Negotiable Instrument

-a bank check, promissory note, bill of exchange, or any other written security document that
can be transferred by endorsement plus delivery, or in some cases by delivery only. The effect of this
transfer is to vest legal ownership, giving the new owner the right to demand payment of the face
amount of the instrument, along with any interest that may be due. A bearer bond, for example, may
be negotiated by delivery only, without an endorsement of the former owner.( Hemphill's Law
Dictionary)

Nature of N.I.
Not as Legal Tender- merely as Provisional payments
As Contract

Principal Functions of a N.I

As a Substitute for money – but will not be considered full payment as to extinguish an obligation
until it is actually converted into cash
It increases Credit Circulation- affect world trade favorably.
It increases Purchasing Power in Circulation –increase the volume of daily business transaction.

Kinds of N.I. and Parties Thereto:

1. Promissory Note- Unconditional promise in writing made by one person to another, signed by the
maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money
to order or to bearer.
Principal Parties
 Maker –he is the debtor. "Party Primarily Liable".
 Payee –the creditor. If the P/N is endorse the Payee and other endorser will be
"Parties Secondary Liable to the Holder of P/N.
Other Forms of Promissory Note
 Certificate of Deposit –written acknowledgement by a bank of receipt of money
which the bank promises to pay
 Bonds –These are more elaborate P/N, generally for bigger amount and longer period.
Also defined as unit of indebtedness and regarded as part of one entire
indebtedness.
Parties in the issue of bonds
 The bond issuer –the borrowing company who floats the bond.
 The bondholder –purchaser of bonds.
 Trustee –third party to whom the issuing company has mortgaged corporate
property and will answer the debt in case of non-payment by issuer.
Forms of Bonds
 Debentures bonds –not secured by specific property.
 Mortgage Bonds –secured by a mortgage on corporate property.
 Coupon Bonds –attached are coupon notes representing the amount of interest.
 Due Bill –instrument whereby one person acknowledges his indebtedness to another
and promise to pay to the bearer
 Bank Notes –P/N of the issuing bank which are payable to the bearer on demand and
intended to circulate as money, passes hand to hand without evidence except
possession.
 2. Bill of Exchange –An unconditional order in writing addressed by one person to another, signed by
the person giving it, requiring the person to whom it is addressed to pay on demand or at
fixed or determinable future time a sum certain money to Order or to Bearer.
Principal Parties
 Drawer –he is the debtor. Ask the drawee to pay the bill to the Payee then recover it.
 Payee –the creditor. Collect the payment from the Drawee
 Drawee –Party Primarily Liable to the bill, subject to his acceptance. Required to pay the
Payee and recover the same from the Drawer.
Forms of Bill of Exchange:
 Trade Acceptance –bill of exchange drawn by the seller of goods on the buyer.
 Clean Bill of Exchange –no document is attached when presentment for payment is made.
 Documentary Bill of Exchange –supporting documents like invoices are attached.
 Bank Acceptance –draft drawn on and accepted by a bank.
 Draft –payable on demand, an order for payment of money drawn by one person on other.
3. Check –A form of bill of exchange drawn on bank and always payable on demand.
Principal Parties
 Drawer –the person issuing the check.
 Payee –the creditor of the Drawer to whom the bank must pay the check.
 Drawee –the Bank where the Drawer has a deposit
Forms of Check
 Ordinary Check –there is an element of assurance and certainty that it will be paid.
 Cashier Check –check drawn by the bank upon itself.
 Certified Check –personal check made by the drawer and certified by the drawee bank.
 Voucher Check –contains a statement of account paid by the check(attached voucher).
 Traveller's Check –holder must place a signature upon issuance and before it is paid.
 Manager's Check –check drawn by the manager of the bank against the bank itself.
 Crossed Check –it may only be deposited, may be negotiated once, and a warning to the
holder that it is issued to a definite purpose.
 Memorandum Check –form of ordinary check with the word "Memo" across its face.

Distinction among the three:

 As to Negotiability – P/N is an Unconditional promise, BoE and Check, the drawee is required to
pay
 As to Scope of Liability
o P/N –maker is the Primary liable. Drawer, payee and other endorser are secondary liable.
o BoE and Check –Drawee is the party primarily liable. Drawer, payee and other endorser are
party secondarily liable
 Presentation for Acceptance
o P/N –absolutely not necessary
o BoE –necessary on three circumstances
 When BoE is payable at a fixed period after sight.
 When the place of payment of the BoE is different from the domicile of the drawee.
 When presentment for acceptance is expressly required on the bill of exchange.
o Check –not necessary cause it is payable on demand.
 When N.I. is payable on demand
 o P/N payable on demand –presentment for payment must be made within a reasonable time
after issue.
o BoE payable on demand - presentment for payment must be made within a reasonable time
after the last endorsement.
o Check - presentment for payment must be made within a reasonable time after issue.
 In case of death of parties
o Check –Drawee bank has an authority to stop payment of the check if it has knowledge of the
death of the Drawer before payment.
o P/N and BoE –death will not affect payment because of transmissibility of rights.
 In case of Forgery
o General Rule –states that the party whose signature was forged, and all parties prior to him,
will not be liable even to a holder in due course. However, the parties after the forgery will be
liable to an HDC as regular endorser.

Different Stages of N.I.

