Promissory Note (PN) = promise to pay

Bill of Exchange (BE) = order to pay

PN BE
Parties (1) Creditor: Payee (1)
Debtor: Drawer
Party to whom the maker has unconditionally
The one giving the order
promised to pay the sum certain in money
The person ordering someone to pay
(2) Debtor: Maker Drawee(2)
The party who signs the instrument and makes the
The party to whom the bill is addressed and is being
unconditional promise to pay a sum certain in money ordered by the Drawer to pay the Payee
on demand or at a fixed or determinable future time.
(3) Payee the person in whose favor the bill is drawn and to
whom the drawee will pay the bill
Features There is always a promise There is always an order
Liability (1) Maker: Primarily Liable (1) Drawee: No Liability
(2) Payee and subsequent indorsers: Secondarily Liable RATIO: Not obliged to pay, unless the drawee becomes
the drawee-acceptor who binds himself to pay, thus, for
accepting the order to pay, drawee-acceptor becomes
primarily liable
(2) Drawee-acceptor: Primarily Liable
(3) Drawer, Payee, subsequent indorsers: Secondarily Liable
Presentment No presentment necessary. Necessary ONLY in three circumstances:
for Acceptance (1) When the BE is payable at a fixed period or after sight
RATIO: The maturity date is counted from the date of the
1st presentment for acceptance made by the holder to the
drawee
(2) When the place of payment of BE Is different from the
domicile of the drawee
(3) When presentment for acceptance is expressly required
on the BE (e.g. Pay to the order of B P5,000 on Dec 31.
1991. Presentment for Acceptance is required.
When Payable Presentment for Payment must be made within a reasonable Presentment for Payment must be made within a reasonable time
on Demand time AFTER ISSUE. AFTER THE LAST INDORSEMENT OR NEGOTIATION.

Q: Why is the drawee not obliged to accept the order to pay?

A: Because there is no relationship between the drawee and the drawer.
The drawee is actually paying from his own funds, with or without a
previous agreement between them. There is payment from the drawees
pockets subject to reimbursement later on.
Whether or not the following are negotiable:
(1) Bill of lading not negotiable; it represents goods rather than
money. A bill of lading is a form of document of title issued by the
carrier whereby receipt of goods is acknowledged and the carrier
promises to deliver the goods to whoever is validly holding it and
who can present the bill of lading. It may be considered a
negotiable instrument of title under the Civil Code, but it is not a
negotiable instrument under the NIL. (Aquino, 2009)
(2) Pawn ticket not negotiable; no unconditional promise to or
order to pay a sum certain in money and is not payable to order
or to bearer.
(3) Trust receipt not negotiable; represents goods rather than
money. It is a security transaction intended to aid in financing
importers or dealers in merchandise by allowing them to
obtain delivery of the goods under certain covenants.
(4) Warehouse receipt not negotiable; document of title that
represents title to and possession of goods. (Aquino, 2009)
(5) Trade acceptance negotiable; a bill of exchange of which the
acceptor is a bank or banker engaged generally in the business of
granting bankers acceptance credit (a special type of BE).
(Bonifacio, 1978)
(6) Bill of Lading not negotiable; represents goods rather than
money.
(7) Letter of Credit not negotiable; because they do not contain an
unconditional order or promise to pay. (Aquino, 2009)
GENERAL CONSIDERATIONS
Section 1 Form of Negotiable Instruments An instrument to be
negotiable must conform to the following requirements:
(1) It must be in writing and signed by the maker or drawer;
(2) It must contain an unconditional promise or order to pay a sum
certain in money;
(3) Must be payable on demand, or at a fixed or determinable future
time;
(4) Must be payable to order or to bearer;
(5) Where the instrument is addressed to a drawee, he must be named
or otherwise indicated therein with reasonable certainty.
Basic Guiding Principles:
Negotiability is merely a matter of form.
If the instrument fulfils all the above requisites, it becomes
negotiable even though it may be void, voidable, unenforceable
or uncollectible.
e.g. Suppose a person gives a promissory note in payment
of a gambling debt to another person. If the promissory
note has all the above requisites, it becomes a negotiable
promissory note even though the consideration is
contrary to law, gambling debts being illegal.
No matter what consideration, whether or not for illegal or illicit
purposes, confine yourself to Section 1, if it is valid on its face and
can be considered a negotiable instrument.
(1)In writing and signed by the maker or drawer
Pursuant to Section 1, it is a negotiable instrument, even if it be
written on a persons forehead or on the wall as long as it is in
writing.
The signature may be in any form, but preferably in his regularly
accepted signature, as long as he intends to be bound (even if it
is just X or your favourite number)
 (2)Unconditional promise or order to pay a sum
certain in money
RATIO: No person would trust negotiable instruments if it subject
to a contingency
Q: I promise to pay AE or order P10,000, pursuant to the contract. Is this
negotiable?
A: Negotiable, the term pursuant to the contract simply mentions the
contract which gave rise to the instrument, there is no condition
obtaining in the case at bar.
Q: What if pursuant to the contract is changed to subject to the
contract, will there be a difference?
A: Yes. There will be a difference because it is no longer simply stating the
transaction which gave rise to the instrument but making it subject to the
terms and conditions of another contract.
Q: Pay to the order of AE P10,000 out of the proceeds of the sale.
To: Juan de la Cruz. Is this negotiable?
A: Non-negotiable, subject to the condition that the sale will push through
and amount will be sufficient
Q: How about and reimburse yourself from the proceeds of the sale
instead of out of the proceeds of the sale in the above example?
A: Negotiable, the order is still unconditional because what is reflected is
an absolute obligation to pay P10,000. The specified account is only the
source of reimbursement after payment. If the funds in the account are
insufficient, there would still be an obligation to pay the payee although
the drawee may not be fully reimbursed.
(2.1) Unconditional Promise or Order
Q: Differentiate condition and period.
A: Condition is a future and uncertain event, or a past event unknown to
the parties, the happening (positive) or non-happening (negative) of
which may either give rise to an obligation or may extinguish existing ones
while a period, also known as a day certain, is a future and certain event
which is sure to happen, although when it will happen is not known.
Q: If there is a condition or a term, will the instrument be negotiable?
A: If there is a condition, the instrument is non-negotiable. If there is
merely a term, the negotiability of the instrument will not be affected.
Q: I promise to pay AE or order P10,000 as soon as my means permit me
to do so. Is this negotiable?
A: Even if the clause as soon as my means permit me to do so is
considered as one with a period pursuant to the Civil Code, it is subject
to Article 1197 which says it is the court that will fix the duration of the
period. And because going to court for the fixing of the period imposes
an additional obligation, the instrument is rendered non-negotiable.
(2.2) Sum Certain
The following do not affect the negotiability of the instrument and
the sum payable is still considered certain, pursuant to Section 2
of the NIL:
(1) With interest;
Q: From what period do you reckon the counting of interest?
A: From the date expressly stipulated on the instrument from which the
interest will start to run. If there is no such date, from the date of the
instrument. If the instrument is undated, interest shall start to run from
the date of issue of the instrument.
Q: What are the rules regarding interest?
A: (1) payment of interest must be clearly stated on the instrument;
otherwise interest shall not be chargeable; and (2) if interest is payable
but the rate is not specified, interest shall be charged at the current legal
rate of interest (which has been reverted back to 6% through Monetary
Board Circular No. 799 effective July 1, 2013)
(2) By stated installments;

