Negotiable Instruments Law Reviewer Prepared by: Hanniyah Sevilla 2008
Patterned from
Patterned from
Uniform Negotiable Act of the
ACT 2031, Negotiable Instruments Law
(Took effect on (6/12/1911)
FUNCTIONS AND IMPORTANCE
It is a substitute for money but NOT legal tender;
But in case the N/I is accepted, read with Art. 1249 CC
It is a medium of exchange for most commercial
transactions – you can use checks to pay your grocery, or
salaries for you employees.
It is a medium of credit transactions - meaning the
instrument itself can be proof of indebtedness.
It is a receipt or proof of payment; Or it is a receipt or
evidence from the drawee of the cancellation of the
check due to payment. – proof of the debtor that he
has paid, example, the check is given back to the
drawer for recording because it is already encashed.
Debtor can use is if creditor sues him for nonpayment.
It enhances security - If you lose your check, you
can call the drawer bank and it will no longer be
encashed.
It is a specie of personal property-Therefore it can
be owned, transacted with by itself like any other
property.
Development Bank of Rizal vs. Sima Wei (1993)
A negotiable instrument, of which a check is, is not
only a written evidence of a contract right but is also a
species of property. Just as a deed to a piece of land
must be delivered in order to convey title to the
grantee, so must a negotiable instrument be delivered
to the payee in order to evidence its existence as a
binding contract.
1
PAPA VS. A.U. VALENCIA AND CO
English Bills of Exchange
Act It is an undisputed fact that respondents had given petitioner the
US While N/I is a substitute for money, amounts of (P5,000.00) in cash on 24 May 1973, and
meaning it functions like money, it is NOT (P40,000.00) in check on 15 June 1973, in payment of the
legal tender and the debtor cannot insist purchase price of the subject lot. After more than ten (10) years
that the creditor accept so as to discharge from the payment in part by cash and in part by check, the
LEGAL TENDER: Payment that, by law, cannot be refused him from his debt. presumption is that the check had been encashed. As already
in the settlement of a legitimate debt; One which the stated, he even waived the presentation of oral evidence.
debtor can force the creditor to accept as payment. BUT if the creditor accepts the N/I, the
question is when does the N/I produce Granting that petitioner had never encashed the check, his failure
SECTION 52 of RA 7653. Legal Tender Power. — All effect of payment? In relation to Art. 1249 to do so for more than ten (10) years undoubtedly resulted in the
notes and coins issued by the Bangko Sentral shall be fully of the Civil Code, it is not from the tender impairment of the check through his unreasonable and
guaranteed by the Government of the Republic of the but: unexplained delay.
Philippines and shall be legal tender in the Philippines for
all debts, both public and private: Provided, however, “The delivery of promissory notes payable While it is true that the delivery of a check produces the effect of
That, unless otherwise fixed by the Monetary Board, coins to order, or bills of exchange or other payment only when it is cashed, pursuant to Art. 1249 of the Civil
shall be legal tender in amounts not exceeding (P50.00) mercantile documents shall produce the Code, the rule is otherwise if the debtor is prejudiced by the
for denominations of 25 centavos and above, and in effect of payment only when they have creditor's unreasonable delay in presentment. The acceptance of a
amounts not exceeding (P20.00) for denominations of 10 been cashed, or when through the fault of check implies an undertaking of due diligence in presenting it for
centavos or less. the creditor they have been impaired. payment, and if he from whom it is received sustains loss by want
of such diligence, it will be held to operate as actual payment of
the debt or obligation for which it was given. It has, likewise, been
held that if no presentment is made at all, the drawer cannot be
Ppl vs. Tongko (1998) -A was convicted for estafa under Art. 315(d). He contends that the penalty of 27 held liable irrespective of loss or injury unless presentment is
years is a violation of Sec 19(1) Art III of the Consti. otherwise excused. This is in harmony with Article 1249 of the
Civil Code under which payment by way of check or other
The legislature was not thoughtless in imposing severe penalties for violation of par. 2(d) of Article 315 of negotiable instrument is conditioned on its being cashed, except
the Revised Penal Code. The history of the law will show that the severe penalties were intended to stop the when through the fault of the creditor, the instrument is impaired.
upsurge of swindling by issuance of bouncing checks. It was felt that unless aborted, this kind of estafa" . . . The payee of a check would be a creditor under this provision and
would erode the people's confidence in the use of negotiable instruments as a medium of commercial if its non-payment is caused by his negligence, payment will be
transaction and consequently result in the retardation of trade and commerce and the undermining of the deemed effected and the obligation for which the check was given
banking system of the country." as conditional payment will be discharged.
Pacheco vs. CA (1999) (As to first issue only; see page 4)
Sps. X obtained a loan from Sps Y. Sps Y asked Sps X to issue an undated check with the agreement that the same will not be encashed but would only constitute as evidence of
indebtedness. However, due to nonpayment of the debt, Sps. Y encashed the check and sued Sps. X for estafa
Held: A check has the character of negotiability and at the same time it constitutes an evidence of indebtedness. By mutual agreement of the parties, the negotiable character of a check
may be waived and the instrument may be treated simply as proof of an obligation. There cannot be deceit on the part of the obligor because they agreed with the obligee at the time of
the issuance and postdating of the checks that the same shall not be encashed or presented to the banks. As per assurance of the lender, the checks are nothing but evidence of the loan
or security thereof in lieu of and for the same purpose as a promissory note. By their own covenant, therefore, the checks became mere evidence of indebtedness. It has been ruled that
a drawer who issues a check as security or evidence of investment is not liable for estafa.
Citibank vs. Sabeniano (2007)
A has several accounts with different branches of CitiBank. She also has a loan with Citibank Mla. When A was unable to pay her loan with Citibank Mla, the latter off-setted her debt with
her accounts with Citibank Mla as well as her dollar account with CitiBank-Geneva. Citibank Mla contends that A’s declaration of pledge in her promissory notes authorized the offsetting
and that CitiBank Mla and CitiBank Geneva must be taken as one unit since both belonged to “CitiBank”.
H: While All the Philippine branches of petitioner Citibank should be treated as one unit with its head office, the court be persuaded to declare that these Philippine branches are likewise a
single unit with the Geneva branch. Therefore, the off-setting or compensation of respondent's loans with Citibank-Manila using her dollar accounts with Citibank-Geneva cannot be
effected. The parties cannot be considered principal creditor of the other. As for the dollar accounts, respondent was the creditor and Citibank-Geneva was the debtor; and as for the
outstanding loans, petitioner Citibank, particularly Citibank-Manila, was the creditor and respondent was the debtor. Since legal compensation was not possible, petitioner Citibank could
only use respondent's dollar accounts with Citibank-Geneva to liquidate her loans if she had expressly authorized it to do so by contract. Respondent cannot be deemed to have
authorized the use of her dollar deposits with Citibank-Geneva to liquidate her loans with petitioner Citibank when she signed the PNs. As has been established in the preceding
discussion, "Citibank, N.A." can only refer to the local branches of petitioner Citibank together with its head office. Unless there is any showing that respondent understood and expressly
agreed to a more far-reaching interpretation, the reference to Citibank, N.A. cannot be extended to all other branches of petitioner Citibank all over the world. Moreover, the PNs can be
considered a contract of adhesion. This being the case, the terms of such contract are to be construed strictly against the party which prepared it.
 Negotiable Instruments Law Reviewer Prepared by: Hanniyah Sevilla 2008 2

