NEGOTIABLE INSTRUMENTS LAW
BAR REVIEW 2019
NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031, 3 February 1911)
I. GENERAL CONCEPTS
Negotiable Instrument - a written contract for the
payment of money which is intended as a
substitute for money and passes from one person
to another as money, in such a manner as to give
a holder in due course the right to hold the
instrument free from defenses available to prior
parties. The instrument must comply with Section
1 of the Negotiable Instruments Law, (Reviewer
on Commercial Law, Sundiang and Aquino, 2014
Ed.)
Functions of Negotiable Instrument:
1. Substitute for money
2. Medium of exchange
3. Credit instrument which increases credit
circulation
4. Increase purchasing medium in circulation
5. Evidence of transaction
Two Distinctive Features/Characteristics of NI:
1. Negotiability - it is that attribute or property
whereby a bill or note or check may pass from
hand to hand similar to money, so as to give
the holder in due course the right to hold the
instrument and to collect the sum payable for
himself free from defenses.
2. Accumulation of Secondary Contracts -
secondary contracts are picked up and carried
along with Negotiable Instruments as they are
negotiated from one person to another; or in
the course of negotiation of negotiable
instruments, a series of juridical ties between
the parties thereto arise either by law or by
privity. The indorsers become secondarily
liable to the holder.
Kinds of Negotiable Instruments:
1. Promissory Note (PN) – an unconditional
promise in writing made by one person to
another, signed by the maker, engaging to pay
on demand, or at a fixed or determinable
future time, a sum certain in money to order or
to bearer (Sec. 184).
2. Bill of Exchange (BE) - an unconditional order
in writing addressed by one person to another,
signed by the person giving it, requiring the
person to whom it is addressed to pay on
demand or at a fixed or determinable future
time a sum certain in money to order or to
bearer (Sec. 126).
3. Check - a bill of exchange drawn on a bank
payable on demand (Sec. 185).
Kinds:
• Manager’s / Cashier’s Check – drawn by a
bank on itself and therefore, it is a primary
obligation of the bank.
o It is accepted in advance by the act of
its issuance and is not subject to
The positive thinker sees the invisible, feels the intangible, and achieves the impossible. - Winston Churchill
countermand by the payor after
indorsement.
o The bank’s manager signs manager’s
check while cashier’s check is signed
by the bank cashier.
• Memorandum Check – it is like an
ordinary check except that the word
“memorandum,” “mem” or “memo” is
written upon the face of the check,
signifying that the drawer engages to pay
the bona fide holder absolutely, and not
upon a condition to pay upon presentment
at maturity and if due notice of the
presentment and non-payment should be
given. This check is not to be presented
for payment, but will be redeemed by the
drawer himself.
• Certified Check – one drawn by a
depositor upon funds to his credit in a
bank which a proper officer of the bank
certifies will be paid when duly presented
for payment
• Traveler’s check – one upon which the
purchaser’s signature must appear twice –
at the time he buys it and also at the time
he uses it. It has the characteristics of a
cashier’s check of the issuer.
• Crossed check – done by writing 2 parallel
lines diagonally on the left top portion of
the check. If the name of a bank/company
appears between the parallel lines, the
check is said to be specially crossed, and
payment should be made only if with the
intervention of that bank/company. If no
name appears between the parallel lines,
the check is said to be generally crossed,
and the drawee should not encash the
same but merely accept the check for
deposit.
• Effects of crossing a check:
a. That the check may not be
encashed but only deposited in
the bank;
b. That the check may be
negotiated only once to one who
has an account with a bank; and
c. That the act of crossing the check
serves as a warning to the holder
that the check has been issued
for a definite purpose so that he
must inquire if he has received
the check pursuant to that
purpose.
• Stale check – one which has not been
presented for payment within a
reasonable time after its issue.
Iron Clad Rule: Prohibits the countermanding of
payment of certified checks (Republic of the
Philippines v. PNB, G.R. No. 16106, December 1,
1961). But the holder must be a HIDC (Mesina v.
IAC, 145 SCRA 497)
The payment of manager’s and cashier’s checks is
not subject to the condition that the payee should
comply with his obligations to the purchaser of the
checks. Also, the purchaser of the manager’s and
cashier’s checks has no right to have the checks
Atty. George O. Ortha, II / Page 1 of 15
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cancelled by filing an action for rescission of its BILLOF EXCHANGE CHECK

contract with the payee (MBTC v. Chiok, G.R. No. 4.May be payable on 4. Always payable on
172662, 26 November 2014). demand or at a fixed demand
or determinable
Bills in Set: one composed of several parts, each future time
part numbered and containing a reference to the 5. Presentment for 5. Need not be
other parts, the whole of the parts constituting but acceptance may be presented for
one bill. required (Sec. 143) acceptance

Rights of holders where parts are negotiated Other Forms of Negotiable Instruments
separately: 1. Certificate of deposit issued by banks, payable
1. If both are HIDC, the holder whose title first to the depositor or his order, or to bearer
accrues is considered the true owner of the 2. Trade acceptance
bill. 3. Bonds, which are in the nature of promissory
2. But the person who accepts or pays in due notes
course shall not be prejudiced. 4. Drafts, which are bills of exchange drawn by
one bank upon another
Obligations of holder who indorses 2 or more parts § All of these must comply with Sec. 1, NIL
of the Bill in Set: Note: Postal Money Order, Treasury Warrant,
1. The person shall be liable on every such part. Certificate of Stock, Letter of Credit, Bill of Lading
2. Every indorser subsequent to him is liable on and Warehouse Receipts are not negotiable
the part he has himself indorsed, as if such instruments.
parts were separate bills.
Legal Tender
That kind of money that the law compels a creditor
PROMISSORY BILL OF EXCHANGE to accept in payment of a debt when tendered by
NOTE the debtor in the right amount. Under Sec. 52 of
1.Unconditional 1.Unconditional order RA 7653, all notes and coins issued by the BSP
promise shall be legal tender in the Philippines.
2. Involves 2 parties 2.Involves 3 parties on
on its face its face Legal Tender Power of:
3. Person who issues 3. Person who issues is Notes – no limit as to amount
is the maker the drawer Coins –
4. Maker is primarily 4. Drawer is only a. P1, P5 & P10 – up to P1,000
liable secondarily liable b. P0.25, P0.10, P0.05 & P0.01 – up to P100
5. Party primarily liable 5. Party primarily liable (BSP Circular No. 537, Series of 2006)
is the maker is the acceptor
6. One presentment 4. Could be two Note: A negotiable instrument (including check)
only: for payment presentments: for although intended to be a substitute for money, is
acceptance and for not legal tender.
payment
SEC. 60. Legal Character. _ Checks representing
When a BILL may be treated as a NOTE: demand deposits do not have legal tender power
1. Drawer and drawee are the same person. and their acceptance in the payment of debts, both
1. Drawee is a fictitious person. public and private, is at the option of the creditor:
2. Drawee has no capacity to contract. Provided, however, That a check which has been
3. When instrument is so ambiguous, the holder cleared and credited to the account of the creditor
may treat it either as a BILL or a NOTE. shall be equivalent to a delivery to the creditor of
cash in an amount equal to the amount credited to
BILLOF EXCHANGE CHECK his account. (RA 7653)
1.Not necessarily 1.It is necessary that a
drawn on a deposit. check is drawn on a Incidents in “Life” of Negotiable Instrument
The drawee need bank deposit. The 1. Preparation and signing
not be a bank. drawee is always a 2. Issue
bank. 3. Negotiation
2.Death of a drawer 2.Death of the drawer 4. Presentment for acceptance, in certain kinds
of a BOE, with the of a check, with the of bills of exchange
knowledge of the knowledge of the 5. Acceptance
bank, does not bank, revokes the 6. Dishonor by non-acceptance
revoke the authority authority of the banker 7. Presentment for payment
of the drawee to pay to pay 8. Dishonor by non-payment
3. May be presented 3. Must be presented 9. Notice of dishonor
for payment within a for payment within a 10. Protest, in some cases
reasonable time after reasonable time after 11. Discharge
its last negotiation its issue.
because it may be Issue - the first delivery of the instrument,
further negotiated complete in form, to a person who takes it as a
holder.