Q: I promise to pay AE or order P10,000 on installment basis. Is this
negotiable?
A: Non-negotiable, in order for stated installments to be valid and
consequently, render negotiability, the stated installments must state the
(1) maturity date of each installment and (2) exact amount to be paid for
each installment.
(3) By stated installments. With a provision that, upon default in
payment of any instalment or of interest, the whole shall
become due
Q: Differentiate escalation clause with insecurity clause. not negotiable
A: Insecurity clauses are provisions in the contract which allow the holder
to accelerate payment if he deems himself insecure. In other words, he
can demand payment whenever he feels that there is a danger that make
will not be able to pay on the due date of the instrument. (Aquino, 2009)
While escalation clauses or acceleration clauses are provisions which
state that the whole indebtedness automatically becomes due and
demandable upon default of one or two successive installments or of the
interest. (Pasimio, 1992)
Q: How does an escalation clause affect negotiability? How about an
insecurity clause?
A: An instrument with an escalation clause does not affect negotiability
because the certainty of the amount to be paid is not affected. However,
an instrument with an insecurity clause is non-negotiable. Because the
holders whim and caprice prevail without the fault or control of the
maker. (Aquino, 2009)
(4) With exchange, whether at a fixed rate or at the current rate;
or
Q: What if the sum payable is in another currency? Is it negotiable?
A: Yes. An instrument, whether payable at a fixed exchange rate or at
the current rate is deemed by the law to meet the sum certain
requirement. (De Leon, 2009)
Q: What rate will be applied?
A: The parties may stipulate on any rate (whether at a fixed exchange rate
or at the current rate). In the absence of stipulation, it will be the
prevailing rate of exchange at the time the obligation was constituted.
(5) With costs of collection or an attorneys fee, in case payment
shall not be made at maturity.
Q: How does an instrument with an imposition of attorneys fees, will it be
negotiable?
A: Yes, a stipulation in the instrument to pay all costs of collection and
attorneys fee in case of the filing of a suit for collection will not render
the instrument non-negotiable as the total costs of collection are merely
added to the principal obligation and does not alter the amount of the
sum certain payable. The costs and attorneys fees are merely incidentals
in the collection of the principal obligation. (Pasimio, 1992)
(2.3) In Money
Q: I promise to pay AE or order P10,000 or deliver my IPAD. Is this
negotiable?
A: Non-negotiable because the choice belongs to the maker, thus he is
not absolutely required to deliver money because he can satisfy his
obligation by delivering one sack of sugar.
Q: How about add a statement saying at the holders option. Will it make
the instrument negotiable?
A: Yes because the option to choose belongs to the holder, there is still
an absolute obligation to pay in money.
Note: This situation is similar to an alternative obligation where the right
of choice ALWAYS belongs to the debtor that is why it is important to add
at the holders option, otherwise, the Civil Code provisions on
alternative obligations will apply and it is the debtor who will choose.
(3)Must be payable on demand or at a fixed or
determinable future time
The date of the instrument is important (1) to determine the
maturity date of the instrument if it is payable at a fixed period
after date; or (2) to determine when the interest, if provided in
the instrument, will start to run.
Q: When is the maturity date of a negotiable instrument?
A: (1) On demand, (2) Fixed calendar date, (3) Determinable future time
(3.1) Payable on Demand
An instrument is payable on demand, pursuant to Section 7 of the NIL:
(1) When it is so expressed to be payable on demand, or at sight, or
on presentation; or
(2) In which no time for payment is expressed.
(3) 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.
Q: When there is no time for payment, when is the maturity date if the
instrument is payable at a fixed period after date?
A: (FOR A PROMISSORY NOTE after date is usually used) If there is no
time for payment, the maturity date is counted from the date of the
instrument. If the instrument is undated, the maturity date is counted
from the date of issue.
Q: When there is no time for payment, when is the maturity date if the
instrument is payable at a fixed period after sight?
A: (FOR A BILL OF EXCHANGE after sight is usually used) It will not be
counted from the date of the bill, nor from the date of issue, but rather
from the date of the first Presentment for Acceptance to be made by the
holder to the Drawee.
Q: If there is no maturity date, when to pay?
A: The instrument is payable on demand if there is no maturity date.
Q: When the instrument is payable on demand, when can you demand
payment?
A: Payment can be demanded within a reasonable time. In determining
reasonable time, Section 193 states that regard is to be had as:
(1) To the nature of the instrument;
(2) To usage of trade and business, if any, with respect to such
instruments, and
(3) The facts of the particular case.
If a bill of exchange, reasonable time from last endorsement. If a
promissory note, reasonable time from date of issuance.
(3.2) Fixed calendar date
Fixed time is the definite calendar date expressed in the
instrument
E.g. I promise to pay to the order of B P500 on June 30, 1991.
(3.3) Payable at a Determinable Future Time
The instrument is payable at a determinable future if, though no
date is fixed, the exact date of maturity is capable of being
determined.
Section 4 of the NIL enumerates the instruments that are
considered payable at a determinable future time:
(1) At a fixed period after date or sight; or
e.g. I promise to pay to the order of B P500 30 days after date.
 The fixed period is 30 days after date which is generally used only
in Promissory Notes. The 30 days will be counted from the date of
the Promissory Note. If the PN is dated March 1, 1991, then the
maturity date will be March 31, 1991. However, if the PN is
undated, the rule says that the date of issue will be the date of the
instrument, from which the 30 days will be counted. Example,
Maker A made the PN on March 4, 1991 but left it undated. Then
30 days will be counted from March 4, thus making the maturity
date April 3, 1991.
e.g. I promise to pay to the order of B P500 30 days after sight.
Fixed period after sight is generally used in a Bill of Exchange. The
maturity date of a BE payable at a fixed period after sight is not
based on the date of the BE nor on the date of issue. Rather the
fixed period (30 days) will be counted from the first time
Presentment for Acceptance, regardless of dishonor, is made by
the Payee or Holder to the Drawee. Example, if the holder makes
a presentment for acceptance to the drawee on March 1, 1991,
whether or not the drawee accepts it, the maturity date is already
established on March 31, 1991.
(2) On or before a fixed or determinable future time specified
therein; or
e.g. I promise to pay to the order of B P500 on or before June 30, 1991.
This refers to on or before a fixed time and the holder can
collect from the maker or or at any time before June 30, 1991.
I promise to pay to the order of B P500 on or before Xmas this year.
The Holder can collect from the party primarily liable on or before
December 25, 1991, which is Xmas this year, the determinable
future time specified in the instrument
(3) 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.
Q: I promise to pay AE or order P10,000 on or before the 25th birthday of
X. Negotiable or not?
A: Non-negotiable as it violates Section 1(c). The instrument is subject to
a condition and not just a term. Birthdays are not certain to happen.
(4)Must be payable to order or to bearer
Q: How do you negotiate bearer and order instruments?
A: Bearer instruments are negotiated by mere delivery while order
instruments are negotiated by indorsement coupled with delivery.
Q: To: Y and Z. Is the instrument negotiable?
A: Yes, a bill of exchange may be addressed to two or more drawees
jointly.
Q: How about To: Y or Z.
A: Non-negotiable. A bill of exchange may not be addressed to two or
more drawees in the alternative.
Q: How about To: Y, or in his absence, Z.
A: Also non-negotiable. A bill of exchange may not be addressed to two
or more drawees in succession.
(4.1) Bearer Instruments
Section 9 of the NIL provides that an instrument is payable to bearer in
the following instances:
(1) When it is expressed to be so payable; or
(2) When it is payable to a person named therein or bearer; or
 (3) 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
Q: I promise to pay to the order of Superman, P1000.
Sgd: A. Negotiable? What instrument?
A: Yes, bearer.
Q: What are the requisites to treat the above promissory note a bearer
instrument?
A: (1) The payee is a fictitious or non-existing person; and (2) such fact is
known to the Maker who intentionally makes the promissory note
payable to such fictitious or non-existing person.
Q: What is the fictitious payee rule?
A: An instrument is a bearer instrument if it is payable to the order of a
fictitious or non-existing person and such fact is known to the person
making it so payable.
Q: May a fictitious payee be in reality a true and existing person?
A: Yes, but the instrument is still deemed payable to bearer if the maker
or drawer has no intention to make the instrument payable to such
existing person. The fictitious payee rule does not only contemplate
fictitious persons but also when the named payees do now know and
without intending the named payees to receive the proceeds of the
check.
Q: Why is it a bearer instrument?
A: Because a fictitious person cannot indorse, so the drawer/maker must
have intended that the instrument is a bearer instrument which can be
negotiated by mere delivery.
Q: Who bears the loss in a fictitious payee situation?
A: As a rule, it is the drawer of the check who bears the loss.
Q: Is there an XPN to the foregoing?
A: Yes, it is called the commercial bad faith XPN. Such XPN would cause
the drawee bank to bear the loss instead of the drawer of the checks.
Q: Explain the commercial bad faith XPN further.
A: A showing of commercial bad faith on the part of the drawee bank, or
any transferee of the check for that matter, will work to strip it of this
defense. The exception will cause the drawee bank to bear the loss.
Commercial bad faith is present if the transferee of the check acts
dishonestly, and is a party to the fraudulent scheme.
Q: Why did the SC apply the commercial bad faith XPN in the case PNB v.
Rodriguez? What was the bad faith of PNB?
A: The bad faith of PNB consists in the actuations of its teller in accepting
the checks even without indorsement when they knew that the payees
named therein are living and existing.
(4) When the name of the payee does not purport to be the name of
any person; or
e.g. Pay to cash or Pay to payroll
(5) When the only or last indorsement is an indorsement in blank.
Indorsement can be done in two ways:
(1) special indorsers signature and name with indorsees name
(2) blank indorsers signature and name but without indorsees
name
Q: What is the effect if an order instrument is indorsed in blank?
A: The order instrument is converted into a bearer instrument which can
be negotiated by delivery alone.
Q: What is the effect if it is specially indorsed?
A: Remains as is.
Q: If an originally order instrument is converted, through blank
indorsement, into a bearer instrument, and then it is indorsed specially,
what is the effect?
A: It will revert to being an order instrument which can be negotiated
again through indorsement and delivery.
Q: What is the effect if an originally bearer instrument is indorsed either
specially or blank?
A: It will remain a bearer instrument as to the nature of the instrument,
but a person who indorses specially a bearer instrument becomes a
special indorser who becomes liable for all the warranties of a special
indorser.
It is a redundancy to indorse a bearer instrument because it can
be negotiated by mere delivery, indorsement is not necessary.
A bearer instrument is ALWAYS A BEARER INSTRUMENT.
RECAP: An order instrument specially indorsed remains an order
instrument but if indorsed in blank, it is converted into a bearer
instrument. If the bearer instrument is indorsed specially, it reverts back
to being an order instrument. If the bearer instrument is indorsed in
blank, it remains a bearer instrument.
(4.1) Order Instruments section 8
Section 9 of the NIL provides that an instrument is payable to order in the
following instances:
(1) When it is drawn payable to the order of a specified person or to
him or to his order; or
(2) When 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.
Q: If an order instrument is just delivered, is there a valid negotiation?
A: No valid negotiation but just assignment or transfer.
Q: May the person who received the instrument in the preceding question,
or the transferee, demand indorsement?
A: No. The rights of a holder are only acquired when the instrument is
indorsed, there is no retroactivity.
ADDITIONAL PROVISIONS NOT AFFECTING
NEGOTIABILITY
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 is not affected by a provision which
a) Authorizes the sale of collateral securities in case the instrument
be not paid at maturity;
b) Authorizes a confession of judgement if the instrument be not paid
at maturity; or
c) Waives the benefit of any law intended for the advantage or
protection of the 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 or stipulation
otherwise illegal.
GR: The party primarily liable (PPL), the maker in a PN or drawee-acceptor
in a BE, shall be required to pay the negotiable instrument in a sum certain
in money only. A promise or order to perform an act in addition to the
payment of money is non-negotiable as it runs counter to the general rule.
XPNS:
 (1) Collateral securities the giving of a collateral is not an additional
undertaking but merely as a pledge to secure the debt. If the
debtor fails to pay, the collateral will be sold and from the
proceeds of the sale, the principal debt will be paid.
(2) Confession of judgment tantamount to a voluntary admission of
his indebtedness, a provision to this effect in the instrument will
not affect its negotiability. However, such warrant of attorney is
void for being contrary to public policy as the promissor bargains
away his right to a day in court. (Note: Only the stipulation is void,
the whole instrument is not affected and is still negotiable)
(3) Waiver or benefit An indorser may waive the benefit of the
provision of the NIL that is designed for his benefit such as
presentment for payment, notices of dishonor, protest and
demand. Notwithstanding, the instrument remains to be
negotiable.
(4) At the Holders option discussed in supra (2.3).
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 has been given
thereof;
(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.
Q: Why is the date of the instrument important?
A: To determine (1) the maturity date of the instrument if it is payable at
a fixed period after date; or (2) when the interest, if provided in the
instrument, will start to run.
Q: What is the effect if the instrument is not dated?
A: It is still negotiable. In a PN (date is only material for PN not for BE
because for BE it is sight and not date which matters), the maturity date
will simply be counted from the date of issue.
Q: What is the effect if the instrument does not specify the value given or
that any value has been given thereof?
A: It is still negotiable because it is presumed that the contract between
the maker or drawer and the payee is for a consideration.
Q: What is the effect if the instrument does not specify the place where
made or drawn, or where payable?
A: Such omission will not affect negotiability because the law presumes
that payment shall be made at the domicile of the maker.
STATUTORY CONSTRUCTION OF AMBIGUOUS
INSTRUMENTS
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:
(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.
(1) Sum payable expressed in words or figures:
Q: What is the rule if there is a discrepancy in the sum payable as expressed
in words and figures?
A: The instrument shall be construed in favour of the written amount in
words.
RATIO: The figures are easier to alter than the words.
Q: If at the top of the note the figure shown is P1,000, whereas the amount
payable as written in words appears Ten Thousand Pesos, which is the
correct sum?
A: It shall be that which is written in words, pursuant to the foregoing rule,
or P10,000.
Q: What If the words are ambiguous or uncertain?
A: Reference may be had to the figures to fix the amount.
Q: If the amount in figures at the top of the note is P1,545 while the amount
payable as written reads Fifteen hundred forty five Pesos, which
construction to follow?
A: Reference may be had to the figures to fix the amount.
(2) Payment of Interest:
Q: Computation of interest shall be?
A: From the date specified in the instrument. If there is no date, interest shall
run from the date of the instrument. And if the instrument be undated, interest
shall be computed from the date of issue of the instrument.
Q: What interest rate to follow?
A: The rate shall be the rate stipulated in the instrument. If there no rate, the
interest chargeable will be the legal rate of interest.
(3) When Instrument is undated:
Q: What is the rule if the instrument is undated?
A: The date of issue shall be considered the date of the instrument. This is
important in the (1) computation of interest as stated above and in the (2)
determination of the maturity date of the promissory note in case it is payable
at a fixed period after date.
Q: On May 1st, 1991 A issued an undated promissory note payable 30 days after
date and at 10% interest per annum. When will interest start to commence and
when is the maturity date of the instrument?
A: Interest of 10% p.a. will start to run from May 1st, 1991 and the maturity date
of the note will be May 31st, 1991, the 30 days counted from the date of issue.
 (4) Written and printed provisions:
Q: What is the rule in case there is conflict between the written and printed
provisions of an instrument?
A: The written provisions will prevail.
represents the intent of the drawer
Q: In a printed instrument, the printed intrest rate of 10% p.a. has been crossed
out and written in ink above is 8% p.a. Which will govern?
A: Based on the rule, the handwritten 8% interest will prevail over the printed
rate of 10% p.a.
(5) Ambiguity as to the form of the Instrument:
Q: What is the rule in case of ambiguity as to the form of the instrument?
A: The holder may, at his option, consider the instrument as either a PN or a BE.
(6) When it is not clear in what capacity the signature is
intended:
Q: What is the rule in case it is not shown in what capacity the person had
intended to sign?
A: The person will be deemed an indorser. However, this rule will apply only
when a person affixes his signature in any part of the instrument other than the
place generally recognized and intended for a maker or a drawer or an acceptor.
RATIO for the rule: Because an indorser is least liable.
(7) When Two or More persons promise and sign the
instrument
Q: I promise to pay to the order of B, xxx and signed by two persons X and Y.
What is the rule?
A: The liability of X and Y will be solidary or jointly and severally. The holder of
the Note can sue either X or Y for the full amount.
Q: We promise to pay to the order of B, xxx and signed by X and Y. What is the
rule?
A: Their liability will be joint and the holder must sue both of them for the full
amount, otherwise, the person sued will only be liable for his respective share.
Q: I/We promise to pay to the order of B, xxx and signed by X and Y. What is the
rule?
A: Their liability will be solidary or jointly and severally. The holder of the Note
can sue either X or Y for the full amount.
SIGNATURE
GR: A person whose signature does not appear in the instrument is NOT LIABLE.
XPNs: FAT ABC these persons did not sign but will still be liable
1. A person who Forges the signature of another
F
2. If an authorized Agent signs for and on behalf of his principal,
A the latter will be liable.
3. A person who signs a Trade or assumed name will be liable
T
4. A person who sings on an Allonge
A
5. A person who negotiates by mere delivery an instrument
B payable to Bearer
6. Constructive Acceptance1. destroys the instrument
C 2. refuses to accept within 24hrs
Q: Requirements for an agent to bind his principal.
A:
(1) He is duly authorized by his principal and acts within the scope of his
authority;
(2) He is disclosing his principal.
(3) He is disclosing that he is an agent.
HOLDERS
Section 52 What constitutes a holder in due course. A holder in due course is
a holder who has taken the instrument under the following conditions:
 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 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.
Q: What do we mean when we say the instrument is complete and regular?
A: The instrument is complete when it is not wanting in any material particular.
And it is regular if there are no visible and apparent alterations on the face of
the instrument.
Q: When is an instrument deemed overdue?
A: The instrument is deemed overdue in any of the following cases:
1) When an instrument is payable at a fixed date the day after such fixed
date, it is already overdue. A promissory note payable on June 15,
1991, is considered overdue beginning June 16, 1991.
2) A Promissory Note dated March 1, 1991 and payable 30 days after
date becomes overdue on April 1st, 1991 because the maturity date is
March 31st, 1991.
3) An instrument is payable on March 31, 1991 and the last indorsement
is dated April 1, 1991. The instrument has been indorsed when it is
already overdue and the indorsee is not a holder in due course.
4) A Bill of Exchange payable 30 days after sight and accepted by
drawee/acceptor on March 1, 1991 is considered overdue when it was
last indorsed on April 1, 1991. Indorsee is not a holder in due course.
5) As to an instrument payable by installment, a person who takes the
instrument with notice that the first installment has not been paid, is
not a holder in due course. However, if he takes the instrument without
knowledge that the first installment has not been paid, he is deemed a
holder in due course, as to the rest of the other installments.
6) If the instrument is payable on or before March 31, 1991, it is not
considered overdue until after March 31, 1991. However, if the person
taking the instrument knows that the party primarily liable has
dishonored the instrument when presented to him for payment before
March 31, 1991, then the party taking the instrument is not deemed a
holder in due course.
Q: What is good faith?
A: Good faith means that the person taking the instrument has acted with due
honesty in regard to the rights of the parties liable on the instrument, that at
the time he took the instrument, the holder has no knowledge of any defect or
infirmity of the instrument.
Q: What is value?
A: Value is any consideration sufficient to support a simple contract.
Q: Do you have to write the transaction from which it arose in order to consider
that an instrument has been issued for value?
A: No. Value is presumed. section 24
Q: What is Infirmity in the instrument?
A: Infirmity connotes a thing or things that are wrong with the instrument itself.
E.g. A PN is Payable 30 days after date and bears no date. In this
case, the maturity date cannot be computed because there is no
date of the instrument, although under Sec. 17, paragraph (c) the
rule states that where the instrument is not dated, it will be
considered to be dated as of the time it was issued. So maturity
date will be counted from the date of issue. But suppose the payee
inserts a wrong date for fraudulent purposes, then the instrument
will be avoided as to the holder not in due course. A holder in due
course can collect from the party primarily liable on the maturity
date based on the fraudulent date inserted, because as to him, the
date so inserted is to be regarded as the true date, from which the
30 days will be counted, that is, if such holder had no notice of the
infirmity.
Q: What is defect in title?
A: Defect can be had in two ways. Defect in the acquisition which means the
person obtained the instrument or any signature thereto by fraud, duress, or
force and fear or other unlawful means, or for an illegal consideration. Defect in
the negotiation means the person negotiated the instrument in breach of faith,
or under such circumstances as amount to fraud.
Q: B sold to A a tin of opium for which A issued a PN. Then B indorsed it to C, who
has knowledge that there was an illegal consideration between A and B. Is C a
holder in due course?
A: No he cannot be considered a Holder in due course because he has
knowledge of the defective title of B.
Q: What constitutes notice of defect or infirmity?
A: There must be actual knowledge of the defect or infirmity; or knowledge of
such facts (which do not appear on the face of the instrument) that his action in
taking the instrument amounts to bad faith.
Q: What are the rights of a holder?
A: (1) Right to sue and (2) Right to receive payment
Q: What are the rights of a holder in due course?
A: The rights are the following:
(1) To sue on the instrument on his own name;
(2) To receive payment (payment in due course discharges the instrument);
(3) Hold the instrument free from any defect of title of prior parties;
(4) Acquire the instrument free from defenses available to prior parties
among themselves;
(5) May enforce payment for the full amount of the instrument against all
parties liable thereon.
Q: As a rule, a holder cannot collect from the party liable if defenses may be raised
against him, what is the XPN?
A: Holder in due course by subrogation because he can still collect despite
defenses.
Q: What is the Shelter Principle?
A: It is the exception to the general rule that a holder who is not a holder in due
course is subject to the same defenses as if it were non-negotiable. This rule
provides that holder who is not a holder in due course but nonetheless derived
title from a holder in due course is free from defenses, real or personal.
Section 58: xxx 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
holder in respect of all parties prior to the latter.
Q: What are the requirements in order to invoke the Shelter Principle?
A: (1) The holder must have received the instrument from a holder in due
course;
(2) Such holder may have knowledge of the defect or infirmity;
(3) But such holder must not be party to the illegal transaction.
Q: X, the maker, issues a PN to P for marijuana, P endorses the note to A, A to B,
B to C, C to D, who is a holder in due course, from D to E, who knows of the
illegality and finally from E to F, who likewise knows of the illegality.
(a) May E collect from the maker?
(b) May F collect from the maker?
A:
(a) Yes, X cannot raise the defense of illegality of consideration because E
acquires the rights of D who is a holder in due course.
(b) No, one of the requisites is not present because F did not receive the
instrument from a holder in due course.
Q: What if, in the above example, P repurchases the check from D, will P be
considered a holder in due course?
A: No, the subsequent purchase of the note from a holder in due course will not
cure the defect in his title.
Q: May a payee be a holder in due course?
A: Yes, Section 191 defines holder as the payee or indorsee of a bill or note,
who is in possession of it, or the bearer thereof. Hence, the word holder in
the first clause of Section 52 and in the second subsection thereof may be
replaced by the definition in Section 191 so as to read a holder in due course is
a payee or an indorsee in possession etc.
Q: What are the effects of crossing a check?
A: (a) the check may not be encashed but only deposited in the bank; (b) the
check may be negotiated only once to one who has an account with a bank;
(c) and the act of crossing the check serves as warning to the holder that the
check has been issued for a definite purpose so that he must inquire if he has
received the check pursuant to that purpose, otherwise, he is not a holder in
due course. In other words, the holder is not a holder in due course if he receives
the check other than for the purpose it was issued.
Q: How to cross a check?
A: Two parallel lines on the uppermost left corner of the instrument
Q: What is the doctrine in De Ocampo v. Gatchalian? Q: Distinguish fraud in factum and fraud in inducement.
A: The holder of a crossed check can never become a holder in due course if he A: Fraud in factum exists in those cases in which a person, without negligence,
receives the check other than for the purpose it was issued. has signed an instrument which was, in fact, a negotiable instrument, but was
FORGERY (Indorsement)
deceived as to the character of the instrument and without knowledge of it, as
Available to
where a note was signed by one under the belief that he was signing as a witness
MAKER/DRAWER/Prior Indorsers
(Order Instrument)
NOT Available to BEARER
DEFENSES to a deed or where the signature was procured by fraudulent use of carbon
Instrument (HIDC): Maker, Indorser
XPN: (NOT HIDC) Prior Parties Not paper. While fraud in inducement is that which relates to the quality, quantity,
liable Real Defenses Personal Defenses value, or character of the consideration of the instrument. It implies that the
1. Minority (available only to the 1. Failure or Absence of signer knew what he was signing but that he was induced by fraud to sign. A
minor) Consideration consideration is PRESUMED
clear illustration of this fraud exists where a person is induced to sign a note for
2. Forgery 2. Illegal Consideration the price of a worthless stock which was fraudulently represented by the payee
3. Non-delivery of Incomplete 3. Non-delivery of Complete as to its value. (De Leon, 2009)
Instrument Section 15 want of delivery of incomplete
instrument
Instrument section 16 want of delivery of
complete instrument