Petitioner likewise contends that banking rules FEATURES OF A NEGOTIABLE INSTRUMENT

prohibit the drawee bank from having checks with
more than one indorsement. The banking rule
banning acceptance of checks for deposit or cash TYPES of NEGOTIABLE
payment with more than one indorsement unless INSTRUMENTS
cleared by some bank officials does not invalidate the
instrument; neither does it invalidate the negotiation NEGOTIABILITY – Cf: Sec. 30 PROMISSORY NOTES (cf: Sec. 184)
or transfer of the said check. In effect, this rule This means that the NI is capable of being transferred from one ACCUMULATION OF SECONDARY
destroys the negotiability of bills/checks by limiting person to another as to constitute the transferee the holder BILLS OF EXCHANGE (cf: 126)
CONTRACTS
their negotiation by indorsement of only the payee. thereof. Since it is a substitute for money, it must function also
Under the NIL, the only kind of indorsement which like money capable of transfer ad infinitum. CHECKS (special kind of B/E; cf: Sec.
stops the further negotiation of an instrument is a 185
restrictive indorsement which prohibits the further
negotiation thereof. (Natividad Gempesaw vs. CA)

Summary: Of what are Promissory Note vs. Bills of Exchange

Person who 1st MAKER ORDER
Negotiable Instruments according to Jurisprudence: issued
Original Maker ----- Payee (M P) Drawer, Drawee, Payee
 Draft drawn from a letter of credit (Transfield vs. Luzon Hydro, 11/22/04) parties/structure Dr -----P
 Negotiable order of withdrawal (Ppl vs. Reyes 11/31/05)
 Telegraphic transfers Dr
(BPI vs. CIR 07/27/06- Although there is a word of caution here because this is Applicability Sec 1 (a-d) Sec. 1 (a-e)
discussed in the context of Sec. 126 as well as the NIRC (because the issue is are
telegraphic transfers subject to documentary stamp tax?)
Sec. 185. Check, Sec. 184. Promissory note, defined. - A Sec. 126. Bill of exchange,
 Fixed savings deposit
defined. - A check is a negotiable promissory note within the defined. - A bill of exchange is an
May or may not be negotiable, depending on w/n it meets Sec. 1. (Int’l Exchange
Bank vs. CIR 4/4/07) bill of exchange drawn meaning of this Act is an unconditional unconditional order in writing
on a bank payable on promise in writing made by one person to addressed by one person to
NOT Negotiable Instruments demand. Except as another, signed by the maker, engaging to another, signed by the person
herein otherwise pay on demand, or at a fixed or giving it, requiring the person to
Bills of lading letter of credits Dock Warrants provided, the provisions determinable future time, a sum certain in whom it is addressed to pay on
Warehouse Receipts Quedans pawn tickets of this Act applicable to money to order or to bearer. Where a note demand or at a fixed or
postal money order treasury warrants a bill of exchange is drawn to the maker's own order, it is not determinable future time a sum
payable on demand complete until indorsed by him. certain in money to order or to
Central Bank certificate of indebtedness (Traders vs. CA 3/3/97) apply to a check. bearer.
Special withdrawal slips (Firestone vs. CA 3/5/01)
Check drawn against a drawn account (Elano vs. Espanyol 12/16/05)
Disbursement vouchers and cash vouchers (Andaya v. PPl 6/27/06; NOTE: SEC 1 is a favorite BAR Question. This is the crux in answering Commercial Law Exam. If confronted
Batulanon v PPL 9/15/06) with a problem concerning commercial documents, first run through Sec. 1. If all elements are present, forget
Fixed Savings Deposit other laws and apply all provisions of NIL.

