PART I: FORM AND INTERPRETATION

NEGOTIABLE INSTRUMENTS- a written contract for the

payment of money which is intended as a substitute for 2. Bill of Exchange
money and passes from one person to another, in such a a. Drawer – draws and signs the instrument;
manner, as to give the holder in due course the right to hold orders the drawee to pay
the instrument free from defenses available to prior parties. b. Drawee – person who is being ordered to pay;
he has to accept first before he becomes liable
HISTORY: c. Payee – one to whom payment should be made
1. Copied from the American Uniform NIL
January 10, 2004
2. Bills of Exchange Act of 1882
3. Law of Merchant Pay to the order of Jose 1000.00 on or before
4. Act 2031 January 15, 2004.
5. Code of Commerce Sgd,. Juan
To: Pedro

FUNCTIONS: 3. Other Parties

 Substitute for money a. Indorsers – transfers or negotiate an instrument
 Medium of exchange by indorsement completed by delivery
 Serves as a Credit instrument which increases credit b. Holder – payee or indorsee of a bill or note
circulation c. Bearer – person in possession of a bill or note
 Increases purchasing power in circulation which is payable to bearer
 Proof of transactions INCIDENTS:
1. Preparation and Signing
FEATURES: 2. Issuance – delivery
 Negotiability- ability to be transferred from one 3. Negotiation – transfer
person to another so as to constitute the transferee 4. Presentment for Acceptance
to be a holder, who can be a holder in due course, 5. Acceptance
which is free from personal defenses. 6. Dishonor by non-acceptance
 Accumulation of Secondary Contracts- accumulated 7. Presentment for Payment
because the indorsers become secondarily liable not 8. Dishonor by Payment
only to their immediate transferees but also to any 9. Notice of Dishonor
holder. 10. Protest
11. Discharge
KINDS:
 Promissory Note – unconditional promise made in NEGOTIABLE NON-NEGOTIABLE
writing by one person to another, signed by the LAW NI Analogy
maker, engaging to pay on demand or at a fixed or MODE OF Negotiation or Assignment Assignment
determinable future time, a sum certain in money to TRANSFER
order or to bearer. TRANSFEREE HIDC Not HIDC
EX: certificate of deposit, bonds and debenture
 Bill of Exchange – unconditional order in writting REPUBLIC ACT NO. 2031
addressed by one person to another, signed by the
person giving it, requiring the person to whom it is Sec. 1 – Requirements
addressed to pay on demand or at a fixed a. Must be in writing AND signed by the maker
determinable future time a sum of money to order b. Must contain an unconditional promise OR order to
or to bearer. pay a sum CERTAIN in money
EX: check c. Must be payable on demand, or at a fixed or
PARTIES: determinable future time OR
1. Promissory Note d. Must be payable to order or to bearer AND
a. Maker – one who promises to pay the stated e. Where the instrument is addressed to a drawee, he
amount in the PM must be named or otherwise indicated therein with
b. Payee – one who is supposed to be paid by the reasonable certainty
maker
CONDITION – future or contingent event, or a past event
January 10, 2004
unknown to the parties, the happening or non-happening of
I promise to pay Leona or order, the sum of 1000.00 on January 12, which will give rise to an obligation or extinguish such.
2004.
Sgd,. Juan
STIPULATIONS THAT MAKE A PROMISE OR ORDER
CONDITIONAL:
1. Indication of an account or fund out of which
payment shall be made
2. When payment is made to depend upon a
contingency
STIPULATIONS THAT MAKE A PROMISE OR ORDER
UNCONDITIONAL:
1. indication of a particular fund out of which
reimbursement is to be made
2. indication of a particular account to be debited with
the amount
3. statement of the transaction which gives rise to the
instrument
“Where the instrument is addressed to a drawer, he must be
named or otherwise indicated therein with reasonable
certainty”
 applies only to a Bill of Exchange
 REASON: it is indispensable that any person who will
take the BoE must know the person primarily
responsible under the instrument.
NOT NEGOTIABLE:
 Certificate of Stock
 Bill of Lading
 Warehouse Receipt
 Withdrawal Slip
 Postal Money Order
Sec. 2 -
What constitutes certainty as to sum
1.With interest OR
2.By stated installments OR
3.By stated installments, with a provision that upon
default in payment of any installment or of interest,
the whole shall become due OR
4. With exchange, whether at a fixed rate or at a
current rate OR
5. With costs of collection of money or an attorney’s
fee, in case the payment shall be made in maturity
INSTALLMENT PAYMENTS
 Dates of each installments must be fixed
 Amount to be paid for each installment must also be
stated
