REVIEWER IN COMMERCIAL LAW Table of Contents

BILLS AND NOTES

CHAPTER I. GENERAL 170 CHAPTER VI. PARTIES WHO ARE

CONCEPTS 170 LIABLE 188
A. Negotiable Instruments A. Primarily Liable 188
B. Applicability of the Negotiable 170 1. General Concepts 188
Instruments Law 2. Maker 188
C. Characteristics of Negotiable 171 3. Drawee 188
Instruments 171 4. Acceptor 188
D. Kinds of Negotiable B. Secondarily Liable 189
Instruments 171 1. Drawer 189
E. Parties to a Negotiable 171 2. General or Unqualified
Instruments Indorser 189
F. Comparative Tables 3. Irregular Indorser 189
4. Order of Liability Among
CHAPTER II. NEGOTIABILITY 173 Indorsers 189
A. Determination of Negotiability 173 5. Liability of an Agent 189
B. Requisites of Negotiability 173 C. Limited Liability 190
C. Omissions and Provisions Not D. Order of Liability 190
Affecting Negotiability 175 E. Liabilities vs. Warranties 190
D. Interpretation of Negotiable
Instruments 176 CHAPTER VII. ENFORCEMENT
OF LIABILITY 191
CHAPTER III. TRANSFER 177 A. Liabilities of Parties 191
A. Modes 177 B. Steps to charge parties liable 191
B. Process of Negotiation 177 C. Presentment 191
1. Delivery and Issuance 177 D. Acceptance 193
2. Indorsement 177 E. Notice of Dishonor 194
3. Subsequent Negotiation 177 F. Protest 195
C. Kinds of Indorsement 177 G. Acceptance or payment for 196
D. Unindorsed Instruments 178 honor
E. Cancellation of Instrument 179
F. Indorsement by Agent 179 CHAPTER VIII. DISCHARGE 197
G. Presumption as to Indorsement 179 A. Definition 197
B. Discharge of the Instrument 197
CHAPTER IV. HOLDERS 180 1. By payment in due course 197
A. General Concepts 180 2. By intentional cancellation 197
B. Holder in Due Course 180 3. By reacquisition of principal
1. Requisites of a Holder in debtor in his own right 197
Due Course 180 4. By renunciation of holder 197
2. Rights of a Holder in Due 5. By material alteration 197
Course 182 6. By other acts 197
C. Holder NOT in Due Course 182 C. Discharge of Secondary Parties 197
D. Accommodation 182
CHAPTER IX. CHECKS 199
CHAPTER V. DEFENSES AND A. Certification of Checks 199
EQUITIES 183 B. Cross Checks 199
A. Incapacity 183 C. Types of Checks 199
B. Illegality 183
C. Forgery 183
D. Material Alteration 186 NEGOTIABLE INSTRUMENTS
E. Fraud 186 LAWI
F. Duress 187
G. Absence or failure of
Consideration 187
H. Prescription 187
I. Irregularity in Delivery 187

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REVIEWER IN COMMERCIAL LAW Table of Contents

Bills and Notes

FACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE

Prof. Gwen Grecia-de Vera COMMERCIAL LAW LECTURES

FACULTY EDITOR
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Samantha Poblacion BILLS AND NOTES Jason Mendoza

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PRINTING AND DISTRIBUTION

Chapter I. General Concepts
A. NEGOTIABLE INSTRUMENTS
B. APPLICABILITY OF THE NEGOTIABLE
INSTRUMENTS LAW
C. CHARACTERISTICS OF NEGOTIABLE
INSTRUMENTS
D. KINDS OF NEGOTIABLE INSTRUMENTS
E. PARTIES TO A NEGOTIABLE
INSTRUMENTS
F. COMPARATIVE TABLES
I. General Concepts
A. Negotiable Instruments (NI)
(Asked in 02, 05)
 Written contract for the payment of
money, by its form and on its face,
intended as substitute for money and
intended to pass from hand to hand to
give the holder in due course (HDC)
the right to hold the same and collect
the sum due.
 Instruments are negotiable when they
conform to all the requirements
prescribed by the NIL (Act 2031, 03
February 1911).
 Although considered as medium for
payment of obligations, negotiable
instruments are not legal tender (Sec.
60, New Central Bank Act, R.A. 7653).
BPI vs Royeca, (2008, Nachura):
Q: Can the delivery of a negotiable instrument
discharge an obligation?
A: Settled is the rule that payment must be
made in legal tender. A check is not legal tender
and, therefore, cannot constitute a valid tender
of payment. Since a negotiable instrument is
only a substitute for money and not money,
the delivery of such an instrument does not,
by itself, operate as payment. Mere delivery of
checks does not discharge the obligation under a
judgment. The obligation is not extinguished
and remains suspended until the payment by
commercial document is actually realized.
 Negotiable instruments shall produce
the effect of payment only when they
have been encashed or when through
the fault of the creditor they have been
impaired. (Art. 1249, Civil Code) BUT a
CHECK which has been cleared and
credited to the account of the creditor
shall be equivalent to a delivery to the
creditor of cash.
TIP: Memorize the two most important
provisions of the NIL : Sec. 1 (Forms of
negotiable instruments) and Sec. 52 (What
constitutes a holder in due course)
B. Applicability of the Negotiable
Instruments Law (NIL)
General Rule: The provisions of the NIL are
not applicable if the instrument involved is
not negotiable.
Exception: In the case of Borromeo vs. INSTRUMENTS
NEGOTIABLE
Amancio Sun (1999), the SC applied Sec. 14LAWI
of the NIL by analogy in a case involving a
Deed of Assignment of shares which was
signed in blank to facilitate future
assignment of the same shares. The SC
observed that the situation is similar to
Sec. 14 where the blanks in an instrument
may be filled up by the holder, the signing

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 REVIEWER IN COMMERCIAL LAW
in blank being with the assumed authority
to do so.
C. Characteristics of Negotiable
Instruments
(Asked in 05)
1. Capable of being transferred from one
person to another – has the effect of
transferring title from one person to
another so as to make the latter a
holder entitled to payment thereof
2. Capable of accumulating contracts
resulting from indorsements at the back
Table of Contents
a. Maker - one who makes promise
and signs the instrument
b. Payee - party to whom the promise
is made or the instrument is payable
2. Bill of Exchange
a. Drawer - one who gives the order to
pay money to a third party
b. Drawee - person to whom the bill is
addressed and who is ordered to
pay. He becomes an acceptor when
he indicates his willingness to pay
the bill
c. Payee - party in whose favor the bill
is drawn or is payable

 Where there is indorsement:

D. Kinds of Negotiable Instruments a. Indorser - the payee of an
(Asked in 02) instrument who transfers it to
another by signing it at the back
1. Promissory Note (Sec. 184) thereof
a. An unconditional promise in writing b. Indorsee - person to whom the
b. Made by one person to another indorser negotiates the instrument,
c. Signed by the maker who, by such negotiation, becomes
d. Engaging to pay on demand, or at a the holder of the instrument.
fixed or determinable future time
e. A sum certain in money to order or
to bearer F. Comparative Tables
f. Where a note is drawn to the
maker's own order, it is not 1. Negotiable vs. Non-negotiable
complete until indorsed by him.
Negotiable Non-negotiable
2. Bill of Exchange (Sec. 126) Instruments Instruments
Contains all the Does not contain all
a. An unconditional order in writing
requisites of Sec. 1 the requisites of Sec.
b. Addressed by one person to another of the NIL 1 of the NIL
c. Signed by the person giving it Transferable by Transferable only by
d. Requiring the person to whom it is negotiation or by assignment
addressed to pay on demand or at a assignment
fixed or determinable future time HDC may have Transferee acquires
e. A sum certain in money to order or better rights than rights only of his
to bearer Transferor Transferor
Prior parties warrant Prior parties merely
Check - A bill of exchange drawn on a bank payment warrant legality of
payable on demand. (Sec. 185). It is the most Title
common form of bill of exchange. A holder in due All defenses available
course takes the NI to prior parties may
Instances when a bill of exchange may be free from personal be raised against the
treated as a promissory note: defenses last transferee
 The drawer and the drawee are the same
person; or Illustrations (Asked in 05):
 Drawee is a fictitious person; or a. Postal Money Order – NOT a negotiable
 Drawee does not have the capacity to instrument because of the conditions
contract (Sec. 130)
appearing at the back thereof, thereby INSTRUMENTS
NEGOTIABLE
 Where the bill is drawn on a person who is LAWI
legally absent; making the order conditional, contrary
 Where the bill is ambiguous (Sec. 17[e]) to Sec. 1 of the NIL (Phil. Education Co.
vs. Soriano, 1971).
b. Certificate of Time deposit –
E. Parties to a Negotiable Instrument NEGOTIABLE instrument because it is
an acknowledgment in writing by the
bank of the amount of deposit with a
1. Promissory note
promise to repay the same to the

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 REVIEWER IN COMMERCIAL LAW Table of Contents
depositor or bearer thereof at a specific
time (Caltex vs. CA, 1992). Bill of exchange Check
c. Letter of Credit – NOT negotiable Not necessarily It is necessary that a
because it is NOT payable to order or drawn on a deposit. check be drawn on a
bearer and is generally conditional. The drawee need not bank deposit.
Hence, it does not comply with Sec. 1 of be a bank Otherwise, there
would be fraud.
the NIL.
Death of a drawer of Death of the drawer of
d. Warehouse receipts – NOT negotiable a BOE, with the a check, with the
because their subject matter is things knowledge of the knowledge of the
or goods and not a sum certain in bank, does not bank, revokes the
money as required by Sec. 1 of the NIL. revoke the authority authority of the
e. Treasury warrants payable from a of the drawee to pay. banker to pay.
specific fund – NOT negotiable May be presented for Must be presented for
instruments as they are payable out of payment within payment within a
a particular fund which may or may not reasonable time after reasonable time after
exist, thereby making the order its last negotiation. its issue.
May be payable on Always payable on
conditional, contrary to Sec. 1 of the
demand or at a fixed demand
NIL or determinable
future time

2. Negotiable Instruments vs.

Negotiable Documents
(Asked in 05)