The positive thinker sees the invisible, feels the intangible, and achieves the impossible. - Winston Churchill
Atty. George O. Ortha, II / Page 2 of 15
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Delivery - transfer of possession, actual or When promise or order unconditional

constructive, from one person to another.
Holder – refers to the:
a. If ORDER instrument - The payee or
indorsee of a bill or note who is in
possession of it, or
b. If BEARER instrument - The bearer
thereof (sec.191)
An unqualified order or promise to pay is
unconditional though coupled with:
a. An indication of a particular fund out of
which reimbursement is to be made or a
particular account to be debited with the
amount; or
b. A statement of the transaction which gives
rise to the instrument.

Bearer - the person in possession of a bill or note Ø Mere acknowledgment insufficient.

which is payable to bearer. Ø An order or promise to pay out of a particular
fund is not unconditional because, in effect, it
II. NEGOTIABILITY is subject to the condition that the fund is
sufficient.
Requisites of Negotiability (Sec. 1, NIL)
a. It must be in writing and signed by the maker FUND FOR PARTICULAR FUND
or drawer; REIMBURSEMENT FOR PAYMENT
b. Must contain an unconditional promise or 1. Drawee pays the 1. There is only one
order to pay a sum certain in money; payee from his own act-the drawee
c. Must be payable on demand, or at a fixed or funds; afterwards, pays directly from
determinable future time; the drawee pays the particular fund
d. Must be payable to order or to bearer; and himself from the indicated.
e. Where the instrument is addressed to a particular fund Payment is subject
drawee, he must be named or otherwise indicated. to the condition
indicated therein with reasonable certainty. that the fund is
Note: Do not be confused with the word “order” sufficient.
under “b” and “d” 2. Particular fund 2. Particular fund
indicated is NOT the indicated is the
1. Must be in writing, signed by the maker or direct source of direct source of
drawer; payment but only payment.
- Otherwise it cannot be a substitute for money. the source of
- Signature may be in any form like initial or reimbursement.
mark. No particular location.

2. Must contain an unconditional promise or order 3. Payable on demand or at a fixed or

to pay a sum certain in money; determinable future time;