Sec. 3 – When promise is UNCONDITIONAL
a. Indication of a particular fund out of which
reimbursement is to be made or a particular account
to be debited with the amount
b. Statement of the transaction which gives rise to the
instrument
SUSPENSIVE – the happening or non-happening will give rise
to the obligation
RESOLUTORY – the happening or non-happening will
extinguish the obligation
NON-NEGOTIABLE
January 3, 2004
Pay to X or to order 1000.00 on or before January 5, 2006 subject to the
terms and conditions of the Contract of Sale executed by the parties.
Sgd. Mr Y
To: Mr. Z
NEGOTIABLE 3(B)
January 3, 2004
Pay to X or to order 1000.00 on or before January 5, 2006.
The bill is being executed by virtue of the Contract of Sale executed
by the parties.
Sgd. Mr Y
To: Mr. Z
3(a) “Pay to the order of Juan Dela Cruz P10,000 and
reimburse yourself from my account with you.” – negotiable
Sec. 4 – Determinable Future Time
a. At a fixed period after date OR sight
b. On or before a fixed or determinable future time
specified therein
c. On or at a fixed period after the occurrence of a
specified event which is certain to happen, though
the time of happening is uncertain
Sec. 5 – Factors not affecting negotiability
a. Authorizes the sale of collateral securities in case the
instrument be not paid at maturity OR
b. Authorizes a confession of judgment if the
instrument be not paid at maturity OR
c. Waives the benefit of any law intended for the
advantage or protection of the obligor OR
d. Gives the holder an election to require something to
be done in lieu of payment of money
Collateral “is secured by a real estate mortgage.”
Confession of Judgment – allows a person or attorney in
advance to appear in court and confess judgment
Waiver by Obligor – benefit of any law for his advantage or
protection “{Notice of Dishonor}”
Gives the Option to Holder – “Pay to the order of Mr. X, 3k
OR deliver 10 sacks of rice at his option on January 5, 2006.”
Sec. 6 – The validity & negotiability of an instrument is not
affected by the fact that:
a. It is not dated OR
b. Does not specify the value given or that any value
had been given therefore OR
c. Does not specify the place where it is drawn or the
place where it is payable OR
d. Bears a seal
e. Designates a particular kind of current money in
which payment is to be made
6(a) UNDATED
Presumption – dated as of the time when it was issued
EXCEPTIONS: (DATES ARE NECESSARY)
1. Instruments involved are payable at a fixed period
2. Where date is necessary to fix the maturity date
“I promise to pay to the order of X 1000 60 days from
the date.”
6(b)
Presumption – presence of value or consideration exist
though the payee does not indicate the drawing of the will
6(c) – Sec. 73 provides the rules on the proper places
Sec. 7 – When payable on Demand
a. When it is so expressed to be payable on demand OR
at sight OR on presentation OR
b. No time of payment is expressed
*Overdue = PAYABLE ON DEMAND
Sec. 8 – When payable to Order
a. Payee who is not a maker, drawer or drawee OR
b. Drawer or maker OR
c. Drawee OR
d. 2 or more payees jointly OR
e. 1 or more if several payees OR
f. Holder of an office for the time being
*Payee must be NAMED OR INDICATED WITH REASONABLE
CERTAINTY
Ways in w/c an instrument can be made payable to order
a. Payable to the order of a specified person – “pay to
the order of Mr. X”
b. To a specified person or his order – “ pay to Mr. X or
order.”
Sec. 9 – When payable to Bearer
a. Expressed to be so payable OR
b. When it is payable to a person named therein or
bearer OR
c. When it is payable to the order of a fictitious person
or non-existing person, and such fact was known to
the person making it so payable OR
d. When the name of the payee does not purport to be
the name of any person OR
e. When the only or last indorsement is an
indorsement in blank.
*A person in possession of an instrument that is payable to
the bearer is the HOLDER.
9(a) – “ I promise to pay to bearer on or before June 2, 2006
Php 10000 or promise” or “ I promise to pay Mr. Juan Dela
Cruz or bearer Php 10000 on or before June 2, 2004.”
9(c) – “Pay to the order of Darna 100”
*may be in fact a real person
*This may happen when the maker or drawer who made it
payable to a real person does not really intend to make it
payable to such person so designated as payee
*Drawee is absolved from liability and the drawer bears the
loss
*EXCEPTION- Commercial bad faith on the part of the
drawee, bank or transferee of a check
9(d) – applicable to instruments which are originally order
instruments, that is, instruments that are payable to order
from the time of the issuance.
*Blank Indorsement = effectively converts the order