The moment you answer questions in Commercial Law, the cross road is NIL., why? Because if the instrument
is a negotiable instrument, then forget other laws. Since 1984 until 2008, there is no period in time when
there is no question asked about NIL. This is only 2nd to Corpo with as to bar questions. More or less 36% of
the Bar questions come from Corporation Code; 14% comes from NIL. 13% transpo, 12% Insurance; and the
rest special laws. Of the 14%, from Sec. 1-23 comprise 30% of what is being asked, then Sec. 29, then
holders and rights and liabilities of parties. Some of the sections are not that frequently asked in the Bar. So
the first few sections is really that important because it constitutes 30%.
 Negotiable Instruments Law Reviewer Prepared by: Hanniyah Sevilla 2008 3
Sec. 3. When promise (or order) is unconditional. - An unqualified order
or promise to pay is unconditional within the meaning of this Act though
Section 1. Form of negotiable instruments. - An
coupled with: Sec. 3(A) Last paragraph
instrument to be negotiable must conform to the following
requirements: (A) An indication of a particular fund out of which reimbursement is to be Indication of a particular fund out of Payment out of a particular fund
made or a particular account to be debited with the amount; or which reimbursement is to be made. (CONDITIONAL)
(a) It must be in writing and signed by the maker or (UNCONDITIONAL)
(b) A statement of the transaction which gives rise to the instrument. (CF
drawer; Sec. 24, presumption of consideration) Payment is not subject to existence of There is uncertainty w/n one will be paid.
fund Condition is the existence of a fund.
(b) Must contain an unconditional promise or order to But an order or promise to pay out of a particular fund is not unconditional.
pay a sum certain in money;

(c) Must be payable on demand,or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(when payable to bearer see Sec. 9)
(e) Where the instrument is addressed to a drawee, he
(meaning drawee) must be named or otherwise indicated
therein with reasonable certainty.
Sec. 8. When payable to order. - The instrument is payable to
order where it is drawn payable to the order of a specified
person or to him or his order. It may be drawn payable to the
order of:
(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Section 2 What constitutes certainty as to sum. - The sum payable is a sum
certain within the meaning of this Act, although it is to be paid:
(a) with interest; or
(b) by stated installments; or
(c) by stated installments, with a provision that, upon default in payment of any
installment or of interest, the whole shall become due; (acceleration clause) or
(d) with exchange, whether at a fixed rate or at the current rate; or
(e) with costs of collection or an attorney's fee, in case payment shall not be made
at maturity.
Sec. 4. Determinable future time; what constitutes. - An instrument is
payable at a determinable future time, within the meaning of this Act, which is
expressed to be payable:
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future time specified therein; or
(c) On or at a fixed period after the occurrence of a specified event which is
certain to happen, though the time of happening be uncertain.
A sum certain in money is a fixed amount of money that is
legal tender. The sum payable to be certain must definite and
certain. The amount of money to be paid must be determinable
by inspection and must be stated plainly on the face of the
instrument. And like the denomination in money, must be stated
in the body of the instrument. The sum payable must be in
money only. A bill or a note if it is to be negotiable cannot be
made payable in goods or services. So also is an instrument not
negotiable if it is made payable in bonds, corporate stocks, state
paper, script, checks and foreign bills.
Sec. 7. When payable on demand. - An instrument is payable on
demand:
(a) When it is so expressed to be payable on demand, or at sight, or
on presentation; or
(b) In which no time for payment is expressed.

Where the instrument is payable to order, the payee must be An instrument payable upon a contingency is not negotiable, and the happening Where an instrument is issued, accepted, or indorsed when overdue,
named or otherwise indicated therein with reasonable certainty. of the event does not cure the defect. it is, as regards the person so issuing, accepting, or indorsing it,
payable on demand. (New Bill Doctrine)

Word “order” is one of the two words of negotiability. The other word is “bearer” in Sec. 9.

In Sec1© 2nd sentence. we are talking about Note: Even Sec. 7(a) and (b) must be
“order” SEC 1(B) “order” SEC 1(D)
Period. A future but CERTAIN event., although presented within reasonable time otherwise
Who gives the order Given by the DR for the DW Order of the P or holder that somebody else will be paid it may not be known when. the holder will not be considered as a holder
to pay P instead of him in due course.
Who receives the DW Person primarily liable on the instrument: Last par: It is essential that a negotiable
order/or who is P/N: Maker instrument be payable at ALL events. If CF: Sec 193, Sec. 52(B) and Sec. 53; As to
expected to comply B/E: Acceptor (DW when he accepts is called acceptor) payment is made to depend on a contingency what constitutes a reasonable length of time,
(similar to condition), it is non negotiable. there is no fixed or definite rule. The guide is
Application B/E only B/E and P/N jurisprudence (Int’l Corporate Bank vs.
NB: It is necessary that the year of maturity Gueco)
NB: How negotiated: If the instrument is payable to order, it is negotiated by the indorsement of the holder completed by delivery. (CF Sec. be stated, otherwise, the time of payment of
30) the instrument, although payable at a certain New Bill Doctrine presupposes that the
time, is NOT determinable. Case: Puget Sound instrument was originally payable on a fixed
CF Sec. 31: The indorsement must be written on the instrument itself or upon a paper attached thereto. In an order instrument, a specified
State Bank vs. Washington State Paving Co: or determinable future time. Such time has
person must always be named therein either before or after the word “order”. If there is no payee, there is nobody who could give the order or
authority to collect, and there would be nobody who could indorse the instrument.. Thus an instrument payable to “order” where there is no Read why the statement “ On demand or at passed and yet, despite its being overdue, it
blank space for the name of the P is not negotiable. But it is sufficient that P is described with reasonable certainty, though not named. the end of the year, I promise to pay P or was indorsed, accepted or negotiated. As
order P1,000” is subject to a contingency. regards the person so doing, it is considered
as payable on demand. But again, look at
reasonable length of time.