Negotiable Negotiable
Instruments Documents
Governed by the Governed by the Civil
Negotiable Code
Instruments Law
Contains all the Does not contain all
requisites of Sec. 1 the requisites of Sec.
of the NIL 1 of the NIL
Subject is a sum Subject is goods
certain in money
Have right of No secondary liability
recourse against of intermediate parties
intermediate parties
who are secondarily
liable
Holder in dues Transferee merely
course may have steps into the shoes of
rights better than the transferor
transferor
Instrument itself is Instrument is merely
property of value evidence of title; thing
of value are the goods
mentioned in the
document

3. Promissory Note vs. Bill of

Exchange
NEGOTIABLE INSTRUMENTS
Promissory note Bill of exchange LAWI
Unconditional Unconditional order
promise
Involves 2 parties Involves 3 parties
Maker is primarily Drawer is only
liable secondarily liable
Only one Two presentments: for
presentment: for acceptance and for
payment payment

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 REVIEWER IN COMMERCIAL LAW
Chapter II. Negotiability
A. DETERMINATION OF NEGOTIABILITY
B. REQUISITES OF NEGOTIABILITY
C. OMISSIONS AND PROVISIONS NOT
AFFECTING NEGOTIABILITY
D. INTERPRETATION OF NEGOTIABLE
INSTRUMENTS
A. Determination of Negotiability
 Caltex Phils. v. CA (1992): In
determining the negotiability of an
instrument, the instrument in its
entirety and by what appears on its face
must be considered. It must comply
with the requirements of Sec. 1 of the
Negotiable Instruments Law.
 PBCOM vs. Aruego (1993): The
acceptance of a bill of exchange is not
important in the determination of its
negotiability. The nature of acceptance
is important only on the determination
of the kind of liabilities of the parties
involved
B. Requisites of Negotiability
(Asked in 92, 93, 96, 97, 00, 02, 05, 07)
Sec. 1. Form of negotiable instruments.
An instrument to be negotiable must conform to
the following requirements:
(a) It must be in writing and signed by the
maker or drawer;
(b) Must contain an unconditional promise or
order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a
drawee, he must be named or otherwise
indicated therein with reasonable certainty.
1. In writing and signed by the maker or
drawer
a. No person liable on the instrument
whose signature does not appear
thereon.
b. One who signs in a trade or assumed
name liable to same extent as if he had
signed in his own name (Sec. 18).
c. Signature of party may be made by duly
authorized agent; no particular form of
appointment necessary (Sec. 19)
d. "In writing" - includes print; written or
typed
e. Signature is binding so long it is
intended or adopted as the signature of
the signer or made with his authority.
Chapter II. Negotiability
2. Containing an unconditional promise
to pay or order to pay
Sec. 3. When promise is unconditional.
An unqualified order or promise to pay is
unconditional within the meaning of this Act,
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.
But an order or promise to pay out of a
particular fund is not unconditional.
a. “UNCONDITIONAL”
 The promise or order to pay, to be
unconditional, must be unqualified.
 Metropolitan Bank vs. CA, (1991): A
NIL is conditional when reference
to the fund clearly indicates an
intention that such fund alone
should be the source of payment.
b. “ORDER OR PROMISE TO PAY”
 As to promissory
note
 Promise
to pay should be express on the
face of the instrument
 Word
"promise" is not absolutely
necessary. Any expression
equivalent to a promise is
sufficient.
 Mere
acknowledgment of a debt
insufficient
 As to bill of exchange:
 Order - command or imperative
direction; the instrument, by its
nature, demanding a right.
 Words which are equivalent to
an order are sufficient.
 A mere request or authority to
pay does not constitute an
order. Although the mere use of
polite words like "please" does
not of itself deprive the
instrument of its characteristics
as an order, its language must
clearly indicate a demand upon
the drawee to pay.
3. Sum payable must be certain
A sum is certain if from the face of the
instrument it can be mathematically
computed.
 REVIEWER IN COMMERCIAL LAW
Sec. 2. What constitutes certainty as to sum.
The sum payable is a sum certain within the
meaning of this Act, although it is to be paid:
(a) with interest; or
(b) by stated installments; or
(c) by stated installments, with a provision that,
upon default in payment of any installment
or of interest, the whole shall become due;
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.
4. Payable in money
a. Capable of being
transformed into money.
b. NON NEGOTIABLE: an
instrument which contains an order or
promise to do an act in addition to the
payment of money
5. Payable on demand, or at a fixed or
determinable future time
a. Time of payment must be
certain
b. “ON DEMAND”
Sec. 7 . When payable on demand.
An instrument is payable on demand:
(a) When it is so expressed to be payable on
demand, or at sight, or on presentation; or
(b) In which no time for payment is expressed.
Where an instrument is issued, accepted, or
indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it,
payable on demand.
 Demand
instruments: Holder may call for
payment any time; maker has an
option to pay at any time, and the
refusal of the holder to accept
payment will terminate the running
of interest, if any, but the obligation
to pay the note remains.
c. “AT A FIXED TIME”
 Only on the stipulated date, and not
before, may the holder demand its
payment.
 Should he fail to demand payment,
the instrument becomes overdue but
remains valid and negotiable. It is
Chapter II. Negotiability
merely converted to a demand
instrument.
d. “AT A DETERMINABLE
FUTURE TIME”
Sec. 4. Determinable future time; what
constitutes.
An instrument is payable at a determinable
future time, within the meaning of this Act,
which is expressed to be payable:
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future
time specified therein; or
(c) On or at a fixed period after the occurrence
of a specified event which is certain to
happen, though the time of happening be
uncertain.
An instrument payable upon a contingency is
not negotiable, and the happening of the event
does not cure the defect.
 Effect of acceleration provisions:
 If option
(absolute or conditional) to
accelerate maturity is on the
maker, still NEGOTIABLE.
 If option to
accelerate is on the holder and
can be exercised only after the
happening of a specified
event/act over which he has no
control (conditional), still
NEGOTIABLE.
 Provisions extending time of
payment
 General
rule: Negotiability not affected.
Effect is similar with that of an
acceleration clause at the option
of the maker.
 Exception
: Where a note with a fixed
maturity provides that the
maker has the option to extend
time of payment until the
happening of contingency,
instrument NOT negotiable. The
time for payment may never
come at all.
6. Payable to order or to bearer
(Asked in 98)
a. Must contain Words of
Negotiability
 REVIEWER IN COMMERCIAL LAW
b. Caltex vs. CA (1992): The
negotiability or non-negotiability of an
instrument is determined from the face
of the instrument itself. Where words
"or bearer" printed on a check are
cancelled by the drawer, instrument
becomes not negotiable.
f.
c. “PAYABLE TO BEARER”
Sec. 9. When payable to bearer.
The instrument is payable to bearer:
(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.
 Examples:
 Expressed
to be so payable
"I promise to pay the bearer the
sum…."
 Payable to
a person named therein or
bearer
"Pay to A or bearer."
 Payable to
the order of a fictitious person or
non-existing person, and such
7. If bill of exchange, drawee named or
fact was known to the person
making it so payable
“Pay to John Doe or order."
a.
 Name of
payee does not purport to be the
b.
name of any person –
"Pay to cash;"
"Pay to sundries."
 Only or
last indorsement is an
indorsement in blank.
C. Omissions and Provisions
d. Ang Tek Lian vs. CA,
(1950): A check drawn payable to the
order of cash is a check payable to
bearer, and the bank may pay it to the
person presenting it for payment
without the drawer's indorsement.
1. Non-dating of the
e. Fictitious payee rule
2. Non-specification
Chapter II. Negotiability
It is not necessary that the person
referred to in the instrument is really
non-existent or fictitious to make the
instrument payable to bearer. The
person to whose order the instrument is
made payable may in fact be existing
but he is till fictitious or non-existent
under Sec. 9(c) of the NIL if the person
making it so payable does not intend to
pay the specified persons.
“PAYABLE TO ORDER”
Sec. 8. When payable to order.
The instrument is payable to order where it is
drawn payable to the order of a specified person
or to him or his order. It may be drawn payable
to the order of:
(a) A payee who is not maker, drawer, or
drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the
payee must be named or otherwise indicated
therein with reasonable certainty.
 Consolidated Plywood Industries vs.
IFC Leasing, (1987): Without the
words "to order" or "to the order
of," the instrument is payable only
to the person designated therein
and is therefore non-negotiable.
 For order instruments - negotiation
requires delivery and indorsement of
the transferor.
designated with reasonable certainty
Applies only to bill of
exchange
A bill may be addressed
to 2 or more drawees jointly whether
they are partners or not but not to 2 or
more drawees in the alternative or in
succession (Sec. 128, NIL).
Not
Affecting Negotiability
Omissions and Additional Provisions
Provisions That Do Not Affect
That Do Not Affect Negotiability
Negotiability
1. Authorizes the sale
instrument of collateral
securities on
 REVIEWER IN COMMERCIAL LAW Chapter II. Negotiability
of value given, or default;
that any value 2. Authorizes
had been given confession of
3. Non-specification judgment on default;
of place where it 3. Waives the benefit of
is drawn or place law intended to
where it is protect the debtor;
payable or
4. Bears a seal 4. Allows the creditor
5. Designation of the option to require
particular kind something in lieu of
of currency in money.
which payment
is to be made NOTE: Negotiability is
affected when
instrument contains a
promise or order to do
any act in addition to
the payment of money.