instrument bearer instrument and may be negotiated by
mere delivery
Sec. 10 – Instruments need not need to follow the language
of this act.
Sec. 11 – Where the instrument or an acceptance or any
indorsement thereon is dated, such date is deemed prima
facie to the true date of the making, drawing, acceptance, or
indorsement, as the case may be.
Sec. 12 – The instrument is not invalid for the reason only
that it is ante-dated or post-dated, provided this is not done
for an illegal or fraudulent purpose. The person to whom an
instrument so dated is delivered acquires the title thereto as
of the date of delivery.
Post Dated = date appearing on the instrument is a date after
the true date.
Ante-Dated = earlier than true date
Sec. 13 – When date may be inserted -
 Where an instrument expressed to be payable at a fixed
period after date is issued undated, OR
 where the acceptance of an instrument payable at a
fixed period after sight is undated, any holder may
insert therein the true date or acceptance, and the
instrument shall be payable accordingly.
The insertion of a wrong date does not avoid the
instrument in the hands of a subsequent holder in due
course; but as to him, the date so inserted is to be regarded
as the true date.
Sec. 14 – Blanks; when may be filled (applicable to
incomplete but delivered instrument)
1. person in possession that is wanting a material
particular has a prima facie authority to complete it
by filling up the blanks strictly in accordance with the
authority given and within a reasonable time
o MATERIAL PARTICULAR - what may be missing;
includes the important details that affect the
tenor of the instrument or the rights of the
parties
 a) Date o Delivery is conclusive and unconditional as
b) Sum payable to the HIDC if he is in possession of a
c) Time and place of payment complete instrument
d) Member of relations of parties
e) Currency ART. 14 ART. 15 ART. 16
f) Place of payment where such was not Incomplete Incomplete but Complete
specified but undelivered but
2. If a person delivers a blank paper to another person delivered undelivered
containing his signature for the purpose of Presump- Authority to No presumption Delivered
converting it into a negotiable instrument, the tion fill up but has the prima if no longer
person to whom the instrument was delivered has facie authority to in the
the prima facie authority to fill it up for any amount fill up if: hands of
o REQUISITES 1. Delivered the maker
a) Delivery 2. Blank with or drawer
b) Blank paper with signature signatures
c) Delivered with the purpose of 3. Purpose to
converting it to a negotiable instrument convert it
3. If the holder, after it was filled up is a HIDC ,he may to NI
enforce the instrument as if it has been strictly filled Negotia- Yes Yes Yes
up in accordance with the authority given within a bility
reasonable time. HDC Yes as to the No, unjust May collect
written enrichment
Sec. 15 – Incomplete instrument not delivered amount to
o Not a valid contract if completed and negotiated be collected
without authority in the hands of any holder Liability of Yes, due to Yes, due to Yes, due to
o Not valid against any person whose signature Secondary warranty warranty warranty
was placed thereon Parties
Defense Personal Real Personal
Sec. 16 – Delivery NHIDC No, No Can’t
1. NI is complete and revocable until delivery of the instrument collect
instrument for the purpose of giving effect was not because
a) Delivery – transfer of possession of NI from filled up delivery is
one person to another with either for a
b) Issue – first delivery of the instrument from authority special or
the maker or drawer to the payee conditional
c) Negotiation – transfer from one person to purpose
another that constitutes the transferee the
holder of the instrument Sec. 17 – Construction if ambiguous
2. Delivery must be by or under the authority of the 1. Sum expressed in words and figures
party making, drawing, accepting or indorsing the o If there is discrepancy between the 2, the
instrument sum denoted by words is the sum payable
o Not authorized agents or representatives = 2. Instrument provides payment of interest without
INCOMPLETE INSTRUMENT specifying the date which interest is to run
3. Instrument is not in the hands of the drawer or maker o Interest runs from the date of the
PRESUMPTION = M or D has already delivered the instrument
instrument for purpose of issuing the same
March 11, 2014
4. Instrument is not in the hands of the Indorser
PRESUMPTION = I has indorsed already for purposes I promise to pay Mr. X or oder, the sum of P100 on January 5, 2015 with
of transferring title interest at 20% per annum
5. Parties are not HIDC (delivery of a complete