4. Material Alteration section 125 5. Fraud in inducement Q: Is fraud in factum a real or personal defense? What about fraud in
5. Ultra Vires act of Corporation 6. Filling up blank not within inducement?
6. Fraud in Factum or Esse Contractus authority A: Fraud in factum is a real defense because there is no contract. It implies that
7. Illegality if declared void for any 7. Duress or Intimidation a person did not know what he was signing. Fraud in inducement is a personal
purpose 8. Filling up blank beyond reasonable defense because it does not prevent a contract. (De Leon, 2009)
8. Vicious Force or Violence time
9. Want of authority 9. Transfer in breach of faith (2) Incapacity
10. Prescription 10. Mistake
11. Discharge in Insolvency 11. Insertion of wrong date (2.1) Minority
12. Ante-dating or Post-dating for
illegal or fraudulent purpose Q: What kind of a defense is minority? Who can invoke it?
A: Minority is a real defense personal to the minor. Only the minor can raise the
defense of minority.
Q: Differentiate real from personal defense.
A: Real defenses are available against all holders of a negotiable instrument, Q: Will the defense of minority prevent a valid transfer of title?
including a holder in due course and are defenses which go into the validity of A: Despite minority, there will be a valid transfer of title from the minor to
the contract and the capacity of the parties to such contract. On the other hand, another only that liability will not attach to the minor.
personal defenses are available against holders not in due course, but not valid
against a holder in due course and are defenses available to parties among
themselves which do not go into the validity of the instrument as a contract or
into the capacity of the contracting parties, but only to the relation of the parties
to the contract. The latter is also referred to as Equitable defenses.