1. Issue –Preparation of the instrument by the maker.
2. Negotiation –The payee endorse the instrument through endorsement to other person
a. Payable to Bearer –negotiated by
i. Mere delivery
ii. By blank endorsement plus delivery
b. Payable to Order –negotiated by proper endorsement and delivery, if the payee makes blank
endorsement it will become payable to bearer.
3. Presentation for Acceptance –only applies on BoE that needed presentation(3 circumstances).
4. Acceptance
5. Dishonor by non-acceptance –only applies to BoE when the drawee refuse to pay the holder then
acquires the right to recourse against secondary liable parties.
6. Presentment for Payment –applies on both P/N and BoE
7. Dishonor by Non-payment –applies on both P/N and BoE and the holder will have the right to
recourse against secondary liable parties.
8. Discharge –under
a. Payment in due course by or on behalf of the principal party.
b. Payment in due course by the party accommodated, where the instrument is made or accepted
for accommodation.
c. Intentional cancellation thereof by the holder.
d. Any other act which will discharge a simple contract for payment of money.
e. Merger or confusion.

Requisites to be a N.I.
 It must be in writing and signed by the maker or drawer.
 Must contain an unconditional promise or order to pay sum certain in money.
o Sum certain in money –must be certain amount and strictly in money unless it is the option of
the holder.
 Must be payable on demand or at fixed or determinable future time.
o On Demand
 When the instrument is expressly stated to be "payable on demand"
 When the time of payment is "at sight or on presentation"
 When no time of payment is stated in the instrument.
 When the instrument is issued, accepted, endorsed when already overdue.
 o At fixed time
 Definite calendar date expressed in the instrument.
o At determinable future time
 At a fixed period after date or after sight.
 On or before a fixed or determinable future time specified therein.
 On or at a fixed period after the occurrence of a specified event which is certain to
happen, although the time of happening is uncertain.
 Must be payable to order or to bearer.
o To order
 Payable to the order of a specified person
 Payable to a specified person or order
o Payable to bearer
 Payable to bearer
 Payable to a specified person or bearer
 Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.
o May be addressed to two or more drawees jointly or solidarily, but not in the alternative or in
succession
 "To A and B" –valid
 "To A or B" –not valid
 "To A, or in his absence, B" –not valid

Section 2. Certainty as to sum, what constitute. The sum payable is a sum certain within the meaning of this
Act, although it is to be paid-
 With interest –must be stated
 By stated installment –negotiable if the amount and the maturity date of each installment are
expressly established
 By stated installment, with a provision that upon default in payment of any installment or of interest,
the whole become due.
 With exchange, whether a fixed rate or at the current rate –must be in Philippine currency unless
otherwise it will be void. Computed using the prevailing rate at the time the obligation was
constituted.
 With costs of collection or an attorney's fee, in case payment shall not be made at maturity.

Section 5. 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 judgment if the instrument be not paid at maturity.
c. Waives the benefit of any law intended for the advantage or protection of the obligor.
d. Gives the holder an election to require something to be done in lieu of payment of money.

Section 6. The validity and negotiable character of an instrument are not affected by the fact that
a. It is not dated
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
d. Bears a seal
e. Designated a particular kind of current money in which payment is to be made
Section 8. It may be drawn payable to the order of –
a. A payee who is not maker, drawer, or drawee
b. The drawer or maker
c. The drawee
d. Two or more payees jointly
e. One or some of several payees
f. The holder of an office for the time being
Section 9. The instrument is payable to bearer-
a. When it is expressed to be so payable
b. When it is payable to a person named therein or bearer
c. When it is payable to the order of a fictitious or non-existing person, and such fact was known to the
person making it so payable
d. When the name of the payee does not purport to be the name of any person
e. When the only or last endorsement is an endorsement in blank

Requisites of an incomplete negotiable instrument:

 The instrument is incomplete as to the date, the amount or sum payable.
 The instrument is signed by the maker or drawer.
 The maker or drawer voluntarily delivers the instrument to the payee, giving the latter the authority
to fill in the blanks properly.
 The payee must fill up the blanks strictly in accordance with such authority, and within a reasonable
time after receipt.
o Reasonable Time –determining the reasonable time, regard is to be had as:
 To the nature of the instrument.
 To usage of trade or business, if any, with respect to such instrument.
 The facts of the particular case.

Effects of wrongful insertion of blanks

1. The holder who makes the fraudulent or wrongful insertion cannot collect on the instrument.
2. Parties prior to the fraudulent insertion will not be liable to holder NOT in due course.
3. The holder not in due course can collect from party who made the wrongful insertion and parties
subsequent to the act.
4. If the holder is a holder in due course, he can collect from all other parties.

