Ust 2014 Nil

MERCANTILE LAW
Incidents in the life of a negotiable instrument
NEGOTIABLE INSTRUMENTS LAW
1.
2.
3.
It is a written contract for the payment of money

which is intended as a substitute for money and
passes from one person to another as money, in such
a manner as to give a holder in due course the right
to hold the instrument free from defenses available
to prior parties. The instrument must comply with
Sec. 1 of the Negotiable Instruments Law (NIL)
(Sundiang & Aquino, 2014).
Issue
Negotiation
Presentment for acceptance (in certain kinds
BOEs)
4. Acceptance
5. Dishonor by non-acceptance
6. Presentment for payment
7. Dishonor by non-payment
8. Notice of dishonor
9. Protest in case of foreign bill
10. Discharge
Negotiable instrument v. Non-negotiable instrument
Negotiable instruments are not legal tender
Negotiable instrument
NEGOTIABLE
INSTRUMENT
Governing
Law
Manner of
Transfer
Status of
Transferee
Defenses
Available
NIL.
Can
be
transferred by
negotiation or
by assignment.
The transferee
can
be
a
holder in due
course if all
the
requirements
of Section 52
of the NIL are
complied with.
Negotiable instruments are neither money nor legal

tender; they are mere substitutes for money (NCBA,
Sec. 60).
NON-NEGOTIA
BLE
INSTRUMENT
The Civil Code
or pertinent
special
laws
should apply
(GSIS v. CA,
170 SCRA 533,
1989).
Can
be
transferred
only
by
assignment.
The transferee
can never be a
holder in due
course
but
remains to be
an assignee.
GR: The delivery of a negotiable instrument does

not by itself produce the effect of payment (Roman
Catholic Bishop of Malolos vs. Intermediate Appellate
Court, 191 SCRA 411, 1990).
XPNs: Negotiable instrument shall produce the effect
of payment when:
1. When they have been cashed, or when through
the fault of the creditor they have been
impaired (NCC, Art. 1249).
2. If a check representing demand deposit has
been cleared and credited to the account of the
creditor, such shall be equivalent to delivery to
the creditor of cash (NCBA, Sec. 60).
Q: Negotiable instruments are used as substitutes
for money, which means - (2012 Bar Question)
a.) That they can be considered legal tender.
b.) That when negotiated, they can be used to pay
indebtedness.
c.) That at all times the delivery of the instrument is
equivalent to delivery of the cash.
d.) That at all times negotiation of the instruments
requires proper indorsement.
All defenses
available
to
prior parties
may be raised
against
the
last transferee.
A: B. When negotiated, negotiable instruments can

be used to pay indebtedness.
(Sundiang, 2014)
Laws governing a negotiable instrument
Characteristics
instrument
1. NIL - For instruments which meet the requisites of

negotiability.
2. New Civil Code (NCC) Applies suppletorily in
cases of assignment and demand for payment of
an NIL.
3. Code of Commerce Applies suppletorily to NIL in
cases of crossed checks.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
or
features
of
negotiable
1. Negotiability The note may pass from hand

to hand similar to money so as to give the
holder in due course (HIDC) the right to hold
the instrument and collect the sum payable
for himself free from any infirmity in the
20

instrument or defect in the title of any of the
prior parties or defenses available to them
among themselves.
Q: A promissory note which does not have the

words "or order" or "or bearer" will render the
promissory note non-negotiable, and therefore (2012 Bar Question)
a.) It will render the maker not liable
b.) The note can still be assigned and the maker
made liable;
c.) The holder can become holder in due course;
d.) The promissory note can just be delivered and
the maker will still be liable
2. Accumulation of secondary contracts A

characteristic of a negotiable instrument
where additional parties become involved as
they are transferred from one person to
another. Once an instrument is issued,
additional parties can become involved (De
Leon, 2010).
FORMS AND INTERPRETATION
A: B. The note can still be assigned and the maker

made liable
Form of negotiable instruments (Requisites of

negotiability)
Rules of construction in case of ambiguities in a

negotiable instrument
An instrument to be negotiable must conform to the

following requirements: (SUn-DOrA)
1. It 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; and
5. Where the instrument is Addressed to a drawee,
he must be named or otherwise indicated therein
with reasonable certainty (NIL, Sec.1).
1.
2.
3.
4.
5.
6.
7.
NOTE: A NI need not follow the exact language of NIL, as

long as the terms are sufficient which clearly indicate an
intention to conform to the requirements of the law (NIL,
Sec. 10).
Words prevail over figures

If date from which interest is to run is
unspecified, interest runs from the date of the
instrument; if undated, from the issue thereof
If undated, instrument is considered dated as of
the time it was issued
Written provisions prevail over printed
If there is doubt whether it is a bill or note, the
holder may treat it as either at his election
When not clear in what capacity it was signed,
deemed signed as an indorser
When two or more persons signed a negotiable
instrument stating "I promise to pay," in case of
liability, they shall be deemed to be jointly and
severally liable (NIL, Sec. 17).
REQUISITES OF NEGOTIABILITY
The requirements stated in Sec. 1 must appear on the face

of the instrument otherwise the instrument would not be
negotiable.
Factors to determine the negotiability (FRI)