(1) Fraud (2.2) Ultra Vires Act of the Corporation

Q: What is an ultra vires act?
A: It is an act committed outside the object for which a corporation is created
as defined by the law of its organization and therefore beyond the power
conferred upon it by law. (Aquino, 2009)
Q: What is the rule regarding ultra vires acts of the corporation?
A: As a rule, the corporation is not liable.
XPN: If the corporations acts were authorized through a board
resolution.
(3) Delivery of Incomplete Instrument
Q: X issued a PN to Y, leaving the amount payable in blank. Ys authority was only
to fill up the amount for P10,000, however, Y filled it up for P100,000. Y indorsed
the instrument to A, A to B, B to C, and C to D.
(a) Can the maker be held liable?
(b) Who are liable to D?
A:
(a) The maker can be held liable to a holder in due course. However, in
order for the maker to be liable against a holder not in due course, it
must be shown that the instrument was filled up strictly in accordance
with the authority given and within a reasonable time.
(b) Y, A, B, and C are liable to D for their warranties (as an indorser, warrant
that the instrument is genuine and what it purports to be). X is likewise
liable to D if D is a holder in due course.
Q: What are the characteristics of Section 14?
A:
It should be signed.
It should have missing particulars.
It is a personal defense.
It cannot be invoked against a holder in due course.
Prior parties (prior to completion) are liable against a HDC.
Parties after completion are ALWAYS liable because their warranties will
be taken into consideration.
(4) Non-delivery of Complete Instrument Section 16
Q: X prepared a PN, handed it to A for safekeeping. A negotiated it to B, B to C, C
to D. Against whom can D collect or not collect?
A: If D is a holder in due course, he can collect from A, B, and C, due to their
warranties as an indorser. D Can likewise collect from the maker, X, because his
personal defense of non-delivery of complete instrument will not lie against a
holder in due course. If D is not a holder in due course, he can likewise collect
from A, B, and C due to the same reasons but he cannot collect from X, as X has
a personal defense against one who is not a holder in due course.
Q: Is the fact that there is no delivery affect the liability of general indorsers?
A: No, they are still liable because of their warranties. The personal defense of
Section 16 are available only to parties prior to the unauthorized delivery.
(5) Non-delivery of Incomplete Instrument Section 15
Q: There is a blank amount kept in the drawer. The housekeeper stole the PN
from the maker, negotiated it to A, A to B, B to C, C to D. Against whom can D
collect?
A: The housekeeper, A, B, and C are liable to D because of their warranties as a
general indorser, they warrant the genuineness of the instrument.
Q: Can the maker be held liable?
A: No, he was a party prior to delivery and against parties prior to delivery, the
instrument is not a valid contract pursuant to Section 16 of the NIL.
15
Q: Will your answer change if D was a holder in due course?
A: No, it will be the same as the defense under Section 16 is a real defense and
may be invoked against a holder in due course. 15
(6) Forgery
Q: Is the instrument inoperative or ineffectual? Is it rendered non-negotiable due
to the forgery?
A: No, it is only the forged signature which is rendered inoperative or ineffectual.
Q: Who are those precluded from setting up the defense of forgery?
A: Those who warrant or admit the genuineness of the signature in question:
 (1) Drawee/Acceptor shall be liable to the holder of the instrument even
if the drawers signature is really forged, because at the time of making
his acceptance, he warrants that the drawers signature is genuine, etc.
(Order instrument where the drawers signature is forged)
(2) Indorser an indorser shall be liable because he warrants among other
things the genuineness of the signature of all prior parties at the time
of his indorsement.
(3) Person negotiating by mere delivery A person negotiating an
instrument payable to bearer shall be liable because he warrants that
the instrument is genuine and the forged signature is not necessary to
the title of the holder.
(6.1) Rules on Forgery of Indorsements
(1) When an indorsement is forged and the instrument is payable to order,
the party whose indorsement is forged and all the parties prior to him,
including the maker, shall not be liable even to a holder in due course.
An instrument, payable to order, can only be negotiated by proper
indorsement plus delivery, and since an indorsement is forged, it is
inoperative as to parties prior to the forged indorsement because valid
title is not transferred by the forged indorsement. However, all
indorsers subsequent to the forged indorsement whose signatures are
genuine, will be liable to the holder of the instrument because as
regular indorsers, they warrant that the instrument is genuine at the
time of their indorsement.
(2) If the note if originally payable to bearer, the party whose indorsement
is forged and prior to him, including the maker, may be held liable by a
holder in due course only, provided the instrument is mechanically
complete before the forgery. The reason is that the forged indorsement
is not necessary to the title of the holder since an instrument payable
to bearer can be negotiated by mere delivery.
(6.2) Forgery in Notes
Q: X issued a PN payable to the order of Y. A obtained the instrument and forged
Ys signature thereon. A then indorsed the note to B, B to C, and C to D. From
whom can D collect?
A: D can collect primarily from the forger A. D can also collect from B and C
because of their warranties as a general indorser, as such, they are precluded
from setting up the defense of forgery. X and Y cannot be liable because they
can be brought under the scope of the cut-off rule, which means that parties
prior to the forgery are cut-off from liability.
Q: When can the cut-off rule be invoked? What is the reason for the cut-off rule?
A: The cut-off rule can be invoked in case of order instruments. We cut them off
because their signature is need in order to acquire title. And since they did not
affix their signature, they did not transfer title to the instrument, consequently,
they cannot be held liable on an instrument which they did not transfer title to.
It cannot be invoked in case of bearer instruments because signature is not
necessary to convey title.
Q: X issued a PN payable to bearer and negotiated it to Y. A obtained the
instrument and forged Ys signature. A then negotiated the note to B, B to C, C to
D. Against whom can D collect?
A: D can collect primarily from A because he is the forger. D can also collect from
A, B, and C because of their warranties. If D is a holder in due course, he can
collect from Y notwithstanding the forgery. D can likewise collect from the
maker, X.
Q: Why can D collect from Y when it was Ys signature which was forged? Can Y
not set up the defense of forgery?
A: D can collect from Y because even if it was Ys signature which was forged, in
bearer instruments, signature of the payee or holder is unnecessary to pass title
to the instrument as the instrument may be negotiated by mere delivery.
Q: Does Y not have any recourse?
A: Y can set up the defense of non-delivery of complete instrument against a
holder not in due course. But since such defense is only personal, said defense
cannot be invoked against a holder in due course.
(6.3) Forgery in Bills of Exchange
Q: What is the rule in case it is the drawers signature which was forged?
A: Forgery of a drawers signature, drawer is not liable, drawee bank is liable
because the bank is in a superior position to detect the forgery. (PNB v. Quimpo)
XPN: Negligence on the drawers part (Please see Ilusorio v. CA)
Q: What is the rule in case it is the payees signature which was forged?
A: As a rule, the drawer is not liable because the drawee bank owes the duty to
pay only to the order of the drawer. The drawer, in effect, said Pay to Y. Why
then, did the drawee pay to A? Drawee bank violated its contractual duty
therefore, the drawee bank must credit back the amount it debited from the
drawers account.
XPN: When drawer is negligent

