Negotiable Instruments, Campos (Abbr.
I. Introduction
A. Definition – instruments are negotiable when they
conform to all the requirements prescribed by the
Negotiable Instruments Law (Act No. 2031)
1. Not considered legal tender, but often take the
place of money as a means of payment
B. Kinds of negotiable instruments
1. Promissory note – evidences a promise to pay
money (I promise to pay the order of person the
sum of amount on or before date)
a) Certificates of deposit – instrument issued
by a bank reciting deposit of a sum of money
b) Bonds – evidence of indebtedness issued by
a corporation, public or private, payable at a
definite date in the future
2. Bill of exchange – an order made by one person
to another to pay money to a third person (after
date, pay to person or order the sum of amount)
a) Check – a bill of exchange wherein the one
who issues it orders his bank to pay the
person named on the check
b) Draft – a form of bill of exchange used mainly
in transactions between persons physically
remote from each other
(1) Bank draft – from one bank to another
(2) Usually covered by a letter of credit
C. Parties
1. In general
a) Promissor, who is called the maker
b) Payee, to whom the promise to pay is made
2. Bill of exchange or draft
a) Drawer, who gives the order to pay
b) Drawee, who is the addressee of the order
c) Payee, to whom the payment is to be made
3. When payee of an instrument transfers it to
another by signing it
a) Indorser, negotiates or indorses the same
b) Indorsee, to whom he negotiates the same,
who becomes the holder of the instrument
D. Nature of liability
1. Primary liability
a) Primary party – the party who is absolutely
and unconditionally required to pay the
instrument when it falls due
(1) On a promissory note, it is the maker
(2) On a bill of exchange, it is the drawee,
but there is no person primarily liable to
pay until and unless the drawee accepts
the order of the drawer to pay
(a) Before he accepts, the drawee is not
liable on the instrument and cannot
be compelled by the holder to accept
or pay it
(b) When he accepts, he becomes an
acceptor who is absolutely bound to
pay on the date specified
2. Secondary liability
a) Secondary party – the party who can be held
responsible should the primary parties fail to
pay
(1) On a promissory note, it is the indorser
(2) On a bill of exchange, it is the drawer or
indorser
b) Conditions for secondary liability
(1) That a demand or presentment be duly
made on the primary party
(2) Should the said party dishonor (i.e. fail to
pay or accept) such instrument, that a
notice of dishonor be given to the
secondary party sought to be charged
c) Implied contracts of indorsement
(1) Indorser is selling or transferring the
instrument to his indorsee, thus
assuming liabilities similar to a seller or
transferor of personal property
(2) Indorser warrants that he will pay the
instrument when the two conditions
above have been fulfilled
E. Functions of negotiable instruments
1. Substitute for money in payment
a) Its validity as a means of payment is
conditioned on its being honored by the
person bound by its terms to pay it
2. Means of creating and transferring credit
3. Facilitate the sale of goods
F. Concept of negotiability – a person who takes a
negotiable instrument can rely on its face and need not
inquire into past events that gave rise to its execution
1. Once the negotiable instrument is negotiated to a
third person, it becomes completely independent
of the obligation that gave rise to it
G. History of the negotiable instruments law – a
verbatim reproduction of the Uniform Negotiable
Instruments Law of the United States, which was
patterned after the English Bill of Exchange Act
H. Applicability of the negotiable instruments law – it
applies only to negotiable instruments, which are those
instruments that confirm with the requisites in Sec. 1,
or else the instrument would not be negotiable and
would be governed by the law on contracts
1. Law merchant – a system of law which does not
rest exclusively on positive institutions and local
customs of any particular country but consists of
certain principles of equity and usages of trade
which general convenience and a common sense
of justice has established
II. Requisites of negotiability (Ch. 1)
A. Form of negotiable instruments (Sec. 1)
1. Must be in writing and signed by the maker or
drawer
2. Must contain an unconditional promise or order to
pay a sum certain in money
3. Must be payable on demand, or at a fixed or
determinable future time
4. Must be payable to order or to bearer
1

5. Where the instrument is addressed to a drawee,
he must be named or otherwise indicated therein
with reasonable certainty
B. Promissory note (Sec. 184) – 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
C. Bill of exchange (Sec. 126) – 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
D. Written form and signature
1. Written form includes print and not only what is
written, but also what has been typed
2. Signature is binding whether it is in one’s
handwriting, or printed, engraved, lithographed or
photographed, so long as it is indeed or adopted
as that of the signer or made with his authority
a) If the signature is so placed that it is not clear
in what capacity the person intended to sign,
he is deemed an indorser
E. Unconditional order or promise to pay
1. Not a mere acknowledgement of a debt
a) Including the word “promise” is not absolutely
necessary, any expression equivalent is
sufficient (ex. “due on demand”)
2. Not a mere request or authority to pay
a) An order is a command or imperative
direction, thus its language must clearly
indicate a demand upon the drawee to pay
3. When unconditional (Sec. 3) – 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
b) A statement of the transaction which gives
rise to the instrument
c) However, conditional when it is an order or
promise to pay out of a particular fund, or if
the indicated condition is fulfilled
F. Certainty as to sum (Sec. 2) – the sum payable is a
sum certain although it is to be paid:
1. With interest
2. By stated installments
a) Stated – the amount of each installment and
its due date are fixed in the instrument
3. Acceleration provision – by stated installments
with a provision that upon default in payment of
any installment or of interest, the whole shall
become due
4. With exchange, whether at a fixed rate or at the
current rate
5. With costs of collection or an attorney’s fee, in
case payment shall not be made at maturity
Negotiable Instruments, Campos (Abbr.)