Certainty of sum payable Certainty of time of payment

The sum payable is a sum certain 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; 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. 2)
Ø Interest stipulated but not specified – legal
interest.
Ø Interest not stipulated – legal interest will be
paid when the debtor incurs in delay (Art.
2209, NCC)
Ø Interest due shall earn legal interest from the
time it is judicially demanded (Art. 2212, NCC)
BSP Circular No. 799, Series of 2013 – “The rate
of interest for the loan or forbearance of any
money, goods or credits and the rate allowed in
judgments, in the absence of an express contract
as to such rate of interest, shall be six percent
(6%) per annum.” (Effective 1 July 2013)
Note: NI need not be payable in legal tender.
The positive thinker sees the invisible, feels the intangible, and achieves the impossible. - Winston Churchill
An instrument is payable at a determinable future
time 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.
Ø After sight means after the drawee has seen
the NI upon presentment for acceptance.
Ø The event must necessarily happen. If
conditional, not negotiable.
Ø An instrument payable upon a contingency is
not negotiable, and the happening of the event
does not cure the defect. (Sec. 4)
Ø A promise to pay “when able,” “as soon as I
can”, etc., without specification of an absolute
date is not negotiable. However, there is a
difference of opinion as to whether it is a
conditional promise or an absolute promise to
pay at an unreasonable time:
a. Under the first view, negotiability is
destroyed both by the condition and by
want of a fixed time for payment;
b. Under the second view, by the general
principle that a promise to pay within a
reasonable time is not so certain as to
render an instrument negotiable.
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Aftersight Draft - payable only after the expiration
of the stipulated period from acceptance (legal
sight).
Acceleration Notes
- provisions which make it possible for the maker
to pay the NI at an earlier date or make it possible
for the holder to require payment of the NI at an
earlier date.
st
1 Class – On or before a certain date
nd
2 Class –
a. renders whole debt due and demandable
upon failure of obligor to comply with
certain conditions (Acceleration Clause)
b. Maker shall supply additional collateral in
case of depreciation of the value of the
original deposit, and upon default, the
note shall become due.
c. Contains provisions for acceleration where
holder deems himself insecure (Insecurity
Clause)
Extension Clause
- Clause in NI that extend the maturity dates. “An
instrument is payable at a definite time if by its
terms it is payable at a definite time subject to
extension at the option of the holder, or to
extension to a further definite time at the option of
the maker or acceptor or automatically upon or
after a specified act or event.” (Subsection 3-
109(1)(d) of the Uniform Commercial Code of the
United States; Aquino, Timoteo B., Notes and
Cases on Negotiable Instruments Law and
Banking Law, 2018 Ed., pp. 58-59.)
- Different from Sec. 120(f)
When payable on demand (Sec. 7):
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.
Note: Where an instrument is issued, accepted, or
indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it,
payable on demand.
4. Payable to order or to bearer
When payable to order (Sec. 8)
The instrument is drawn payable:
a. To the order of a specified person or
b. To him or his order.
Ø The payee must be named or otherwise
indicated therein with reasonable certainty.
Ø 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 (“AND”); or
e. One or some of several payees (“OR”); or
f. The holder of an office for the time being.
The positive thinker sees the invisible, feels the intangible, and achieves the impossible. - Winston Churchill
When payable to bearer (Sec. 9)
a. When it is 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 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.
Fictitious Payee Rule
- If an actual, existing and living payee is not the
intended recipient of the proceeds of the
check, the payee is considered a “fictitious”
payee and the check is a bearer instrument.
Hence, even if the signature of the payee was
forged, the collecting bank and drawee bank
are relieved of liability.
- Theory: One cannot expect a fictitious payee
to indorse. Hence, the issuer must have
intended for the NI to be negotiated by mere
delivery.
- The loss falls on the drawer.
- Burden: The check is presumed to be an order
instrument and it is up to the person making
the contrary allegation to prove otherwise.
(PNB v. Rodriguez, et al. G.R. No. 170325, 26
September 2008)
- In the US, the rule is used to counteract the
effect of forged indorsements on the right of
the holder to enforce payment against the
drawer or maker.
- The rule intends to remove the group of cases
involving a dishonest employee from the
tradition “forged indorsement doctrine” and
imposes the loss on the employer who hires
and fails to properly control the dishonest
agent, rather than on banks which collect and
pay checks with forged indorsement.
- Bad Faith Exception: A showing of commercial
bad faith on the part of the drawee bank, or
any transferee will work to strip it of this
defense.
5. Identification of the drawee
Ø Where the instrument is addressed to a
drawee (meaning in a bill of exchange), he
must be named or otherwise indicated with
reasonable certainty. The holder must know to
whom he should present it for acceptance
and/or payment; otherwise, the purpose of
negotiable instrument as a tool in commercial
dealings will be greatly hampered. (Reviewer
on Commercial Law, Sundiang and Aquino)
Ø A bill may be addressed to more than one
drawee jointly, whether they are partners or
not; but not to two or more drawees in the
alternative or in succession. (Sec. 128)
Factors that Determine Negotiability:
1. The whole instrument itself
2. Only what appears on the face of the
instrument
3. Provisions of the NIL, Sec.1
Atty. George O. Ortha, II / Page 4 of 15
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Additional provisions not affecting
negotiability
General Rule: the instrument is non-negotiable if it
contains a promise or order to do any act in
addition to the payment of money.
Test: If the promise would give rise to a cause of
action for breach of contract if the additional act is
not done, the instrument is not negotiable.
Exceptions:
a. authorizes the sale of collateral securities in
case the instrument be not paid at maturity;
b. authorizes a confession of judgment if the
instrument be not paid at maturity;
c. waives the benefit of any law intended for the
advantage or protection of the obligor; or
d. gives the holder an election to require
something to be done in lieu of payment of
money.
§ Confession of judgment – a written
statement signed by the defendant, setting
forth the basis of liability and authorizing the
entry of judgment thereon.
§ Kinds of confession of judgment
a. cognovit actionem – literally means “he
has confessed action.” It is a written
confession of action by the defendant
acknowledging his indebtedness to the
plaintiff after the action has been filed. It is
given after the action is brought to save
expenses.
b. relicta verificationem – literally means “his
pleadings being abandoned.” It is
confession of judgment by withdrawal of
the defense.
Note: However, warrants of attorney to confess
judgment before action is begun, are not
authorized nor contemplated by our law. They are
void as against public policy because: [i] they
enlarge the field for fraud; [ii] the promisor
bargains away his right to a day in court; and [iii]
the effect is to strikedown the right of appeal
accorded by statute. The NIL does not sanction
nor validated any provision otherwise illegal.
Omissions and Provisions that do not affect
Negotiability (Sec. 6)
The validity and negotiable character of an
instrument are not affected by the fact that:
a. it is not dated; or
b. does not specify the value given, or that any
value 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; or
e. designates a particular kind of current money
in which payment is to be made.
Ø if it is not dated, the instrument will be
considered to be dated as of the time it was
issued.
The positive thinker sees the invisible, feels the intangible, and achieves the impossible. - Winston Churchill
Cases where date is important:
a. If necessary to fix the date of maturity of NI
b. If NI is payable on demand – to determine
W/N the NI was presented within a reasonable
period of time from issue/last negotiation
c. If NI is interest bearing
Ø consideration for the instrument is presumed.
(Art. 154 NCC & Sec. 25 NIL)
Ø Sec. 73 specifies where presentment for
payment should be made when the place of
payment is not specified
Ø In common law, a sealed instrument is not
negotiable & is governed contracts under seal
Rules of construction:
a. Where the sum payable is expressed in words
and also in figures and there is a discrepancy
between the two, the sum denoted by the
words is the sum payable; but if the words are
ambiguous or uncertain, reference may be
had to the figures to fix the amount;
b. Where the instrument provides for the
payment of interest, without specifying the
date from which interest is to run, the interest
runs from the date of the instrument, and if the
instrument is undated, from the issue thereof;
c. Where the instrument is not dated, it will be
considered to be dated as of the time it was
issued;
d. Where there is a conflict between the written
and printed provisions of the instrument, the
written provisions prevail;
e. Where the instrument is so ambiguous that
there is doubt whether it is a bill or note, the
holder may treat it as either at his election;
f. Where a signature is so placed upon the
instrument that it is not clear in what capacity
the person making the same intended to sign,
he is to be deemed an indorser;
g. Where an instrument containing the word "I
promise to pay" is signed by two or more
persons, they are deemed to be jointly and
severally liable thereon.
Consideration
Ø Presumption of consideration. - 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.
Ø Value - 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.
Ø Holder for value – one who has given a
valuable consideration for the instrument
issued or negotiated to him.
• What constitutes holder for value:
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 become such prior to that time.
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• where the holder has a lien on the Methods of negotiation

instrument arising either from contract or 1. Order Instrument –Indorsement AND Delivery.
by implication of law, he is deemed a 2. Bearer Instrument – Delivery only.
holder for value to the extent of his lien.
Indorsement - legal transaction effected by the
Ø Effect of want of consideration: a matter of writing of one's own name at the:
defense as against any person not a holder in a. back of the instrument or
due course; and partial failure of consideration b. upon a paper (allonge) attached thereto.
is a defense pro tanto, whether the failure is Ø General Rule: indorsement must be of the
an ascertained and liquidated amount or entire instrument (but partial indorsement may
otherwise. constitute a valid assignment binding between
the parties).
Absence of consideration – total lack of any Exception: where instrument has been paid in
valid consideration for the contract is only a part, it may be indorsed as to the residue.
personal defense.
Negotiable: Pay to X AND Y; Pay to X OR Y
Failure of consideration – failure or refusal or Not Negotiable: Pay to X P600 and to Y P400
one party to do, perform or comply with the
consideration agreed upon is also only a Ø Kinds of indorsement:
personal defense. a. Special - specifies the person to whom or
to whose order, the instrument is to be
III. TRANSFER AND NEGOTIATION payable (sec. 34)
b. Blank - specifies no indorsee:
Types of transfers: • Instrument is payable to bearer and
1. Assignment - transfer of title to the instrument, may be negotiated by delivery (sec.
with the assignee generally taking only such 34)
title as his assignor has, subject to all • May be converted to special
defenses available against his assignor; indorsement by writing over the
2. Negotiation - transfer of a negotiable signature of indorser in blank any
instrument from one person to another made contract consistent with character of
in such a manner as to constitute the indorsement.
transferee the holder thereof c. Restrictive - when the indorsement either:
3. By Operation of Law – such as by succession, i. Prohibits further negotiation of the
by insolvency. instrument; or
ii. Constitutes the indorsee the agent of
Distinctions between Negotiation and the indorser; or
Assignment iii. Vests the title in the indorsee in trust
for or to the use of some other
NEGOTIATION ASSIGNMENT persons. But mere absence of words
1. Refers only to 1. Refers generally to implying power to negotiate does not
negotiable an ordinary make an indorsement restrictive.
instruments; contract; § All subsequent indorsees acquire only
2. The transferee is a 2. The transferee is an the title of the first indorsee under the
holder; assignee; restrictive indorsement. (sec. 37)
3. A holder in due 3. An assignee is d. Qualified - constitutes the indorser a mere
course is subject subject to both real assignor of the title to the instrument. (sec.
only to real and personal 38)
defenses; defenses; • made by adding to the indorser's
4. A holder in due 4. Generally, an signature words like "sans recourse,”
course may acquire assignee merely “without recourse", "indorser not
a better right than steps into the shoes holden", "at the indorser's own risk",
that of a prior party of the assignor; etc.
5. A general indorser 5. An assignor does • The purpose of this kind of
warrants the not warrant the indorsement is to transfer title without
solvency of prior solvency of prior guaranteeing payment by the primary
parties; parties unless party.
expressly stipulated • It does not mean, however, that the
or the insolvency is qualified indorser incurs no liability at
known to him; all. The effect is merely to limit his
6. An indorser is not 6. An assignor is liable liability. He is liable for breach of is
liable unless there even without notice warranties as an indorser under Sec.
be presentment and of dishonor; 65. Thus, he is liable if the instrument
notice of dishonor; is dishonored by NON-ACCEPTANCE
7. Negotiation is 7. Governed by Arts. or NON-PAYMENT due to:
governed by the NIL. 1624 to 1635 (on a. forgery;
assignment of b. lack of good title to the instrument
credits) of the Civil indorsed;
Code.