Section 5 Additional provisions not affecting negotiability. -
An instrument which contains an order or promise to do any act in
addition to the payment of money is not negotiable. But the
negotiable character of an instrument otherwise negotiable is not
affected by a provision which:
(a) authorizes the sale of collateral securities in case the
instrument be not paid at maturity; or
(b) authorizes a confession of judgment if the instrument be not
paid at maturity; or
(c) waives the benefit of any law intended for the advantage or
protection of the obligor; or
(d) gives the holder an election to require something to be done
in lieu of payment of money.
But nothing in this section shall validate any provision or
stipulation otherwise illegal.
Sec. 6. Omissions; seal; particular money. - The validity and
negotiable character of an instrument are not affected by the fact
that:
(a) it is not dated; or (CF: Sec. 17c; Sec. 13)
(b) does not specify the value given, or that any value had been
given therefore; or (CF: Sec. 24)
(c) does not specify the place where it is drawn or the place
where it is payable; or (d) bears a seal; or
(e) designates a particular kind of current money in which
payment is to be made.
But nothing in this section shall alter or repeal any statute
requiring in certain cases the nature of the consideration to be
stated in the instrument.
Consideration means an inducement to a contract,
that is the cause, price or impelling influence which
indueces a contracting party to enter into the
contract.
Sec. 24 gives a presumption that when an instrument
is issued, there exists the presumption that the same
was issued because of a valuable consideration.
Relate to Art. 1354 of the Civil Code that although the
cause is not stated in the contract, it is presumed to
exists and is lawful unless the debtor proves
otherwise. Also Art. 1409 of the CC is relevant: a
contract which has nonexisting cause from the
beginning is void.
Negotiable Instruments Law Reviewer Prepared by: Hanniyah Sevilla 2008
1st sentence Sec 5(d)
Promise or order to do an act Act IN LIEU OF MONEY;
IN ADDITION TO PAYMENT OF Promise or order to do an act
MONEY instead of/or payment of
money
Not negotiable Negotiable
Violates Sec. 5 and Sec. 1(B) Does not affect negotiability of
an act provided that the
election or option is given to
the HOLDER
Must be assigned Must be indorsed
PNB vs. Manila Oil Refining: Confession of Judgment is a written
statement signed by the defendant setting forth the basis of liability
and authorizing the entry of judgment thereon.
They are not authorized under our law because they enlarge the field
of fraud since the promissory bargains away his right to a day in
court and his right to appeal. However, this does not affect the
negotiability of the instrument.
Pacheco vs. CA (How material is the fact that a check was issued
undated)
Sps Y should have known that they need not even ask the Sps X to place a date
on the check, because as holder of the check, he could have inserted the date
pursuant to Section 13 of the Negotiable Instruments Law (NIL). Moreover, as
stated in Section 14 thereof, the person in possession of the check, has prima
facie authority to complete it by filling up the blanks therein. Besides, pursuant to
Section 12 of the same law, a negotiable instrument is not rendered invalid by
reason only that it is antedated or postdated. Thus, the allegation of Mrs. Y that
the date to be placed by Mrs X was necessary so as to make the check evidence of
indebtedness is nothing but a ploy.
SEC. 24: Every negotiable instrument is deemed prima facie to have
been issued for a valuable consideration; and every person whose
signature appears thereon to have become a party thereto for value
Sec. 25. Value, what constitutes. — Value is any consideration
sufficient to support a simple contract. An antecedent or pre-existing
debt constitutes value; and is deemed such whether the instrument
is payable on demand or at a future time.
Sec. 28. Effect of want of consideration. - Absence or failure of
consideration is a matter of defense as against any person not a
holder in due course; and partial failure of consideration is a defense
pro tanto (proportionate defense) , whether the failure is an
ascertained and liquidated amount or otherwise.
4
Sec. 17. Construction where instrument is ambiguous. - Where the
language of the instrument is ambiguous or there are omissions
therein, the following rules of construction apply:
(a) Where the sum payable is expressed in words and also in
figures and there is a discrepancy between the two, the sum
denoted by the words is the sum payable; but if the words are
ambiguous or uncertain, reference may be had to the figures to fix
the amount;
reason: IT is more difficult to alter the words than the figure
Ppl vs. Rodriguez (April 1999): Fx: One of the amounts issued stated in
figures 1,000,200.00 while the amount in words read one million two
hundred thousand pesos. The defense of the accused was at teh time the
accused money in the bank was 1,144,700-- so if you refer to the amount
stated in words the check would have bounced.
Accdg to SC: Rule of interpretation finds no application in this case. There
is no ambiguity in this case as other documents show that the agreement
was indeed for 1,200,000.00.
(b) Where the instrument provides for the payment of interest,
without specifying the date from which interest is to run, the
interest runs from the date of the instrument, and if the instrument
is undated, from the issue thereof;
(c) Where the instrument is not dated, it will be considered to be
dated as of the time it was issued;
(d) Where there is a conflict between the written and printed
provisions of the instrument, the written provisions prevail;
reason: The written provision being the last will of the maker or drawe
therefore it is given greater weight.
(e) Where the instrument is so ambiguous that there is doubt
whether it is a bill or note, the holder may treat it as either at his
election;
(f) Where a signature is so placed upon the instrument that it is
not clear in what capacity the person making the same intended to
sign, he is to be deemed an indorser;
Remedios Nota Sapiera vs. CA: There are four checks and there is doubt as
to what capacity the person signed the instrument. According to the SC,
the four checks issued by de Guzman were signed by petitioner on the
back with no indication on how she would be bound thereby, therefore she
is deemed an indorser. In relation to Sec. 63 and 66. As to what type of
indorser? Usually a general indorser under Sec. 66.
(g) Where an instrument containing the word "I promise to pay" is
signed by two or more persons, they are deemed to be jointly and
severally liable thereon.
 Negotiable Instruments Law Reviewer Prepared by: Hanniyah Sevilla 2008 5
Sec. 9. When payable to bearer. - The instrument is NEGOTIATION ASSIGNMENT
Notes: Sec. 9 A to D are negotiable instruments originally payable to bearer. Sec. 9E is a
payable to negotiable instrument originally payable to order. Refers only to negotiable Refers generally to an
bearer: instruments ordinary contract
Examples
9(a) I promise to pay Bearer or order the sum of x x x on Dec. 25, 2008; The transferee is a holder Transferee is an assignee
(a) When it is expressed to be so payable; or
9(b) I promise to pay Juan dela Cruz OR bearer x x x Holder in due course is An assignee is subject to
(b) When it is payable to a person named therein or subject only to real both real and personal
bearer; or  In this case, the conjunction OR is very important to the negotiability of the defenses defenses
instrument. If the conjunction used is AND, the instrument is no longer negotiable because A holder in due course may An assignee merely steps
9(c) I promise to pay Albus Dumbledore acquire a better title than into the shoes of the
(c) When it is payable to the order of a fictitious or non- that of a prior party assignor (See Sec. 52, 57)
existing person, and such fact was known to the  Intent of maker or drawer to is important. It is essential that the payee is known to the
person making it so payable; or maker or drawer to be a fictitious or non-existing person, otherwise it would become an
order instrument, not a bearer instrument. A general indorser warrants An assignor does not
the solvency of prior parties warrant the solvency of
(d) When the name of the payee does not purport to be 9(d) I promise to pay cash or I promise to pay x x x prior parties unless
the name of any person; or expressly stipulated or the
insolvency is known to him
How are negotiable instruments negotiated?
(e) When the only or last indorsement is An indorser is not liable Assignor is liable even
an indorsement in blank If payable to bearer: by delivery unless there is presentment without notice of dishonor
If payable to order: indorsement of the holder plus delivery of dishonor
Governed by NIL Governed by CC
AS to METHOD of INDORSEMENT AS TO PRESENCE OF LIMITATIONS