G. Payable in money – must be capable of being
transformed into money, not necessarily limited to legal
tender but any particular kind of current money
1. Additional acts – an instrument which contains an
order or promise to do an act in addition to the
payment of money is not negotiable
a) Exception – if the order or promise gives the
holder, not the maker, an election to require
something to be done in lieu of payment of
money, negotiability would not be impaired
H. Certainty of time of payment
1. When payable on demand (Sec. 7)
a) Where it is expressed to be payable on
demand, or at sight, or on presentation
b) In which no time for payment is expressed
c) Where an instrument is issued, accepted or
indorsed when overdue, as regards the
person so issuing, accepting, or indorsing it
2. Payable at a fixed time
3. Payable at a determinable future time (Sec. 4)
a) At a fixed period after date or sight
b) On or before a fixed or determinable future
time specified therein
c) On or at a fixed period after the occurrence of
a specified event which is certain to happen,
though the time of happening be uncertain
d) Acceleration provisions
(1) Where the option to accelerate is on the
maker, the negotiability is not affected,
whether such option is absolute or
conditional
(2) Where the option to accelerate is on the
holder, whether such provision renders
the instrument non-negotiable depends
on the nature of the provision
(a) Non-negotiable if unconditional
e) Provisions extending time of payment – also
an acceleration at the option of the maker,
thus would not affect negotiability
(1) Exception – where a note with a fixed
maturity provides that the maker has the
option to extend the payment until the
happening of a contingency, the
instrument is non-negotiable (Sec. 4)
I. Must be payable to order or bearer – must contain
the so-called “words of negotiability”, i.e. must be
payable to “order” or “bearer”, which are expressions
of consent that the instrument may be transferred
1. The instrument need not follow the language of the
law, but any term which indicates an intention to
conform to the legal requirements is sufficient
a) Where the words “or bearer” printed on a
check are cancelled by the drawer, the
instrument becomes non-negotiable
2. When payable to order (Sec. 8) – where drawn
payable “to the order of a specified person” or “to
him or his order”, which means it is to be paid to
the person designated or to any person to whom
he has indorsed or delivered the same
2

a) Without the words “to order” or “to the order
of”, the instrument is payable only to the
person designated and is non-negotiable
b) In the above case, any subsequent purchaser
will not enjoy the advantages of a holder, but
will merely step in the shoes of the person
designated
3. When payable to bearer (Sec. 9)
a) When it is expressed to be so payable
b) When it is payable to a person named therein
or bearer
c) When it is payable to the order of a fictitious
or non-existing person, and such fact was
known to the person making it so payable
d) When the name of the payee does not purport
to be the name of any person
e) When the only or last indorsement is an
indorsement in blank
J. Parties must be designated with certainty
1. Maker and drawer – the maker of a note or the
drawer of a bill must sign the instrument, while the
payee and the successive indorsees negotiate the
instrument by signing on the back
a) Ambiguity – once a party to an instrument
deviates from commercial usage with respect
to the place of signature, and it is not clear
from the instrument in what capacity he signs,
the party is considered as an indorser
2. Payee (Sec. 8) – drawn payable to the order of:
a) A payee who is not maker, drawer, or drawee
b) The drawer or maker
c) The drawee
d) Two or more payees jointly
e) One or some of several payees
f) The holder of an office for the time being
3. Drawee
a) Bill addressed to more than one drawee (Sec.