Q: When can a collecting bank be held liable?

A: In case the holder did not encash the check but instead, deposited it to its
own bank (otherwise known as the collecting bank), in effect, the collecting bank
asks the drawee bank as an indorser. To illustrate, the drawer issued a check to
Y, the payee addressed to BDO. Ys signature was forged by by A and deposited
it to Metrobank. In this case, BDO is the drawee bank while Metrobank is the
collecting bank. In this scenario, the check will go through a clearing process.
The collecting bank will ask the drawee bank as an indorser, and an indorser is
precluded from setting up the defense of forgery, which is likewise the case of
a collecting bank. Another reason for the collecting banks liability is because it
can go after the forger since the forger is the collecting banks client. The
collecting bank can seek reimbursement from the forger who is his client.
However, the drawee bank may be held liable if it did not immediately inform
the collecting bank of the forgery.
 MATERIAL ALTERATION
Q: Special indorsement in a bearer instrument, will it change the nature of the
instrument?
A: No, it will not change the nature of the instrument. A bearer instrument is always a
bearer instrument.
Q: What is material alteration?
A: It is a defense which changes the liability of the parties or the effect of the
instrument.
Q: Is the alteration of a serial number material alteration?
A: No.
Q: Is material alteration a real or personal defense?
A: Real defense. Some authors would say it is a partial real defense because a holder in
due course may still be able to collect according to the original tenor of the
instrument. In real defense there is usually no collection.
Q: X issued a check with Y as payee and left the amount in blank. Ys authority was to
write P100,000. However, Y did not follow and wrote P500,000. Y negotiated it to A, A to
B, B to C. Is it material alteration?
A: Not material alteration but a case of Section 14, delivery of incomplete instrument.
The amount is left blank, there is a missing particular.
Q: X issued a check for P100,000 with Y as payee. Y changed the amount thereof to
P500,000. Y negotiated it to A, A to B, B to C. Is it material alteration?
A: Yes because there was no blanks, there was really an amount stated. Changing it
from P100,000 to P500,000 constitutes material alteration which changes the liability
of the parties.
Q: In the foregoing, against whom can C collect and not collect? For how much?
A: C, presumed as a holder in due course, can collect primarily from Y because he is
the one authorized, made or assented to the material alteration. C can likewise collect
from A and B because of their liabilities as an indorser. And lastly, C can collect from X
but only for the original amount prior to the alteration.
Q: Is it important that the holder is a holder in due course? Should you qualify first?
A: C should be a holder in due course before he can collect from the party who did not
assent to the alteration but only according to its original tenor.
Q: If he is not a holder in due course, can he collect from the party who did not assent to
the material alteration? Can he collect from Y, A and B?
A: No. As to Y, A and B, he can collect from Y because he is the one who authorized,
made or assented to the material alteration and from A and B because as subsequent
indorsers they are liable for their warranties.
Q: May C collect from Y the balance of the instrument after collecting P100,000 from X?
A: Once the instrument is paid by the party primarily liable, the instrument is
discharged.
Q: Metrobank v. Cabilzo: Was Cabilzo negligent? Why was there no showing of
negligence?
A:
Q: Bank of America v. PRCI: Was the check payable to CASH?
A:
Q: Same: For the blank allotted for the payee, was there any amount written? Was it
successfully enchased? Was the irregularity discovered?
A:
Q: Same: Was this technically speaking, a material alteration?
A: No. But because of the glaringly obvious irregularities, what was applied was
material alteration. (Atty. Escalantes comment: WRONG! Irregularities are not
material alteration)
ACCOMODATION
Q: Who is an accommodation party? Does he receive any consideration? What is his
liability? Is his liability primary or secondary? Can he sign as a maker? Drawer?
Acceptor? Indorser?
A: If an instrument is issued for value given for the benefit of a party to the instrument
("accommodated party") and another party to the instrument ("accommodation party")
signs the instrument for the purpose of incurring liability on the instrument without
consideration therefor, the instrument is signed by the accommodation party "for
accommodation." His liability depends on the capacity in which he signs the instrument.
He may sign as a maker, drawer, indorser, or acceptor.
Q: Who is the accommodated party?
A: The party in whose favour the credit is lent.
Q: What do we mean when we say that the accommodation party acts as a surety?
A: The accommodation party has a right of recourse from the accommodated party.
Q: Will payment be discharged if payment is made by the accommodation party?
A: No, not yet because the accommodation party still has a right to be reimbursed.
There is still a pending obligation, a right to be paid by the accommodated party.
Q: May a corporation act as an accommodation party?
A: No, it is an ultra vires act of the corporation. It is the officer who is liable in his
personal capacity.
XPN: There should a board resolution authorizing such act. Otherwise, officers
will be liable.
Q: May a holder be a holder in due course despite his knowledge that the party who
signs is an accommodation party?
A: Yes.
Q: Who is an irregular indorser?
A: 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
bearer, he is liable to all parties subsequent 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.
Q: Distinguish general indorser from irregular indorser.
A: A general indorser is liable even to holders in due course or not in due course while
an irregular indorsers liability extends only to those enumerated.
Note: In Sec. 66, do not be deceived by to all subsequent holders in due course
because even if the holder is not a holder in due course, he is liable, not only holders in
due course.
Q: Who are the parties primarily liable in a negotiable instrument? What are the
warranties of the maker and the acceptor?
A: Warranties of Maker: (O-EC)
(1) That he will pay the note according to its original tenor to the payee, or to the
holder, or to any subsequent indorser who may be called upon to pay the
holder thereof.
(2) That he admits the existence of the payee and his then capacity to indorse.
Warranties of Acceptor: (EGC-EC)
(1) (a) the existence of the drawer
(b) the genuineness of the drawers signature
(c) drawers capacity and authority to draw the instrument
(2) (a) the existence of the payee
(b) the payees capacity to indorse.
Note: The acceptor who warrants the genuineness of the drawers signature is the
primary reason why he is precluded from setting up the defense of forgery.
Q: What is the difference between tenor as to the makers warranty and tenor of the
acceptance?
A: For acceptance, it can be partial, not according to the tenor of the instrument but
tenor of the acceptance. For the maker, it is according to what is written in the
instrument.
Q: Who is the certifier of a check?
A: Always a bank. Certification is equivalent to acceptance.
Q: Who are the parties secondarily liable?
A: In a promissory note, the parties secondarily liable are the indorsers. In a bill of
exchange, the parties secondarily liable are the drawer and the indorsers.
Note: The PSL must be furnished a notice of dishonor first, either by non-acceptance or
non-payment, before they can be held liable.
Q: What are the warranties of the drawer?
A: Warranties of Drawer:
(1) That he admits the existence of the payee and his then capacity to indorse.
(2) (a) That when the bill is presented for acceptance to the drawee, it will be
accepted, or when it is presented for payment, it will be paid, or both,
according to its tenor.
(b) That if the drawee does not accept the bill, then the drawer undertakes to
pay the instrument to the holder himself or to any subsequent indorser who
may be compelled to pay the holder thereof.
(c) Or if the drawee/acceptor has accepted the bill, he subsequently refuses to
pay the bill on maturity date, the drawer will be liable on the instrument,
together with the other indorsers
(d) Failure on the part of the Holder to give Notice of Dishonor by non-
acceptance or non-payment to the drawer and other indorsers, who are all
 considered parties secondarily liable, will discharge them from liability on the Sgd. B
instrument.
To C
Q: Can the drawer sign without recourse? A Pay to D and E.
A: Yes. The effect of such signature by the drawee means that he does not have any Pay to D and E can you do this?
liability, even secondarily, and even if he is presented with a notice of dishonor. A: Yes.
E.g. (Sgd.) B, without recourse or sans recourse
Q: Pay to the order of A P1,000
Q: Can a maker sign without recourse. Sgd. B
A: NO.
To C
Q: Who is an indorser? A Pay to D 500.00.
A: Pay to E 500.00.
Pay to D 500.00, Pay to E 500.00 can you do this?
Q: If there is doubt as to the capacity by which a person signs, what is the presumption? A: No.
Why? RATIO: Because the law abhors the splitting of causes of action or to avoid
A: The presumption is that he is an indorser. multiplicity of suits.
RATIO: An indorser is least liable.
Q: Pay to the order of A P1,000
Q: Is indorsement a contract? Why? Sgd. B
A:
To C
Q: Pay to the order of A P1,000 A Pay to D.
Sgd. B Pay to D can you do this?
A: Yes. It is a special indorsement.
To C
A Pay to D. Q: Is there an XPN to the rule that an instrument must be indorsed in its entirety?
A:
In the problem above, the special indorsement of A to D contain no words of negotiability.
Does it matter? Q: If they are both indorsees, should they both indorse?
A: No. There is no need to put words of negotiability in AN INDORSEMENT. A: Yes.
XPNs: (1) they are partners.
Q: Pay to the order of A P1,000 (2) One is authorized by the other to indorse.
Sgd. B
Q: Will negotiability cease when it is indorsed?
To C A: Negotiability will not cease when the instrument is indorsed.
A Pay to D 500.00.
Q: What is a restrictive indorsement and give examples of each.
Pay to D 500.00 can you do this? A: A restrictive indorsement
A: No. The instrument must be indorsed according to its entirety. (a) Prohibits the further negotiation of the instrument; or

Q: Pay to the order of A P1,000 e.g. Pay to A, only.


