have suffered.

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1285. Illustrations. Thus, a $2,000 compensatory damage awarded to a bachelor of good
reputation for damages because of banks negligent dishonor of his check, resulting in his arrest
and detention in jail was held not so excessive as to require interference by the court.
1286. When drawer of dishonored cheek entitled only to temperate damages and
attorneys fees, but not to moral damages. The drawee is not liable on a check as until
accepted or certified by him, he is not a party to instrument. However, on the basis of the
contractual relation between him as drawee(depository) and the drawer (depositor), the drawee is
obligated to pay the persons designated by the drawer to be paid by the drawee. Accordingly, if
the drawee dishonors the check is sued by the drawer, without justifiable cause, the drawee is
liable to the drawer for damages. But where a drawer issues a check that is dishonored by the
drawee bank upon a mistake but rectifies the mistake with in four hours and the payee was paid
in full, the drawer is not entitled to moral damages. Temperate or moderate damages are proper
not for indemnification of loss suffered but for the vindication or recognition of a right violated
or invaded.
1287. Banks not obliged to make part payment. But a bank is under no obligation to
rnake a part payment to the amount of the funds on deposit, on a check drawn by the depositor to
an amount in excess of such funds, nor has the payee of such a check any right to the actual
balance on deposit to the credit of the drawer. All of the checks presented to a bank for payment
in a bundle through a clearing housemust be paid, or none, and, if funds to pay all are
insufficient, the payer bank may not select checks for payment, thus permitting preference. In
practice, the holder of the check sometimes deposits sufficient amount of his funds to the
drawers account in order to have sufficient on deposit in the drawers name so that the latters
check will be honored by the bank,
1288. Summary of rights and liabilities of parties. Thus, where the drawee bank
refuses to certify, or accept, or pay a check:
(1) The holder has no action against it as a check is ofitself not an assignment of the
funds of the drawer in the hands of the drawee bank, and the drawee bank is not liable on the
check until it has accepted or certified it.
(2) Neither has the holder a right of action against the drawer where the drawee bank
refuses to accept or certify the check but he has a right of action against the drawer where the
drawee hank refuses to pay.
(3) And while the holder has no right of action against the drawee bank which refuses to
pay, accept or certify a check, the drawer has a right of action against the drawee bank so
refusing. Such right of action, however, is not based on the check drawn but on the original
contract of deposit between them.
1289Duty of depositor to bank. Where a drawer of a check has prepared his check so
negligently that it can be easily altered without giving the instrument a suspicious appearance
and alterations are afterwards made, he can blame no one but himself and in such case he cannot
hold the bank liable for the consequences of his own negligence in that respect; but negligence of
the depositor in drawing a check will not excuse the paying bank unless it is misled by such

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negligent act, and, if the drawer of a check is first in fault and if his negligence contributes
directly to its wrongful and fraudulent appropriation, he is not entitled to recover.
1290. Duty of depositor where passbook returned to him. The weight of authority,
and perhaps of reason, supports theview that when a depositors passbook has been written up
andreturned to him with cancelled checks which have been chargedto his account, it is his duty
to examine such checks within areasonable time, anti if they disclose forgeries or alterations,
toreport them to the bank, and failing in which he cannot, if hisfailure results in detriment to the
bank, dispute the correctnessof payments thereafter made by it on similar checks. Thisrule,
however, assumes that the bank itself has not been guiltyof negligence in making the payment
for when, by the exercise of proper care, it could have discovered the alteration or forgery, it
must bear the loss notwithstanding that the depositor failed in his duty to examine the accounts.
1291.Stopping payment. As a check of itself does not operate as an assignment of the
funds to the credit of the drawer, the latter may countermand payment before its acceptance or
certification. The order to stop payment must be communicated to the bank before the check to
which it refers has been paid; and in the absence of a rule of the bank that stop orders must be in
writing, a verbal notice is sufficient.
1292. When stopping payment constitutes crime. Stopping of the payment of a check
would constitute crime of estafawhere the accused issues a check and receives money, not goods,
for them from the offended party, and where, at the time the accused received the money for the
check from the offended party, he has the intention of stopping payment on it. This is different
from a case where goods or effects are bought and then payment stopped on checks given for
goods.
XVII GENERAL PROVISIONS
SECTION 190.Short title. This Act shall be known as the Negotiable Instruments
Law.
SECTJON 191.Definitions and meaning of terms. In this Act, unless the contract
otherwise requires:
Acceptance means an acceptance completed by delivery or notification; .
Action includes counterclaim and set-off;
Bank includes any person or association of persons carrying on the business of
banking, whether incorporated or not;
Bearer means the person in possession of a bill or note which is payable to bearer:
Bill means bill of exchange, and note means negotiable promissory note;
Delivery means transfer of possession, actual or constructive, from One person to
another;
Holder means the payee orindorsee of a bill or note who is in possession of it, or
the bearer thereof ;
Indorsement means an iudorsement completed by delivery;
Instrument means negotiable instrument;

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Issue means the first delivery of the instrument, complete in form, to a person
who takes it as a holder;
Person includes a body of persons, whether incorporated or not;
Value means valuable consideration;
Written includes printed, and writing includes print.
SECTION 192.Persons primarily liable on instrument. The person primarily
liable on an instrument is the person who, by the terms of the instrument, is absolutely
required to pay the same. All other parties are secondarily liable.
SECTION 193. Reasonable time, what constitutes. In determining what is a
reasonable time, regard is to be had to the nature of the instrument, the usage of trade or
business with respect to such instruments, and the facts of the particular case.
1293. Reasonable time relative. The term is relative and depends upon:
(a) the nature of the instrument;
(b) the usages of business or trade, if any; and
(e) the facts of the particular case.
SECTION 194. Time, how computed; when last day falls on holiday, Where the
day, or the last day for doing any act herein required or permitted to be done falls on
Sunday or on a holiday, the act may be done on the next succeeding secular or business
day.
SECTION 195.Application of Act. The provisions of this Act do not apply to
negotiable instruments made and delivered prior to the taking effect hereof.
SECTION 196. Cases not provided for in Act. Any case not provided for in this
Act shall be governed by the provisions of existing legislation or in default thereof, by the
rules of the law merchant.
1294. What law governs where case not provided by Instruments Law. See
comments under Article 2 of the Code ofCommerce.
1295. Law merchant. See comments under Article 3 of the Code of Commerce.
1296. How copies of bill of exchange obtained. See Articles 448, 449 and 400 of the
Code of Commerce.
1297. Bearers duty to prove identity. See Article 442 of the Code of Commerce.
1298. Effect of partial payments. See Article 501 of the Code of Commerce.