128) – a bill may be addressed to two or more
drawees jointly, but not two or more drawees
in the alternative or in succession
b) When bill treated as a promissory note (Sec.
130) – where in a bill the drawer and drawee
are the same person, or where the drawee is
a fictitious person, or a person not having
capacity to contract, the holder may treat the
instrument, at his option, as a bill or a note
(1) If bill names no drawee but is accepted
by a third party, although the issuer of the
bill cannot be held as drawer, the
acceptor could be held as a maker
K. Provisions not affecting negotiability (Sec. 5)
1. Authorizes the sale of collateral securities in case
the instrument be not paid at maturity
2. Authorizes a confession of judgment if the
instrument be not paid at maturity
3. Waives the benefit of any law intended for the
advantage or protection of the obligor
4. Gives the older an election to require something to
be done in lieu of the payment of money
Negotiable Instruments, Campos (Abbr.)
L. Omissions not affecting negotiability (Sec. 6)
1. It is not dated (Sec. 17, 13)
2. Does not specify the value given, or that any value
has been given therefor (Sec. 24)
3. Does not specify the place where it is drawn or the
place where it is payable (Sec. 73)
4. Bears a seal
5. Designates a particular kind of current money in
which payment is to be made
M. Rules of construction (Sec. 17)
1. 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
a) If the words are ambiguous, reference may be
had to the figures to fix the amount
2. 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
a) If the instrument is undated, from the issue
3. Where the instrument is not dated, it will be
considered to be dated as of the time it was issued
4. Where there is conflict between the written and
printed provisions of the instrument, the written
provisions prevail
5. 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
6. 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
7. Where an instrument containing the words “I
promise to pay” signed by two or more persons,
they are deemed jointly and severally liable
III. Transfer (Ch. 2)
A. Delivery and issuance (Sec. 16) – every contract on
a negotiable instrument is incomplete and revocable
until delivery of the instrument for the purpose of giving
effect thereto, therefore, without the initial delivery of
the instrument from the maker to the payee, there can
be no liability on said instrument
1. Delivery – transfer of possession, actual or
constructive, from one person to another
2. Such delivery must be intended to give effect to
the instrument, however, once the instrument is no
longer in the possession of the person who has
signed it, a valid delivery by him is presumed
a) As to the holder in due course, the
presumption is conclusive, provided the
instrument is complete (Sec. 16)
3. Issue or issuance of the instrument – the first
delivery of the instrument complete in form to a
person who takes it as a holder
B. Negotiation (Sec. 30) – an instrument is negotiated
when it is transferred from one person to another in
such manner as to constitute the transferee the holder
3

1. The transfer of a negotiable instrument made in
such a manner that the transferee becomes a
holder and thus possibly a holder in due course
capable of acquiring a better title to the instrument
than that of his transferor
a) May be for value or by way of gift
b) If an instrument is transferred without
negotiation, the transfer is a mere assignment
which constitutes the transferee as an
assignee, subject to all defenses existing
among prior parties
2. If payable to bearer, it is negotiated by delivery
a) Bearer – the person in possession of a bill or
note which is payable to bearer
3. If payable to order, it is negotiated by the
indorsement of the holder completed by delivery
a) Holder – the payee or indorsee of a bill or
note, who is in possession of it, or the bearer
C. Methods of negotiation
1. Instrument payable to order
a) Indorsement by the payee or present holder
(1) Indorsement – the signature of the
indorser usually on the back of the
instrument
b) Delivery to the transferee or indorsee
2. Instrument payable to bearer
a) Delivery – however, it is common practice to
indorse a bearer instrument whenever it is
transferred as an additional security
(1) Does not include warranty that transferor
will pay in case the primary party fails to
pay, but he does assume the liabilities of
a seller or transferor
3. Ordinary assignment – a transfer effected
otherwise than by negotiation when an order
instrument is delivered without indorsement or
where the indorsement is not made properly as
required by law
D. How indorsement made (Sec. 31) – the indorsement
must be written on the instrument itself or upon a paper
attached thereto, even without additional words (no
need for words of negotiability)
1. By signature on instrument or on allonge
a) The common law rule is that an allonge can
be validly used only where there is no longer
any room on the instrument for further
indorsements, or else it will not be sufficient
2. In case of joint payees – if indorsed to “A and B”,
they are joint payees, but if indorsed to “A or B”,
they are alternative payees
3. If name misspelled (Sec. 43) – payee or indorsee
may indorse the instrument adding, if he thinks fit,
his proper signature
a) Indorsement should be made by the holder in
the manner he was designated, otherwise the
signature will prima facie not be valid
b) Afterwards, he may sign his correct name
E. Indorsement must be of entire instrument (Sec. 32)
– an indorsement which purports to transfer to the
Negotiable Instruments, Campos (Abbr.)