(b) Constitutes the indorsee the agent of the indorser; or
e.g. Pay to A, for deposit.
Pay to A, for collection.
(c) Vests the title in the indorsee in trust for or to the use of some other persons.
Q: Who is a special indorser? A blank indorser?
A: A special indorser is one who is so named by the indorsee in the latters indorsement,
coupled with the latters signature. A blank indorser is one who is not so named by the
indorsee in the latters indorsement, there is only the latters signature.
Q: What is a qualified indorsement?
A: A qualified indorsement is one by which an indorser may negate or limit his liability
on the instrument by adding the words without recourse or sans recourse to his
indorsement.
Q: What are the warranties of a qualified indorser?
A: Warranties of a party who negotiates by mere delivery and a qualified indorser:
(PTCK)
(1) That the instrument is genuine and in every respect what it purports to be;
(2) That he has a good title to it;
(3) That all prior parties had capacity to contract;
(4) That he has no knowledge of any fact which would impair the validity of the
instrument or render it valueless.
Q: I promise to pay to the order of A P1,000.
Sgd. B
A negotiated the note to C, C to D, D to E. C signed without recourse. On maturity date, E
collected payment from B. B said I am insolvent, I aint paying. E, thus, furnished the
party secondarily liable with a notice of dishonor. When C received the notice of dishonor,
he said, okay lang, I signed without recourse :P. Can C insist that he has no liability
because he signed without recourse? Can E collect from C?
A: Yes, C can insist that he has no liability. As a corollary, E cannot collect from C because
insolvency is not one of the warranties of a qualified indorser.
Q: In the foregoing example, what if B says, my signature in that indorsement was
forged. E, again furnishes a notice of dishonor to PSL, then goes to C wanting to collect
payment. Can E collect from C? Why?
A: Yes, E can collect from C because at the time C signs the instrument, he warrants that
the instrument is genuine and in all respects what it purports to be.
Q: How about if the defense of B is minority? Can E collect from C?
A: Yes, E can collect from C because at the time C signs the instrument, he warrants that
prior parties have the capacity to enter into contracts.
Note: The foregoing warranty includes insanity and any person who loses the capacity
to validly enter into contracts.
Q: What if B says there was fraud, that he was defrauded into issuing the instrument. Can
E collect from C?
A: Yes, E can collect from C because at the time C signs the instrument, he warrants that
he has no knowledge of any fact which would impair the validity of the instrument or
render it valueless.
Q: To which do these warranties extend to?
A: These warranties extend to the subsequent holder in the case of a qualified indorser
and they extend to the immediate transferee in the case of a person negotiating by
mere delivery.
Q: Who is a general indorser?
A: A person who negotiates without any conditions or qualifications, the opposite of a
qualified indorser.
Q: What are the warranties of a general indorser?
A: Warranties of a general indorser: (PTCVP)
(1) That the instrument is 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;
(4) That the instrument is at the time of his indorsement valid and subsisting.
(5) He 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 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.
Note: The presumption is that every indorser is a general indorser.
Q: I promise to pay to the order of A P1,000.
Sgd. B
A negotiated the note to C, C to D, D to E. E collects from B but B says that he was
defrauded in issuing the instrument. E furnishes a notice of dishonor to all the PSL. E
comes to C, a general indorser, to collect payment. Can E collect from C?
A: Yes because C is a general indorser.
Q: What if the general indorser invoked that he did not have knowledge of the fraud? Can
E still collect from C?
A: E can still collect from C because it is not the general indorsers warranty but the
qualified indorsers warranty. Also, it would be in conflict with his Section 66 (d)
warranty that the instrument is valid and subsisting at the time of his indorsement.
RATIO: The law deleted Section 65 (d) in Section 66 because the law wants to
make it a point that even if the general indorser has or has no knowledge, he
is still liable. If the general indorser would be allowed to argue that he had no
knowledge, then the general indorser would no longer have any liability. It
would be in conflict with his other warranties.
Note: Examples of Section 65 (Qualified Indorser):
(a) Forgery
(b) Instrument was stolen
(c) Minority, Insanity
(d) Fraud, knowledge of any defense, this can encompass any defense that the
indorser can disown knowledge of except those which are glaring such as
material alteration or incomplete but delivered (there are blanks, you can see
it)
General indorser has so many liabilities. Section 66 (d) is our basis for attaching
secondarily liability, he cannot disown knowledge, he cannot say there is forgery or prior
parties are minors, insane, etc.
Other indorsements:
Joint two or more indorsees
Facultative waiver of presentment, notice or protest (holder need not give you notice
of dishonor for secondary liability)
Q: What happens if the name of the indorsee is misspelled? Can he correct?
A: 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.
Q: How do you negotiate an order instrument? What if an order instrument is not
indorsed, is there a valid negotiation?
A: An order instrument is negotiated by indorsement plus delivery. If an order
instrument is not indorsed, there is no valid negotiation but just a mere equitable
assignment.
There is transfer but lesser rights.
Transferee merely steps into the shoes of the transferor.
Q: Can the transferee demand that indorsement be made?
A: Yes, that is one of the rights of a transferee, to demand indorsement, if what is
assigned to him is an order instrument which needs to be indorsed but is merely
delivered.
Q: May he be a holder in due course? The transferee?
A: Yes, he may be a holder in due course provided all the requisites under Sec. 52 are
present. If there are circumstances which happened before indorsement was made
which constitute a violation of Section 52, he will not become a holder in due course.
Q: What indorsements may be stricken out?
A: Those which the holder thinks is not material to his title.
Q: I promise to pay to the order of B P1,000.00.
Sgd. A
From A to B it was specially indorsed and delivered. From B to C it was indorsed in blank
coupled with delivery. From C to D it was indorsed again in blank coupled with delivery.
From D to E it was merely delivered. From E to F it was also delivered. Was there proper
negotiation of the order instrument?
A: Yes.
Q: What indorsements may be stricken out and what is the effect of striking out an
indorsement?
A: The indorsements in blank of B to C coupled with delivery converted the instrument
into a bearer instrument, thus, the indorsement of C in blank coupled with delivery to D
is no longer needed because the instrument may be negotiated by mere delivery, thus,
it may be stricken out. The indorser whose indorsement is stricken out will be relieved
from liability and all subsequent indorsers, C, as the person whose indorsement was
stricken out, and D, as a subsequent indorser, will be relieved from liability. E is not
relieved from liability because he did not indorse, he merely delivered.
Otherwise stated, the indorsement from C to D is no longer needed because at the time
B negotiated the instrument to C, the instrument became a bearer instrument which
may be negotiated by mere delivery, the blank indorsement of C to D is not necessary.
Note: You need to indorse and deliver an order instrument. If you strike out the II. EFFECT OF NON-PRESENTMENT WHEN REQUIRED:
indorsement of A, only delivery will be left. There will be no proper negotiation because
the instrument is originally an order instrument and you cannot negotiate an order The holder of a bill which is required to be presented for acceptance to the drawee must
instrument without negotiation and delivery, As indorsement cannot be stricken out. within a reasonable time
However, if it was a bearer instrument, there is no problem in striking out those who 1) Present the bill for acceptance; or
indorsed specially or generally (e.g. A) because the instrument may be negotiated by 2) Negotiate it.
mere delivery.
Failure to do any of the above within a reasonable time will discharge the parties
The problem with striking out indorsements, you will be lessening the parties from secondarily liable from liability.
whom you can demand payment.
III. HOW MADE:
Q: From whom can he collect?
A: A, B and E. By : the holder himself, or by his authorized representative.
To :
A to B is special coupled with delivery. B to C is blank indorsement coupled with delivery. (a) The drawee himself or to any person authorized to accept or refuse acceptance
C to D is blank indorsement coupled with delivery. D to E is special indorsement coupled on his behalf; or
with delivery. E to F is blank indorsement coupled with delivery. From F to G merely (b) If there are two or more drawees who are not partners, presentment must be
delivered. Was there proper negotiation? What indorsements may be stricken out? made to all of them, unless
A: From B to C it was converted into a bearer instrument, the indorsement of C to D (i) One drawee has the authority to accept or refuse acceptance for all;
may be stricken out because the instrument can be negotiated by mere delivery. From or
D to E it was converted into an order instrument. From E to F it was converted into a (ii) The drawees are partners, in which case presentment may be made
bearer instrument. And from F to G it was negotiated by mere delivery, thus there was to any one of the partners.
proper negotiation. (c) If the drawee is dead, presentment may be made to:
(i) His personal representative, if there is one; or
Q: Who are relieved from liability? (ii) Presentment may be excused under Sec. 148.
A: C, the person whose indorsement was struck out, and D and E as subsequent
indorsers. (d) If the drawee is insolvent, presentment may be made to:
(i) The insolvent drawee himself; or the drawees trustee or assignee.
Q: From whom can G collect?
A: A, B, and F. When : within a reasonable hour on a regular business day and before the bill
is overdue.
PRESENTMENT FOR ACCEPTANCE Presentment for Acceptance of a bill may be made on a Saturday under the following
rules:
I. WHEN REQUIRED: (SEE) a) If the Saturday is a holiday presentment for acceptance may be made on the
following business day.
a. Where the bill is payable after sight; or in any case where presentment for b) If Saturday is not a holiday presentment for acceptance may be made before
acceptance is necessary in order to fix the maturity of the instrument 12 oclock on that day.
b. Where the bill expressly stipulates that it shall be presented for acceptance; or Where :
c. Where the bill is drawn payable elsewhere than at the residence of place of i) At the place of business or residence of the drawee, if known, or
business of the drawee. ii) If the residence is different from place of business, presentment may be
made at either place; or
 iii) If place of payment is designated on the bill, and drawees residence or
place of business is unknown, presentment may be made at the place of
payment.
IV. WHEN TIME IS INSUFFICIENT
This section refers to an instance where the bill is drawn payable elsewhere that at the
residence or place of business of the drawee.
GR: Failure to make presentment for acceptance by the holder will discharge the drawer
from liability.
XPN: If the holder has insufficient time to make the presentment for
acceptance before the maturity date of the bill, the delay caused between
presenting the bill for acceptance and presenting it for payment on maturity is
excused.
Effect: Parties secondarily liable will not be discharged from liability
a. When it is duly presented for acceptance, and such an acceptance as
prescribed by this Act is refused or cannot be obtained; or
b. When presentment for acceptance is excused, and the bill is not accepted.
VII. RIGHTS AND DUTY OF HOLDER WHERE BILL NOT ACCEPTED
Duty the holder must, within the reglamentary period (24 hours), give notice of
dishonor by non-acceptance to all perties secondarily liable
Right A right of recourse against the parties secondarily liable accrues to the holder,
after giving Notice of Dishonor by non-acceptance to PSL, presentment for payment is
no longer necessary to hold the PSL liable, the holder may proceed against any one of
the PSL to collect at random
VIII. EFFECT OF OMISSION TO GIVE NOTICE OF NON-ACCEPTANCE