D. Interpretation of Negotiable
Instruments

1. Sum expressed in words takes

precedence over sum in numbers; BUT
where words are so ambiguous or
uncertain, reference to the figures
should be made.
2. Where interest is stipulated, without
specification of the starting date, the
interest runs from the date of the
instrument, and if undated, from the
issue thereof.
3. An undated instrument is considered
dated as of time issued.
4. Written provisions prevail over printed
provision.
5. Where the instrument is ambiguous as
to whether it is a note or a bill, the
holder may treat it as either at his
election
6. When the capacity of signatory is not
clear, he is to be deemed an indorser G.
“I promise to pay” when signed by two
or more persons is deemed to be jointly
and severally signed
7. Evangelista vs. Mercator Finance (2003):
Where two promissory notes, both
employing the terms “I promise to pay”,
were each signed by two or more
persons, a solidary (joint and several)
liability on each note is created on the
part of the signors.
 REVIEWER IN COMMERCIAL LAW
Chapter III. Transfer
A. MODES
B. PROCESS OF NEGOTIATION
1. DELIVERY AND ISSUANCE
2. INDORSEMENT
3. SUBSEQUENT NEGOTIATION
C. KINDS OF INDORSEMENT
D. UNINDORSED INSTRUMENTS
E. CANCELLATION OF INSTRUMENT
F. INDORSEMENT BY AGENT
G. PRESUMPTION AS TO INDORSEMENT
A. Modes
1. Negotiation
2. Assignment
NEGOTIATION ASSIGNMENT
The transfer of the The transferee does
instrument from one not become a holder
person to another so and he merely steps
as to constitute the into the shoes of the
transferee as holder transferor. Any defense
thereof (Sec.30). available against the
transferor is available
against the transferee.
B. Process of Negotiation
If payable to bearer – negotiated by delivery
(Sec. 30)
If payable to order – negotiated by
indorsement of the holder and completed by
delivery (Sec. 30)
1. Delivery and Issuance
 Delivery means transfer of
possession of instrument by the maker
or drawer, with intent to transfer title to
the payee and recognize him as holder
thereof.
 Issuance is the first delivery of
the instrument complete in form to a
person who takes it as a holder (Sec.
191).
 Requisites
a. Mechanical act of writing the
instrument completely and in
accordance with the requirements of
Section 1; and
b. The delivery of the complete
instrument by the maker or drawer
to the payee or holder with the
intention of giving effect to it.
 Presumption of delivery
a. Where the instrument is no longer
in the possession of a party whose
Chapter III. Transfer
signature appears thereon, a valid
and intentional delivery by him is
presumed until the contrary is
proved
b. if it is in the hands of a HDC, the
presumption is conclusive
 Presumption as to date
a. Date is not an essential element of
negotiability
b. An undated instrument is
considered to be dated as of the time
it was issued
2. Indorsement
 Signature of the indorser, without
additional words, is a sufficient
indorsement (Sec. 31)
 Where placed – The indorsement
must be written (Sec. 31):
a. On the instrument itself, or
b. On a separate piece of paper
attached to the instrument
called “allonge”
 Must be of the ENTIRE instrument
 CANNOT indorse a part only of
the amount payable; BUT if the
instrument has been paid in
part, then the instrument may
be indorsed as to the residue
(Sec. 32)
 CANNOT transfer the instrument
to two or more indorsees
severally (Sec. 32)
3. Subsequent negotiation
 Renegotiation to prior parties
Sec. 50. When prior party may negotiate
instrument.
Where an instrument is negotiated back to a
prior party, such party may, subject to the
provisions of this Act, reissue and further
negotiable the same. But he is not entitled to
enforce payment thereof against any intervening
party to whom he was personally liable.
C. Kinds of Indorsement
 As to manner of future method
of negotiation
1. Special
 Specifies the person to whom/to
whose order the instrument is to
be payable; indorsement of such
indorsee is necessary to further
negotiation.
 REVIEWER IN COMMERCIAL LAW
 A special indorser is liable to all
subsequent holders, unless the
instrument is an originally
bearer instrument, in which
case he is liable only to those
who take title through his
indorsement (Sec 40).
2. Blank
 Specifies no indorsee,
instrument so indorsed is
payable to bearer, and may be
negotiated by delivery
 The holder may convert a blank
indorsement into a special
indorsement by writing over the
signature of the indorser in
blank any contract consistent
with the character of the
indorsement.
 An order instrument may
be converted into a bearer
instrument by means of a blank
indorsement.
 But a bearer instrument
remains as such whether it has
been indorsed specially or in
blank. It is the liability of the
indorser which is affected.
 As to title transferred
1. Restrictive
 Such
indorsement either:
 Prohibits further negotiation
of instrument
 Constitutes indorsee as
agent of indorser
 Vests title in indorsee in
trust for another
 Rights of Restrictive Indorsee:
 Receive payment
 Bring any action thereon
that the indorser could
bring.
 Transfer his rights as such
indorsee, but all subsequent
indorsees acquire only the
title of first indorsee under
restrictive indorsement.
2. Non-restrictive
 As to kind of liability assumed by
indorser
1. Qualified
 Constitutes indorser as mere
assignor of title (e.g., “without
recourse”) (Sec. 38).
Chapter III. Transfer
 But this does not mean that the
transferee only has the rights of
an assignee. Transfer remains a
negotiation and transferee can
still be a holder capable of
acquiring a title free from
defenses of prior parties.
2. Non-qualified
 As to presence/absence of express
limitations
1. Conditional
 Placed by indorser upon primary
obligor’s privileges of paying the
holder
 Additional condition annexed to
indorser’s liability (Sec. 39).
 Where an indorsement is
conditional, a party required to
pay the instrument may
disregard the condition, and
make payment to the indorsee or
his transferee, whether condition
has been fulfilled or not
2. Unconditional
 Other Kinds of Indorsement
1. Absolute
One by which the indorser binds
himself to pay, upon no other
condition than the failure of prior
parties to do so, and of due notice to
him of such failure
2. Joint
Where instrument payable to the
order of two or more payees or
indorsees not partners, all must
indorse, unless the one indorsing
has authority to endorse for the
others (Sec. 41)
3. Irregular
Where a person, not otherwise a
party to the instrument, places
thereon his signature in blank
before delivery, he is liable as
indorser
D. Unindorsed Instruments
Sec. 49. Transfer without indorsement; effect
of.
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 therein, and the transferee
acquires in addition, the right to have the
indorsement of the transferor. But for the
purpose of determining whether the transferee is
REVIEWER IN COMMERCIAL LAW Chapter III. Transfer
a holder in due course, the negotiation takes
effect as of the time when the indorsement is
actually made.

E. Cancellation of Indorsements
Sec. 48. Striking out indorsement.
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.

F. Indorsement by Agent
Sec. 20. Liability of person signing as agent,
and so forth.
Where the instrument contains or a person adds
to his signature words indicating that he signs
for or on behalf of a principal or in a
representative capacity, he is not liable on the
instrument if he was duly authorized; but the
mere addition of words describing him as an
agent, or as filling a representative character,
without disclosing his principal, does not
exempt him from personal liability.

G. Presumption as to Indorsements
Sec. 47. Continuation of negotiable
character.
An instrument negotiable in its origin continues
to be negotiable until it has been restrictively
indorsed or discharged by payment or otherwise.
 REVIEWER IN COMMERCIAL LAW
Chapter IV. Holders
A. GENERAL CONCEPTS
B. HOLDER IN DUE COURSE
1. REQUISITES OF A HOLDER IN DUE
COURSE
2. RIGHTS OF A HOLDER IN DUE
COURSE
C. HOLDER NOT IN DUE COURSE
D. ACCOMMODATION
A. General Concepts
1. Holder is a payee or indorsee of a bill or
note who is in possession of it, or the
bearer thereof
(Sec. 191).
2. Rights of a holder (Sec. 51)
1. sue thereon in his own name
2. payment to him in due course
discharges instrument.
3. Chan Wan vs. Tan Kim, (1960): The only
disadvantage of a holder who is not a
holder in due course is that the
negotiable instrument is subject to
defenses as if it were non-negotiable.
B. Holders in due course (HDC)
 HDC under Sec. 52
 HDC under Sec. 58: A holder who
derives title to the instrument through a
HDC has all the rights of the latter even
though he himself satisfies none of the
requirements of due course holding
 HDC under Sec. 59 (presumption):
Every holder is deemed prima facie to
be a holder in due course.
1. Requisites of a holder in due
course
Sec. 52. What constitutes a holder in due
course.
A holder in due course is 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;
(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.
Chapter IV. Holders
a. That the instrument is
complete and regular upon its face
 It is incomplete when it is wanting
in any material particular or
particular proper to be inserted in a
NI without which the same will not
be complete.
 Material Particulars
A change in the ff. is considered a
material alteration (Sec. 125):
 Date
 Sum payable
 Either for principal or interest
 Time or place of payment
 Number or relations of the
parties
 Medium or currency in which
payment is to be made
 Or which adds a place of
payment where no place of
payment is specified
b. That he became the holder of
it before it was overdue and without
notice that it had been previously
dishonored, if such was the fact
 “OVERDUE”
The ff. cannot be HDCs: (Sec. 53)
 A holder who became such after
the date of maturity of the
instrument (instrument is
overdue);
 In case of demand instruments,
a holder who negotiates it after
an unreasonable length of time
after its issue
 Instruments with fixed maturity
but subject to acceleration:
ultimate date of maturity is the
date of maturity for the purpose
of determining whether a
purchaser is a HDC
 Undated instruments: Prima
facie presumption that it was
negotiated before it was overdue
(Sec. 45).
Note: An overdue instrument is still
negotiable, but it is subject to the
defense existing at the time of the
transfer.
 An instrument is not invalid for the
reason only that it is ANTE-DATED
OR POSTDATED provided not done
for an illegal or fraudulent purpose.
The person to whom an instrument
 REVIEWER IN COMMERCIAL LAW
so dated is delivered acquires the
title thereto as of the date of delivery
(Sec. 12).
c. That he took it in good faith
AND for value
 “VALUE”
 Any consideration sufficient to
support a simple contract. An
antecedent or pre-existing debt
constitutes value, whether the
instrument is payable on
demand or at a future time (Sec.
25)
 “HOLDER FOR VALUE”
 Where value has at any
time been given for the
instrument, the holder is
deemed a HFV in respect to all
parties who become such prior
to that time (Sec. 26); and
 Where the holder has a
lien on the instrument, he is
deemed a HFV to the extent of
his lien
(Sec .27).
 Presumption: Every NI is
deemed prima facie issued for
valuable consideration; and
every person whose signature
appears thereon is deemed to
have become a party thereto for
value (Sec. 24).
 Bayani vs. People, (2004):
Such presumption cannot be
overcome by the petitioner’s bare
denial of receipt of the
consideration.
 “ GOOD FAITH”
 Holder must have taken
the instrument in good faith and
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.
 NOT a Holder in GOOD
FAITH: Holder acted in bad faith
or holder had NOTICE OF
DEFECT.
 “ACTUAL KNOWLEDGE”
Sec 56. What constitutes notice of
defect
To constitute notice of an infirmity in
the instrument or defect in the title of
the person negotiating the same, the
person to whom it is negotiated must
have had actual knowledge of the
infirmity or defect, or knowledge of such
Chapter IV. Holders
facts that his action in taking the
instrument amounted to bad faith.
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.
 “SUSPICIOUS CIRCUMSTANCES”
 BAD FAITH - does not
require actual knowledge of the
exact fraud that was practiced;
knowledge that there was
something wrong about the
assignor’s acquisition of title is
sufficient.
State Investment House vs. IAC (1989): A
check with 2 parallel lines in the upper left
hand corner means that it could only be
deposited and may not be converted to cash.
Consequently, such circumstance should
put the payee on inquiry and upon him
devolves the duty to ascertain the holders’
title to the check or the nature of his
possession. Failing in this respect, the
payee is declared guilty of gross
negligence amounting to legal absence of
good faith and as such the consensus of
authority is to the effect that the holder
of the check is not a holder in good faith.
 “DEFECTIVE TITLE”
Title is NOT defective when at the
time it was negotiated to him, he
had NO notice of:
 any infirmity in instrument
 any defect in title of person
negotiating
Title is DEFECTIVE when (Sec. 55):
 instrument /
signature obtained by fraud,
duress, force or fear or other
unlawful means OR for an illegal
consideration; or
 instrument is
negotiated in breach of faith, or
fraudulent circumstances
 NOTICE of infirmity or
defect – actual knowledge of the
infirmity or defect OR knowledge
of such facts that his action in
taking the instrument amounted
to bad faith (Sec.56)
 RIGHT of a transferee
who receives NOTICE of any
infirmity or defect BEFORE he
has PAID THE FULL amount for
the instrument. He will be
deemed a HDC only to the extent
 REVIEWER IN COMMERCIAL LAW
of the amount therefore paid by
him (Sec.54)
2. Rights of a Holder in Due
Course
a. To sue on the instrument in his own
name (Sec. 51)
b. To receive payment on the instrument–
discharges the instrument (Sec. 51)
c. Holds instrument free of any defect of
title of prior parties (Sec. 51)
d. Free from defenses available to prior
parties among themselves (Sec. 57)
e. May enforce payment of instrument for
full amount, against all parties liable
(Sec. 57)
f. Only a HDC may enforce payment on
the promissory note (BPI vs. Alfred
Berwin & Co, 1928).
C. Holder NOT in Due Course
1. Presumption in Favor of Due
Course Holding
Every holder is deemed prima facie to
be a holder in due course (Sec. 59).
a. BURDEN SHIFTS when it is
shown that the title of any person
who has negotiated the instrument
was defective. Holder MUST PROVE
that he or some person under whom
he claims acquired the title as a
holder in due course.
b. But 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. (Sec. 59)
c. However, this presumption
arises only in favor of a person who
is a holder as defined in Sec. 191,
meaning a “payee or indorsee of a
bill or note, who is in possession of
it, or the bearer thereof.”
2. Holder Not In Due Course
a. One who became a holder of an
instrument without any, some or all
of the requisites under Sec. 52.
b. With respect to demand
instruments, if it is negotiated an
unreasonable length of time after its
issue, the holder is deemed not a
holder in due course. (Sec. 53)
Chapter IV. Holders
c. Rights of a holder not in due
course:
 It can enforce the instrument
and sue under it in his own
name.
 Prior parties can avail
against him any defense among
these prior parties and prevent
the said holder from collecting in
whole or in part the amount
stated in the instrument
D. Accommodation Party
(Asked in 91, 96, 98, 05)
Sec. 29. Liability of accommodation party.
An accommodation party is 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. 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.
1. Liability
The person to whom the instrument
thus executed is subsequently
negotiated has a right of recourse
against the accommodation party in
spite of the former’s knowledge that no
consideration passed between the
accommodation and accommodated
parties (Sec. 29).
Stelco Marketing Corp. vs. C.A. (1992):
Liable on the instrument to a holder for value
notwithstanding such holder at the time of the
taking of the instrument knew him to be only
an accommodation party. Hence, As regards,
an AP, the 4th condition, i.e., lack of notice of
infirmity in the instrument or defect in the
title of the persons negotiating it, has no
application.
2. Accommodation Party as Surety
a. AP is generally regarded as a surety for
the party accommodated;
b. When AP makes payment to holder of
the note, he has the right to sue the
accommodated party for reimbursement
(Agro Conglomerates, Inc. vs. CA 2000).
REVIEWER IN COMMERCIAL LAW Chapter V. Defenses and Equities