indorsee a part only of the amount payable, or to
transfer the instrument to two or more indorsees
severally, does not operate as negotiation
1. However, where the payees or indorsees are joint,
the negotiation is valid since it is indorsed in its
entirety to both indorsees
2. Discount – a transaction where the indorsee pays
the indorser less than the face amount of the
instrument, which is allowed
F. Kinds of indorsements (Sec. 33)
1. Basis of classification
a) Blank vs. special – has to do with the future
method of negotiation, whether by
indorsement and delivery or by delivery only
b) Restrictive vs. nonrestrictive – has to do
with the kind of title transferred
c) Qualified vs. unqualified – has to do with
scope of the liability assumed by the indorser
d) Conditional vs. unconditional – has to do
with the presence or absence of express
limitations put by the indorser upon the
primary obligor’s privileges of paying the
holder
2. Special and blank (Sec. 34, 40, 35)
a) Special – a special indorsement specifies the
person to whom, or to whose order, the
instrument is to be payable
(1) Indorsement of such indorsee is
necessary to the further negotiation of
the instrument
b) Blank – specifies no indorsee, and an
instrument so indorsed is payable to bearer
and may be negotiated by delivery
(1) May be converted into a special
indorsement by writing over the signature
of the indorser in blank any contract
consistent with the character of the
indorsement
3. Qualified and unqualified (Sec. 38)
a) Qualified – constitutes the indorser a mere
assignor of the title to the instrument
(1) Made by adding the words “without
recourse” or any words of similar import
(2) Effect: to relieve the qualified indorser of
his liability to pay the instrument should
the maker be unable to pay at maturity
4. Conditional and unconditional (Sec. 39)
a) Conditional – one where an additional
condition is annexed to the indorser’s liability
(1) Must be express
(2) Party required to pay may disregard the
condition and make payment to the
indorsee or his transferee
(3) Party to whom an instrument so indorsed
is negotiated will hold the same or the
proceeds, subject to the rights of the
person indorsing conditionally
b) Unconditional – an indorsement without any
other condition than that due demand or
4

presentment be made on the party primarily
liable on the date of maturity, and that should
the latter fail to pay on such, a notice of
dishonor be promptly sent to the indorser
5. Restrictive and nonrestrictive (Sec. 36)
a) Restrictive – one which either:
(1) Prohibits the further negotiation of the
instrument (pay to X only)
(a) Destroys negotiability
(2) Constitutes the indorsee the agent of the
indorser
(3) Vests the title in the indorsee in trust for
or to the use of some other person
(a) For (2) and (3), the instrument may
be further negotiated but reserves
the beneficial interest therein in the
indorser or a third person
b) Rights of indorsee
(1) To receive payment of the instrument
(2) To bring any action thereon that the
indorser could bring
(3) To transfer his rights as such indorsee,
where the form of the indorsement
authorizes him to do so
(4) All subsequent indorsees acquire only
the title of the first indorsee
G. Indorsement to or by collecting bank
1. A holder of a check may:
a) Cash it with the drawee bank
(1) Payment by the drawee bank would
discharge the instrument and terminate
all rights and liabilities of the parties
b) Deposit it to his credit either in the drawee
bank or in another bank
(1) Holder would in effect be negotiating the
check to such bank since he would have
to indorse the check before the bank will
accept it for deposit
2. If the indorsement is “for collection”, it is a
restrictive indorsement where the bank is merely
an agent for collection (Sec. 36[2])
3. Rule: indorsement made by the depositor of a
check would be in blank and not show any
restriction to the collecting bank’s title
a) However, the deposit slip which the depositor
fills up will usually state that the bank is a
mere collecting agent
H. Negotiation by joint or alternative payees or
indorsees (Sec. 41) – where an instrument is payable
to the order of two or more payees or indorsees who
are not partners, all must indorse, unless the one
indorsing has authority for the others
I. Unindorsed instruments (Sec. 49) – where the holder
of an instrument payable to his order transfers it for
value without indorsing it, the transfer vests in the
transferee such title as the transferor had
1. Transferee acquires the right to have the
indorsement of the transferor
Negotiable Instruments, Campos (Abbr.)
