Negotiable Instruments Law
Atty. Rommel Mercado
Sec. 119. Instrument; how discharged. - A negotiable instrument
is discharged:
(a) By payment in due course by or on behalf of the principal
debtor;
(b) By payment in due course by the party accommodated, where
the instrument is made or accepted for his accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract for the
payment of money;
(e) When the principal debtor becomes the holder of the
instrument at or after maturity in his own right.
Meaning and effect of Discharge of Instrument: a release of ALL parties
from the obligations arising thereunder; renders the instrument ineffectual
and, consequently, it can no longer be negotiated
Concept of Discharge: refers to both the instrument and to the parties to
it; the NIL provides for specified methods for the discharge of the instrument,
which necessarily includes the discharge of the persons primarily liable, and
for the discharge of those secondarily liable
Methods for discharge of Instrument:
- There is no express provision for the relies of those primarily liable
because they are ABSOLUTELY bound to pay in the first instance and can
only be relieved only by a discharge of the instrument itself;
- The list of Sec. 199 is exclusive
1. Payment by principal debtor
- When there are several person liable for an instrument, if it is
satisfied by someone who primarily liable, there will be a complete
discharge
- The following requisites must concur: (a) It must be made by or on
behalf of the principal debtor; (b) at or after its maturity; (c) to the
holder thereof; (d) in good faith and without notice that the holder’s
title is defective
- Principal debtor is the person ultimately bound to pay the debt
2. Payment by accommodated party – the accommodated part is the
real debtor; his payment is actually the payment by the principal
debtor, whether he appears as a party to the instrument or not
3. Intentional cancellation of instrument by holder:
- The following must concur: (1) it is intention; (2) made by the
holder.
- It may be done thru writing the words cancelled or paid on the face
of the instrument, when the instrument is torn up, burned,
mutilated, or destroyed.
- Cancellation is presumed to be intentional
4. Any act which discharges a contract:
- Generally, payment of money would suffice;
- The Art. 1232 of the Civil Code also provides a list; however, shall
only operate to discharge the instrument as between the
immediate parties and not int hands of a holder in due course:
 By payment or performance;
 By the loss of the thing due;
 By the condonation or remission of the debts;
 By the confusion or merger of the rights of creditor and debtor;
 By compensation;
 By novation.
- Other include the annulment, rescission, fulfillment of a resolutory
condition, and prescription
5. Reacquisition by principal debtor in his own right
- The following must concur: (a) By the principal debtor; (b) in his
own right; (c) at or after date of maturity
- There is a merger of creditor and debtor
- In his own right does not mean in his representative capacity
Sec. 120. When persons secondarily liable on the instrument are
discharged. - A person secondarily liable on the instrument is
discharged:
(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.
Methods of Discharge of Secondary Parties
1. Any act which discharges the instrument:
- If any of those circumstances enumerated in Sec. 119 took place, the
instrument ceases to have force and effect and ALL parties are
discharged;
- The discharge of a party secondarily liable does not discharge the
instrument itself
2. Intentional cancellation of signature
- Striking out the signature of a party secondarily liable means
discharging such person from his liability as if he never became a party
thereto
- The indorsement must not be necessary to the holder’s title
3. Discharge of prior party by act of holder
- The discharge of a party as by intentional cancellation of his signature
also operates as a discharge of parties subsequent to the party
discharged.
- the discharge deprives a subsequent party of a right of recourse
against the party discharged by the holder
- includes prior indorsers and principal debtors
- applies only to discharge by the act of the holder and not to discharges
by operation of law (ex. Bankruptcy, statute of limitations or failure to
give notice of dishonor)
4. Valid tender of payment
- Tender of payment: one produces and offers a person holding a claims
or demand against him the amount of money which he considers and
admits to eb due, in satisfaction of such claim or demand without any
stipulation or condition
- If accepted, it would discharge such party and all parties subsequent
to him
- Refusal to accept tender only stops the running of interest and relieves
the party making tender from subsequent liability for costs and
attorney’s fees in case of litigation
5. Release of principal debtor by act of holder
- The release of the principal debtor discharges the instrument and all
the secondary parties
- GR: If the principal debtor is released, subsequent parties lose their
right of recourse against him.
- XPN: if the holder EXPRESSLY reserved his right of recourse against
the said subsequent parties, then NOBODY is discharged because it is
an implied reservation by the subsequent parties of their right of
recourse against the principal debtor
- The release must be by the act of the holder and not by operation of
law
6. Extension of time of payment
- “Agreement binding on the holder” = agreement binding on the holder
made with the principal debtor
- Must be supported by a valuable consideration and for a definite period
- Consistent with the rule that an extension granted to the debtor by the
creditor without the consent of the guarantor extinguishes the
guaranty.
- There is no discharge of parties secondarily in the following cases: (a)