Chapter V. Defenses and Equities between public 10. Negotiation under

(Asked in 95, 98, 07) enemies; circumstances that
11. Illegality – if amount to fraud;
declared void for 11. Mistake;
A. INCAPACITY any purpose 12. Intoxication
B. ILLEGALITY 12. Forgery. (according to better
C. FORGERY authority);
D. MATERIAL ALTERATION 13. Ultra vires acts of
E. FRAUD corporations where
F. DURESS the corporation
G. ABSENCE OR FAILURE OF has the power to
CONSIDERATION issue negotiable
H. PRESCRIPTION paper but the
I. IRREGULARITY IN DELIVERY 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
REAL DEFENSES PERSONAL contracting with
DEFENSES the insane person;
Those that attach to Those which are and
the instrument itself available only against 16. Illegality of
and are available a person not a holder contract where the
against all holders, in due course or a form or
whether in due subsequent holder who consideration is
course or not, but stands in privity with illegal.
only by the parties him. (a.k.a. equitable
entitled to raise defenses) A. Incapacity Civil Code
them. (a.k.a provides that
absolute defenses) a contract
REAL defense but
1. Material 1. Absence or failure
available only to with an illegal
Alteration; of consideration,
2. Want of delivery partial or total; the incapacitated cause is void.
of incomplete 2. Want of delivery of party (ex. minor 2. REAL when
instrument; complete or corporation); the law
3. Duress instrument; the indorsement expressly
amounting to 3. Insertion of wrong or assignment of provides for
forgery; date in an the instrument by illegality as a
4. Fraud in factum instrument; a corp. or by an real defense
or fraud in esse 4. Filling up of blank (statutory
infant passes the
contractus; contrary to
property therein, declaration of
5. Minority authority given or
(available to the not within notwithstanding illegality).
minor only); reasonable time; that from want of
6. Marriage in the 5. Fraud in capacity, the C. Forgery
case of a wife; inducement; corp. or infant (Asked in 90,
7. Insanity where 6. Acquisition of may incur no 92, 95, 97, 00,
the insane instrument by liability thereon 01, 04, 05)
person has a force, duress, or (Sec. 22).
guardian fear;
 Counterfeit
appointed by 7. Acquisition of the
the court; instrument by making or
8. Ultra vires acts unlawful means; B. Illegality fraudulent
of a corporation 8. Acquisition of the alteration of
9. Want of instrument for an 1. In general, a any writing,
authority of illegal PERSONAL which may
agent; consideration; defense even if consist of:
10. Execution of 9. Negotiation in 1409 of the
instrument breach of faith;
REVIEWER IN COMMERCIAL LAW Chapter V. Defenses and Equities
a. Signing of through or liable because of their warranties.
another’s under 3. Party who the made the forgery
name with such liable.
intent to signature
defraud; Exception:
or Unless the
b. Alteration party against Payee’s signature 1. Maker and payee not liable.
of an whom it is forged
instrumen sought to
t in the enforce such 2. Indorsers subsequent to forgery a
name, right is liable.
amount, precluded
name of from setting 3. Party who made the forgery is liable
payee, etc. up the forgery Indorser’s signature 1. Maker, payee and indorser who
forged signature was forged is not liable.
with intent or want of
to defraud. authority (Sec. 2. Indorsers subsequent to forgery a
23). liable. (Because of their warranties)
 General Rule:  Persons
When a precluded
signature is from setting 3. Party who made the forgery is liable
forged or up defense of
made without forgery
the authority 1. Those who
of the person, warrant or
the signature admit the 1. Bill of Exchange
(not genuinene
instrument ss of the ORDER INSTRUMENT
itself and the signature
1. Drawer is not liable because he w
genuine in Drawer’s signature never a party to the instrument.
signatures) is question. forged 2. Drawee is liable if it paid (
wholly This recourse to drawer) because
inoperative includes admitted the genuiness of t
Effects: indorsers, drawer’s signature. Drawee cann
 No right to persons recover from the collecting ba
retain the negotiatin because there is no privity betwe
instrumen g by the collecting bank and the draw
t delivery The latter does not give a
 No right to and warranty regarding the signature
give a acceptors. the drawer. (Associated Bank v
discharge 2. Those CA)
therefore who, by 3. Indorsers subsequent to forge
their acts, liable (such as collecting bank
 Nor right
silence, or last endorser)
to enforce
negligence 4. Party who made the forgery is liab
payment
, are Payee’s signature 5. Drawer, drawee and payee n
thereof forged liable.
against estopped
6. Indorsers subsequent to forgery a
any party from
liable. (such as collecting bank)
thereto, setting up
7. Party who made the forgery is liab
can be the
acquired defense of
forgery.