2. In determining whether the transferee is a holder
in due course, the negotiation takes effect as of
the time when indorsement is actually made
J. Cancellation of indorsements (Sec. 48) – the holder
may at any time strike out any indorsement which is not
necessary to his title, and the indorser whose
indorsement is struck out and all of the subsequent
indorsers are relieved from liability on the instrument
1. If the instrument is payable to bearer on its face,
then indorsements on the back are immaterial to
the title of the bearer, who is the presumed owner
2. If all indorsements are special, then all of them
would be necessary to the holder’s title
K. Indorsement by agent (Sec. 44) – where any person
is under obligation to indorse in a representative
capacity, he may indorse in such terms as to negative
personal liability
1. An instrument may be indorsed through an agent,
whose authority need not be in writing
2. In signing, an agent should make it plain that he is
signing on behalf of the principal, otherwise he
may be held personally liable
L. Presumption as to indorsements
1. Time of indorsement (Sec. 45) – except when an
indorsement bears date after the maturity of the
instrument, every negotiation is deemed prima
facie to have been effected before the instrument
is overdue
a) Though indorsements after maturity are good
to transfer title, they prevent a holder from
becoming a holder in due course
2. Place of indorsement (Sec. 46) – except where
the contrary appears, every indorsement is
presumed prima facie to have been made at the
place where the instrument is dated
a) The law of the place of dating will govern any
controversy should there be a conflict of laws
3. Effect of instrument drawn or indorsed to a
person as cashier or other fiscal officer of a
bank or corporation (Sec. 42) – deemed prima
facie to be payable to the bank or corporation of
which he is such officer and may be negotiated by
either the indorsement of the bank or corporation,
or the indorsement of the officer
M. Continuation of negotiable character (Sec. 47) – an
instrument negotiable in its origin continues to be
negotiable until it has been restrictively indorsed or
discharged by payment or otherwise
1. Even if overdue, it retains its negotiability until it
has been paid or restrictively indorsed specifically
to prohibit further negotiation
2. The fact that it is overdue does not affect the right
of the holder to further negotiate it, but merely
prejudices the status of subsequent holders as
they cannot be considered holders in due course
IV. Holder in due course (Ch. 3)
A. Requisites of a holder in due course (Sec. 52) –
must be a holder (actual possession) who has taken
the instrument under the following conditions:
5

1. That it is complete and regular upon its face
2. That he became the holder of it before it was
overdue, and without (actual) notice that it had
been previously dishonored, if such was the fact
3. That he took it in good faith and for value
4. 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
B. Rights of a holder in due course (Sec. 57, 58)
1. Holds the instrument free from any defect of title of
prior parties
a) A holder in due course can acquire a better
title because he takes the instrument free
from any defect of title of prior parties
2. Holds the instrument free from defenses available
to prior parties among themselves
a) If the holder is not a holder in due course, the
negotiable instrument is subject to the same
defenses as if it were non-negotiable
b) However, real defenses which attach to the
instrument would be available even against a
holder in due course
3. May enforce payment of the instrument for the full
amount thereof against all parties liable thereon
C. Holder for value
1. What constitutes value
a) Presumption of consideration (Sec. 24) –
every negotiable instrument is deemed to
have been issued for valuable consideration
(1) Every person whose signature appears
to have become a party thereto for value
b) What constitutes consideration (Sec. 25) –
value is any consideration sufficient to
support a simple contract, such as an
antecedent or pre-existing debt
(1) Value need not be full and a holder will
be one for value even if he gave less than
the face value, provided that the intention
is to transfer the full amount
c) Bank credit as value – the bank becomes a
holder for value only when the depositor
withdraws the amount of the deposited
instrument, not upon crediting to account
(1) Where withdrawal takes place before
maturity and before the bank receives
notice of any defense, said defense
would be unavailable against the bank
(2) First money in, first money paid out
2. What constitutes a holder for value (Sec. 26) –
where value has at any time been given for the
instrument, the holder is deemed a holder for
value in respect to all parties who became such
prior to that time
a) The mere fact that the present holder paid
nothing for a note or is not a holder for value
does not preclude recovery
(1) However, it lets in all defenses, if any,
urged against the original payee
Negotiable Instruments, Campos (Abbr.)