the extension is consented to by such party; (b) the holder expressly
reserves the right of recourse against such party
Sec. 121. Right of party who discharges instrument. - Where the
instrument is paid by a party secondarily liable thereon, it is not
discharged; but the party so paying it is remitted to his former
rights as regard all prior parties, and he may strike out his own and
all subsequent indorsements and against negotiate the instrument,
except:
(a) Where it is payable to the order of a third person and has been
paid by the drawer; and
(b) Where it was made or accepted for accommodation and has
been paid by the party accommodated.
Effect of Reacquisition by prior party:
- Payment at or after maturity by a party secondarily liable does not
discharge the instrument but only cancels his own liability and that of
parties subsequent to him.
- For prior parties, the re-acquirer is remitted to his former position and
may strike out his own and all subsequent indorsements, as they are not
necessary for his title
Negotiation by Prior Party:
- The first clause provides that the instrument is not discharged AND it
may again be negotiated
- The exception only applies to the right to negotiate
- If it would apply to instruments that are not discharged, it would deny
the drawer who pays a bill of the right to recover from the acceptor
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 Negotiable Instruments Law
Atty. Rommel Mercado
Sec. 122. Renunciation by holder. - The holder may expressly
renounce his rights against any party to the instrument before, at,
or after its maturity. An absolute and unconditional renunciation of
his rights against the principal debtor made at or after the maturity
of the instrument discharges the instrument. But a renunciation
does not affect the rights of a holder in due course without notice.
A renunciation must be in writing unless the instrument is delivered
up to the person primarily liable thereon.
Meaning of renunciation:
- the act of surrendering a right or claim with or without recompense;
- Generally, Sec. 122 only applies to renunciation by a unilateral act of the
holder i.e. a release without consideration
- Sec. 119(e) covers a case of oral renunciation supported by a
consideration; if there is no consideration, the renunciation is ineffective
How renunciation by holder is made:
- must be made by a written declaration
- If oral, it should be accompanied by a surrender of the instrument to
the person primarily liable thereon
- mere expression of an intention or desire to renounce is not enough.
- The renunciation must be EXPRESS
Effect of Renunciation:
- If made in favor of a secondary party, it must be made by the holder,
before, at, or after maturity of the instrument; it only discharges such
secondary party and all parties subsequent to him
- If made in favor of the principal debtor, it must be made at or after
maturity; it discharges the instrument and all parties thereto, provided it
is made ABSOLUTELY and UNCONDITIONALLY
- Renunciation is only a PERSONAL DEFENSE and does not affect the rights
of a holder in due course
Sec. 123. Cancellation; unintentional; burden of proof. - A
cancellation made unintentionally or under a mistake or without the
authority of the holder, is inoperative but where an instrument or
any signature thereon appears to have been cancelled, the burden
of proof lies on the party who alleges that the cancellation was made
unintentionally or under a mistake or without authority.
When cancellation inoperative: If made (1) unintentionally; (2) by
mistake or thru fraud; (3) without authority
payment within a reasonable payment within a reasonable
time from its last negotiation time from its issue
When a promissory note is like a bill of exchange: If a note is indorsed
by the payee
When bill of exchange is like a promissory note: if the bill of exchange
has been accepted;
Other classes of bills of exchange: drafts, orders, and checks
1. Foreign bill of exchange – a bill drawn in one state and payable in another
state; if drawn and payable within the same state, it is called an inland
bill of exchange
2. Draft: it is called a demand or sight draft if a bill if exchange payable on
demand at sight, when the holder presents it for payment; If payable at
a stated time after sight or a definite future time or some future
determinable time, it is called a time draft.
- If drawn by a bank against its branch or another bank, it is called a
bank draft;
- A draft drawn and payable in one country is a domestic draft. If drawn
in one country and payable in another, it is an international draft
- Drawee-bank acting as a "payor" bank is solely liable for acts done not
in accordance with the instructions of the drawer-bank or of the
purchaser of the draft.
- It has the burden of proving that it did not violate the instructions given
to it.
- Drawer, if sued by purchaser, must debit the customer’s account
despite instruction of non-payment; must prove that that he informed
the drawee
- Draft is always drawn on a bank; a check is drawn on bank AND
payable in demand;
- Bank draft is more acceptable as medium of payment because of the
bank’s superior credit and resources
3. Trade Acceptance: a draft or bill of exchange drawn by the seller on the
purchaser of goods and accepted by the latter by signing it as drawee.
- Has a definite maturity date and is ordinarily used in the purchase and
sale of goods
- Seller is both the drawer and the payee
- To enable the seller to raise money on the paper even before the
obligation of the purchaser is due or matures thru endorsement and
discount
- If the instrument is drawn against a bank instead of the purchaser, it
is called banker's acceptance; the bank is lending its credit to the buyer
(not a loan) and is more acceptable as a credit instrument