V. WHEN EXCUSED The rule in this section is only true if the holder who fails to give notice of dishonor by
non-acceptance to PSL, later negotiates the bill to a holder in due course. In this case,
The holder may treat a bill of exchange as dishonored by non-acceptance: the holder in due course may give the required Notice of Dishonor by non-acceptance
a. When the drawee is to the PSL as to hold them liable on the instrument.
i) Dead, or
ii) Has absconded, or ACCEPTANCE
iii) Fictitious, or
iv) Not capacitated to enter into contracts I. DEFINED
b. When with reasonable diligence, presentment cannot be made, such as: It is the signification by the drawee of his assent to the order of the drawer.

i) When drawee cannot be found at his residence or place of business, or II. REQUISITES (WSLPC)
ii) When drawees residence or place of business cannot be ascertained or
has been vacated. 1. Acceptance must be in writing.
XPN: Constructive acceptance
c. When, although presentment has been irregular, acceptance has been refused 2. It must be duly signed by the drawee, in which case he becomes the acceptor.
on some other ground, such as: 3. The drawee/acceptor becomes liable on the instrument (i) retroactive from the
i) When presentment for acceptance is made after 12 oclock noon on a date of the first P/A; and (ii) according to the tenor of his acceptance.
Saturday, or on a Sunday or on a holiday which is considered irregular, but 4. It must not express that the drawee will perform his promise by any other
the drawee refused to accept for some other reason. means than payment of money.
5. The Acceptance is incomplete and not valid unless delivered or communicated
Note: It is still necessary that the proper Notice of Dishonor by non-acceptance be given to the holder.
to the parties secondarily liable Note: If the acceptance is not communicated, it will be deemed a
constructive acceptance.
VI. DISHONOR BY NON-ACCEPTANCE
 If you have not communicated your acceptance, it can be withdrawn as Effect: they become liable to the holder if the drawee/acceptor
long as the holder has not yet attained knowledge of your acceptance. dishonors the bill by non-payment

III. HOW MADE ii) Disagree to the qualified acceptance and MUST notify the holder of their
dissent within a reasonable time after notice, otherwise they will be
i. On the face of the bill by writing the word accepted and signed by deemed to have given their assent.
the drawee
ii. On a separate paper other than the bill itself Failure of the holder to give notice by the holder of the acceptance of drawees qualified
iii. Separately even before the bill itself is drawn. acceptance to the PSL will discharge the PSL from their liability.

IV. KINDS OF ACCEPTANCE PRESENTMENT FOR PAYMENT

1) Actual acceptance I. PURPOSE

2) Constructive Acceptance
3) General Acceptance Presentment for payment is necessary in order to charge the drawer and indorsers. It is
4) Qualified Acceptance not necessary to charge the persons primarily liable on the instrument.
i) Conditional
ii) Partial Presentment for payment is needed in order for the holder to preserve his right of
iii) Local recourse against the party secondarily liable.
iv) Qualified as to time
v) Acceptance by one or more of the drawees, but not all II. REQUISITES

Note: If the instrument is qualified as to time, or qualified conditionally, locally, partially,
etc. the holder may treat the instrument as dishonored because acceptance, as a rule,
must be unconditional. However, the holder must communicate his dissent within a
reasonable time.
V. RIGHTS OF PARTIES TO QUALIFIED ACCEPTANCE
a) The drawee he may or may not accept the bill drawn against him, but if he
accepts it, he may impose any condition on his acceptance and he becomes
liable according to the tenor of his acceptance.
b) The holder has the right to demand a general or unqualified acceptance, and
if the drawee insists in making a qualified acceptance, the holder:
i) May treat the bill as dishonored and then give a Notice of Dishonor by non-
acceptance to PSL; or
ii) May accept the qualified acceptance, but MUST immediately notify the
PSL of such qualified acceptance.
c) The parties secondarily liable upon receipt of the holders notice (as
mentioned in the foregoing)
i) Expressly give their assent to the qualified acceptance
By : The holder or his authorized representative.
To :
a) the party primarily liable on the instrument, or
b) if he is absent or inaccessible, to any person found at the place where the
presentment is made.
At : the date of maturity. If the instrument is payable on demand,
presentment for payment must be made
a) Within a reasonable time after issue in the case of Promissory Note, and
b) Within a reasonable time after the last indorsement or negotiation, if it is a Bill
of Exchange.
Note: According to usual banking practice, If the instrument is a check, presentment for
payment must be made six months from the date of the issuance of the check or 180
days, otherwise, it will be deemed a stale check.
When : At a reasonable hour on a business day. If maturity date falls on a
Saturday, Sunday or holiday, presentment must be made within a reasonable hour on
the next following business day. If the instrument is payable on demand, presentment
may be made until 12:00 noon Saturday, at the option of the holder.
 the personal representative cannot be found, presentment for payment is
Note: If place of payment is a bank, presentment for payment must be made within excused.
regular banking hours. If payor has no funds in the bank, presentment before the bank Or if there is no such personal representative, to the estate of the
closes is sufficient. deceased.
RATIO: to give the person making payment the opportunity to make his deposit
2. Presentment to persons liable as partners

Where : Presentment must be made:

a) Where a place of payment is specified in the instrument and it is there
presented, or (specified)
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; (no place)
c) Where no place of payment is specified and no address is given, then at the
usual place of business or residence of the person to make payment; (no place
nor address)
d) Wherever the person to make payment can be found or at his last known place
of business or residence (wherever payor found)
Note: If PPL expresses his ability and willingness to pay the instrument at the special
place specified in the instrument, such is deemed a tender of payment. Presentment must be made:
a) To anyone of the partners;
b) If there is a dissolution of the partnership before maturity date of the
instrument, presentment may still be made to any one of the partners;
c) If one of the partners dies before maturity date, presentment must be made
to the surviving partner;
d) If a place of payment is specified, presentment must be made at such specified
place to any one of the partners present thereat.
3. Presentment to joint debtors

And : Includes the presentation or exhibition of the negotiable instrument a) To ALL of the joint debtors;
to the PPL for verification purposes. b) If one joint debtor dies before maturity, presentment must be made to the
surviving joint debtors;
Note: If the PPL pays the sum payable, the instrument is discharged and must be c) If there is a place of payment specified, presentment must be made to ALL joint
surrendered to the PPL. debtors at such specified place of payment
XPN: One of the joint debtors is duly authorized to accept the
Effects of the foregoing: presentment for all of them
The holder need not make a presentment for payment to charge the party primarily
liable because he can sue the latter directly in case of non-payment. However, the effect IV. WHEN EXCUSED
of such non-presentment for payment will discharge all the parties secondarily liable
inasmuch as their liability is premised on the dishonor of the instrument by non- 1. For both PN and BE:
payment and the corresponding Notice of Dishonor given to them.
a) Where after the exercise of reasonable diligence presentment as required by
III. MANNER OF PRESENTMENT this Act cannot be made;
b) Where the drawee is a fictitious person;
1. Presentment where principal debtor is dead c) Waiver of presentment, express or implied.