3. Where holder has a lien on the instrument
(Sec. 27) – where the holder has a lien on the
instrument, arising either from contract or by
implication of law, he is deemed a holder for value
to the extent of his lien
a) If a negotiable instrument is given as
collateral for a debt, the holder has a lien on
the instrument
b) If the amount of the instrument is less than the
principal debt secured, the pledgee is a holder
for value for the full amount
c) If the amount of the instrument is more than
the principal debt secured, and there are no
existing defenses, the pledgee can recover
all, but the excess is held in trust for
whomsoever is entitled to it
(1) If there are existing defenses among
prior parties, of which the pledgee had no
knowledge, he can recover only the
amount of the debt
D. Holder in good faith – at the time the instrument was
negotiated to the holder, the holder must have had no
notice of any infirmity in the instrument or defect in the
title of the person negotiating the said instrument
1. When title defective (Sec. 55) – the title of a
person who negotiates an instrument is defective:
a) When he obtained the instrument, or any
signature thereto, by fraud, duress, or force
and fear, or other unlawful means
b) When he negotiates it in breach of faith, or
under circumstances amounting to fraud
2. What constitutes notice (Sec. 56) – To constitute
notice of an infirmity in the instrument or defect in
the title, the person to whom it is negotiated must
have had:
a) Actual knowledge of the infirmity or defect, or
b) Knowledge of such facts that his action in
taking the instrument amounts to bad faith
3. What does not constitute notice
a) Constructive knowledge of the defect
b) Gross negligence in itself, since it is not
equivalent to bad faith or actual knowledge
4. Bad faith and suspicious circumstances
a) Bad faith can only be proven by circumstantial
evidence, it is a question of fact determined
on a case to case basis
b) Negligence in tracking down a suspicious
circumstance which would put a prudent man
on inquiry is not of itself sufficient
c) Where the suspicious circumstances are so
cogent and obvious, then the holder will be
subject to defenses
(1) But it is not necessary to prove that the
defendant knew the exact fraud, only that
he had notice of something wrong
(2) For example, knowledge of the holder of
other suspicious transactions of the
transferor may be sufficient to hold that
said holder had notice of former’s fraud
6

5. Effect of purchase at discount
a) This does not, of itself, constitute bad faith
(1) However, if the instrument is purchased
at a heavy discount, this fact may be
taken into account, with other facts, in
determining purchase in good faith
6. Effect of notice before full payment (Sec. 54) –
where the transferee receives notice of any
infirmity or defect before he has paid the full
amount agreed to be paid therefor, he will be
deemed a holder in due course only to the extent
of the amount paid by him
a) Where the purchaser receives notice of
defenses after he has partially paid the
instrument, he is a holder in due course as to
such amount paid by him
b) Should he pay the remainder despite notice,
he cannot recover the remainder
c) The term “paid” includes any performance by
the purchaser, not limited to payment of
money, such as assumption of obligations
d) The purchaser is relieved from all further legal
obligation to make further payment
(1) Does not apply where the holder has
given a promise for the instrument, in
which case he would be in the same
position as one who had paid money or
property at the time of transfer
7. Constructive notice not sufficient – a purchaser
of an instrument is not charged with notice of
defenses or equities disclosed by public records,
nor is he affected by lis pendens
8. Notice of accommodation not notice of defect
(Sec. 29) – an accommodation party is liable on
the instrument to a holder for value, even if the
holder at the time of taking the instrument knew
him to be only an accommodation party
a) 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
E. Complete and regular – he must have taken the
instrument complete and regular on its face
1. If a purchaser of a negotiable paper takes prior to
completion or contemporaneously with the act of
completion, he is not a holder in due course
2. Where the instrument is executed in blank and is
subsequently filled up and issued to the first holder
who has no knowledge of the execution in blank,
the holder is a holder in due course
a) However, if the first holder takes the
instrument complete in form with knowledge
of the original execution in blank, he is not a
holder in due course
3. A purchaser who takes an instrument irregular on
its face is not a holder in due course
a) He is subject not only to defenses and
equities related to the irregularity involved, but
Negotiable Instruments, Campos (Abbr.)