Two principal kinds of holder

1. Holder for value –one who gives value or consideration for the instrument issued/negotiated to him.
2. Holder in due course –holder who takes a valid negotiable instrument in good faith, for value and in
the regular course of trade, free from defense between the parties, and without notice of defects in
title to the instrument.
a. The holder taken the instrument under the ff. conditions:
i. That is complete and regular on its face
1) The instrument must not contain blanks as to some material terms.
2) The instrument must not contain material alteration clearly evident on the face
of the instrument.
ii. 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
iii. That he took it in good faith and for value
 1) Value –any consideration sufficient to support a simple contract. It must
actually be given not a mere promise.
iv. 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
1) Infirmity –things that are wrong with the instrument itself

Defense
-grounds available to the payor to refuse payment to or escape liability from the holder of a
negotiable instrument. (valid reason).
 Personal Defense (Equitable Defense) –against holder in value
-defenses available to prior parties among themselves and include all defense to the contract
which arises out of the relation of the parties to the contract.
 Absence or lack of consideration
 Fraud in inducement
 Other forms of personal defense
o Set-off between immediate parties
o Lack of delivery of a complete instrument
o Compensation or other forms of payment
o Illegal consideration
o Undue influence, intimidation or violence
 Real Defense –against holder in due course and in value
-defense which go to existence or validity of the instrument as a contract or to the capacity of
the parties.
 Forgery
 Non-delivery of an incomplete instrument
 Incapacity of the maker
 Other forms of real defense
o Duress amounting to forgery
o Material alteration
o Nullity of contract

*When an incomplete N.I. is filled unauthorized by the maker and deliver by the same, the maker can use it
as a defense to the holder of the N.I. but the holder can go after secondary parties liable after the
unauthorized completion.

Delivery
-It is the transfer of possession of the instrument, whether actual or constructive from one person to
another with intent to transfer title to the instrument

*When a complete N.I. is delivered without the authority of the maker, he shall not be liable to the holder
but the holder can recourse against secondary liable parties after the unauthorized delivery. If it is a holder in
due course then the defense is invalid.

Section 17. Construction where instrument is ambiguous, such rule shall apply
 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.
  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
 Where the instrument is not dated, it will be considered to be dated as of the time it was issued
 Where there is a conflict between the written and printed provisions of the instrument, the written
provisions prevail
 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
 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 endorser.
 Where an instrument containing the words "I promise to pay" is signed by two or more persons, they
are deemed to be jointly and severally liable thereof

*An agent can bind his principal in a N.I provided

1. He is duly authorized by his principal.
2. He is acting within the scope of his authority.
3. He is disclosing his principal
*Procuration
-means agency or proxy or power of attorney with a very limited authority and if the agent is acting
beyond his authority the principal shall not be liable for his acts.

Section 22 –The endorsement or assignment of the instrument by a corporation, or by an infant(minor)

passes the property therein, notwithstanding that for want of capacity the corporation or infant may incur
NO LIABILITY.

*Forgery
-It is the counterfeit making or fraudulent alteration of any writing and may consist in the signing of
another's name, or the alteration of an instrument in the name, amount, description of the person and the like
with the intent thereby to defraud.
a) Fraud in Factum –real defense, the instrument is invalid against holder in value and in due course.
b) Fraud in Inducement –personal defense, applies only to holder in value but not in due course.
c) Duress amounting to forgery –there is a force or intimidation making the instrument invalid.
Rules on forgery of endorsement
Payable on order –the party whose endorsement is forged and all the parties prior to him including
the maker shall not be liable even to holder in due course because it need to be in proper
endorsement plus delivery not just by mere delivery but the holder can collect from parties after the
forgery.
Payable on bearer –the party whose endorsement is forged and all the parties prior to him including
the maker shall not be liable if the holder is in value but if the holder is in due course, he can collect
from all the parties.
Parties who cannot set up defense of forgery
a. A drawee/acceptor –because at the time of making his acceptance, he warrants that the drawer's
signature is genuine making him liable to the holder.
b. An endorser –because he warrants among other things the genuineness of the signature of all prior
parties at the time of his endorsement.
c. A person negotiating by mere delivery –a person negotiating an instrument "payable to the 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.
Valuable Consideration
-maybe said to consists in some right, interest, profit, or benefit or it may be some forbearance,
detriment, loss or labor, or service given, suffered or undertaken by other party, such as the payee.
-considerations not capable of pecuniary estimation are not considered valuable considerations
 Love and affection
 Mere moral obligations
 Gratitude
 Service rendered out of kindness, without expectation of reward
Section 27 –a N.I. cannot be subject to partial collateral unless it is endorse fully then the creditor of the
payee become the holder of the N.I.

Section 28 –Effect of want(lacking) of consideration –all of it are personal defense only

 Absence or lack of consideration –holder will be unable to collect (holder in value)
 Failure of consideration –holder will be unable to collect
 Partial failure of consideration –"pro-tanto personal defense" (To such extent)
o Holder can only collect part of the consideration which is deemed complete (holder in value)
*Holder in due course can collect the full amount for it is not affected by personal defense

Accommodation Party
-one who has signed the instrument as maker, drawer, acceptor, or endorser, without receiving value
therefor, for the purpose of lending his name and credit to some other person

Requisites of an Accommodation party

 That he signs the instrument as maker, drawer, acceptor, or an endorser.
 That he does not receive any part of the consideration.
 That he is merely lending his name and credit to another person known as the accommodated party
 That he becomes liable solidarily as Surety and can be held directly liable by the holder of the
negotiable instrument.
In BoE the Accommodation Party may sign as –
 Accommodation Drawer –he will draw the bill payable to the accommodated party as payee and
drawable against a drawee with whom he has a credit.
 Accommodation Acceptor –the accommodated party will be the drawer. He will draw the bill
payable to himself or to another person as payee.