instrument = instrument is conditional or for a (Sgd) Mr. A
special purpose and not for the purpose of 3. No date = Date of issuance
transferring title 4. Conflict between Written and Printed Provision
6. Immediate and Remote Holders who are not HIDC = o Written provision prevails
no delivery at all of the complete instrument 5. Instrument is so ambiguous that there is doubt
7. HIDC = It cannot be established that there’s no whether it is a bill or note
delivery and that there is a conditional or special o Holder chooses what he prefers
purpose 6. Signature - Not clear if he’s capacitated = INDORSER
 7. There is a clause, “I promise to pay” that is signed by
2 or more person
o Jointly and severally liable
Sec. 18 – Liability of a person signing in a trade or assume
name
GR: No person is liable on the instrument whose signature
does not appear
EXC: expressly provided
*one who signs in a trade or assumed name will be liable to
the extent as if he signed in his own name
Sec. 19 – Signature of an agent
o Authority of an agent shall be established such as in
the case of agency
o No particular form of appointment
Sec. 20 – Liability of a person signing as agent
o Not liable if:
a) He is duly authorized
b) The words indicate that he signs on or for behalf
of the principal or in a representative by capacity
o Not exempted from personal liability if:
a) He did not disclose the principal AND
b) The words describe him as a filling representative
or agent
Sec. 21 – Signature by Procuration
o Operates as a notice that the agent has but a limited
authority to sign and the principal is bound only in
case the agent signed within the actual limits of his
authority
PERSONS LIABLE THOUGH HE DID NOT SIGN THE
INSTRUMENT IN HIS OWN NAME
1. One who signs in a trade or assumed name
2. One who signs through an agent or unauthorized
representative
3. Incapacitated persons who sign through their legal
representatives
4. Forgers
5. Persons whose signatures were forged but precluded from
setting up the defense of forgery
6. In cases of constructive acceptance
7. Indorsers who sign on a separate piece of paper known as
allonge and persons who sign by mere delivery
Sec. 22 – Effect of Indorsement by Infant or Corporation
o Passes the property therein, notwithstanding that
from want of capacity, the corporation or infant may
incur no liability thereon
a) MINOR
 passes the title to the instrument
 no liability
 the defense of minority is available only
to himself
b) CORPORATION
 may raise want of authority as real defense
 may claim that an act is ULTRA VIRES, acts
committed outside the object for which a
corporation is created, as defined by the
law of its organization and therefore
beyond the power conferred by law
 void and cannot be validated = ultra vires
Sec. 23 – Forged Signature
 forged signature or made without the authority of
the person whose signature it purports to be
 wholly inoperative AND
 no right to retain the instrument OR
 to give a discharge therefor OR
 to enforce payment against any party
 UNLESS: The party whom it sought to enforce such
right is precluded from setting up the defense of
forgery or want of authority
Persons whose signature was forged
- was never a party and never consented the contract
- forgery can’t be presumed, it must be established
- not liable
Rule on Joint payees/indorsers who are not partners
 Both must sign and indorse UNLESS the one
indorsing has authority to indorse to others
CUT-OFF RULE
 The parties, prior to the forged signature are cut off
from the parties after the forgery in the sense that
prior parties can’t be held liable and can raise the
defense of forgery
 Forged instrument = NEGOTIABLE
Persons precluded from setting up forgery
1. Persons who warrant or admit the genuineness of
signature in question AND
2. Those who, by their act, silence or negligence are
stopped from setting up the defense of forgery
Drawer/Maker’s signature was forged
 M/D is not liable
 No right to enforce payment against the
maker/drawer is obtained by any holder
INDORSERS (after forgery) = secondarily liable to maker
PARTIES (after forgery) = Holder can enforce payment
REASON: they warranted that the instrument is genuine
FORGER = principal debtor, becomes maker
INDORSEMENT SIGNATURE WAS FORGED
A. Order
- Can’t be enforced against the maker and
payee
- Payee’s forged signature = inoperative and
no right to enforce payment
- Parties after forgery = secondarily liable
B. Bearer
- Signature of payee or holder is
UNNECESSARY to pass title to the
instrument
- Maker is still liable to a holder in due
course even if an indorsement was forged
after the issuance of the note
 PART II: CONSIDERATION