Sec. 30. What constitutes negotiation. - An instrument is A. SPECIAL (SEC 34);
negotiated when it is transferred from one person to another in B. BLANK (SEC 34)
such manner as to constitute the transferee the holder thereof.
As to kind of title transferred
If payable to bearer, it is negotiated by delivery; if
payable to order, it is negotiated by the indorsement of
A. RESTRICTIVE
the holder and completed by delivery. B. NON RESTRICITVE (SEC 36)
AS TO SCOPE OF LIABILITY OF INDORSER
Sec. 31. Indorsement; how made. - The indorsement must
be written on the instrument itself or upon a paper attached
A. QUALIFIED (SEC. 38)
thereto (called allonge). The signature of the indorser, without
B. GENERAL (SEC. 66)
additional words, is a sufficient indorsement. (CF: Sec. 14 rule
2)
Requisites for:
Sec. 33. Kinds of indorsement. - An indorsement may be SPECIAL INDORSEMENT
either special or in blank; and it may also be either restrictive 1. Signature (Cf Sec. 30) or
or qualified or conditional. indorsement of the holder + delivery;
Sec. 34. Special indorsement; indorsement in blank. - A 2. Specifies the person to whom or to
special indorsement specifies the person to whom, or to whose whose order the instrument is payable.
order, the instrument is to be payable, and the indorsement of
3. indorsement of (special) indorsee is
such indorsee is necessary to the further negotiation of the
necessary to further negotiate to the
instrument. An indorsement in blank specifies no indorsee, and
further negotiation of the instrument.
an instrument so indorsed is payable to bearer, and may be
negotiated by delivery.
A. CONIDTIONAL
B. UNCONDITIONAL (SEC 39) Ex. I promise to pay P or order the sum of 5,000 on
demand.
OTHERS:
(Sgd) M
A. JOINT (SEC 41)
B. SUCCESSIVE (SEC 50, 68)
Pay to A or order
C. IRREGULAR OR ANOMALOUS (64)
D FACULTATIVE (111) (Sgd) P
The second indorsement is a special indorsement. If A
wants to negotiate this further, his signature is necessary.
So A can either indorse it specially to B, or in blank. Either
way, A’s signature is still necessary. Note that Sec. 34
does not require for A to indorse it specially also if it was
BLANK INDORSEMENT specially indorsed to him. A has a choice: He can indorse it
1. specifies no indorsee. in blank or by way of special indorsement, what is
important is A’s signature for a valid negotiation.
2. Instrument payable to bearer and
In relation to 9(e)
may be negotiatied by delivery. (Cf If A says:
Sec. 9e) Pay to B or order
(Sgd) A [this is a special indorsement]
But if, after receiving it from P, merely signs his name:
Pay to A or order
(Sgd) P
(Sgd) A [this is a blank indorsement]