Presumption: Cancellation is intentional; the holder has the burden to prove

its ineffectiveness Sec. 127. Bill not an assignment of funds in hands of drawee. - A
bill of itself does not operate as an assignment of the funds in the
Examples of Cancellation: (1) writing the words cancelled or paid; (2)
drawing crisscross lines across the instruments; (3) tearing, erasure,
hands of the drawee available for the payment thereof, and the
obliteration, or burning drawee is not liable on the bill unless and until he accepts the same.
Status of Drawee prior to acceptance or payment and after payment:
1. Drawee a mere stranger to the bill - he is a stranger to the bill drawn on
Sec. 126. Bill of exchange, defined. - A bill of exchange is an him unless and until he accepts the same; if he does, he becomes the
unconditional order in writing addressed by one person to another, principal debtor
signed by the person giving it, requiring the person to whom it is 2. Drawee not bound to accept
addressed to pay on demand or at a fixed or determinable future - Before acceptance, the bill is merely an order to the drawee to pay
time a sum certain in money to order or to bearer. - Drawee is not bound to accept; he shall only become liable if he accepts
the same
Bill of Exchange Promissory Note - It must be presented within reasonable time after their issuance or last
Unconditional order unconditional promise made negotiation, otherwise, the drawer is discharge from liability or to the
addressed by one person to by one person to another to extent of the loss cause by such delay
another requiring the latter to pay it 3. Drawee not liable to holder in due course
pay the instrument - mere issuance of a bill does not operate as an assignment of the funds
in the hands of the drawee
Three parties: drawer, Two parties: maker, payee or - HIDC has no cause of action against drawee, but only against drawer
drawee, and the payee or bearer and indorsers
bearer - The drawee who refuses to accept may be liable to drawer
Drawer, the one who issues Maker, the one who issues 4. Effect of payment
the instrument, is only the instrument, is primarily - no contractual relation created between a drawee-bank and the payee
secondarily liable liable - If dishonored, the payee cannot sue the drawee-bank but only the
drawer for lack of privity.
If drawn payable to the A note is complete if drawn
drawer's own order, it is payable to the maker's own
complete without order and is indorsed by him Sec. 128. Bill addressed to more than one drawee. - A bill may be
indorsement, provided, it has addressed to two or more drawees jointly, whether they are
been accepted by the drawee partners or not; but not to two or more drawees in the alternative
Must be presented for no need of presentment for or in succession.
acceptance in certain cases; acceptance Bills addressed to several drawees:
drawee shall not be liable
unless he accepts 1. If addressed to two or more drawee, it is allowed (ex. To A and B)
2. If addressed to two or more drawees in the alternative, it is not allowed
If payable on demand, it If payable on demand, it (ex. To A or B)
must be presented for must be presented for 3. If addressed to two or more drawees in succession, it is not allowed (ex.
To A, and in his absence, to B)
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 Negotiable Instruments Law
Atty. Rommel Mercado
Sec. 129. Inland and foreign bills of exchange. - An inland bill of
exchange is a bill which is, or on its face purports to be, both drawn
and payable within the Philippines. Any other bill is a foreign bill.
Unless the contrary appears on the face of the bill, the holder may
treat it as an inland bill.
- Classifies bill accdg to where they are drawn and paid
Inland bill- bill drawn and payable in the Philippines
Foreign bill- not drawn and payable in the PH
Importance of the distinction:
1. A foreign bill must be protested in case of dishonor to
charge the drawer and indorser under Sec 118 (notice of
dishonor- when protest is needed) and Sec 158 (cases
when protest necessary). On the other hand, protest is not
needed in an inland bill.
2. To determine the applicable law that will govern the
validity, interpretation and effect of the bill
A foreign bill may be treated as an inland bill unless the contrary
appears on its face. (i.e. the bill does not show that it was drawn in
another country)
Sec. 130. When bill may be treated as promissory note. - Where
in a bill the drawer and drawee are the same person or where the
drawee is a fictitious person or a person not having capacity to
contract, the holder may treat the instrument at his option either
as a bill of exchange or as a promissory note.
Ex: Drawee and drawer are the same person in cases when a draft
drawn by a bank on its branch, or by a corporation on its treasurer
or by an agent on his principal by authority of the latter.
Reasons:
1. the drawer is practically ordering himself to pay. Treating
the bill as a note would make the drawer the maker and
would make his liability primary.
2. Where the drawee is a fictitious person- nobody could
accept the bill
3. No capacity to contract- acceptance would not be valid
In all these cases, the holder does not need to prove presentment
for payment or have the acceptance of the drawee or give notice of
dishonor to charge the drawer. Even if the holder treats the bill as
such, notice of dishonor is not required to make the drawer liable.
Sec. 131. Referee in case of need. - The drawer of a bill and any
indorser may insert thereon the name of a person to whom the
holder may resort in case of need; that is to say, in case the bill is
dishonored by non-acceptance or non-payment. Such person is
called a referee in case of need. It is in the option of the holder to
resort to the referee in case of need or not as he may see fit.
Referee- person named by the drawer or indorser as the one to
whom the holder may resort in case of need (dishonor by non-
acceptance or non-payment)
- Not required that the holder apply to referee in case of
dishonor. On the other hand, referee is not bound to pay