Sec. 24 – Presumption of Consideration HOLDERS IN DUE COURSE

o Every negotiable instrument is deemed prima facie 1. Complete and regular upon its face
to have been issued for a valuable consideration and 2. H before it overdue and dishonored
every person whose signature appears thereon to 3. GF and for value
have become a party thereto for value 4. No defect

Sec. 25 – Value Sec. 28 – Effect of want of consideration

o Any consideration sufficient to support a simple o Absence or failure of consideration is a matter of
contract defense as against any person not a holder in due
o An antecedent or pre-existing debt course and partial failure of consideration is a
o Payable on demand or at a future time defense pro tanto.

VALUABLE CONSIDERATION Sec. 29 – Liability of accommodation party

o Rights, interests, profit or benefit accruing to the
party who makes the contract
o Discounting = instrument is negotiated; deducts a
percentage from the principal amount
o Lien
NO VALUABLE CONSIDERATION
o Donation and Gift
REASON: based on love and affection only
Sec. 26 – What constitutes holder for value
o Where value has at any time been given for the
instrument, the holder is deemed a holder for value
in respect to all parties who became such prior to
that time.
Sec. 27 – When lien on instrument constitutes holder for value
o Where the holder has a lien on the instrument
arising either from contract or by implication of law,
he is deemed a holder for value to the extent of his
lien.
REQUISITES OF AN A.P
1. He must be a party to the instrument, signing as
maker, drawer, acceptor, or indorser
2. He must not receive value therefor AND
3. he must sign for the purpose of lending his name or
credit to some other person
LIABILITY
“Such person is liable on the instrument to a holder for
value, notwithstanding such holder, at the time of taking
the instrument knew him to be only an accommodation
party”
 liable according to the face of the undertaking as
if he were financially interested in the
instrument
 By lending his name, an accommodated party is
in effect a surety of the accommodated party
Purpose: to enable the accommodated party to
obtain credit or raise money
 Not applicable to corporations

 A transferee who did not give a valuable

consideration may not be considered a holder in due
course.