The positive thinker sees the invisible, feels the intangible, and achieves the impossible. - Winston Churchill
Atty. George O. Ortha, II / Page 6 of 15
 NEGOTIABLE INSTRUMENTS LAW
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c. lack of capacity to contract on the
part of prior parties; or
d. the fact that the instrument was
valueless or not valid at the time
of the indorsement which fact was
known to him.
e. Conditional - right of the indorsee is made
to depend on the happening of a
contingent event
• Party required to pay may disregard
the conditions.
• This kind of indorsement has no effect
on the further negotiation of the
instrument. The party required to pay,
if he chooses, may make payment,
disregarding the condition without
incurring any liability because he is
expressly authorized to do so under
Sec. 39. But the person who received
payment will hold the proceeds
subject to the right of the conditional
indorser.
f. Absolute - one by which indorser binds
himself to pay:
i. upon no other condition than failure of
prior parties to do so; and
ii. upon due notice to him of such failure.
g. Joint - indorsement of instrument payable
to 2 or more persons; all must indorse in
order for the transaction to operate as a
negotiation.
• Pay to X AND Y; Both must indorse
• Pay to X OR Y: any one
• Exceptions to the rule requiring joint
indorsement:
a. Where the payees or indorsees
are partners; and
b. Where the payee or indorsee
indorsing has authority to indorse
for the others.
h. Irregular - a person who, not otherwise a
party to an instrument, places thereon his
signature in blank before delivery.
Ø Rules on Indorsements:
• Effect of transfer without indorsement:
a. transfer vests in the transferee such title
as the transferor had therein (assignment),
and
b. the right to have the indorsement of the
transferor.
ú For the purpose of determining
whether the transferee is a holder in
due course, the negotiation takes
effect as of the time when the
indorsement is actually made.
ú Applicable only to order instruments
• Indorsement of a bearer instrument: where an
instrument, payable to bearer, is indorsed
specially, it may nevertheless be further
negotiated by delivery; but the person
indorsing specially is liable as indorser to only
such holders as make title through his
indorsement.
Note: The rule only applies to originally bearer
instruments. If it is originally a BEARER
The positive thinker sees the invisible, feels the intangible, and achieves the impossible. - Winston Churchill
instrument, it will always be a BEARER
instrument. As opposed to an original order
instrument becoming payable to bearer, if the
same is indorsed specially, it can NO
LONGER be negotiated further by mere
delivery, it has to be indorsed.
• Striking out indorsements: 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.
ú If the instrument is payable to bearer on its
face, then whether or not there are
indorsements on the back of the
instrument would be immaterial to the title
of the bearer, who is presumptively the
owner and holder by his mere possession
of such instrument. None of the
indorsement would be necessary to it’s
title since mere delivery would have been
sufficient to transfer title from one holder
to another.
ú Where the instrument is payable to order
on its face, the situation is different. First,
the indorsement of a special indorsee is
necessary for the further negotiation of the
instrument. Second, the last indorsement
controls the method of further negotiation.
• When prior party (reacquirer) may negotiate:
where an instrument is negotiated back to a
prior party, such party may reissue and further
negotiate the same. But he is not entitled to
enforce payment thereof against any
intervening party to whom he was personally
liable.
ú In the following cases, a prior party cannot
further negotiate the instrument:
1. Where it is payable to the order of a
third person, and has been paid by the
drawer;
2. Where it was made or accepted for
accommodation and has been paid by
the party accommodated;
3. In other cases, where the instrument
is discharged when acquired by a
prior party.
IV. HOLDERS
Classes of holders:
1. simple holder (sec. 51)
2. holder for value (sec. 26)
3. holder in due course (sec.52, 57)
Holder in Due Course (1996, 1998, 2000 Bar
Exams)
A holder who has taken the instrument under the
following conditions:
a. That it is complete and regular upon its face;
b. That he became the holder of it before it was
overdue, and without notice that it has been
previously dishonored, if such was the fact;
c. That he took it in good faith and for value;
Atty. George O. Ortha, II / Page 7 of 15
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d. That at the time it was negotiated to him, he
had no notice of any infirmity in the instrument
or defect in the title of the person negotiating
it.
Ø When title defective - The title of a person
who negotiates an instrument is defective
when he:
I. obtained the instrument or any signature
thereto, by/for (manner of acquisition):
a. fraud
b. duress, or force and fear
c. other unlawful means
d. illegal consideration
II. negotiates the NI (manner of negotiation)
e. in breach of faith
f. under such circumstances amounting
to fraud.
Ø What constitutes notice of defect. - The
person to whom it is negotiated must have:
a. actual knowledge of the infirmity or
defect, or
b. knowledge of such facts that his
action in taking the instrument
amounted to bad faith. (sec. 56)
Ø Notice before full amount is paid - where
the transferee receives notice of any infirmity
in the instrument or defect in the title of the
person negotiating the same before he has
paid the full amount agreed to be paid, he will
be deemed a holder in due course only to the
extent of the amount paid by him.
Ø When person not deemed a holder in due
course - where an instrument payable on
demand is negotiated on an unreasonable
length of time after its issue, the holder is not
deemed a holder in due course.
• Reasonable time, what constitutes. -
regard is to be had to the
a. nature of the instrument,
b. the usage of trade or business
with respect to such instruments,
and the
c. facts of the particular case.
• Effect: in the hands of any holder other
than a holder in due course, a negotiable
instrument is subject to the same
defenses as if it were non-negotiable
Ø General Rule: every HOLDER is deemed
prima facie to be a holder in due course. But
holder must prove first that he is a holder.
Exception: when it is shown that the title of
any person who has negotiated the instrument
was defective, the burden is on the holder to
prove that he or some person under whom he
claims acquired the title as holder in due
course (shifting of burden of proof).
Limitation: the last-mentioned rule does not
apply in favor of a party who became bound
on the instrument prior to the acquisition of
such defective title (Burden not Shifted) (Sec.
59).
Ø Rights of a holder in due course:
a. he may sue on the instrument in his own
name;
The positive thinker sees the invisible, feels the intangible, and achieves the impossible. - Winston Churchill
b. he may receive payment and if payment is
in due course, the instrument is
discharged.
c. holds the instrument free from any defect
of title of prior parties,
d. holds the instrument free from defenses
available to prior parties among
themselves, and
e. may enforce payment of the instrument for
the full amount thereof against all parties
liable thereon.
Ø Payment in due course is payment made:
a. at or after the maturity of the instrument
b. to the holder thereof
c. in good faith and without notice that his
title is defective.
Ø Shelter Rule:
a. A HNIDC who derives his title from a
HIDC, AND
b. who is not himself a party to any fraud or
illegality affecting the instrument, has all
the rights of such former holder in respect
of all parties prior to the latter.
Ø Rights of a Holder NOT in Due Course
1. He may sue on the instrument in his own
name;
2. He may receive payment and if the
payment is in due course, the instrument
is discharged;
3. He is entitled to the instrument but holds it
subject to the same defenses as if it were
non-negotiable; and
4. He has all the rights of the holder in due
course from whom he derived his title in
respect of all parties prior to such holder,
provided he is not himself a party to any
fraud or illegality affecting the instrument.
Can a finance company be a HIDC?
No – Consolidated Plywood & Industries, Inc. v.
IFC Leasing and Acceptance Corporation, 149
SCRA 448 (1987)
Yes – Juanita Salas v. CA, 181 SCRA 296 (1990)
No – Great Asian Sales Center Corporation v.
Court of Appeals, G.R. No. 105774, 25 April 2002
(The SC said the solution is for FC to make the
consumer sign a separate contract and to enforce
the obligation based on contract instead of the NI)
(Effectively) No – Art. 146, RA 7394 (Consumer
Act, 1992), at least insofar as consumer loans are
concerned
“ARTICLE 146. Sale of Consumer
Products On Installment Payment. — In a
consumer credit sale other than one pursuant to
an open-end credit plan, the obligation of the
consumer to whom credit is being extended shall
be evidenced by a single instrument which shall
include, in addition to the disclosures required by
this act, the signature of the seller and the person
to whom credit is extended, the date it was signed,
Atty. George O. Ortha, II / Page 8 of 15
 NEGOTIABLE INSTRUMENTS LAW
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a description of the property sold and a description
of any property transferred as a trade-in. The
instrument evidencing the credit shall contain a
clear and conspicuous typewritten notice to the
person to whom credit is being extended that:
“a) he should not sign the instrument if it
contains any blank space;
“b) he is entitled to a reasonable return of the
precomputed finance charge if the balance is
prepaid; and
“c) he is entitled to an exact, true copy of the
agreement.
“In cases where the instrument will be sold
at a discount to a bank, financing company or
other lender, the said transferee shall be
subject to all claims and defenses which the
debtor could assert against the seller of
consumer products obtained hereto or with the
proceeds thereof.” (emphasis supplied.)
“ARTICLE 4. Definition of Terms. — For
purposes of this Act, the term:
“xxx xxx xxx
“n) ‘Consumer’ means a natural person who
is a purchaser, lessee, recipient or prospective
purchaser, lessor or recipient of consumer
products, services or credit.
“o) ‘Consumer credit’ means any credit
extended by a creditor to a consumer for the sale
or lease of any consumer product or service under
which part or all of the price or payment therefor is
payable at some future time, whether in full or in
installments.
“xxx xxx xxx
“q) ‘Consumer products and services’ means
goods, services and credits, debts or obligations
which are primarily for personal, family, household
or agricultural purposes, which shall include but
not limited to food, drugs, cosmetics, and devices.
“xxx xxx xxx
“s) ‘Consumer transaction’ means (1) (i) a
sale, lease, assignment, award by chance, or
other disposition of consumer products, including
chattels that are intended to be affixed to land, or
of services, or of any right, title, or interest therein,
except securities as defined in the Securities Act
and contracts of insurance under the Insurance
Code, or (ii) a grant of provision of credit to a
consumer for purposes that are primarily personal,
family, household or agricultural, or (2) a
solicitation or promotion by a supplier with respect
to a transaction referred to in clause (1).”
V. LIABILITIES OF PARTIES
Persons primarily liable on instrument: the
person who, by the terms of the instrument, is
absolutely required to pay the same. All other
parties are "secondarily" liable.
The positive thinker sees the invisible, feels the intangible, and achieves the impossible. - Winston Churchill
LIABILITY WARRANTY
1. Conditioned on 1. Not conditioned.
presentment &
notice of dishonor.
2. Action accrues only 2. Action accrues
upon maturity/ once there is
dishonor. breach.
1. Parties Primarily Liable
a. Maker (Sec. 60)
• engages to pay according to the tenor
of the instrument; and
• admits the existence of the payee and
his then capacity to indorse at the time
of the making of the note.
• A person placing his name on the face
of a note is prima facie a maker and
liable as such; and he is presumed to
have acted with care and to have
signed the instrument with full
knowledge of its contents.
b. Acceptor (Sec. 62)
• engages to pay according to the tenor
of his acceptance;
• admits:
1. the existence of the drawer,
2. the genuineness of his signature
and
3. his capacity and authority to draw
the instrument; and
4. the existence of the payee and his
then capacity to indorse.
Important: The drawee is not liable to the
payee or holder until he accepts the
instrument, or certifies the check (Secs.
127 & 189).
Exception: In HSBC v. Catalan, 440
SCRA 498 (2004), the Supreme Court
ruled that although the payee may not sue
the drawee based on the check, the payee
may sue the drawee based on tort under
Art. 19 of the NCC. The payee may sue
for abuse of right so long as he can prove:
(a) that there is a legal right or duty; (b)
which is exercised in bad faith; and (c) for
the sole intent of prejudicing or injuring
another. According to the Supreme Court,
the allegations in Catalan’s amended
complaint warrant an action for tort,
particularly:
a. the unwarranted failure of the bank to
pay the checks despite the repeated
assurance of the drawer as to the
authenticity of the checks and
frequent directives to pay the value
thereof to Catalan; and
b. the bank failed to inform the payee of
the reasons for its continued inaction
and non-payment.
Note: The bank was not sued on the value
of the checks, but for how it acted in
relation to Catalan’s claim for payment.
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 NEGOTIABLE INSTRUMENTS LAW
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• Acceptor admits the genuineness of • If instrument payable to order of