In relation to 9(E): Remember that a blank indorsement

Q: Now, what if the indorsement in blank is not the ONLY
specifies no indorsee. So who will now sign the instrument
or LAST indorsement? Sec. 34 must be immediately cross
if it was indorsed in blank? No one. That is why if the
referred to Secs. 40, 49, 67 and 65
only or last indorsement is an indorsement in blank,
the order instrument becomes a bearer instrument in 9e.
In a sense, there is already compliance with the
requirement of the law that an order instrument needs to
be indorsed – when the indorser signed his name.
 Negotiable Instruments Law Reviewer Prepared by: Hanniyah Sevilla 2008 6
Possible Scenarios: What if bearer instrument is indorsed? What if order instrument is not indorsed, and merely delivered?
Special indorsement Blank Indorsement
Sec. 37: An indorsement is restrictive which either –
Order Sec. 34, 1st Sentence: Indorsement of indorsee is Sec. 34, last sentence: Instrument becomes a bearer
Instrument necessary to the further negotiation of the instrument, negotiated by mere delivery
instrument. a. prohibits the further negotiation of the instrument;
Bearer Apply Sec. 40: Where an instrument, payable to Apply Sec. 49: The transfer vests in such transferee such title b. constitutes the indorsee the agent of the indorser; or
Instrument bearer, is indorsed SPECIALLY, it may that the transferor had; Transferee acquires the right to have c. vests the title in the indorsee in trust for or to the use of some other person.
nevertheless be further negotiated by delivery; the indorsement of the transferor; BUT for the purposes of But the mere absence of words implying power to negotiate does not make an
Diagram: but the person indorsing specially is liable as determining if transferee is a holder in due course, negotiation Indorsement restrictive.
T
M—>P— indorser to only such holders as make title takes effect as to the time the indorsement is actually made.
>AB through his indorsement. Y
P
Sec. 47: An instrument negotiable in its origin continues to be negotiable until it has been
E
restrictively indorsed or discharged by payment or otherwise.
Second principle: THE PERSON INDORSING IT SPECIALLY IS S
BEARER INSTRUMENT THAT WAS LIABLE AS INDORSER TO ONLY SUCH HOLDERS AS MAKE TITLE Cf: Natividad Gempesaw case: “There are only 3 types of restrictive indosement. The fourth type
INDORSED SPECIALLY: TRHOUGH HIS INDOSEMENT. O in this case is not allowed since it violates Sec. 36. A bank may not legally refuse to honor a
negotiable bill or check drawn against it with more than one indorsement if there is nothing
F irregular with the b/e or check and the drawer has sufficient funds. “
First principle: IT REMAINS A BEARER So if B takes hold of the NI and goes to M for payment and M pays, P is I
INSTRUMENT AND MAY NEVER- liable to A for the amount of the NI because A made title through P’s
N
THELESS BE FURTHER NEGOTIATED indorsement.
D Sec. 38: A qualified indorsement constitutes the indorser a mere assignor of the
BY DELIVERY.
P’s liability is under SEC. 67 as an indorser (qualified or general, O title of the instrument. It may e made by adding to the indorser’s signature the
Ex. I promise to pay to bearer 500K on depending on his indorsement). If he merely delivered the instrument, R words “without recourse” or any words of similar import. Such an indorsement does
he would only be liable under Sec. 65. S not impair the negotiable character of the instrument.
sight.
E
(Sgd) M Q: What should A follow? Should A merely deliver the instrument or is his M
signature necessary to the further negotiation of the instrument? Indorser wants to limit his liability on the instrument; It constitutes an unwillingness to be
E
Note that P needs only to deliver it to be answerable for the solvency of prior parties. Purpose is to transfer the title without guaranteeing
Third principle: Sec. 40 APPLIES ONLY TO ORIGINAL BEARER
N payment by the primary party. In effect, he is secondarily liable under Sec. 65. And he is liable
valid negotiation, but P did not study T
INSTRUMENTS. to all persons who may trace title to his signature.
NIL and he specially indorsed it to A.
S
I promise to pay bearer 500K
Sec. 39: Where an indorsement is conditional, a party required to pay the
on sight So in the example, since it is an original bearer instrument, A may instrument may disregard the condition and make payment to the indorsee or his
merely deliver the NI to further negotiate it. So A can disregard the transferee whether the condition has been fulfilled or not. But any person to whom
(Sgd) M special indorsement made by P. an instrument so indorsed is negotiated, will hold the same, or the proceeds thereof,
Pay to A or order subject to the rights of the person indorsing conditionally.
Ex2: I promise to pay P or order 5k on Sept. 22, 2007
Sgd M
(Sgd) P Sgd P
* so the instrument now becomes a bearer instrument. I promise to pay P or order sum of 500
So the original commitment of M is Sgd. M
under Sec. 1(B), but here comes P If A specially indorses it to B, what should B do to further negotiate the
instrument? Pay to A if he attends the NI class on March 8, 2007.
making an order under Sec 1(D). Is M
Sgd. P
bound by such order? I promise to pay P or order 5k on Sept. 22, 2007
Sgd M
1st principle: The condition refers to indorsement, and not to promise or order to pay a sum
Answer: SEC. 40 Sgd P certain in money (Sec. 1b);
Pay to B or order
Sgd A 2nd principle: If A goes to M for payment prior to the NI class or even after the NI class, M can
So, M’s commitment remains. The
Answer: Sec. 34 will apply. disregard the condition and make payment to A w/n the condition has been fulfilled.
Negotiable instrument is the
B’s indorsement is necessary for the further negotiation of the
commitment of M. So M is not bound by instrument. Why? Because under Sec 9E, it says “ WHEN THE ONLY Rationale: The commitment of M is to unconditionally pay a sum certain in money. The
the order of P because his commitment AND LAST INDORSEMENT IS AN INDORSEMENT IN BLANK”. In the conditional indorsement is between P and A.
is to a bearer instrument. So kung hindi example given, the only and last indorsement is NOT an indorsement is
si A ang mag-encash, okay lang kasi blank. So parang nachange na sya from bearer instrument to an order 3rd principle: A or the proceeds is liable to P if for example, A did not attend NI class.
bound man sya to a bearer instrument, instrument indorsed specially, ergo the need for B’s indorsement.

Sec. 48: The holder may at any time strike out any indorsement which is not necessary to his
title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are
thereby relieved from liability on the instrument.
Note: That in order for a negotiable instrument to be valid, the instrument must conform to all the requirements in Sec. 1 AND there must be delivery of the instrument.
Rules in case the instrument is incomplete, and/or undelivered. (Source of more or less 20% BQ in NIL)
This means that only the contract on the negotiable
instrument is not valid. The negotiable instrument itself is
valid. Remember requisites of valid contract: consent,
consideration, object and for some, delivery. Here, delivery
is absent.
SEC 16. Complete, undelivered;
1.Every contract on a negotiable instrument is
incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto
2. As between immediate parties and as regards a
remote party other than a holder in due course, the
delivery, in order to be effectual, must be made
either by or under the authority of the party making,
drawing, accepting, or indorsing, as the case may
be;
3. And, in such case, the delivery may be shown to
have been conditional, or for a special purpose only,
and not for the purpose of transferring the property
in the instrument.
4. But where the instrument is in the hands of a
holder in due course, a valid delivery thereof by all
parties prior to him so as to make them liable to him
is conclusively presumed. And where the instrument
is no longer in the possession of a party whose
signature appears thereon, a valid and intentional
delivery by him is presumed until the contrary is
proved.
Negotiable Instruments Law Reviewer Prepared by: Hanniyah Sevilla 2008
M – P – B – A --- C--- B--- W—X
B is allowed to reissue it to W and X. But B cannot enforce payment/reimbursement against A and C.
So in effect, he can cancel or strike out A and C’sindorsement. B must immediately go to P or M.
Complete Incomplete
Delivered OK Sec. 14
(personal defense)
Undelivered Sec. 16 Sec. 15
(personal (real defense)
defense)
Sec. 15. Incomplete instrument not delivered. -
Where an incomplete instrument has not been
delivered, it will not, if completed and negotiated
without authority, be a valid contract in the hands of
any holder, as against any person whose signature
was placed thereon before delivery.
Blandeau Doctrine -“Where one of two persons
must suffer by the bad faith of another, the loss
must fall upon the one who first reposed confidence
and made it possible for the loss to occur”
Applies only to Sec. 14 and 16. It does not apply to
Sec. 15 because Sec. 15 is a real defense, meaning
it is available even against a holder in due course.
7
Section 14: Incomplete Undelivered
1. Where the instrument is wanting in any material
particular, the person in possession thereof has a
prima facie authority to complete it by
filling up the blanks therein.
Q: How far can one go in ignoring the requisites of
Sec. 1?
A: All requisites in Sec. 1 can be ignored EXCEPT
signature of maker or drawer PLUS intent/purpose of
converting/making the instrument negotiable
2. And a signature on a blank paper delivered by
the person making the signature in order that
the paper may be converted into a negotiable
instrument operates as a prima facie authority
to fill it up as such for any amount.
3. In order, however, that any such instrument
when completed may be enforced against any
person who became a party thereto prior to its
completion, it must be filled up strictly in
accordance with the authority given and
within a reasonable time.
4. But if any such instrument, after completion, is
negotiated to a holder in due course, it is
valid and effectual for all purposes in his
hands, and he may enforce it as if it had been
filled up strictly in accordance with the authority
given and within a reasonable time.