Negotiation –when an instrument is transferred from one person to another

Modes of transfer of instrument:
1) By assignment –merely puts the assignee in the place of the assignor, when the holder of the N.I.
transfer it to another person without proper endorsement, such transfer operates as an equitable
assignment and not a negotiation.
2) By operation of Law
a. By the death of the holder –his right to collect passed on to his estate, representative or heir.
b. By the bankruptcy of the holder –passes to his trustee or assignee
3) By negotiation –transfer of a N.I. from one person to another in such manner as to constitute the
transferee the holder of the instrument
a. Payable to order
 b. Payable to bearer

Kinds of Endorsement (General Negotiation)

1. Special Endorsement –the N.I. is endorsed to a specific person. (full endorsement)
2. Blank Endorsement –the endorser merely signs his name in blank without additional words.
3. Restrictive Endorsement –consist of three kinds:
a. One which prohibits further negotiation of the N.I.
b. One which constitute the endorsee a mere agent of the endorser
c. One which makes the endorsee a trustee for a third person
4. Qualified Endorsement –the endorser becomes a mere assignor of the title to the instrument. By
adding "without recourse" or the same.
5. Conditional Endorsement –subject to a suspensive condition.

Other Forms of Endorsement

1. Joint Endorsement –when an instrument is endorsed by two or more joint endorsee or payees.
2. Facultative Endorsement –an endorser enlarges his liability by waiving presentment, notice or
protest.
3. Irregular or Anomalous Endorsement –a person who is not party to the instrument affixes thereon
his signature in blank before delivery, in which case he becomes liable as an irregular or
anomalous endorser.

*When an ORDER INSTRUMENT is endorsed in blank, the instrument is converted to BEARER.

*When an ORDER INSTRUMENT is endorsed in blank, then in special making it ORDER again.
*When a BEARER INSTRUMENT is endorsed in special, the instrument will not be converted to ORDER

Rights of the endorsee in a restrictive endorsement

1. To receive payment of the instrument.
2. To bring any action thereon that the endorser could bring.
3. To transfer his right as such endorsee, where the form of the endorsement authorizes him to do so.

A qualified endorser shall be liable to the holder as secondary liable party if he violates the ff. warranties:
 That the instrument is genuine and in all respects what it purports to be.
 That he has a good title to it.
 That all prior parties had capacity to contract
 That he has no knowledge of any fact which would impair the validity of the instrument or render it
valueless

If the N.I. is endorsed after the due date, it will become payable on demand and the holder is not a holder in
due course but the burden of proof rest on the maker.

Instrument is discharged by
 Payment in due course by or on behalf of the principal debtor
 Payment in due course by the party accommodated, where the instrument is made or accepted for
accommodation
Essential elements of a payment in due course
1. It must be made at or after maturity of the instrument.
2. Must be made to the holder or his authorized representative.
 3. Must be made in good faith, and without notice of holder's defective title.

The holder who is both the endorsee and possessor of the instrument has the right to sue on the instrument in
his own name irrespective whether he is a
 Holder for value –endorsee who has both the legal title and beneficial interest to the instrument and
is subject to both real and personal defense available against him.
 Holder in due course –one who also possess the legal title and beneficial interest thereon, but subject
to real defense only.
 Restrictive Endorsee –one to whom the instrument has been restrictively endorsed (restrictive
endorsement) .
 Holder for value up to the extent of his lien –he is merely a pledgee of the instrument which is
endorsed to him as collateral for an indebtedness of the endorser due to him.

Elements of a payment in due course:

 Payment made at or after maturity of the instrument.
 Payment made to the holder himself or to his authorized representative.
 Payment made in good faith and without notice of defective title.

Warranties of the Acceptor:

a. The existence of the drawer.
b. The genuineness of drawer's signature.
c. Drawer's capacity and authority to draw the instrument.
d. The existence of the payee.
e. The payee's capacity to endorse.

*A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor, is deemed
to be an endorser, unless he clearly indicates by appropriate words his intention to be bound in some other
capacity.

Section 64 –liability of irregular endorser

Irregular endorser – person affixes his signature in blank and before delivery of the instrument.
 If the instrument is payable to the order of a third person, he is liable to the payee and all subsequent
parties.
 If the instrument is payable to the order of the maker, or drawer, or is payable to the bearer, he is
liable to all parties subsequent to the maker or drawer.
 If he signs for accommodation of the payee, he is liable to all parties subsequent to the payee.

Warranties of general endorser

 That the instrument is genuine and in all respects what it purports to be
 That he has a good title to it
 That all prior parties had capacity to contract
 That the instrument is at the time of his endorsement valid and subsisting
 That on due presentment, it shall be accepted or paid, or both, as the case may be according to its
tenor and if it be dishonored and the necessary proceeding on dishonor be duly taken, he will pay the
amount thereof to the holder, or to any subsequent endorser who may be compelled to pay it
Exception to the rule that joint endorser must both sign to endorse the instrument
1. If the joint payees or endorsees are partners
2. If one of them is authorized by the others to sign on their behalf
Effects of presentment for payment
1. Non-presentment of payment to the primarily liable party will cause the secondarily liable party to be
discharge when the primary liable dishonors the instrument at maturity date.
2. If the instrument is payable at a special place
a. If the primary liable party is ready to pay at that place and the holder is not, the primary liable
party is only liable to the extent of the instrument.
b. If the primary liable party is not ready to pay at that place but the holder is already there, the
primary liable party shall be liable for the instrument and for damages.