 Rules on Forgery Indorser’s 1. drawer, payee and indorser who

signature forged signature was forged not liable.
1. Promissory Note 2. Drawee is liable if it paid.
3. Indorsers subsequent to forgery a
ORDER INSTRUMENT liable. (such as collecting bank)
Maker’s signature 1. Maker is not liable because he never
4. Party who made the forgery
forged became a party to the instrument. liable.
2. Indorsers subsequent to forgery are
REVIEWER IN COMMERCIAL LAW Chapter V. Defenses and Equities
drawee deposit
bank. or/dra
 Acceptance (Samsung Rule: The wer to
and payment Constructi drawee careful
under on Co. vs. who pays ly
mistake Far East the holder examin
 A bank is Bank and of the bill e
bound to Trust Co., cannot bank’s
know the 2004). recover statem
signatures from the ents,
of its  Extensions of holder cancell
depositors. Price vs. Neal what he ed
If bank doctrine paid under checks
pays a  Doctrine: mistake , his
forged As  Stop check
check it between Payment stubs,
must be equally Order is and
considered innocent one issued other
as making persons, by the pertine
the the drawee drawer of nt
payment who pays a check record
out of its money on counterma s
own funds a check or nding his within
and draft the first order a
cannot signature to the reason
charge the on which drawee able
account of was forged bank to time
the CANNOT pay the and to
depositor recover the check. report
whose money Rule: The any
signature from the drawee errors
was forged one who bank is withou
(PNB vs. received it. bound to t
Quimpo The follow the unreas
1988). drawee is order, onable
 Conseque bound to provided it delay.
ntly, if a know the is received  If a
bank pays signature prior to its drawer
a forged of its certificatio /depos
check, it depositor. n or itor’s
must be  The bar to payment neglige
considered recovery is of the nce
as paying extended check. and
out of its to delay
funds and overdrafts  Effects of should
cannot and stop Negligence of cause
charge the payment Depositor a bank
amount so orders.  If such to
paid to the  Overdraft negligence honor
account of occurs was the a
the when a proximate forged
depositor. check is cause of check,
A bank is issued for the loss, drawer
liable, an amount the bank cannot
irrespectiv more than (drawee) is later
e of its what the NOT liable compla
good faith, drawer  It is in
in paying has in the should
a forged deposit duty of bank
check with the the refuse
REVIEWER IN COMMERCIAL LAW Chapter V. Defenses and Equities
to from and tment
recredi the not had
t his holder forgeri done
accoun or the es of its
t. forger the duty to
 When  When drawer ascerta
drawee drawee or in the
may may not maker’ genuin
recover recover s eness
from from signat of the
drawer holder ure indors
 Where  Where (PNB v ements
the the CA, (BPI v
instru instru 1968). CA,
ment is ment is  1992).
origina origina collecti  In
lly a lly a ng presen
bearer bearer bank ting
instru instru or last the
ment, ment , indors checks
becaus becaus er for
e the e the general clearin
indorse indorse ly g the
ment ment suffers collecti
can be can be the ng
disrega disrega loss agent,
rded as rded as becaus made
being being e it has an
unnece unnece the expres
ssary ssary duty to s
to the to the ascerta guaran
holder’ holder’ in the tee on
s title s title genuin the
 Indorse  If eness validity
ment drawee of all of “all
forged fails to prior the
by an act indors prior
employ prompt ements endors
ee or ly , if consid ements
agent he ering .”
of the delays that  The
drawer in the act drawee
 If due informi of bank
to the ng the presen is not
drawer’ holder ting similar
s whom the ly
neglige he paid check situate
nce/de  Between for d as
lay, the Drawee payme the
forgery Bank and nt to collecti
is not Collecting the ng
discove Bank drawee bank
red  is an becaus
until it bank asserti e the
is too only on that former
late for liable the makes
the for party no
bank forged makin warran
to indors g the ty as to
recover ements presen the
REVIEWER IN COMMERCIAL LAW Chapter V. Defenses and Equities
genuin ng alteration 2. Sum
eness bank. and payable,
of any  subsequen either for
indors both t principal
ement. are indorsers. or interest
The guilty However, 3. Time or
drawee of if an place of
bank’s neglige altered payment
duty is nce, instrumen 4. Number or
but to the t is relations
verify degree negotiated of the
the of to a HDC, parties
genuin neglige he may 5. Medium or
eness nce of enforce currency
of the each payment in which
drawer’ will be thereof payment is
s weighe according to be made
signat d in to its 6. That
ure consid original which
and ering tenor adds a
not of the regardless place of
the amoun of whether payment
indors t of the where no
ement loss alteration place of
becaus which was payment is
e the each innocent specified
drawer should or 7. Any other
is its bear fraudulent change or
client. (BPI v . addition
 CA, b. which
the 1992) Alteration by alters the
neglige a stranger effect of
nce of (spoliatio the
D. Material
the n)- the instrumen
drawee Alteration effect is t in any
bank (Asked in 95, the same respect.
is the 96, 99) as where
proxim the E. Fraud
ate  Any change in alteration
cause the is made by Fraud Fraud
of the instrument a party in in
collecti which affects which a factu esses
ng or changes the HDC can m or contra
liability of the fraud ctus or
bank’s recover on in fraud
payme parties in any the
way. induce in
nt of a original ment executi
check tenor of on
with a  Effects: the The The
forged a. Alteration instrumen person person
indors by a party t (Sec. who is
ement, – Avoids 124). signs induce
the the the d to
drawee instrumen  Changes in
instru sign an
t except ment instru
bank the following intends ment
may be as against constitute
the party to sign not
held material the knowin
liable who made, alterations same g its
to the authorized (Sec. 125): as a NI charact
collecti , or 1. Date but er as a
assented was bill or
to the induce note
REVIEWER IN COMMERCIAL LAW Chapter V. Defenses and Equities
d by Article 559 which period of an undelivered
fraud permits an owner action based on a (Sec 15)
BPI vs Franco, who has lost or written contract is a. Who may
(2007, Nachura) has been 10 years from be
unlawfully
accrual of cause estopped
Q: Can a bank deprived of a
movable to of action. from
unilaterally freeze
a depositor’s recover the exact raising the
account on the same thing is not real
I. Irregularity
suspicion that the applicable in the defense
depositor was case at bar since
in Delivery under Sec
involved in a what is involved (Asked in 97, 15? A
multi-million peso here is money 02, 04, 05) drawee
scam carried out which is a generic bank
against the bank? and fungible 2. Complete
instrument whose
thing.
A: NO. The undelivered negligent
deposit of money (Sec. 16). custody of
in banks is F. Duress a. Between the
governed by the immediate checks,
Civil Code There may be after
cases where the parties
provisions on partial
simple loan or duress employed and those
who are execution,
mutuum. As is so serious that contribute
there is a debtor- it will give rise to similarly
situated, d to its
creditor a real defense
relationship delivery escape.
because of the b. If
between a bank must be
and its depositor,
lack of completed
contractual coupled
a bank ultimately with the and
acquired intent. Although negotiated
the signer may intention
ownership of the without
deposits, but know what he is of
transferrin authority,
such ownership signing, there not a valid
is coupled with a may be wanting g title to
the contract
corresponding the intent or
obligation to pay instrument against a
willingness to be person
the depositor an .
equal amount on bound. Then it who has
becomes a real b. As to HDC,
demand. The it is signed
bank cannot defense. before
conclusivel
prevent the delivery of
depositor from y
G. Absence or presumed the
demanding contract
payment by failure of that there
even in the
drawing checks Considerati was valid
against his delivery; hands of
on HDC but
current account, and
or asking for the Personal defense c. subsequen
release of the to the prejudiced As against an t indorsers
funds in his
party and immediate are liable.
savings account. This is a
To grant any available against party and
any person not remote real
bank the right to defense.
take whatever HDC. party who
action it pleases is not a
on deposits HDC, 4. Incomplete
which it H. Prescription instrument
presumpti
supposes are on of a delivered
derived from Refers to (Sec. 14)
extinctive valid and
shady
intentional a. Holder has
transactions, prescription and prima facie
would open the may be raised delivery is
rebuttable. authority
floodgates of even against a to fill up
public distrust in HDC. Under the
the banking 3. Incomplete the
Civil Code, the
industry. prescriptive instrument
REVIEWER IN COMMERCIAL LAW Chapter V. Defenses and Equities
instrument
.
b. The
instrument
must be
filled up
strictly in
accordanc
e with the
authority
given and
within
reasonable
time
c. HDC may
enforce the
instrument
as if filled
up
according
to no. 2.
REVIEWER IN COMMERCIAL LAW Chapter VI. Parties Who are Liable

Chapter VI. Parties Who are Liable

2. Maker
A. PRIMARILY LIABLE a. Promises to pay the instrument
1. GENERAL CONCEPTS according to its tenor
2. MAKER b. Admits existence of payee and his then
3. DRAWEE capacity to indorse.
4. ACCEPTOR c. Therefore, IS PRECLUDED from setting
B. SECONDARILY LIABLE
up the following defenses:
1. DRAWER
2. GENERAL OR UNQUALIFIED
 the payee is a fictitious person
INDORSER  the payee was insane, a minor, or a
3. IRREGULAR INDORSER corporation acting ultra vires
4. ORDER OF LIABILITY AMONG
INDORSERS 3. Drawee
5. LIABILITY OF AN AGENT Drawee: A person on whom a bill of
C. LIMITED LIABILITY exchange or check is drawn and who is
D. ORDER OF LIABILITY
ordered to pay it.
E. LIABILITIES VS. WARRANTIES
a. Liability of drawee to HOLDER
A. Primarily Liable  NOT liable on the instrument until
(Secs. 60 and 62) he accepts it and even a holder in
due course cannot sue him on the
1. General Concepts instrument before his acceptance
 Persons who by the terms of the  A bill/check of itself does NOT
instrument are absolutely required to operate as an assignment of the
pay the same. funds in the hands of the
a. Maker of promissory note drawee/bank (Sec 189), and the
b. Acceptor of bill of exchange drawee/bank is NOT liable on the
 Unconditionally liable; he is duty bound bill unless and UNTIL he/it
to pay the holder at date of maturity, ACCEPTS (or certifies) the same
WON holder demands payment from (Sec. 127).
him, and he is not relieved from liability b. Liability of drawee to DRAWER
even if the instrument should become  Before payment or certification by
overdue due to failure of holder to make the bank, the drawer may
such demand. countermand the order, and
payment thereafter to the payee by
Maker Acceptor or Drawee the bank is wrongful.
A. Engages to A. Engages to pay  Since a check is not an assignment
pay according to according to the tenor of of the drawer’s fund, the bank is
the tenor of the his acceptance;
liable for paying it in disregard of
instrument; and
the countermand.
B. Admits the B. Admits the existence of  Moreover, drawee can no longer
existence of the the drawer, the recover what it voluntarily paid to
payee and his genuineness of his the holder of the uncertified and
capacity to signature and his capacity unaccepted instrument.
indorse. and authority to draw the
instrument; and 4. Acceptor
(Asked in 98)
C. Admits the existence of
the payee and his capacity Upon acceptance, the acceptor engages to
to indorse. pay the bill according to the tenor of his
acceptance, and admits the following (Sec.
A bill of itself does not 62):
operate as an assignment a. existence of drawer
of funds in the hands of b. genuineness of his signature
the drawee available for c. his capacity and authority to draw the
the payment thereof and instrument
the drawee is not liable
d. existence of payee and his then capacity
unless and until he
accepts the same to endorse
(Sec.127)
 REVIEWER IN COMMERCIAL LAW Chapter VI. Parties Who are Liable