Sec. 18. Liability of person signing in trade or assumed name. -
No person is liable on the instrument whose signature does not
appear thereon, except as herein otherwise expressly provided. But
one who signs in a trade or assumed name will be liable to the same
extent as if he had signed in his own name.
Sec. 19. Signature by agent; authority; how shown. - The
signature of any party may be made by a duly authorized agent. No
particular form of appointment is necessary for this purpose; and the
authority of the agent may be established as in other cases of agency.
Sec. 21. Signature by procuration; effect of. - A signature by
"procuration" operates as notice that the agent has but a limited
authority to sign, and the principal is bound only in case the agent in
so signing acted within the actual limits of his authority.
Sec. 20. Liability of person signing as agent, and so forth. -
Where the instrument contains or a person adds to his signature
words indicating that he signs for or on behalf of a principal or in a
representative capacity, he is not liable on the instrument if he was
duly authorized; but the mere addition of words describing him as an
agent, or as filling a representative character, without disclosing his
principal, does not exempt him from personal liability.
Sec. 69. Liability of an agent or broker. - Where a broker or other
agent negotiates an instrument without indorsement, he incurs all the
liabilities prescribed by Section Sixty-five of this Act, unless he
discloses the name of his principal and the fact that he is acting only
as agent.
Sec. 22. Effect of indorsement by infant or corporation.- The
indorsement or assignment of the instrument by a corporation or by
an infant passes the property therein, notwithstanding that from want
of capacity, the corporation or infant may incur no liability thereon.
Negotiable Instruments Law Reviewer Prepared by: Hanniyah Sevilla 2008 8
EXCEPTIONS
a. where a person signs in a trade or assumed name;
Gen Rule: Only persons whose b. the principal is liable if a duly authorized agent signs on his
signatures appear on an own behalf; (See Sec. 20)
instrument are liable thereon c. in case of forgery, the forger is liable even if his signature
does not appear on the instrument; (See Sec. 23)
d. where the acceptor makes his acceptance of a bill on a
separate paper -- as to the person who sees or knows that
CF:Art. 1868-1870, 1898, 1899 there is a separate paper, acceptor becomes liable
of Civil Code on Agency e. where a person makes a written promise to accept a bill
before it is drawn.
“Procuration”- act by which a principal
gives power to another to act in his place
as he could; agency.
Requisites: (So that agent will not incur liability on instrument)
1. Agent is duly authorized;
2. He adds words to his signature indicating that he signs as an
agent, for or on behalf of a principal, or in a representative capacity
3. He discloses his principal.
This is the opposite of Sec. 18.
This pertains to personal defenses-- or defenses which are available
only to the persons who can benefit therefrom. So notwithstanding the
absence of capacity on the part of the minor; notwithstanding that he
may incur no liability because he may set up as his minority, the
property is still transferred.
M--P--A(minor)--B: So B cannot recover from A who is a minor or
corporation, but as regards M and P, B can recover as they are not
benefited by A's defense of minority.

Sec. 23. Forged signature; effect
of. - When a signature is forged or
made without the authority of the
person whose signature it purports
to be, it is wholly inoperative, and no
right to retain the instrument, or to
give a discharge therefor, or to
enforce payment thereof against any
party thereto, can be acquired
through or under such signature,
unless the party against whom it is
sought to enforce such right is
precluded from setting up the
forgery or want of authority.
EF
FE
Negotiable Instruments Law Reviewer Prepared by: Hanniyah Sevilla 2008 9
CT
S What is wholly inoperative? Is it the signature or the entire instrument?
OF It is the signature and not the entire instrument which will be rendered wholly inoperative due to forgery.
FO
RG
ER What do we mean by having some exceptions (to Sec. 23)?
Y
It means that the signature may be forged yet the party against whom these rights are enforced may be precluded from setting up forgery or want of
authority if the following circumstances are there:
1. If they can still be made liable by their acts, silence or negligence or commonly called estoppel.
2. Warranties as to the genuiness of the signature.
Even if the signature appears to be or has been proven to be forged, because of the warranties that you have made, you are now precluded from
setting up defense of forgery. Example: The drawer issues a check for the drawee to pay P. P went to the bank. The bank teller will look at the
signature if they are the same. If the Bank teller stamps the check as genuine, it cannot later on allege that the signature appearing thereon is a
forgery. This is a direct provision under Sec. 62 (liability of acceptor)