Presentment for payment, to be sufficient, must be made:

 By the holder, or by some person authorized to received payment on his behalf.
 At a reasonable hour on a business day.
 At a proper place as herein defined.
 To the person primarily liable on the instrument, or if he is absent or inaccessible, to any person
found at the place where the presentment is made.
*If the debtor is partner, the holder can present for payment either of the two even after dissolution but if the
debtors are jointly only, he/she must present the payment to ALL the debtor. (in case of no specified
location)
*Delay to present the instrument for payment by the holder will discharge secondary liable parties unless
due to fortuitous events.

Presentment for the payment is dispense with:

 Where after the exercise of reasonable diligence, presentment as required by this Act cannot be made
 Where the drawee is a fictitious person
 By waiver of presentment, expressed or implied

The instrument is dishonored by non-payment when:

a) It is duly presented for payment and payment is refused or cannot be obtained
i. When the primarily liable party refuse to pay
ii. When the primarily liable party is willing to pay but doesn't have the funds.
iii. When the primarily liable party unable to pay on maturity date but promise to pay 5
days later
b) Presentment is excused and the instrument remains unpaid after maturity date

If the maturity of the N.I. falls on:

1. Sunday or Holidays –presentment may be made on the following business day.
2. Saturday –generally, the following business day except when
a. The instrument is payable on demand – may present the N.I for payment before 12:00 noon
when the entire day is not a holiday.
Elements of Payment in due course
 Must be made at or after maturity of the instrument
 To the holder thereof
 It must be in good faith and without notice that the title of the holder is defective

Instances where presentment of BoE for acceptance is needed:

1. Where the bill is payable after sight, or in any other case where presentment for acceptance is
necessary in order to fix the maturity of the instrument
2. Where the bill expressly stipulates that it shall be presented for acceptance
 3. Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.
*Notice of dishonor for non-payment must be made within 24 hours or else the secondarily liable parties
will be discharged.
*The form of the notice may be written or oral as long as it indicates that the instrument is dishonored.

Rules on where to send the notice of dishonor

1. If a party adds an address to his signature, the notice must be sent to him at that address
2. If the is no address, notice must be sent to;
a. The Post office nearest to his place of residence or the post office where he is accustomed to
receive his letter
b. His residence or place of business
c. The place where he is sojourning
*Waiver of Notice –voluntary giving up of known or established right to receive notice of dishonor before
he can be liable to the holder. (express or implied)
*Protest –it is a formal statement of the presentment and dishonor of the bill made under oath.(in case of
foreign bills of exchange)
Notice of dishonor is not required to be given to the drawer in any of the following case(BoE):
1) Where the drawer and drawee are the same person
2) When the drawee is a fictitious person or a person not having capacity to contract
3) When the drawer is the person to whom the instrument is presented for payment
4) Where the drawer has no right to expect or require that the drawee or acceptor will honor the
instrument
5) Where the drawer has countermanded payment

A N.I. is discharged:
1) By payment in due course by or on behalf of the principal debtor.
2) By payment in due course by the party accommodated, where the instrument is made or accepted for
accommodation
3) By the intentional cancellation thereof by the holder
4) By any other act which will discharge a simple contract for the payment of money.
5) When the principal debtor becomes the holder of the instrument at or after maturity in his own right.

A person secondarily liable on the instrument is discharged:

1) By any act which discharge the instrument
2) By the intentional cancellation of his signature by the holder
3) By the discharge of a prior party
4) By a valid tender of payment made by a prior party
5) By a release of the principal debtor, unless the holder's right of recourse against the party secondarily
liable is expressly reserved
6) 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

*Renunciation –act of an individual or corporation in giving up or abandoning a right without transferring

the right to another. May be:
1) Expressed, oral or written
2) Made before, at or after maturity date
3) Made in favor of any party to the instrument
 a. If renunciation is made in favor of party primarily liable
i. It must be absolute and unconditional
ii. It must be made at or after maturity date
iii. The instrument is discharged
b. If renunciation is made in favor of any party secondarily liable
i. It must be made before, at or after maturity date
ii. The party in whose favor the renunciation is made and all parties subsequent to him
are discharged from liability.
4) Made with or without consideration
*renunciation will not affect the rights of a holder in due course without notice,

Material alteration – affects the liability of the parties to the instrument in any respect
 The date
 The sum payable, either for principal or interest
 The time or place of payment
 The number or the relation of the parties
 The medium or currency in which payment is to be made

Referee in case of need –he is the party named by the drawer in his bill or by an endorser in his endorsement
against whom the holder may collect in case the bill is dishonored.

Acceptance –signification by the drawee of his assent to the order of the drawer.
Requisites
 Acceptance must be in writing.
 It must be duly signed by the drawee in which case become the acceptor.
 The drawee becomes liable on the instrument retroactive from the date of the first presentment for
acceptance and according to the tenor of his acceptance.
 It must not express that the drawee will perform his promise by any other means than payment of
money.
 The acceptance is incomplete and not valid unless delivered or communicated to the hodler.
Kinds
Actual Acceptance
Constructive Acceptance
o When he destroy the bill
o When he failed to return the bill accepted or not
General Acceptance
Qualified Acceptance
o Conditional
o Partial
o Local
o Qualified as to time
o Acceptance by one or more of the drawees but not all
*Drawee have 24 hours to decide if he will accept the instrument or not.
Presentment for Acceptance is excused and the bill maybe treated as dishonored:
 When the drawee is dead, or has absconded or is a fictitious person or a person not having capacity
to contract.
 Where after the exercise of reasonable diligence, presentment cannot be made.
 Where although presentment has been irregular, acceptance has been refused on some other grounds.
*If a foreign bill is not protested for dishonor, the drawer and endorser will be discharge.