drawer’s signature, not indorsers’. maker or drawer, he is liable to all
• Where a check is certified by a bank, it parties subsequent to the maker or
is equivalent to an acceptance. Since drawer.
certification is equivalent to acceptance, • If he signs for accommodation of the
a bank which has certified a check payee, he is liable to all parties
whether at the request of the holder or subsequent to the payee.
of a drawer, has the same liabilities and
makes the same warranties as an GENERAL INDORSER IRREGULAR
acceptor. It cannot, after certification, INDORSER
question the genuineness of the 1. Makes either a blank 1. Always makes a
drawer’s signature. If it discovers that or special indorsement; blank indorsement;
such signature is forged subsequent to 2. Indorses the 2. Indorses before its
certification but prior to payment, it instrument after its delivery;
cannot refuse to pay on the check. If its delivery to the payee;
discovery comes after it has paid the 3. Liable only to parties 3. Liable to the payee
check, it cannot recover back what it subsequent to him and subsequent
paid on the ground of mistaken payment parties unless he signs
unless the holder is guilty of fraud or for the accommodation
negligence. of the payee in which
• If a drawee-bank accepts or pays a case he is liable only
check despite a stop payment order to all parties
from the drawer, through oversight or subsequent to the
otherwise, it cannot refuse to pay the payee.
holder or recover what has been paid;
neither may it debit the drawer’s account 3. Parties with Limited Liability (sec. 65;
unless the acceptance or payment was Metropol Financing v. Sambok, 120 SCRA
made prior to the receipt of the order. 864)
• The liabilities of an acceptor applies to a c. Qualified Indorser - warrants that:
drawee who pays without accepting the ú instrument is genuine and in all
instrument. respects what it purports to be;
ú he has good title to it;
2. Parties Secondarily Liable ú all prior parties had capacity to
a. Drawer (Sec. 61) contract;
• admits the existence of the payee and ú he has no knowledge of any fact
his capacity to indorse; which would impair the validity of the
• engages that the instrument will be instrument or render it valueless.
accepted or paid or both according to
its tenor; and d. Persons Negotiating by Delivery
• engages that if the instrument is ú warranties same as those of qualified
dishonored and proper proceedings indorsers, but extend to immediate
are brought, he will pay to the party transferee only.
entitled to be paid.
4. Other parties who may be liable
b. General Indorser (Sec. 66)
• Warrants: General Rule: One whose signature does not
1. genuineness of the instrument; appear on the instrument shall not be liable
2. his good title to it; thereon (Sec. 18).
3. capacity to contract of prior
parties; and Parties who may be liable although his signature
4. instrument is valid and subsisting. does not appear on the NI:
• engages that the instrument will be 1. The principal who signs through an agent
accepted or paid or both according to 2. One who signs his assumed or trade name is
its tenor; and liable
• engages that if the instrument is 3. The forger
dishonored and proper proceedings 4. Persons whose signatures were forged, but
are taken, he will pay to the party are precluded from setting up the defense of
entitled to be paid. forgery
5. One who indorses in a separate instrument
c. Irregular Indorser – a person, not (allonge)
otherwise a party to an instrument, places 6. A person negotiating by delivery (as in the
his signature thereon in blank before case of a bearer instrument) is liable to his
delivery. immediate indorsee.
Rules: 7. In the case of constructive acceptance
• If instrument payable to the order of a
rd
3 person, he is liable to the payee
and subsequent parties.