capacity to indorse; some other

B. Secondarily Liable (Secs. 61, 64 and and engages that, capacity (Sec.
66) on due 63).
(Asked in 07) presentment, the  A person, who
instrument will be places his
accepted or paid, or
DRAWER GENERAL IRREGULAR signature on
both, according to
INDORSER INDORSER an instrument
its tenor, and that if
A. Admits A. Warrants A person, not negotiable by
it be dishonored
the all otherwise a delivery,
and the necessary
existence of subsequent party to an
proceedings on incurs all the
the payee HDC - instrument,
and his places his
dishonor be duly liabilities of an
taken, he will pay indorser (Sec.
capacity to a. That the signature
the amount thereof 67).
indorse; instrument is thereon in
to the holder or to
genuine and blank before
any subsequent
3.
in all respect delivery (Sec. Indorser
indorser who may
what it 64). When a person
be compelled to pay
purports to
it. But the drawer not otherwise a
be A. If
may insert in the party to an
instrument
instrument an instrument,
b. He has payable to the
express stipulation places thereon his
good title to order of a 3rd
negativing or
it; person, he is signature in blank
limiting his own
liable to the
liability to the
before delivery, he
c. All prior payee and is liable as an
holder.
parties had subsequent indorser, in
B. Engages capacity to parties. accordance w/
that the contract  Limiting
Liability: these rules:
instrument
will be d. The drawer may a. Instrument
accepted or instrument is, insert in the payable to
paid by the at the time of instrument an order of 3rd
party endorsement, express person: liable
primarily valid and
stipulation to payee and
liable; and subsisting. B. If to all
instrument negativing/lim
iting his own subsequent
B. Engages payable to parties
C. Engages that the order of maker liability to the
holder. b. Instrument
that if the instrument or drawer or
instrument will be to bearer, he payable to the
is accepted or is liable to all order of
2.
dishonored paid, or both, parties maker/drawer
and proper as the case subsequent to
Unqualified , or payable to
proceedings may be, the maker or Indorser bearer: liable
are brought, according to drawer.  Every person to all parties
he will pay its tenor; and who indorses subsequent to
to the party WITHOUT maker/drawer
entitled to C. If he signs qualification c. Signs for
be paid. C. If the for accommo- (Sec. 66.)
instrument is dation of the accommodatio
 A person n of payee,
dishonored payee, he is
placing his liable to all
and liable to all
necessary parties subse- signature parties
proceedings quent to the upon an subsequent to
on dishonor payee. instrument payee (Sec 64)
be duly other than as
taken, he will a maker,
pay to the
4. Order of
drawer, or
party entitled Liability
acceptor
to be paid. unless he among
indicates by Indorsers
1. The drawer by appropriate (Sec. 68)
drawing the a. Among
words his
Sec. 61. Liability instrument admits themselves:
the existence of the
intention to be
of drawer. bound in liable prima
payee and his then
facie in the
 REVIEWER IN COMMERCIAL LAW Chapter VI. Parties Who are Liable
order they person that capacit
indorse, but adds to he’s y to
proof of his only contrac
another signature acting t;
agreement words as
D. He
admissible indicating agent. has no
b. Holder may that he (Sec. knowle
sue any of the signs on 69) dge of
indorsers, behalf of a any
regardless of principal, fact
order of not liable C. Limited which
indorsement if he was Liability would
c. Joint duly (Sec. 65, impair
Metropol the
payees/indors authorized
Financing v. validity
ees deemed to  Exception of the
indorse jointly s: Sambok,
instru
and severally a. Mere 1983) ment
additio or
5. Liabili n of QUALI PERSO render
words FIED N it
ty of an INDOR NEGOT
describ valuele
AGENT SER IATING ss.
a. Agency ing BY
 Signature him as DELIV
an PERSO GENE
of any ERY
N RAL
party may agent Every NEGO INDOR
be made withou person TIATIN
t negotia SER
by duly G BY
disclosi ting MERE
authorized
ng his instru DELIV
agent, ment
establishe princip ERY
by OR BY
d as in al deliver A.
b. Where QUALI
ordinary y or by Warran FIED
agency a a ties INDOR
 Signature broker qualifie same SEME
per or d as NT
agent endors those of
procuratio No There
negotia ement qualifie
n operates second is
tes an warran d
as notice ary second
ts that: indorse
that the instru liability ary
rs; and
ment ; but is
agent has A. liabilit
withou liable
limited Instru
for y, and
authority t ment is B. warran
breach
to sign, indorse genuin Warran ties
of
and the ment, e and ties
warran
he in all extend
principal ty
incurs respect to
is bound s what immedi
Warran Warra
only in all ts that nts
it ate
case the liabiliti he has that
purpor transfe
agent in so es in ts to ree
no the
Sec. knowle
signing be; only. instru
65, dge of
acted any ment
within the unless B. He is, at
fact
actual he has
which the
disclos good
limits of would time of
es title to
his it;
impair his
authority name the indors
b. Liability of validity ement,
C. All
princip of the
 General prior valid
al and instru
rule: parties
ment
and
Where fact had subsist
or
 REVIEWER IN COMMERCIAL LAW Chapter VI. Parties Who are Liable
render ing dishonor of Primary and Warranties of parties
it the secondary liability
valuele instrument of parties
ss (AQUINO). Makes the parties Impose no direct
 As respect one liable to pay the sum obligation to pay in
certain in money the absence of breach
D. Order of another,
stated in the thereof. In case of
Liability indorsers are instrument. breach, the person
liable prima who breached the
General rule: facie in the same may either be
One whose order in which liable or barred from
signature does they indorse asserting a particular
unless the defense.
not appear on the
contrary is Conditioned on Does not require
instrument shall presentment and presentment and
not be liable proven
notice of dishonor notice of dishonor.
thereon. (Sec.68)
(CAMPOS) (CAMPOS)

Exceptions: E. Liabilities
a. The principal
vs.
who signs
through an
Warranties
agent is liable;
b. The forger is
liable;
c. One who
indorses in a
separate
instrument
(allonge) or
where an
acceptance is
written on a
separate
paper is liable;
d. One who signs
his assumed
or trade name
is liable; and
e. A person
negotiating by
delivery (as in
the case of a
bearer
instrument) is
liable to his
immediate
indorsee.