also to those which have nothing to do with
such irregularity
4. Effect of alteration of instrument (Sec. 124) –
where a negotiable is materially altered without the
assent of all parties liable thereon, it is avoided,
except as against a party who has himself made,
authorized, or assented to the alteration and
subsequent indorsers
a) But when an instrument has been materially
altered and is in the hands of a holder in due
course, not a party to the alteration, he may
enforce payment according to original tenor
b) If the alteration is apparent on the face of the
instrument, it renders the latter irregular under
Sec. 52, even if the change may have been
authorized or assented to by all parties
c) If the unauthorized alteration is apparent and
material, then not only is the holder deprived
of the rights of a holder in due course, but the
instrument is entirely void
F. Holder before or at maturity and without notice of
dishonor – must become holder of the instrument
before it is overdue and without notice that it has been
previously dishonoured if such was the fact
1. The fact that the instrument is overdue is a strong
indication that it was dishonored
a) The law puts the potential holder on inquiry as
to whether it was dishonored and the reason
therefor
2. Dishonor
a) By non-acceptance – can refer only to a bill
of exchange and takes place when the
drawee refuses to accept the order of the
drawer as stated in the bill
(1) May occur even before maturity
b) By non-payment – occurs at the time of
maturity when the party primarily liable fails to
pay the instrument at the date of maturity
3. Where person not deemed holder in due
course (Sec. 53) – where an instrument payable
on demand is negotiated an unreasonable length
of time after its issue, the holder is not deemed a
holder in due course
a) If the purchase of a demand instrument is
made outside of the reasonable time after
issue, the purchase is one of an overdue
instrument
b) Reasonable time (Sec. 193) – consider the
nature of the instrument, usage of trade or
business with respect to such instrument, and
facts of the particular case
c) Negotiation of an instrument through an
undated endorsement establishes prima facie
that it was negotiated before it was overdue
(Sec. 45)
(1) One who denies that the holder of such
an instrument is a holder in due course
has the burden of proving his allegation
7

d) An instrument remains negotiable even after
maturity, the main distinction lies between the
rights of a transferee before and of a
transferee after maturity
(1) The purchaser after maturity takes the
instrument subject to all defenses and
equities with which it was encumbered
G. Effect of postdating or antedating (Sec. 12) – the
instrument is not invalid for the reason only that it is
antedated or postdated, provided this is not done for
an illegal or fraudulent purpose
1. The instrument is not only valid but also negotiable
though it be antedated or postdated
2. A holder thereof can be a holder in due course, he
is not put on inquiry by the mere fact of its being
antedated or postdated
H. Effect of qualified, conditional, and restrictive
indorsements – as a general rule, there is no effect
1. Qualified – the status of a holder in due course is
not affected by his taking under a qualified
indorsement
a) If there is any defect and the holder under a
qualified indorsement did not know about it
and took the instrument for value, in good
faith, and before it was overdue, he would be
free from any defense based on such defect
2. Conditional – does not by itself deprive the
conditional indorsee or any subsequent holder of
the rights of a holder in due course
a) The fact that a condition is imposed on the
indorsee does not necessarily mean there is
some defect of title or infirmity in the
instrument
3. Restrictive – will not prevent the indorsee from
being a holder in due course
a) However, should he violate the prohibition
and indorse the instrument to another, then
the latter cannot be a holder in due course
(1) There is no valid negotiation, therefore
the transferee cannot even be a holder
(2) The restrictive indorsement also serves
as a notice to any purchaser of the
instrument of the prohibition to negotiate
b) A restrictive indorsement constituting the
indorsee as agent of the indorser can vest him
with the rights of a holder in due course if his
principal is a holder in due course
(1) Any subsequent holder from the
indorsee-agent will have the same rights
as the indorsee-agent
(2) If the principal is not a holder in due
course, neither is the restrictive indorsee
I. Payee as holder in due course
1. Normally, a payee cannot be a holder in due
course because he has dealt directly with the
maker or drawer and thus must have knowledge
of facts which may create a defense
Negotiable Instruments, Campos (Abbr.)
a) However, there may be circumstances under
which he is insulated from the maker or
drawer by a third party, such as a remitter
b) As such, if he meets the requirements of Sec.