The positive thinker sees the invisible, feels the intangible, and achieves the impossible. - Winston Churchill
Atty. George O. Ortha, II / Page 10 of 15
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Parties who are not liable although his signature
appear on the NI:
1. Persons covered by Sec. 15 (Incomplete and
undelivered NI)
2. Minor or incapacitated persons
3. Agent
4. Person whose signature was forged.
Requisites for an Agent to escape liability:
1. must be duly authorized;
2. add words to his signature indicating that he
signs as an agent, that is, for or on behalf of a
principal, or in a representative capacity; and
3. disclose his principal.
Ø 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.
21)
Ø Indorsement or assignment of the NI 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. (sec. 22)
Accommodation Party
One who has signed the instrument as maker,
drawer, acceptor, or indorser, without receiving
value therefor, and for the purpose of lending his
name to some other person.
Ø Can receive payment for lending his name.
Ø Indorser must lend his name to the maker, and
not to the holder (Maulini v. Serrano, 28 Phil.
640)
Ø Liability: such a 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.
Ø Effects:
1. accommodation party is generally
regarded as a surety for the party
accommodated;
2. When accommodation party makes
payment to holder of the note, he has the
right to sue the accommodated party for
reimbursement.
Ø Rights of accommodation parties as against
each other: the other may demand
contribution from his co-accommodation party
without first directing his action against the
principal debtor provided:
1. he made the payment by virtue of judicial
demand; or
2. the principal debtor is insolvent.
(Sadaya v. Sevilla, 19 SCRA 924; Art. 2073,
NCC)
Note: A corporation cannot act as an
accommodation party. The issuance or
indorsement of negotiable instrument by a
corporation without consideration and for the
accommodation of another is ultra vires.
(Crisologo v. CA, 117 SCRA 594).
The positive thinker sees the invisible, feels the intangible, and achieves the impossible. - Winston Churchill
Order of liability of indorsers:
1. among themselves – indorsers are liable
prima facie in the order in which they indorse;
but evidence is admissible to show that, as
between or among themselves, they have
agreed otherwise (sec. 68)
2. The holder – indorsers are liable in any order
VI. DEFENSES
1. Real/Absolute Defenses - those that attach to
the instrument itself and are available against
all holders, whether in due course or not.
Examples:
1. Alteration
2. Non-delivery of incomplete instrument
3. Duress amounting to forgery (when
signature is acquired by duress)
4. Fraud in factum or fraud in esse
contractus
5. Minority
6. Marriage in the case of a wife
7. Insanity where the insane person has a
guardian appointed by the court (Ogden)
8. Ultra vires acts of a corporation, where the
corporation is absolutely prohibited by its
charter or statute from issuing any
commercial paper under any
circumstances (Foreign case)
9. Want of authority of agent
10. Execution of instrument between public
enemies (Ogden)
11. Illegality of contract where it is the contract
or instrument itself which is expressly
made illegal by statute
12. Forgery
13. Prescription
14. Discharge in insolvency
2. Personal/Equitable Defenses – those which
are available only against a person not a
holder in due course or a subsequent holder
who stands in privity with him.
Examples:
1. Absence or failure of consideration
2. Want of delivery of complete instrument
3. Insertion of wrong date in an instrument,
where it is payable at a fixed period after
date and it is issued undated or where it is
payable at a fixed period after sight and
the acceptance is undated
4. Filling up of blank contrary to authority
given or not within reasonable time, where
the instrument is delivered
5. Fraud in inducement
6. Acquisition of instrument by force, duress,
or fear
7. Acquisition of the instrument by unlawful
means
8. Acquisition of the instrument for an illegal
consideration
9. Negotiation in breach of faith
10. Negotiation under circumstances that
amount to fraud
11. Mistake
12. Intoxication (according to better authority);
13. Ultra vires acts of corporations where the
corporation has the power to issue
Atty. George O. Ortha, II / Page 11 of 15
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negotiable paper but the issuance was not
authorized for the particular purpose for
which it was issued
14. Want of authority of agent where he has
apparent authority
15. Insanity where there is no notice of
insanity on the part of the one contracting
with the insane person
16. Illegality of contract where the form or
consideration is illegal
Ø Defenses available to solidary debtor (Art.
1222, NCC):
a. Those derived from the nature of the
obligation
b. Those that are personal to him
c. Those that personally belong to the others
(partial defense)
Ø Fraud in factum v. Fraud in inducement
Ø Effects of Defenses:
1. Minority is a real defense, but personal to the
minor
2. Incomplete but delivered instrument (Sec. 14;
1997, 2004 Bar Exams)
• Situations contemplated:
a. 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. Material particular:
those that can or cannot affect
negotiability
b. A signature on a blank paper
delivered by the person making the
signature in order that the paper may
be converted into a NI operates as a
prima facie authority to fill it up as
such for any amount
• To hold parties prior to completion liable
by a HNIDC: NI must be filled up strictly in
accordance with the authority given AND
within a reasonable time
• If requisites not met, can HNIDC enforce
the NI against a party prior to completion?
b. No (better view)
c. Yes, according to authorized tenor
• if any such instrument, after completion, is
negotiated to a HIDC, 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
3. Incomplete and undelivered instrument (Sec.
15)
• 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.
• However, subsequent indorsers are liable.
• In the hands of a HIDC, there is prima
facie presumption of delivery
The positive thinker sees the invisible, feels the intangible, and achieves the impossible. - Winston Churchill
4. Complete and undelivered instrument (Sec.
16)
• as between immediate parties and as
regards a remote party other than a holder
in due course, the delivery must be
authorized in order to be effectual
• “Immediate” means privity, not proximity
• As against a HNIDC, it may be proved
that:
a. No delivery was made
b. Delivery was not authorized
c. Delivery was conditional or for a
special purpose
Rules on delivery of NI (Sec. 15 & 16)
1. Delivery is essential to the validity of any NI
2. Delivery must have been with the intention of
passing title
3. An incomplete and undelivered NI is invalid as
to any party before delivery in the hands of
ANY holder, even a HIDC
4. NI mentioned in #3, there is prima facie
presumption of delivery (if HIDC)
5. Delivery to the agent is sufficient (if HIDC)
6. There is a prima facie presumption of delivery
of a complete NI (if HNIDC)
7. There is conclusive presumption of delivery of
a complete instrument (if HIDC)
8. Delivery of the NI may be made on a parol
condition or for a special purpose (only against
a HNIDC)
5. Prescription
• Under the NCC, 10 years from accrual of
the cause of action
• In the case of checks, the action of the
depositor against his drawee bank
commences to run from the time he is
given notice of payment (PCIB v. CA, 350
SCRA 446 [2001])
• In Papa v. Valencia, 284 SCRA 643
(1998), the SC said that the failure of the
payee to encash the check for more than
10 years ”undoubtedly resulted in the
impairment of the check through his
unreasonable and unexplained delay.”
This is contrary to NAMARCO v. F.U.N.D.,
49 SCRA 238 (1973) where it was held
that the rule that delivery of a mercantile
document shall produce the effect of
payment when impaired by the creditor’s
fault has no application to a check issued
by the debtor himself. There will be no
prejudice to the drawer-debtor because he
is supposed to maintain his funds in his
account. Nonetheless, it is submitted that
the SC could have arrived at the same
conclusion reached in the Papa Case if it
relied on prescription.
6. Alteration (1995, 1996, 1999 Bar Exams)
• The instrument is avoided
• Exceptions:
1. against a party who has himself made,
authorized, or assented to the
alteration
2. subsequent indorsers
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3. holder in due course not a party to the
alteration - he may enforce payment
according to its original tenor
• Changes constituting material alteration:
a. date;
b. sum payable, either for principal or
interest;
c. time or place of payment
d. number or relations of the parties;
e. medium or currency in which payment
is to be made;
f. that which adds a place of payment
where no place of payment is
specified; and
g. any other change or addition which
alters the effect of the instrument in
any respect.
Note: a material alteration is one that alters
the effect of the instrument; one which
changes the items required to be stated under
Sec. 1, NIL.
• Spoliation – alteration made by a stranger
to the instrument. Sec. 124 is the