Extend of damage recoverable when protesting:

1. The face value of the bill
2. Interest thereon
3. Protest fee
4. Re-exchange expense for procuring a new bill

How protest should be made: (must be made at the day of dishonor)

-the protest must be annexed to the bill or must contain a copy thereof, and must be under the hand and seal
of the notary making it and must specify:
a) The time and place of presentment
b) The fact that the presentment was made and the manner thereof
c) The cause or reason for protesting the bill
d) The demand made and the answer given, or the fact that the drawee or acceptor could not be found

Protest may be made by:

a) A notary public
b) Any respectable resident of the place where the bill is dishonored in the presence of two or more
credible witnesses

*Noting of Protest –means that the notary notes on the bill or on a separate paper attached to the bill or on
his registry book all the information required under SEC. 153 duly signed by him and under his seal,
thereafter he may extend the time of the protest. (regularly must be made on the day of dishonor ).

Protest is still needed even:

 By the loss or destruction of the bill
 By the wrongful withholding of the bill from the person entitled to hold it.
*Protest may still be made on a copy or reproduction of the bill
*The bill may be protested for security when the acceptor has been adjudged bankrupt or insolvent

Acceptance for Honor

-acceptance by a stranger of a bill of exchange to pay, totally or partially, for the honor of the drawer or any
endorser after the bill has been protested.

Requisites of a Valid Acceptance for Honor

 Must be in writing
 Must indicate that it is an acceptance for honor
 Must be signed by the acceptor for honor
 Acceptor must appear before the Notary and declare that he has "Accepted for the Honor of X"
(Sgd.) Y.

*When the acceptance of honor does not expressly state for whom he will honor, it is deemed he honor for
DRAWER.
*Maturity date of the bill after the acceptance of honor will start after being "noted" by the notary public.
*When two or more person offers to pay the bill, the one who will discharge the most parties will be given
the preference.
*When the holder does not accept the payment for honor, he will lose the right to recourse against any party
who would have been discharge by such payment.
*The person paying for honor will subrogate the rights of the holder after paying the bill and the notarial
expense, also receiving the bill itself and protest. He may collect from other party whose liability is not
discharge starting from the party he honor and prior to it.

Bill in a set
-one composed of various or several parts each part being numbered and containing a reference to other
parts all which constitute one whole bill of exchange
-it is where several copies of a bill has been made but acceptance and payment of one part of it will have an
effect on the whole bill except when the drawee accept the parts separately.

Examples of Promissory Notes

1. Collateral Note – promissory note combined with a pledge agreement to the effect that the maker
pledges securities such as stocks or certificates, bonds and other security devices to the payee to
secure payment of the maker's debt.
2. Chattel Mortgage Note –Combination of promissory note and a chattel mortgage whereby the maker
gives the payee a chattel mortgage on certain personal property as security
3. Real Estate Mortgage Note –maker gives as security a real estate mortgage which thw holder may
also foreclose in the event the maker defaults in his payment of the note.
4. Title Retaining Note –combination of promissory note and a conditional sale contract whereby the
maker promises to pay the purchase price of goods bought from the payee but agrees that the title to
the goods shall remain in the payee until the purchase price is paid in full.
5. Cognovit Note –in addition to the maker's promise to pay, the note gives the payee permission to
take judgment against the maker without trial if the maker fails to pay on maturity date. (judgment
note0

*Certification of Check –acceptance of the drawee bank of the check making them primarily liable, may be
requested by
1. Drawer –Drawer will be secondarily liable to the same extent as the drawer of the bill.
2. Payee –Drawer is discharge from liability
3. Holder –drawer and all prior endorser are discharged fro liability

Kinds of Check
a) Memorandum Check –an ordinary check with the word Memo or Memorandum written across its
face.
b) Letter of Credit –a commercial letter addressed by a bank to a correspondent bank certifying that an
individual named therein is entitled to draw on the original bank, up to a specified sum
a. Recoverable and Irrevocable letter of credit
i. Recoverable –the issuing bank reserves the right to cancel or modify the letter of
credit issued at any time without obligation on its part.
ii. Irrevocable –the name of the payee and other terms and conditions of the letter of
credit can no longer be altered or changed.
b. Back-to-Back letter of credit –a domestic letter of credit established by the local confirming
bank in favor of the new supplier of the original exporter, backed by the confirmed letter of
credit which the exporter got from the issuing foreign bank.
c. Revolving letter of credit –where the issuing bank limits the importers' credit line by issuing
only so much as corresponds to every shipment and released under trust receipt.
 d. Red-claused letter of credit –recoverable letter of credit which permits the beneficiary to
obtain advances from the notifying bank without presenting the customary shipping
documents,
c) Crossed Check –a check across the face of which is stamped the name of a certain bank to which it
must be presented. Purpose is:
a. To convey instructions that it is for deposit or that it is not to be paid except through a
specified bank
b. To make certain that the check is paid to the rightful person.
Kinds of Crossing
i. General Crossing –two transverse lines are drawn across the face of the check and between the lines
are written such words "& Co." or "Not Negotiable" or "Account Payee Only".
ii. Special Crossing –the check with special crossing may or may not have the two transverse lines but
indicates the specific bank to whom the holder may deposit the check.

d) Stale Check –when it is not presented for payment within a reasonable time after issue. (6 months)

Warehouse Receipt
-A receipt or evidence showing storage of goods or property in a warehouse.
-may be issued by any warehouseman.