52, he may still be considered a holder in due
course
J. Rights of a purchaser from a holder in due course
(Sec. 58) – in the hands of any holder other than a
holder in due course, a negotiable instrument is subject
to the defenses as if it were non-negotiable
1. However, a holder who derives his title through a
holder in due course, and who is not 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
a) The above is true even if the subsequent
holder satisfies none of the requirements of
due course holding
b) Ex. a purchaser, even with notice of defect of
title, who takes from a holder in due course,
acquires all the rights of the latter and is free
from defenses
2. If the purchaser from a holder in due course was a
party to the fraud or illegality affecting the
instrument, he does not acquire the latter’s rights
a) It has even been held that a holder who
reacquires from a holder in due course and
who, at the time he first held title had
knowledge of a defense, is disqualified from
obtaining the rights of a holder in due course
3. The rights passed down are granted only in
respect to parties prior to the holder in due course
through whom the title is acquired
K. Presumption in favor of due course holding (Sec.
59) – every holder is deemed prima facie to be a holder
in due course
1. However, 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 a holder in due course
a) The above does not apply in favor of a party
who became bound on the instrument prior to
the acquisition of such defective title
2. The presumption applies in favor of holders only,
not to other kinds of transferees
a) Before the presumption can be availed of, the
plaintiff must prove that he is a holder
(1) He has to prove the genuineness of the
maker or drawer’s signature to establish
the existence of the obligation
(2) He has to prove the genuineness of all
indorsements necessary to his title, to
establish his link to the maker and his
status as a holder
3. This presumption refers only to the status of the
present holder and not to any previous holder
8
 Negotiable Instruments, Campos (Abbr.)

a) Thus, if the present holder’s rights depend on a) Those wherein a true contract appears, but
a previous holder’s status as a holder in due where for some reason, such as fraud, the
course, he would have to prove the fact defendant is excused from the obligation
4. If the defendant claims to have a personal defense (1) Ex. inducement, want of consideration,
and duly proves it, the burden of proving due incompleteness of the instrument, lack of
course holding will be on the plaintiff-holder delivery of a completed instrument
a) However, the above does not apply where the b) Cannot affect a holder in due course
defendant’s defense is not his own, that is, 3. Legal title – one who has legal title may recover
where the defendant became bound on the possession even from a holder in due course
instrument prior to the acquisition of the 4. Equitable title – one who has equitable title may
defective title relied on by him as a defense not recover its possession from a holder in due
L. Transferee of unindorsed instrument (Sec. 49) – course but may do so from any other holder
where the holder of an instrument payable to his order 5. When title defective (Sec. 55) – obtained the
transfers it for value without indorsing it, the transfer instrument, or any signature thereto, by fraud,
vests in the transferee such title as the transferor had duress, or force and fear, or other unlawful means,
1. In addition, the transferee acquires the right to or for an illegal consideration or he negotiates it in
have the indorsement of the transferor breach of faith, or under such circumstances as
a) But for the purpose of determining whether amount to fraud
the transferee is a holder in due course, the a) These circumstances render a holder’s title
negotiation takes effect as of the time when defective and implies the right of the real
the indorsement is actually made owner of the instrument to get it back from the
(1) No retroactive effect guilty holder or from any subsequent holder
(2) As such, if at the time of indorsement, the who is not a holder in due course
transferee already know of the defense, b) If it is in the hands of a holder in due course,
or obtains the indorsement after maturity, the latter is free from the defect of title of any
such indorsement will not improve his prior party and the true owner will not have the
status right to recover possession from him
2. If his transferor had legal title, then so does he B. Incapacity (Sec. 22) – the indorsement or assignment
a) It seems to be the prevalent view that if his of the instrument by a corporation or an infant passes
transferor was a holder in due course, then he the property therein, notwithstanding that from want of
acquires rights of a holder in due course capacity the corporation or infant may incur no liability
b) If the transferor who did not indorse was not a thereon
holder in due course, then his transferee is VI.
subject to all defenses as if the instrument
were non-negotiable, although he himself
may satisfy the requirements, unless he
obtains the former’s indorsement
3. An intention by both parties at the time of the
transfer to have the paper indorsed is not enough,
it is the actual act of indorsement which constitutes
the negotiation
a) In the absence of proof of the time of the
subsequent indorsement, the presumption
that every negotiation is prima facie deemed
effected before the instrument was overdue
V. Defenses and equities (Ch. 4)
A. Defenses and equities in general
1. Real defenses
a) Those which attach to the instrument itself
and generally disclose an absence of one of
the essential elements of a contract or where
the contract is void by reason of public policy
(1) Ex. forgery, incapacity, fraud in the
execution1, some types of duress, lack of
delivery of an incomplete instrument
(2) Can affect a holder in due course
2. Personal defenses

1
No intent to issue a negotiable instrument
9