the holder but he may be made liable to the party who
named him
X. ACCEPTANCE
Sec. 132. Acceptance; how made, by and so forth. - The
acceptance of a bill is the signification by the drawee of his assent
to the order of the drawer. The acceptance must be in writing and
signed by the drawee. It must not express that the drawee will
perform his promise by any other means than the payment of
money.
Acceptance of bill- the signification by the drawee of his assent
to the order of the drawer. Also defined as the act by which the
drawee manifests his consent to comply with the request contained
in the bill of exchange directed to him and it contemplates an
engagement or promise to pay.
- No acceptance unless completed by delivery or notification
- Only applies to bills of exchange
- May be actual or constructive
Object and effect of acceptance
1. Until acceptance, drawee is not liable on the bill.
Payee/holder has no recourse against him. The object of
acceptance is to bind the drawee and make him an actual
party liable to the instrument.
2. By acceptance, the drawee admits to everything essential
to its validity. Thus, want or failure of consideration cannot
be shown in a suit by the payee against the acceptor.The
presumption is that every BOE is drawn due to some
indebtedness from the drawee to the drawer, and that the
acceptance is an appropriation of the funds of the drawer
to the drawee. It is not unjust as it is the duty of the
drawee prior to acceptance, to know if he owes the drawer
something which is exclusively within his knowledge but
which the oayee would have no means of knowing.
3. The drawer is the principal debtor until the bill has been
accepted. Upon acceptance, the bill becomes a note. The
drawee assumes the liability of the maker and the drawer,
that of the first indorser.
The nature of acceptance is important only to determine the
liabilities of the parties involved.
Formal requisites of acceptance:
1. Must be in writing- because sound public policy requires
some substantial and tangible evidence of the contract and
more reliable in its nature than the statement of
recollection of witnesses. However, this does not apply to
constructive acceptance and a foreign bill unless their law
requires written acceptance.
2. Signed by the drawee- the drawee is not liable if it is not
signed by him. Signature is sufficient acceptance.
3. Express promise to pay money- acceptance must always
express a promise to pay money only.
4. Delivered to the holder- acceptance is incomplete until the
acceptor has delivered the bill back to the holder. Before
delivery, the acceptor may revoke or cancel his
acceptance.
Acceptance is made by writing across the face of the bill the word
“accepted” under which the drawee signs his name with the date.
Any equivalent word to constitute acceptance or the signature of
the drawee without more is valid as acceptance. What is important
is that an intention to accept may be inferred from the words used.
Sec. 133. Holder entitled to acceptance on face of bill. - The holder
of a bill presenting the same for acceptance may require that the
acceptance be written on the bill, and, if such request is refused,
may treat the bill as dishonored.
Acceptance may be on the bill itself or on a separate document such
as in a letter or telegram. Acceptance on a separate paper may be
on a present or future bill. But, in a constructive acceptance, there
is no actual written acceptance by the drawee.
Right of holder to acceptance on the bill- even if it is not
essential that the acceptance be on the bill itself, a holder may
compel the drawee to make the acceptance on the bill. If drawee
refuses, the holder may consider the bill to be dishonored and go
after the parties who are secondarily liable on the instrument after
giving notice of dishonor. Although a bill payable at a fixed time
need not be presented for acceptance to charge the drawer or
indorser, it may be presented for acceptance at any time.
Sec. 134. Acceptance by separate instrument. - Where an
acceptance is written on a paper other than the bill itself, it does
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 Negotiable Instruments Law
Atty. Rommel Mercado
not bind the acceptor except in favor of a person to whom it is
shown and who, on the faith thereof, receives the bill for value.
Requisites for the acceptance to be binding when made on a
separate paper:
1. The acceptance must be shown to the person to whom the
instrument is negotiated.
2. Such person must take the bill for value on the faith of
such acceptance
For future/non existing bill: no need for exhibition, enough that the
holder knows of the acceptance and relies upon it, the acceptor
must be held to his acceptance even if it was not actually shown to
the holder.
Acceptance by telegram:
- The words must indicate a promise to pay and not merely
informative
- The word “good” if written on the instrument constitutes
acceptance but not if written on a separate instrument
Sec. 138. Acceptance of incomplete bill. - A bill may be accepted
before it has been signed by the drawer, or while otherwise
incomplete, or when it is overdue, or after it has been dishonored
by a previous refusal to accept, or by non payment. But when a bill
payable after sight is dishonored by non-acceptance and the drawee
subsequently accepts it, the holder, in the absence of any different
agreement, is entitled to have the bill accepted as of the date of the
first presentment.
- Acceptance may be made even before the bill has been
signed by the drawer or otherwise incomplete, even after
it is overdue and even after it has been dishonored by non-
acceptance or non-payment
Incomplete bill- though it is allowed, the person to whom it is
transferred cannot be a holder in due course
Overdue bill has been dishonored- a bill does not lose its
negotiability by the fact that it is overdue or has been
dishonored. A bill may still be accepted within 24 hours or after
there has been refusal to pay. This section refers only to a bill
that has not been dishonored.