Functions of Warehouse Receipt

 To established a contract for storage and safekeeping of goods or property covered by the warehouse
receipt.
 To serve as evidence of title or ownership of goods or property deposited in the warehouse.
 To facilitate transactions covering the goods or property deposited by the negotiation of the receipt.

Parties to a warehouse receipt

1) Depositor –the party who deposited goods or property for storage and safekeeping. (bailor)
2) Warehouseman –the party who owns the business of warehousing and who receives the goods or
property for storage.(bailee)

Warehouse receipt must embody within its written or printed terms :

a) The location of the warehouse where the goods are stored
b) The date of issue of the receipt
c) The consecutive number of the receipt
d) A statement whether the goods received will be delivered to the bearer, to a specified person, or to a
specified person or his order
e) The rate of storage charges
f) A description of the goods or of the packages containing them
g) The signature of the warehouseman, which may be made by his authorized agent
h) If the receipt is issued for goods of which the warehouseman is owner, either solely or jointly or in
common with others, the fact of such ownership
i) A statement of the amount of advances made or such liabilities incurred for which the warehouseman
claims a lien. If the precise amount of such advances made or such liabilities incurred is, at the same
time of the issue of the receipt, unknown to the warehouseman or to his agent who issued it, a
statement of the fact that advances have been made or liabilities incurred and the purpose thereof is
sufficient.
*if the receipt is deliverable to the depositor or to a specified person, the receipt is non-negotiable.
*if the receipt is deliverable to the bearer or to order of a specified person it is negotiable.
*An insertion in the negotiable receipt that it is "non-negotiable" is void.
*Duplicate receipts shall be marked "duplicate" or the warehouseman shall be liable for damage it may
cause.
*Failure to mark "non-negotiable" on the face of a non-negotiable receipt shall be borne by the
warehouseman and shall be liable for damage.
*A warehouseman is bound to deliver the goods upon demand made by the holder or by the depositor, if
such demand is accompanied with:
1. An offer to satisfy the warehouseman's lien
a. Warehouseman lien is the right of the warehouseman to retain possession of the goods until
total legitimate charges of the warehouseman have been paid
2. An offer to surrender the receipt, if negotiable, with such endorsement as would be necessary for the
negotiation of the receipt
3. A readiness and willingness to sign when the goods are delivered, an acknowledgement that they
have been delivered, if such signature is requested by the warehouseman.
*A warehouseman is justified in delivering the goods, subject to the provisions of the three following
sections:
a) The person lawfully entitled to the possession of the goods or his agent
b) A person who is either himself entitled to delivery by the terms of a non-negotiable receipt issued for
the goods, or who has written authority from the person so entitled endorsed upon the receipt or
written upon another paper
c) A person in possession of a negotiable receipt by the terms of which goods are deliverable to him or
order, or to bearer, or which has been endorsed to him or in blank by the person to whom delivery
was promised by the terms of the receipt or by his mediate or immediate endorsee.
*Conversion –it is the authorized appropriation of another's property for the use of the wrongdoer or the
destruction or alteration of the nature of the property.

*The alteration of a receipt shall not excuse the warehouseman who issued it from any liability if such
alteration was:
 Immaterial –warehouseman is liable according to such immaterial alteration.
 Authorized Alteration –he will be liable according to the authorized alteration.
 Unauthorized Alteration
o Without Fraudulent Intent –warehouseman will be liable in accordance with the original tenor
of the receipt
o With Fraudulent Intent –
 Warehouseman will be liable according to the original tenor of the receipt to the
person who makes the fraudulent alteration and to subsequent persons who take the
receipt with knowledge of the fraudulent alteration; but excused for any other
liability.
 Warehouseman will be liable according to the original tenor of the receipt in addition
to whatever other liabilities to a purchaser of the receipt for value who did not have
any knowledge of the alteration.
*As a general rule, a warehouseman cannot set up title for himself or right to the possession of the goods
unless that right emanates from:
 His valid exercise of the warehouseman's lien
 A transfer of the title made by the depositor at the time of or subsequent to the deposit of the goods.
*Interpleader –a legal proceeding that enables a person holding money or property to compel other parties
claiming the money or property to litigate the matter between them.
*The warehouseman cannot set-up as a defense the "adverse title of a third person" for his failure or refusal
to deliver the goods to the depositor or to any person claiming under the latter. Exceptions are:
1) Where there are several adverse claims for the title or possession of the goods under Section 17 and
18
2) When such third person is lawfully entitled to the goods under section 9
3) When the goods have been sold because of their perishable or hazardous nature under section 36

*Commingling of fungible goods by the warehouseman is, as a rule, not allowed unless he is authorized to
do so, either by (1) agreement, or (2) by custom, but the goods so commingled must be of the same kind,
quality and grade, If commingling takes place, the rule on co-ownership governs.