Notes:
 There is no
order of
liability
among the
indorsers as
against the
holder. He is
free to choose
to recover
from any
indorser in
case of
 REVIEWER IN COMMERCIAL LAW
Chapter VII. Enforcement of
Liability
A. LIABILITIES OF PARTIES
B. STEPS TO CHARGE PARTIES LIABLE
C. PRESENTMENT
D. ACCEPTANCE
E. NOTICE OF DISHONOR
F. PROTEST
G. ACCEPTANCE OR PAYMENT FOR HONOR
A. Liabilities of Parties
1.
The unconditional promise attaches the
moment the maker makes the
instrument while the acceptor’s assent
to the unconditional order attaches the
moment he accepts the instrument. No
further act is necessary in order for the
liability to accrue. Presentment for
payment is all that is necessary.
2. Secondary liability
B. Steps to charge parties liable
1. Steps in promissory note (indorsers)
a. Presentment for payment to the
maker.
b. Notice of dishonor should be given,
if dishonored by non-payment.
2. Steps in bill of exchange
a. Presentment for acceptance in the
following instances:
a. Where the bill is payable after
sight, or when it is necessary in
order to fix the maturity of the
instrument;
b. Where the bill expressly
stipulates that it shall be
presented for acceptance;
c. Where bill is drawn payable
elsewhere than at the residence
or place of business of the
drawee. (Sec. 143)
Note: In all the above cases, the
holder must either present the bill
for acceptance or negotiate it within
a reasonable time; otherwise, the
drawer and all indorsers are
discharged (Sec. 144)
b. If dishonored by non-acceptance:
 Notice of dishonor given to
drawer and indorsers.
 Protest in case of a foreign bill.
Chapter VII. Enforcement of Liability
c. If bill is accepted, then present the
bill for payment to the acceptor.
d. If dishonored upon presentment for
payment:
 Notice of dishonor to persons
secondarily liable.
 Protest for dishonor by non-
payment in case of foreign bill.
C. Presentment
(Asked in 94)
1. Definition
a. The production of a Bill of Exchange
to the drawee for his ACCEPTANCE,
or to the drawer or acceptor for
PAYMENT; or
b. The production of a PN to the party
liable for payment
2. Presentment for acceptance
a. When necessary
Sec. 143. When presentment for acceptance
must be made.
Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in
any other case, where presentment for
acceptance is necessary in order to fix the
maturity of the instrument; or
(b) Where the bill expressly stipulates that it
shall be presented for acceptance; or
(c) Where the bill is drawn payable elsewhere
than at the residence or place of business of
the drawee.
In no other case is presentment for acceptance
necessary in order to render any party to the bill
liable.
b. Effect of non-presentment within
reasonable time – drawer and all
indorsers discharged (Sec. 144).
 What is reasonable time involves
a consideration of the nature of
the instrument, usage of trade
or business with respect to the
instrument, and the facts of
each case.
c. How made
Sec. 145. Presentment; how made.
Presentment for acceptance must be made by or
on behalf of the holder at a reasonable hour, on
a business day and before the bill is overdue, to
the drawee or some person authorized to accept
or refuse acceptance on his behalf; and
(a) Where a bill is addressed to two or more
drawees who are not partners, presentment
must be made to them all unless one has
authority to accept or refuse acceptance for
 REVIEWER IN COMMERCIAL LAW
all, in which case presentment may be made
to him only;
(b) Where the drawee is dead, presentment may
be made to his personal representative;
(c) Where the drawee has been adjudged a
bankrupt or an insolvent or has made an
assignment for the benefit of creditors,
presentment may be made to him or to his
trustee or assignee.
d. When made
Sec. 146. On what days presentment may be
made.
A bill may be presented for acceptance on any
day on which negotiable instruments may be
presented for payment under the provisions of
Sections seventy-two and eighty-five of this Act.
When Saturday is not otherwise a holiday,
presentment for acceptance may be made before
twelve o'clock noon on that day.
Sec. 72. What constitutes a sufficient
presentment.
Presentment for payment, to be sufficient, must
be made:
(a) By the holder, or by some person authorized
to receive payment on his behalf;
(b) At a reasonable hour on a business day;
(c) At a proper place as herein defined;
(d) To the person primarily liable on the
instrument, or if he is absent or
inaccessible, to any person found at the
place where the presentment is made.
Sec. 85. Time of maturity.
Every negotiable instrument is payable at the
time fixed therein without grace. When the day
of maturity falls upon Sunday or a holiday, the
instruments falling due or becoming payable on
Saturday are to be presented for payment on the
next succeeding business day except that
instruments payable on demand may, at the
option of the holder, be presented for payment
before twelve o'clock noon on Saturday when
that entire day is not a holiday.
e. When Excused
Sec. 148. Where presentment is excused.
Presentment for acceptance is excused and a bill
may be treated as dishonored by non-acceptance
in either of the following cases:
(a) Where the drawee is dead, or has
absconded, or is a fictitious person or a
person not having capacity to contract by
bill.
(b) Where, after the exercise of reasonable
diligence, presentment can not be made.
(c) Where, although presentment has been
irregular, acceptance has been refused on
some other ground.
Chapter VII. Enforcement of Liability
f. Dishonor and Effects
Sec. 149. When dishonored by non-
acceptance.
A bill is dishonored by non-acceptance:
(a) When it is duly presented for acceptance
and such an acceptance as is prescribed by
this Act is refused or can not be obtained; or
(b) When presentment for acceptance is
excused and the bill is not accepted.
Sec. 150. Duty of holder where bill not
accepted.
Where a bill is duly presented for acceptance
and is not accepted within the prescribed time,
the person presenting it must treat the bill as
dishonored by nonacceptance or he loses the
right of recourse against the drawer and
indorsers.
Sec. 151. Rights of holder where bill not
accepted.
When a bill is dishonored by non-acceptance, an
immediate right of recourse against the drawer
and indorsers accrues to the holder and no
presentment for payment is necessary.
3. Presentment for payment
a. When necessary
In order to charge the drawer and
indorsers (Sec. 70)
b. When NOT necessary
 To charge the person primarily
liable on the instrument (Sec.
70)
 To charge the drawer where he
has no right to expect or require
that the drawee or acceptor will
pay the instrument. (Sec. 79)
 To charge an indorser where the
instrument was made or
accepted for his accommodation
and he has no reason to expect
that the instrument will be paid
if presented. (Sec. 80)
c. When Excused
 Where, after the exercise of
reasonable diligence,
presentment cannot be made;
 Where the drawee is a fictitious
person;
 By waiver of presentment,
express or implied.
d. When a bill is dishonored by non-
acceptance – immediate right to
recourse accrues to holder (Sec.
151)
 REVIEWER IN COMMERCIAL LAW
e. In case of waiver of protest, whether
in the case of a foreign bill of
exchange or other NI – deemed to be
a waiver not only of a formal protest
but also of presentment and notice
of dishonor. (Sec. 111)
f. Date and time of presentment:
 bearing fixed maturity / not
payable on demand – on the day
it falls due if day of maturity
falls on Sunday or a holiday, the
instruments falling due or
becoming payable on Saturday
are to be presented for payment
on the next succeeding business
day (Sec. 85)
 Payable on demand – within a
reasonable time after its issue, iv
at the option of the holder, may
be presented for payment before
twelve o'clock noon on Saturday
when that entire day is not a
holiday (Sec. 85)
 Demand bill of exchange –
within a reasonable time after
the last negotiation. (Sec. 71)
Note: Although presentment was
made within a reasonable time from
last negotiation, it may have been
made within an unreasonable time
from issuance. Thus holder may
still not be a holder in due course
under Sec. 71
g. Check - must be presented for
payment within reasonable time
after its issue or drawer will be
discharged from liability thereon to
extent of loss caused by delay
4. Dishonor by Nonpayment
Sec. 83. When instrument dishonored by non-
payment.
The instrument is dishonored by non-payment
when:
(a) It is duly presented for payment and
payment is refused or cannot be obtained; or
(b) Presentment is excused and the instrument
is overdue and unpaid.
Sec. 84. Liability of person secondarily liable,
when instrument dishonored.
Subject to the provisions of this Act, when the
instrument is dishonored by non-payment, an
immediate right of recourse to all parties
secondarily liable thereon accrues to the holder.
Chapter VII. Enforcement of Liability
D. Acceptance
The signification by the drawee of his
assent to the order of the drawer.
1. Form: Must be in writing and signed
by the drawee and must not express
that the drawee will perform his
promise by any other means than the
payment of money. (Sec. 132) If request
for a written acceptance is refused, the
holder may treat the bill as dishonored
(Sec. 133)
2. Kinds:
a. General -- assents without
qualification to the order of the
drawer
b. Qualified - which in express terms
varies the effect of the bill as drawn
 Conditional - makes payment by
the acceptor dependent on the
fulfillment of a condition therein
stated
 Partial - an acceptance to pay
part only of the amount for
which the bill is drawn.
 Local - an acceptance to pay
only at a particular place.
 Qualified as to time - the
acceptance of some one or more
of the drawees but not of all.
(Sec. 141)
3. Implied Acceptance
If after 24 hours, the drawee fails to
return the instrument. He is also
deemed to have accepted the
instrument when he destroys the same.
FEBTC vs. Gold Palace Jewellery Co,
(Nachura, 2008):
Q: What is the implication of payment without
acceptance by a drawee
A: Act No. 2031, or the Negotiable
Instruments Law (NIL), explicitly provides that
the acceptor, by accepting the instrument,
engages that he will pay it according to the
tenor of his acceptance. This provision applies
with equal force in case the drawee pays a bill
without having previously accepted it. His
actual payment of the amount in the check
implies not only his assent to the order of
the drawer and a recognition of his
corresponding obligation to pay the
aforementioned sum, but also, his clear
compliance with that obligation. Actual
payment by the drawee is greater than his
acceptance, which is merely a promise in
writing to pay. The payment of a check
 REVIEWER IN COMMERCIAL LAW
includes its acceptance.
E. Notice of dishonor
(Asked in 96)
Notice given by holder or his agent to party
or parties secondarily liable that the
instrument was dishonored by non-
acceptance by the drawee of a bill or by
non-payment by the acceptor of a bill or by
non-payment by the maker of a note. (Sec.
89)
1. Requisites:
a. Given by holder or his agent, or by
any party who may be compelled by
the holder to pay (Sec. 90)
b. Given to secondary party or his
agent (Sec. 97)
c. Given within the periods provided by
law (Sec. 102)
d. Given at the proper place (Secs. 103
and 104)
2. When dispensed with:
a. When party to be notified knows
about the dishonor, actually or
constructively (Secs. 114-117)
b. If waived (Sec. 109)
c. When after due diligence, it cannot
be given (Sec. 112).
3. To whom given
a. Non-acceptance (bill) – to persons
secondarily liable, namely, the
drawer and indorsers as the case
may be.
b. Non-payment (both bill and note) –
indorsers.
Note:
Notice must be given to persons
secondarily liable. Otherwise, such
parties are discharged. Notice may be
given to the party himself or to his
agent.
4. By whom given
Sec. 90. By whom given.
The notice may be given by or on behalf of the
holder, or by or on behalf of any party to the
instrument who might be compelled to pay it to
the holder, and who, upon taking it up, would
have a right to reimbursement from the party to
whom the notice is given.
a. Dishonor by non-payment
Sec. 83. When instrument dishonored by non-
payment.
Chapter VII. Enforcement of Liability
The instrument is dishonored by non-payment
when:
(a) It is duly presented for payment and
payment is refused or cannot be obtained; or
(b) Presentment is excused and the instrument
is overdue and unpaid.
Effect: There is an immediate right of
recourse by the holder against persons
secondarily liable. However, notice of
dishonor is generally required. (Sec. 84)
b. Dishonor by non-acceptance
Sec. 149. When dishonored by non-
acceptance.
A bill is dishonored by non-acceptance:
(a) When it is duly presented for acceptance
and such an acceptance as is prescribed by
this Act is refused or can not be obtained; or
(b) When presentment for acceptance is
excused and the bill is not accepted.
Effect: Immediate right of recourse
against the drawer and indorsers
accrues to the holder and no
presentment for payment is necessary.,
(Sec. 151)
c. Dishonor in the hands of an
Agent
Agent can do either of the following:
 Directly give notice to persons
secondarily liable thereon; or
 Give notice to his principal. In
such case, he must give notice
within the time allowed by law
as if he were a holder. (Sec. 94)
d. Waiver of Notice of Dishonor
Sec. 109. Waiver of notice.
Notice of dishonor may be waived either before
the time of giving notice has arrived or after the
omission to give due notice, and the waiver may
be expressed or implied.
Sec. 110. Whom affected by waiver.
Where the waiver is embodied in the instrument
itself, it is binding upon all parties; but, where it
is written above the signature of an indorser, it
binds him only.
a. Notice of dishonor is not
required to be given to the
drawer in any of the ff. cases:
 Drawer and drawee are the
same;
 Drawee is a fictitious person
or not having the capacity to
contract;
 REVIEWER IN COMMERCIAL LAW
 Drawer is the person to
whom the instrument is
presented for payment;
 The drawer has no right to
expect or require that the
drawee or acceptor swill
honor the instrument;
 Where the drawer has
countermanded payment.
(Sec. 114)
b. Notice of dishonor is not
required to be given to an
indorser in the ff. cases:
 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;
 Indorser is the person to
whom the instrument is
presented for payment;
 Instrument was made or
accepted for his
accommodation.
(Sec. 115)
c. 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. (Sec. 117)
F. Protest
1. Definition
Testimony of some proper person that
the regular legal steps to fix the liability
of drawer and indorsers have been
taken
2. When necessary
Sec. 152. In what cases protest necessary.
Where a foreign bill appearing on its face to be
such is dishonored by nonacceptance, it must
be duly protested for nonacceptance, by
nonacceptance is dishonored and where such a
bill which has not previously been dishonored by
nonpayment, it must be duly protested for
nonpayment. If it is not so protested, the drawer
and indorsers are discharged. Where a bill does
not appear on its face to be a foreign bill, protest
thereof in case of dishonor is unnecessary.
3. Form
a. Annexed to the bill or must contain
a copy thereof, and
b. Must be under the hand and seal of
the notary making it
Chapter VII. Enforcement of Liability
4. Contents
a. The time and place of presentment
b. The fact that presentment was made
and the manner thereof
c. The cause or reason for protesting
the bill
d. The demand made and the answer
given, if any, or the fact that the
drawee or acceptor could not be
found. (Sec. 153).
5. By whom
Sec. 154. Protest, by whom made.
Protest may be made by:
(a) A notary public; or
(b) By any respectable resident of the place
where the bill is dishonored, in the presence
of two or more credible witnesses.
6. Time
Sec. 155. Protest; when to be made.
When a bill is protested, such protest must be
made on the day of its dishonor unless delay is
excused as herein provided. When a bill has
been duly noted, the protest may be
subsequently extended as of the date of the
noting.
7. Place
a. At the place where it is dishonored,
EXCEPT bill drawn payable at the
place of business or residence of
person other than the drawee has
been dishonored by non-acceptance
b. It must be protested for non-
payment at the place where it is
expressed to be payable
c. No further presentment for payment
to, or demand on, the drawee is
necessary. (Sec. 156)
8. Protest for better security against the
drawer and indorsers — where the
acceptor has been adjudged a bankrupt
or an insolvent or has made an
assignment for the benefit of creditors
before the bill matures (Sec. 158)
9. Delay excused
a. When caused by circumstances
beyond the control of the holder
b. When not imputable to his default,
misconduct, or negligence
c. When the cause of delay ceases to
operate, the bill must be noted or
protested with reasonable diligence
 REVIEWER IN COMMERCIAL LAW Chapter VII. Enforcement of Liability
10. When protest dispensed with- by any
circumstance which would dispense
with notice of dishonor (Sec. 159).