Sec. 23 vs. Sec. 15 Sec. 23 vs. Sec. 125

Forgery vs. Material Alteration
In both cases, they are
real defenses and
Sec. 125. What constitutes a material alteration. - Any alteration which changes:
available against a
holder in due course.
(a) The date;
Meaning to say that the
(b) The sum payable, either for principal or interest;
Blandeau doctrine does
(c) The time or place of payment:
not apply.
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
Sec. 23 talks about a
(f) Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a
forged signature, which
material alteration.
means counterfeit
making or fraudulent
alteration of a writing In both cases there are alterations.
which may consist of
signing of another's If the signature is the one altered, we apply Sec. 23. But if the one altered are the contents of the document meaning all of the requirements under Sec. 1 except the
name or the alteration signature (we call them material particulars), we apply Sec. 125.
of an instrument in the
name, account and In Sec. 15, the instrument is blank (except for the signature which is genuine), in Sec. 124, 125, the instrument is not blank, the material particulars are altered.
description of a person
with intent to defraud. Forgery under Sec. 23 refers to the signature of the drawer or maker or indorser, while material alteration refers to those mentioned in Sec. 125 -- meaning, any other change
So either it was not or addition which alters the effect of the instrument in any respect.
your signature or the
signature has been In Sec. 23, if indorsement is immaterial as in the case of a bearer instrument, then forgery is immaterial. Forgery of indorsement is immaterial to a bearer instrument. While
altered. Sec. 23 talks material alteration will always be material regardless if instrument is payable to order or bearer.
about a signature which
is forged. Forgery is done by a stranger or person without authority. A person cannot forge his own signature. Material alteration may be made by the party or a stranger.

Sec. 15 presupposes In cases of forgery, the signature is wholly inoperative. In material alteration, the instrument is avoided, but holder in due course may enforce payment according to its
that everything in the original tenor.
negotiable instrument is
incomplete, except the Forgery admits of exceptions -- warranty and estoppel; while material alteration except a party who has himself made, authorized, or assented to the alteration and
signature. subsequent indorsers. They are still made liable.
 Negotiable Instruments Law Reviewer Prepared by: Hanniyah Sevilla 2008 10

SUMMARY of IMPORTANT PRINCIPLES in FORGERY

Situation A: Signature of Maker is forged Situation E: Effect of forgery with collecting bank

Situation B: Signature of the Drawer is the one forged Situation F: What is the effect of forgery in the relationship between collecting bank and drawee bank

Situation C: indorsement of the Payee that is forged Situation G: Effect of forgery in the relationship of drawer and drawee bank

Situation D: When subsequent indorsements are forged.

A collecting bank where the check is deposited and which indorses the check upon presentment with
First principle: Associated bank vs. CA the drawee bank is such an indorser. So even if the indorsement of the check deposited by the bank's

A forged signature, whether it be that of the drawer (Situation B) or the payee (situation C) is wholly
inoperative and no one can gain title to an instrument through it. A person whose signature to the
instrument was forged was never a party and never consented to the contract which allegedly gave
rise to the instrument.
Second Principle:
The exception to rule #1 are as follows:
1. parties who warrant or admit the genuiness of signature -- indorsers, persons negotiating by
delivery and acceptors.
2. those who by their acts, silence or negligence are estopped from setting up the defense of forgery.
Third Principle:
client is forged, the collecting bank is bound by its warranties as an indorser and cannot set up the
defense of forgery against the drawee bank.
The moment that BPI accepts the check from its client, it is required to stamp under the Philippine
Clearing house corporation rules, "all prior indorsement guaranteed". So that is the reason why the
drawee bank under this particular rule accepts the check because there is warranty of all prior
indorsements. Such that if the indorsement is not a valid indorsement, as against the two parties
(collecting bank and drawee bank), it is the collecting bank that will be liable because of that
warranty.
Sixth principle: Equitable PCI vs. Ong -- here, what is involved is a manager's check. According to
the SC, a manager's check may be treated as a promissory note with the Bank as maker.

In bearer instruments, the signature of the payee or holder is unnecessary to pass title through the
instrument, hence, when the indorsement is a forgery, only the person whose signature is forged can
raise the defense of forgery against a holder in due course. The rest of them cannot raise the defense
of forgery because the indorsement that is forged is not necessary.
Fourth Principle:
All the discussions above apply also to a promissory note.
Seventh principle: Associated BAnk case and Illusorio case (2002)
If the drawee (letter G) proves that the customer drawer contributed to the forgery or contributed
(through negligence) to the forgery, the drawer is precluded from asserting forgery.

In order instruments, the signature of each holder is essential to transfer title. If the holder's If both the drawee bank and the customer drawer are negligent, then such loss can be appropriated
indorsement is forged (Situations C and D) of an order instrument,all parties prior to the forger may between the negligent drawer and the negligent to drawee. Most of the time 50-50.
raise the defense of forgery against all parties subsequent thereto. An indorser cannot allege that
prior signature are forged. Eight principle: Allied bank case

M----P----A-----B-----C if B's signature is forged, A and P and M can set up the defense of forgery if C The liability of Allied bank (under A and B) is concurrent with metrobank (under situation F). Meaning
goes to them for payment. But B, A, and P can run after M for payment. So a forged signature blocks to say, here is what we have is a drawee bank as against the collecting bank as the last indorser, if
claims of prior and subsequent parties to the forgery unless it falls under rule number 2. both of them (collecting bank and drawee bank) are negligent, then there can also be shared liability.

Fifth principle: Latest case Allied case Gr. 133197 March 27, 2008 -- it talks about a collecting
bank (Situation E)
For now, let us loosely include in the definition of a collecting bank any "holder".
A collecting bank is such an indorser under Sec. 17 of the PCH rule, and therefore liable as such
indorser.
TYPES OF Holder means the payee or indorsee of a bill or note who is in possession of it, Negotiable Instruments Law Reviewer Prepared by: Hanniyah Sevilla 2008 11
HOLDERS : or the bearer thereof entitled to receive the sum for which it calls.