PART III: NEGOTIATION

Negotiation – transfer of the instrument from one of transferee holder in due course a mere assignee
person to another so as to constitute the transferee the As to the The transferee can The transferee
holder thereof possibility of be a holder in due can never be a
 NEGOTIABLE = can be transferred through becoming a HIDC course in proper holder in due
negotiation and assignment cases course
As to the rights The transferee- The transferee
 NON-NEGOTIABLE = can be transferred through
acquired holder may acquire can’t acquire
an assignment more rights than the more rights than
Negotiation Assignment transferor if he is a the transferor
Applicable law Act 2031 NCC HIDC because he
As to type of Negotiable Contracts in merely steps in
transaction/instr instruments only general or the shoes of the
ument assignable rights transferor
As to the nature The transferee is a The transferee is
Sec. 30 – What constitutes negotiation
o An instrument is negotiated when it is transferred from
one person to another in such manner as to constitute the
transferee the holder thereof.
o If payable to bearer = negotiated by delivery
o If payable to order = negotiated by the indorsement of the
holder completed by delivery
Sec. 31 – Indorsement; how made
o Must be written on the instrument itself or a paper
attached to it
o The signature of the indorser, without additional
words, is a sufficient indorsement
Sec. 32 – Indorsement must be of entire instrument
o An indorsement which purports to transfer to the
indorsee a part only of the amount payable or which
purports to transfer to the instrument to 2 or more
indorsees severally, does not operate as a
negotiation of instrument
o When the instrument has been paid in part, it may
be indorsed as to the residue
o Disallows negotiation of 2 or more persons severally
EX: “Pay to Jose, 15k and pedro, 5k” (assignment)
Sec. 33 – An indorsement may be either special or in blank;
and it may also be either restrictive or qualified or
conditional.
Sec. 34 – Special Indorsement; Indorsement in blank
o Special - specifies the person to whom, or to whose
order, the instrument is to be payable, and the
indorsement of such indorsee is necessary to the
further negotiation of the instrument
“Pay to Juan, Sgd. Pedro”
o Blank – specifies no indorsee, and an instrument so
indorsed is payable to bearer, and may be
negotiated by delivery
Sec. 35 – Blank indorsement; how changed to special
indorsement
o By writing over the signature of the indorser in blank
any contract consistent with the character of the
instrument
Sec. 36 – Restrictive Indorsement
a. Prohibits the further negotiation of instrument OR
b. Constitutes the indorsee the agent of he indorser OR
c. Vest the title in the indorsee in trust for or to the use
of some other person
“Pay to C only. Sgd. K”
Sec. 37 – Effects of Restrictive Indorsement
o Confers upon the indorsee he right to:
1) Receive payment of the instrument
2) Bring any action that the indorser could
bring
3) Transfer his rights as such indorsee, where
the form of the indorsement authorized
him to do so
4) BUT, all subsequent indorsee acquire only
the title of the first indorsee under the
restrictive indorsement.
Sec. 38 – Qualified Indorsement
o Constitutes the indorser a mere assignor of the title
to the instrument
o May be made by adding to the indorser’s signature
the words “without recourse” or any words of
similar import
o Such indorsement does not impair the negotiability
of an instrument
o Indorser disclaims his liability to any holder or any
subsequent party who might be compelled to pay
by another; liable only for breach of warranties
Sec. 39 – Conditional Indorsement
o The party required to pay the instrument may
disregard the condition and make payment to the
indorsee or his transferee whether the condition has
been fulfilled or not.
o BUT any person to whom an instrument is indorsed
is negotiated will hold the same, or the proceeds
thereof, subject to the rights of the person indorsing
conditionally
Sec. 40 – Indorsement of instrument payable to order
o if indorsed specially – it may nevertheledd be further
negotiated by delivery
o BUT any person indorsing specially is liable as
indorser to only such holders as to make title
through his indorsement
Sec. 41– Indorsement where payable to 2 or more persons
o When not partners = all must indorse
o UNLESS = one indorsing has authority to indorse for
the others
Sec. 42 – Effect of instrument drawn or indorsed to a person
as cashier
o Cashier/fiscal officer of a bank or corporation =
prima facie to be payable to the bank or corporation
of which he is an officer, and may be negotiated
either by the indorsement of the bank or
corporation of the officer
Sec. 43 – Indorsement where name is misspelled and so
forth
o Payee or indorsee may indorse the instrument as
therein described adding, if he thinks fit, his proper
signature
Sec. 44 – Indorsement in representative capacity
o Where any person is under obligation to indorse in a
representative capacity, he may indorse in such
terms as to negative personal liability

Sec. 45 – Time of Indorsement; Presumption

GR: Every negotiation is deemed prima facie to have been
effected before the instrument was overdue
EXC: an indorsement bears the date after the maturity of the
instrument

Sec. 46 – Place of Indorsement; Presumption

GR: Every indorsement is deemed prima facie to have been
made at the place where the instrument is dated
EXC: contrary appears

Sec. 47 – Continuation of negotiable character

o An instrument ontinues to be negotiable until it has
been restrictively indorsed or discharged by
payment

Sec. 48 – Striking out indorsement

o The holder may, at any time strike out an
indorsement which is not necessary to his title
o The indorser whose indorsement is struck out, and
all indorsers subsequent to him, are thereby relieved
from liability on the instrument

Sec. 49 – Transfer without indorsement; effect of

o Transfer without indorsement (ORDER) = The
transfer vests in the transferee such title as the
transferor had therein, and the transferee, acquires,
in addition, the right to have the indorsement of the
transferor
o BUT for the purpose of determining whether the
transferee is a holder in due course, the negotiation
takes effect as of the time when he indorsement is
actually made

Incomplete negotiation = equitable assignment and the

transferee acquires the instrument subject to defenses and
equities available among parties

Sec. 50 – When prior party may negotiate instrument

o When an instrument is negotiated back to prior
party, such party may, subject to the provisions of
this act, reissue and further negotiate the same.
o BUT, he is not entitled to enforce payment against
any intervening party to who he was personally
liable