American doctrine of spoliation.
• The general rule denies the drawee
bank’s right to charge against the drawer’s
account the amount of an altered check.
However, the latter’s negligence, before or
after the alteration, may estop him from
setting such alteration as against an
innocent drawee bank who has paid the
check.
Note: Alteration is only a partial real defense
because a holder in due course can still
enforce it according to its original tenor.
Original Tenor is altered before acceptance
st
1 View: Altered tenor is tenor of acceptance
nd
2 View: Original tenor is tenor of acceptance.
Acceptance is the signification by the drawee
of his assent to the order of the drawer. The
order of the drawer is the original tenor, not
the altered tenor. What “tenor of his
acceptance” means is whether the same is
general or qualified acceptance (Sec. 139).
FEBTC v. Gold Palace Jewelry Co., 562
SCRA 604 (2008)
The collecting bank cannot debit the account
of the payee who is a holder in due course if
the collecting bank returned the amount of the
altered check to the drawee bank. It is the
drawee bank that should bear the loss. If
collecting bank reimbursed the drawee bank, it
is considered as acting on its own because:
- Payment of check by the drawee includes
acceptance under Sec. 62, NIL.
- Tenor of acceptance is determined by the
terms of the bill as it is when the drawee
accepts.
- HIDC who relied on the drawee’s clearance
and payment is protected by Sec. 62.
The positive thinker sees the invisible, feels the intangible, and achieves the impossible. - Winston Churchill
- Drawee, compared to the HIDC, is in a
better position to verify with the drawer the
matters stated in the bill.
- The view in common law that drawee bank
may recover from the person to whom
payment was made by mistake is not
applicable since our laws have no similar
provision.
- The principal-agent relationship between the
payee and collecting bank had ceased.
- The collecting bank cannot be considered to
have acted as representative of the drawee
bank when it debited payee’s account.
- The collecting bank cannot invoke the
warranty of payee who indorsed the NI for
collection since it’s restrictive under Sec. 36
(no transfer of title to collecting bank). The
warranties under Sec. 66 are based upon a
transfer of title.
Comments on the FEBTC Case
- The protection of a HIDC should be in
accordance with Sec. 124; hence, entitled to
the original amount.
- When the collecting bank returned the
amount to the drawee bank, it was not a
mere voluntary act, but dictated by law and
jurisprudence. The obligation of the
collecting bank is based on the doctrine that
it has warranties of a general indorser, and
Rules of the Philippines Clearing House
Corporation and BSP Supplementary Rules
on Regional Clearing.
- The warranties of the collecting bank, as
agent of the payee, extends in favor of the
drawee. The act of the agent is the act of the
principal.
- The principal will not escape liability upon
termination of the principal-agent
relationship for acts done when the agency
was still in existence.
- There are SC decisions that support the
view that the payee will shoulder the loss
since he has the same warranties of a
general indorser.
- Payment by mistake is recognized under
Art. 2154, NCC (solutio indebiti).
(Aquino, Timoteo B., Notes and Cases on
Negotiable Instruments Law and Banking Law,
2018 Ed.)
Note: Effective January 4, 2016, any check with
erasure, alteration and/or deficiency—regardless
of any signature or initial to indicate authorization
of erasures and alterations—shall no longer be
eligible or acceptable for clearing pursuant to
Philippine Clearing House Corporation policy
CHOM No. 15-460, as amended.
7. Forgery (1995, 2006, 2010 Bar Exams)
• Effects:
1. signature is wholly inoperative
2. 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
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3. Some parties are precluded from
setting up the defense of forgery
• Extent of Effects:
1. Only the forged signature is
inoperative, not the NI, not the
genuine ones
2. The NI can be enforced by holders
whose title does not depend on the
forged signature (bearer instruments)
3. Can be enforced against those who
are precluded from setting up the
forgery, like:
a. Those who by their acts, silence,
or negligence, are estopped from
setting up the defense of forgery
b. Those who warrant or admit the
genuineness of the signature in
question. These include acts or
omissions that amount to
ratification, express or implied
(indorser, acceptor, person
negotiating by mere delivery).
Note: Persons precluded from setting up the
defense of forgery may still recover damages
under the NCC provisions on quasi-delicts.
Cut-Off Rule
General Rule: Parties prior to the forged
signature are cut-off from the parties after the
forgery in the sense that prior parties cannot
be held liable and can raise the defense of
forgery. The holder can only enforce the
instrument against parties who became such
after the forgery.
Exception: When the prior parties are
precluded from setting up the defense of
forgery.
Forgery of Indorsement
A. PN payable to order
- The party whose signature was forged
and parties prior to him are not liable
B. PN or Bill payable to bearer
- Only the person whose signature was
forged can raise forgery
- To HIDC: Liable. Indorsement is not
necessary to pass title
- To HNIDC: Not liable. Defense is want
of delivery of a mechanically complete
instrument (the instrument must be
complete before the forgery)
C. Bill Payable to order
- Drawee cannot charge the account of
the drawer
- Drawer cannot recover from the
collecting bank
- Drawee can recover from the collecting
bank (BUT if it is the drawer’s signature
which was forged, drawee cannot
recover from the collecting bank)
- Payee can recover from the drawer
- Payee can recover from recipient of
payment
- Payee cannot recover from the drawee
The positive thinker sees the invisible, feels the intangible, and achieves the impossible. - Winston Churchill
- Collecting bank bear’s the risk of loss,
but can recover from the person to
whom it is paid
Forgery of Drawer’s Signature
- Drawee bank that paid is liable. It
cannot go after the collecting bank.
Recourse is against the forger
Double Intent in Fraudulent Impersonation
1. Maker or drawer intends to make the
instrument payable to the person
before him
2. He intends to make the instrument
payable to the person whom he
believes the stranger to be.
st
Note: The 1 is not forgery, but signature
of an assumed name.
• Loss is thrown upon the issuer:
1. Theory of actual intent
2. Theory of estoppel/negligence
VII. NOTICE OF DISHONOR
Notice of Dishonor - bringing, either verbally or
in writing, to the knowledge of the drawer and
indorser the fact that a NI, upon proper
proceedings taken, has not been accepted or paid
and the party notified is expected to pay it.
Ø Effect of failure to give notice: parties
secondarily liable are discharged
Ø Not necessary for qualified indorser or person
who negotiated the NI by delivery.
Ø Requisites:
1. Given by holder (or his agent), or by any
party who may be compelled by the holder
to pay (or his agent);
2. Given to secondary party or his agent;
3. Given within the periods provided by law;
4. Given at the proper place.
Ø When notice of dishonor dispensed with:
1. when party to be notified knows about the
dishonor, actually or constructively;
2. if waived; and
3. when after due diligence, it cannot be
given.
Ø Notice of dishonor given by or on behalf of a
holder inures to the benefit of:
a. all parties prior to the holder, who have a
right of recourse against the party to
whom the notice is given; and
b. all holders subsequent to the holder giving
notice.
Ø Notice of dishonor given by or on behalf of a
party entitled to give notice inures to the
benefit of:
a. the holder; and
b. all parties subsequent to the party to
whom notice is given.
Ø Where an instrument is dishonored in the
hands of an agent, he can do either of the ff.:
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 NEGOTIABLE INSTRUMENTS LAW
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a. directly give notice to persons secondarily
liable thereon; or
b. give notice to his principal.
Ø Notice of dishonor is not required to be given
to the drawer in any of the ff. cases:
1. drawer and drawee are the same;
2. drawee is a fictitious person or not having
the capacity to contract;
3. drawer is the person to whom the
instrument is presented for payment;
4. the drawer has no right to expect or
require that the drawee or acceptor will
honor the instrument;
5. where the drawer has countermanded
payment.
4. By a valid tender or payment made by a prior
party;
5. By the release of the principal debtor, unless
the holder’s right of recourse against the party
secondarily liable is expressly reserved;
6. By any agreement binding upon the holder to
extend the time of payment or to postpone the
holder’s right to enforce the instrument.
Ø In the following cases, the agreement to
extend the time of payment does not
discharge a party secondarily liable:
a. where the extension of time is consented
to by such party;
b. where the holder expressly reserves his
right of recourse against such party.