If PPL is dead before maturity of the instrument and a place of payment is 2. For PN:
specified, holder must make presentment at the specified place.
If no place of payment specified, presentment must be made to the personal Presentment for payment is not required in order to charge an indorser or payee where
representative of the deceased PPL. If after reasonable diligence to locate him, the instrument was made or accepted for his accommodation and he has no reason to
expect that the instrument will be paid if presented. Presentment for payment need no
longer be made to the accommodation maker.
3. For BE:
a) To charge drawer The drawer, through some acts of his, does not expect or
require the drawee or acceptor to pay the instrument, in which case, the
drawer becomes primarily liable on the instrument. Presentment for payment
need not be made to the drawee in order to charge the drawer.
Examples: when the drawer stops payment of the check he issued, when the
drawers bank balance is less than the amount of the check he issued, when
the drawer commits fraud by issuing a check knowing that he has no funds in
the bank to meet it
b) 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, but also of presentment and notice of dishonor.
c) Once the drawee dishonors the B/E by non-acceptance, presentment for
payment is no longer necessary to hold the PSL liable.
V. DATE AND TIME OF PRESENTMENT
GR: Presentment for payment must be made on maturity date without a grace period
or extension. If the holder grants the payor an extension of time for payment without
notice and consent of the parties secondarily liable, the latter are deemed discharged.
If the maturity date falls on:
Sundays or Holidays presentment for payment must be made on the following
business day.
Saturdays GR: presentment for payment must be made on the following business day.
XPN: When the instrument is payable on demand holder may, at his option,
present for payment before 12 oclock noon on Saturday when the entire day is not a
holiday.
Maturity date is arrived at by excluding the first day and including the last of the period.
Where the day, or the last day for doing any act herein required or permitted to be done
is a holiday, it may be done on the next succeeding secular or business day.
VI. DELAY, WHEN EXCUSED
When due to fortuitous events or force majeure or events which are not imputable to
the fault, misconduct or negligence of the holder, he cannot make a presentment for
payment to the party primarily liable on maturity date, the holder is excused for his
failure to make presentment on due date, but he is obliged to make presentment
immediately as soon as the cause of the delay ceases. Otherwise, the PSL will be
discharged.
VII. WHEN INSTRUMENT CONSIDERED DISHONORED AND ITS EFFECTS
The instrument is dishnored by non-payment when:
a) It is duly presented for payment and payment is refused or cannot be obtained;
or
b) Presentment is excused and the instrument is overdue and unpaid.
Note: In the foregoing cases, Notice of Dishonor by non-payment to PSL is proper. The
holder of a negotiable instrument acquires the right of recourse against PSL only after
he has given Notice of Dishonor, either by non-acceptance or non-payment, to all of
them within 24 hours after the dishonor by the PPL.
Effect of failure: PSL will be automatically discharged
PAYMENT
GR: Payment in due course by on or behalf of the principal debtor, or by the party
accommodated, where the instrument is made or accepted for accommodation, will
discharge the negotiable instrument.
Elements of a payment in due course:
1. Must be made at or after maturity of the instrument
Payment before maturity is not a payment in due course and consequently, will not
discharge the instrument. Rather it is deemed a re-negotiation of the instrument to the
PPL who may choose to negotiate it to new parties but not to parties subsequent to him.
2. To the holder thereof
Payment to a 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. It is not a payment in due
course.

3. It must be made in good faith and without notice that the title of the holder is
defective.
Notes:
a) It is the party making the payment who must be in good faith
b) Payment by a maker of the note before maturity date does not constitute
payment in due course as to discharge the instrument, but rather it gives the
maker the right to re-negotiate it to new parties but not to subsequent parties.
c) Payment by PPL may be made to the authorized representative of the holder
as to discharge the instrument. While possession of the instrument by the
maker is prima facie evidence of payment made by him, such is controvertible
when the facts show that surrender of the instrument to the maker is without
authority
DISHONOR
Q: When is an instrument deemed dishonored?
A: The instrument is dishonored by non-payment when:
a) It is duly presented for payment and payment is refused or cannot be obtained;
or
b) Presentment is excused and the instrument is overdue and unpaid.
The instrument is dishonored by non-acceptance when:
a. When it is duly presented for acceptance, and such an acceptance as
prescribed by this Act is refused or cannot be obtained; or
b. When presentment for acceptance is excused, and the bill is not accepted.
Q: If the instrument is for P1,000 and the drawee accepts it only for P800, is the
instrument deemed dishonored?
A: If there is a qualified acceptance, be it local, qualified as to time, and the like, the
holder may treat the instrument as dishonored.
Q: Who may give a notice of dishonor?
A: Parties who may give NoD:
1) The holder himself must give notice to all PSL within 24 hours after the
dishonor.
2) By another party in behalf of the holder may be the holders agent or
authorized representative, or a third party.
3) By any of the Parties secondarily liable who may be compelled to pay the holder
a PSL who received NoD from the holder may, in turn, give NoD to all the PSL
prior to him within 24 hours after he receives the Notice from the Holder.
Note: The NoD given by the PSL inures to the benefit of the holder. The PSL cannot give
notice to subsequent parties, they are deemed discharged.
4) By any party in behalf of the PSL mentioned in #3 above.
Q: A, maker, issued a PN in favor of B, who negotiated it to C, C to D, then D to E. E
presented the instrument for payment to A, however, A refused to pay on the ground of
insolvency. To whom shall E give the notice of dishonor?
A: E must furnish every party secondarily liable a notice of dishonor.
Q: To whom may a NoD be given?
A:
a. In general Notice of dishonor may be given either to the party secondarily
liable himself or to his authorized agent or representative. There is sufficient
service of NoD:
1) If made at the PSLs place of business to the secretary, or in-charge or
clerk.
2) If made at the PSLs residence or domicile to the wife, any of the children
or to any other member of his household.
b. If given by agent If the negotiable instrument is dishonored in the hands of
an Agent, the latter may give NoD to:
1) All the PSL in his own name, or on behalf of his principal, or
2) His principcal, as if the Agent had been an independent holder.
The principal may, in turn, give NoD to the PSL within 24 hours after receipt of
his Agents notice.
c. If part is dead
a) When the holder or the party giving notice knows that a party secondarily liable
is dead, he must give notice of dishonor to:
1) The legal representative of the deceased PSL, if there is one and can be
found; or
2) The last known residence or place of business of the deceased PSL, if there
is no legal representative.
b) When the holder or the party giving notice has no knowledge of the death of
the PSL, NoD sent to the deceased PSLs last know residence or place of
business is sufficient.
d. To partners
If the instrument is a partnership liability, the holder or the party giving notice of
dishonor may, under the principle that partners are mutual agents of each other, give
Notice to:
a) Any one of the partners even though there has been a dissolution; or
b) To any of the surviving partners if one partner is dead.
Notice to one partner is sufficient notice to the Partnership even if the notified partners
fails to inform the Partnership.
e. To joint parties
If the parties secondarily liable are joint parties, then NoD must be given to all of them
unless one is authorized by the others to receive the Notice for all of them.
f. To bankrupt
NoD to a PSL who is judicially adjudged insolvent or who may have made an assignment
for the benefit of his Creditors, may be given to:
1) The insolvent PSL himself, or
2) The trustee or assignee.
Q: What is the purpose of the NoD?
A: To preserve a holders right of recourse against the parties secondarily liable.
Q: What should it contain?
A: A Notice of Dishonor, either by non-acceptance or non-payment, must conform with
the following requirements:
1) It may be made orally or in writing.
Note: Notice may be given in writing although unsigned by the party giving the Notice,
such as a telegram, provided it contains all the necessary information. The written
notice may be supplemented and validated by verbal communication.
2) The Notice must sufficiently describe and identify the instrument.
3) The Notice must state that the instrument had been presented for acceptance
or payment, and was subsequently dishonored.
Note: A mere statement that the instrument was payable and due without indicating
that it was presented for payment and dishonored, is not sufficient notice.
4) The Notice must state that the holder is looking forward to the PSL addressed
to pay the instrument.
5) Notice of Dishonor may be delivered to all the parties secondarily liable
personally or by mail.
Any misdescription of the instrument, as to name of parties, maturity date, etc., will not
vitiate the Notice unless it misleads the PSL addressed.
Q: May a NoD be dispensed with?
A:
1) Waiver of Notice NoD may be 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.
Waiver, defined: It is the voluntary giving-up of a known or established right.
Waiver may be either express or implied. An express waiver may be made on
the instrument at the time it was made or indorsed. An implied waiver may be
inferred from the acts, declarations or silence of the persons bound to receive
notice.
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.
Example: Notice of Dishonor is hereby waived. Sgd. A
This is a general waiver which will be binding on all parties.
Example: B indorsed the PN to C as follows: Pay to C, Notice of Dishonor is hereby
waved. Sgd. A
The waiver made by B is binding on him alone, and not applicable to all
subsequent indorsers.
Waiver of Notice may be made either: (1) before the time of giving notice, or
(2) after the omission to give due notice.
2) Where notice is dispensed with when, after the exercise of reasonable
diligence:
i) It cannot be given to the parties secondarily liable as when it
becomes impossible to contact the parties due perhaps to force
majeure such as pestilence, contagious disease or any other
quarantine restrictions prevailing in the area where the parties reside,
or
ii) It does not reach the parties sought to be charged as when, through
miscarriage in the mails, the Notice did not reach the PSL. They are
deemed bound however, if it can be proved that the Notice was
properly addressed and deposited in the post office within the
prescribed period.
3) 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 necessary, unless in the meantime the instrument has been
accepted.
Q: Will payment by a party secondarily liable discharge the instrument? Q: Is the instrument discharged if payment is made by the accommodation party?
A: No because payment must be made by the principal debtor. A: Only payment by the accommodated party discharges the instrument.

Q: What is payment in due course? Q: Illustrate intentional cancellation.

A:
1. Must be made at or after maturity of the instrument
Payment before maturity is not a payment in due course and consequently, will not
discharge the instrument. Rather it is deemed a re-negotiation of the instrument to the
PPL who may choose to negotiate it to new parties but not to parties subsequent to him.
2. To the holder thereof
A: Tearing the instrument apart, disposing of it, burning it, and the like.
Q: Give examples of any other act which will discharge a simple money obligation.
A: Condonation or remission of the debt, Novation, Compensation, Prescription, etc.
Q: What is merger or confusion?
A: Merger or confusion happens when the principal debtor becomes the holder of the
instrument at or after maturity in his own right.

Payment to a person other than the holder is at the risk of the party so paying if the Q: Renunciation, will it discharge the instrument?
person was not authorized by the holder to receive payment. It is not a payment in due A: The holder may expressly renounce his rights against any party to the instrument
course. 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
3. It must be made in good faith and without notice that the title of the holder is without notice. A renunciation must be in writing unless the instrument is delivered up
defective. to the person primarily liable thereon.

Q: When is the instrument discharged?

A: (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.

Q: When is a party secondarily liable discharged?

A: (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 or payment made by a prior party;
(e) By a release of the principal debtor unless the holder's 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 holder's 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.