Sec. 135. Promise to accept; when equivalent to acceptance. -

An unconditional promise in writing to accept a bill before it is drawn
is deemed an actual acceptance in favor of every person who, upon
the faith thereof, receives the bill for value.
The promise to accept a future non-existing bill must be
unconditional and in writing. As to the issue on whether or not a
description of the bill is essential for the acceptance, a description
is preferred so that there can be no doubt on the application of the
acceptance.

Sec. 136. Time allowed drawee to accept. - The drawee is allowed

twenty-four hours after presentment in which to decide whether or
not he will accept the bill; the acceptance, if given, dates as of the
day of presentation.
- The law allows the drawee time to accept because upon
acceptance he becomes liable as an acceptor
- the drawee has 24 hours from presentment for acceptance
within which to act upon the bill. Upon his acceptance, the
date of acceptance will be the date that the instrument was
presented to him

Sec. 137. Liability of drawee returning or destroying bill. - Where

a drawee to whom a bill is delivered for acceptance destroys the
same, or refuses within twenty-four hours after such delivery or
within such other period as the holder may allow, to return the bill
accepted or non-accepted to the holder, he will be deemed to have
accepted the same.

There is constructive acceptance when:

1. the drawee whom a bill is delivered for acceptance
destroys it
2. the drawee refuses to return the bill within 24 hours after
delivery or within such period as given to him whether it
be accepted or non-accepted
Effect of retention of bill:
1. Mere retention without refusal to return the bill- if for more
than 24 hours, it constitutes constructive acceptance
under Sec 137. This is because 24 hours is considered to
be sufficient time. The manifest purpose in requiring the
prompt return of the bill is for the protection of the holder.
It is immaterial to the drawer when the bill is returned as
he is protected by notice of dishonor. Demand and refusal
are not required to consider that the instrument is
accepted because the moment the instrument was
presented it is already a demand for its acceptance and if
the bill is retained by the drawee, it implies a demand for
its return if acceptance is declined.

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