Ø Notice of dishonor is not required to be given Ø Payment at or after maturity by a party

to an indorser in the ff. cases:
1. drawee is a fictitious person or does not
have the capacity to contract, and indorser
was aware of that fact at the time he
indorsed the instrument;
2. indorser is the person to whom the
instrument is presented for payment;
3. instrument was made or accepted for his
accommodation.
Ø If an instrument is not accepted by the
drawee, there is no sense presenting it again
for payment, and notice of dishonor must at
once be given. If there was acceptance,
presentment for payment is still required and if
payment is refused, there is a need for notice
of dishonor.
Ø An omission to give notice of dishonor by non-
acceptance does not prejudice the rights of a
holder in due course subsequent to the
omission.
VIII. DISCHARGE
Discharge of instrument - a release of all parties,
whether primary or secondary, from the
obligations arising thereunder. It renders the
instrument without force and effect and,
consequently, it can no longer be negotiated.
secondarily liable does not discharge the
instrument. It only cancels his own liability
and that of the parties subsequent to him.
Effects of Renunciation:
1. A renunciation in favor of a secondary party
may be made by the holder before, at or after
maturity of the instrument. Effect: only such
secondary party is discharged and all parties
subsequent to him but the instrument itself
remains in force.
2. A renunciation in favor of the principal debtor
may be effected at or after maturity. Effect: the
instrument is discharged and all parties
thereto provided the renunciation is made
unconditionally and absolutely.
Note: In either case, renunciation does not affect
the rights of a holder in due course without notice.
Ø Cancellation of an instrument includes tearing,
erasure, obliteration, or burning. It is not
limited to writing of the word ‘cancelled”, or
“paid”, or drawing of criss-cross lines across
the instrument.
—oOo—

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

When persons secondarily liable on the

instrument are discharged:
1. By any act which discharges the instrument;
2. By the intentional cancellation of his signature
by the holder;
3. By the discharge of a prior party;

The positive thinker sees the invisible, feels the intangible, and achieves the impossible. - Winston Churchill
Atty. George O. Ortha, II / Page 15 of 15