*goods covered by a negotiable warehouse receipt and still in the possession of the warehouseman, cannot
be attached or levied upon under an execution unless:
 The warehouse receipts is first surrendered to the warehouseman
 Its negotiation is enjoined through a court order

*The warehouseman's liens is enforceable against the following deposited goods:

 Goods belonging to the depositor which is liable as debtor for unpaid claims
 Goods belonging to others but entrusted to the depositor who is authorized to make a pledge on such
goods.
*A warehouseman loses his lien upon goods:
 By surrendering possession thereof
 By refusing to deliver the goods when a demand is made with which he is bound to comply under the
provisions of this act.
*Aside from lien the warehouseman has the following remedies to collect unpaid charges:
1) Sale of the goods. Steps are:
a. Give a written notice to the depositor or any person who may claim an interest on the goods.
The notice shall contain the following:
i. An itemized statement of the warehouseman's claim
ii. A brief statement or description of the goods
iii. A demand that the total amount of the claim, plus such other claims as may accrue,
must be paid on or before the specified date, which must not be less than 10 days from
the date of delivery of notice if personally delivered or 10 days from the date of
receipt if notice is mailed.
iv. A statement that, the goods will be sold at public auction on a specified time and
place if the claim is not paid
b. Publish the notice of sale once a week for two consecutive weeks in a newspaper of general
circulation in the place where sale is to be made. If there is no newspaper published in such
place, the notice shall be posted at least 10 days before the sale in six conspicuous places in
the area. Notice must give description of the goods, name of the owner, and the time and
place of sale.
*If the goods are perishable or hazardous in nature that it may affect the other goods in the warehouse, the
warehouseman may request the depositor to remove it from the warehouse and pay his lien. Failure to
remove it or pay the lien will give the warehouseman the right to sell or if not possible destroy the goods
without incurring liability.
Criminal offense
1) Issue of receipt for goods not received –not exceeding five years imprisonment or by fine not
exceeding 10 000 pesos or both.
2) Issue of receipt containing false statement - not exceeding one years imprisonment or by fine not
exceeding 2 000 pesos or both.
3) Issue of duplicate receipt not so marked - not exceeding five years imprisonment or by fine not
exceeding 10 000 pesos or both.
4) Issue for warehouseman's goods of receipts which do not state the fact - not exceeding one years
imprisonment or by fine not exceeding 2 000 pesos or both.
5) Delivery of goods without obtaining negotiable receipt - not exceeding one years imprisonment or by
fine not exceeding 2 000 pesos or both.
6) Negotiation of receipt for mortgaged goods - not exceeding one years imprisonment or by fine not
exceeding 2 000 pesos or both.

Interpretation of Words Used on Warehouse Receipt Act

*"Action" –includes counterclaim, set-off, and suit in equity as provided by law in these Islands.
*"Delivery" –means voluntary transfer of possession from one person to another.
*"Fungible Goods" –means goods of which anu unit is, from its nature or by mercantile customs, treated as
the equivalent of any other unit.
*"Goods" –means chattels or merchandise in storage or which has been or is about to be stored.
*"Holder" –of a receipt means a person who has both actual possession of such receipt and right of property.
*"Order" –means an order by endorser by endorsement of the receipt.
*"Owner" –does not include mortgagee
*"Person" –includes a corporation or partnership or two or more persons having joint or common interest.
*"To Purchase" –includes to take as mortgagee or as pledgee.
*"Purchaser" –includes mortgagee and pledged
*"Receipt" –means warehouse receipt.
*"Value' –is any consideration sufficient to support a simple contract.

The principal Documents of Title commonly used in business are:

 Bill of Lading –a bailment for carriage whereby the common carrier contracts to carry the goods in
sound condition to destination and to deliver them to the holder of the bill upon its surrender.
 Warehouse Receipt
Other forms are:
 Quedan –a document whereby a warehouseman receives goods in trust with the obligation to deliver
them to the holder of the quedan upon its surrender.
 Dock Warrant –a document issued by a dock operator to the owner of the goods, undertaking that
newly arrived goods as described in the bill of lading and stored on the docks, will be delivered to
the person named therein upon proper endorsement and surrender of the warrant

*The negotiability of the Document of Title is not affected by putting the word "non-negotiable".

*If the transferor and transferee in the transfer of a non-negotiable title failed to notify the bailee about the
transfer, the title of the transferee to the goods and his right to oblige the bailee to hold the goods for him
will be defeated by
 The levy of an attachment of execution upon the goods by the creditor of the transferor
  The notification of the transferor or subsequent purchaser to whom the transferor has again sold the
goods.

Warrant for any person who for value negotiate or transfer a N.I. by endorsement or delivery including one
who assigns for value a claim secured by a document of title unless a contrary intention appears.
1) That the document is genuine
2) That he has a legal right to negotiate or transfer it
3) That he has knowledge of no fact which would impair the validity or worth of the document.
4) That he has a right to transfer the title to the goods and that the goods are merchantable or fit for a
particular purpose, whenever such warranties would have been implied if the contract of the parties
had been to transfer without a N.I. represented thereby
*Breach of the above warranties will make the following liable
 The person who negotiate the N.I. for value by endorsement or by delivery
 The person who assigns for value a claim which is secured by a N.I.

*A negotiable document of title that has been issued cannot be (1)attached by garnishment or (2) levied
under execution unless
 The document of title is first surrendered to the bailee
 The negotiation of the document is enjoined
*The bailee shall in no case be compelled to deliver the goods until:
 The document of title is surrendered to the bailee
 The document of title is impound by the court