11. Waiver of protest - deemed to be a

waiver not only of a formal protest but
also of presentment and notice of
dishonor (Sec.111).

G. Acceptance or payment for honor

1. Acceptance for honor

 Practice of accepting for honor is
obsolete

 When bill may be accepted for

honor. — When a BE has been:
a. protested for dishonor by non-
acceptance or protested for
better security and
b. not overdue

 Any person not being a party

already liable may, with the
CONSENT of the holder, intervene
and accept the bill supra protest for
the honor of any party liable thereon
or for the honor of the person for
whose account the bill is drawn.

 The acceptance for honor may be for

part only of the sum for which the
bill is drawn

 Where there has been an acceptance

for honor for one party, there may
be a further acceptance by a
different person for the honor of
another party. (Sec. 161)

 Referee in case of need — person

whose name is inserted by the
drawer of a bill and any indorser to
whom the holder may resort in case
bill is dishonored by non-acceptance
or non-payment; option of the
holder to resort to the referee (Sec.
131)

2. Payment for honor

Sec. 171. Who may make payment for honor.

Where a bill has been protested for non-
payment, any person may intervene and pay it
supra protest for the honor of any person liable
thereon or for the honor of the person for whose
account it was drawn.
 REVIEWER IN COMMERCIAL LAW
Chapter VIII. Discharge
A. DEFINITION
B. DISCHARGE OF THE INSTRUMENT
1.BY PAYMENT IN DUE COURSE
2.BY INTENTIONAL CANCELLATION
3.BY REACQUISITION OF PRINCIPAL
DEBTOR IN HIS OWN RIGHT
4. BY RENUNCIATION OF HOLDER
5. BY MATERIAL ALTERATION
6. BY OTHER ACTS
C. DISCHARGE OF SECONDARY PARTIES
A. Definition
The release of all parties, whether primary
or secondary, from the obligation on the
instrument; renders the instrument non-
negotiable
B. Discharge of the Instrument
Sec. 119. Instrument; how discharged.
A negotiable instrument is discharged:
(a) By payment in due course by or on behalf of
the principal debtor;
(b) By payment in due course by the party
accommodated, where the instrument is
made or accepted for his accommodation;
(c) By the intentional cancellation thereof by
the holder;
(d) By any other act which will discharge a
simple contract for the payment of money;
(e) When the principal debtor becomes the
holder of the instrument at or after maturity
in his own right.
1. By payment in due course
(Asked in 00)
Sec. 88. What constitutes payment in due
course.
Payment is made in due course when it is made
at or after the maturity of the payment to the
holder thereof in good faith and without notice
that his title is defective.
 If payment is made before maturity
and the note is negotiated to a HDC,
the latter may recover on the
instrument.
 Payment to one of several payees or
indorsees in the alternative
discharges the instrument, but
payment to one of several joint
payees or joint indorsers is not a
discharge. The party receiving
payment must have been authorized
by others to receive payment.
 By whom made:
Chapter VIII. Discharge
a. payment in due course by or on
behalf of principal debtor
b. payment in due course by party
accommodated where party is
made/ accepted for
accommodation
2. By intentional cancellation
Sec. 123. Cancellation; unintentional; burden
of proof.
A cancellation made unintentionally or under a
mistake or without the authority of the holder, is
inoperative but where an instrument or any
signature thereon appears to have been
cancelled, the burden of proof lies on the party
who alleges that the cancellation was made
unintentionally or under a mistake or without
authority.
3. By reacquisition of principal debtor
in his own right
Principal debtor becomes holder of
instrument at or after maturity in his
own right
4. By renunciation of holder
Sec. 122. Renunciation by holder
The holder may expressly renounce his rights
against any party to the instrument before, at,
or after its maturity. An absolute and
unconditional renunciation of his rights against
the principal debtor made at or after the
maturity of the instrument discharges the
instrument. But a renunciation does not affect
the rights of a holder in due course without
notice. A renunciation must be in writing unless
the instrument is delivered up to the person
primarily liable thereon.
5. By material alteration
Material alteration w/o assent of all
parties liable avoids instrument except
as against party to alteration and
subsequent indorsers (Sec. 124)
6. By other acts
Any other act which discharges a simple
contract for payment of money (Art.
1231 of the Civil Code), ex.. issuance of
a renewal note—novation
C. Discharge of Secondary Parties
1. Grounds under Section 120
Sec. 120. When persons secondarily liable on
the instrument are discharged.
A person secondarily liable on the instrument is
discharged:
(a) By any act which discharges the instrument;
 REVIEWER IN COMMERCIAL LAW Chapter VIII. Discharge
(b) By the intentional cancellation of his
signature by the holder;
(c) By the discharge of a prior party;
(d) By a valid tender or payment made by a
prior party;
(e) By a release of the principal debtor unless
the holder's right of recourse against the
party secondarily liable is expressly
reserved;
(f) By any agreement binding upon the holder
to extend the time of payment or to postpone
the holder's right to enforce the instrument
unless made with the assent of the party
secondarily liable or unless the right of
recourse against such party is expressly
reserved.

2. Other grounds:
a. Failure to make due presentment
(Secs. 70, 144)
b. Failure to give notice of dishonor
c. Certification of check at instance of
holder
d. Reacquisition by prior party
e. Where instrument negotiated back
to a prior party, such party may
reissue and further negotiate, but
not entitled to enforce payment vs.
any intervening party to whom he
was personally liable
f. Where instrument is paid by party
secondarily liable, it’s not
discharged, but
 the party so paying it is remitted
to his former rights as regard to
all prior parties
 and he may strike out his own
and all subsequent
indorsements, and again
negotiate instrument, except:
where it’s payable to order of 3rd
party and has been paid by
drawer or where it’s
made/accepted for
accommodation and has been
paid by party accommodated
 REVIEWER IN COMMERCIAL LAW
Chapter IX. Checks
A. CERTIFICATION OF CHECKS
B. CROSS CHECKS
C. TYPES OF CHECKS
Sec. 185. Check, defined.
A check is a bill of exchange drawn on a bank
payable on demand. Except as herein otherwise
provided, the provisions of this Act applicable to
a bill of exchange payable on demand apply to a
check.
A. Certification of Checks
1. An agreement whereby the bank against
whom a check is drawn, undertakes to
pay it at any future time when
presented for payment.
2. A check of itself does not operate as an
assignment of any part of the funds to
the credit of the drawer with the bank.
The bank is not liable to the holder,
unless and until it accepts or certifies
the check. (Sec. 189)
3. A check must be presented for payment
within reasonable time after its issue or
the drawer will be discharged from
liability thereon to the extent of the loss
caused by the delay. (Sec. 186)
4. Effects
a. Equivalent to acceptance (Sec. 187)
and is the operative act that makes
banks liable
b. Assignment of the funds of the drawer
in the hands of the drawee (Sec. 189)
c. If obtained by the holder, discharges
the persons secondarily liable thereon
(Sec. 188)
5. Refusal of drawee bank to certify: The
holder has no action against the bank
but he has a right of action against the
drawer. The drawer in turn has right of
action against the bank based on the
original contact of deposit between
them.
B. Crossed Check
(Asked in 91, 94, 95, 96, 04, 05)
1. Definition
 The NIL is silent with respect to
crossed checks, although the Code
of Commerce makes reference to
such instruments.
 Article 541 of the Code of Commerce
states: “The maker or any legal
holder of a check shall be entitled to
indicate therein that it be paid to a
certain banker or institution, which
he shall do by writing across the
face the name of said banker or
Chapter IX. Checks
institution, or only the words ‛and
company.”
 Under usual practice, crossing a
check is done by placing two parallel
lines diagonally on the left top
portion of the check (State
Investment House vs. IAC, 1989).
 The crossing may be special wherein
between the two parallel lines is
written the name of a bank or a
business institution, in which case
the drawee should pay only with the
intervention of that bank or
company, or crossing may be
general wherein between two
parallel diagonal lines are written
the words "and Co." or none at all as
in the case at bar, in which case the
drawee should not encash the same
but merely accept the same for
deposit (supra).
2. Effects: Bataan Cigar vs. CA (1994)
a. That the check may not be encashed;
it may only be deposited with the
bank;
b. That the check may be negotiated only
once to a person who has an account
with the bank; and
c. That it serves as a warning to a holder
that the check has been issued for a
definite purpose.
C. Types of checks
1. Cashier’s Check
One drawn by the cashier of a bank, in
the name of the bank against the bank
itself payable to a third person. It is a
primary obligation of the issuing bank
and accepted in advance upon issuance
(Tan vs. CA 1994).
2. Manager’s Check
A check drawn by the manager of a bank
in the name of the bank itself payable to a
third person. It is similar to the cashier’s
check as to the effect and use.
3. Memorandum Check
A check given by a borrower to a lender
for the amount of a short loan, with the
understanding that it is not to be
presented at the bank, but will be
redeemed by the maker himself when
the loan falls due and which
understanding is evidenced by writing
the word “memorandum”, “memo” or
“mem” on the check.
4. Certified Check
An agreement whereby the bank against
whom a check is drawn undertakes to
pay it at any future time when
presented for payment. (Sec. 187)
- end of Bills & Notes -