1.
Rules governing the use of phrases in the negotiable

instruments
2.
3.
1. As to promissory note
a. The word promise need not be used. Any
expression equivalent to a promise is sufficient.
b. Mere acknowledgment of a debt is not a
promissory note.
c. Language used must indicate a written
undertaking to pay
2. As to bill of exchange
a. It must contain an order for payment as
distinguished from a mere request.
b. The order is not invalidated because it contains
words of civility. Thus, insertion of polite words
like please does not alter the character of the
instrument; as long as the language expresses the
drawers will that the money be paid.
Words that appear on the Face of negotiable

instrument
Requirements enumerated in Section 1 of NIL
Intention of the parties by considering the whole
of the instrument.
NOTE: In determining the negotiability of an instrument,

consider the instrument in its entirety and only what
appears on its face. It must comply with the requirements
under Section 1 of the NIL (Sundiang, 2014 citing Caltex
Phils. v. CA, 212 SCRA 448).
The instrument must be in writing

It must be reduced in writing or in tangible form. The
negotiability or non-negotiability of an instrument is
determined from the writing on the face of the
instrument itself (De Leon, 2010).
21

FACULTY OF CIVIL LAW
MERCANTILE LAW
instrument payable out of a particular fund is
non-negotiable. In this latter case, the fund specified is the
direct source of payment; therefore, it is subject to the
availability of fund, hence conditional.
The instrument must be signed by the maker or

drawer
It is placed at the lower right hand corner of the
instrument. Nonetheless, it may appear in any part of
the instrument whether at the top, middle or bottom
or at the margin (De Leon, 2010).
Certainty as to sum
A sum is certain within the contemplation of Section
1(b) of the NIL if the amount that is to be
unconditionally paid by the maker or drawee can be
determined on the face of the instrument even if it
requires mathematical computation (Sundiang,
2014).
However, 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 (NIL, Sec. 17 [f]).
NOTE: The signature is valid and binding as long as it
appears that a person intended to make the instrument his
own. The signature is prima facie evidence of a persons
intention to be bound as either maker or drawer.
The sum payable is a sum certain within the meaning

of this Act, although it is to be paid: (ISDEA)
1. With Interest; or
2. By Stated installments; or
3. By stated installments, with a provision upon
Default in payment of any installment or of
interest, the whole shall become due (
acceleration clause);
4. With Exchange, whether at a fixed rate or at the
current rate; or
5. With cost of collection or an Attorneys fees, in
case payment shall not be made at maturity
(NIL, Sec. 2).
Unconditional promise or order to pay

The word promise or order need not appear in
the instrument to satisfy the requirements of Section
1(b) of the NIL (Sundiang, 2014). The promise or
order to pay must not be subject to any condition or
contingency. An instrument payable upon a
contingency is not negotiable even if the condition
thereon has been fulfilled.
Payment with interest
An unqualified order or promise to pay is

unconditional though coupled with:
1. An indication of particular fund out of which
reimbursement is to be made or a particular
account to be debited with the amount; or
2. A statement of the transaction which gave rise to
the instrument. But an order or promise to pay
out of a particular fund is conditional (NIL, Sec 3).
Interest at fixed rate or at increased or reduced rate

will not destroy negotiability because the presence of
such interest does not make uncertain the sum
payable.
In the absence of a date as to which interest is to run,
it shall be from the date of instrument, or in the
absence thereof, at the date of issue. In the absence
of interest rate, it shall be the legal rate.
Indication of particular fund for reimbursement v.

Indication of particular fund for payment
FUND FOR
REIMBURSEMENT
1. The drawee pays the
payee from his own
funds.
2. The drawee pays
himself
from
the
particular
fund
indicated.
Particular
fund
indicated is not the
direct
source
of
payment.
(Sundiang, 2014).
Payment by installment
FUND FOR PAYMENT

There is only one
the
drawee
directly
from
particular
indicated.
Payment by installment is certain if the dates of each

installment is fixed and the amount to be paid for
each installment is stated (NIL, Sec. 2; Sundiang,
2009).
act pays
the
fund
Payment with an acceleration clause

Acceleration clause is a provision, that upon default
in payment of any installment or interest, the whole
shall become due (NIL, Sec.2[c]).
1. If the option to accelerate the maturity is on the
maker, whether such option is absolute or
conditional, it is negotiable.
2. Where acceleration is at the option of the holder
and can only be exercised upon the happening of
the specified event, still negotiable.
3. But where the holders right to accelerate is
Particular
fund
indicated is the direct
source of payment.
NOTE: An instrument which mentions a particular fund out

of which reimbursement is to be made is negotiable. But an
2014 GOLDEN NOTES
22

unconditional, the time of payment is rendered
uncertain, the instrument would not be
negotiable.
Effect if a bill or note is payable other than in money

GR: The note or bill must be payable in money. If
payable in goods, wares, or merchandise, or in
property, the same is not negotiable.
Extension clause
Extension Clauses are provisions extending the time
of payment.
XPNs: Negotiability is not affected if the note

contains an additional provision which: (SECo Law)
1. Authorizes the sale of collateral Securities in
case the instrument be not paid at maturity;
or
2. Gives the holder an Election to require
something to be done in lieu of payment of
money; or
3. Authorizes a Confession of judgment if the
instrument be not paid at maturity; or
4. Waives the benefit of any Law intended for
the advantage or protection of the obligor
(NIL, Sec. 5).
GR: An extension clause does not affect the

negotiability of the instrument.
XPN: Where a note with a fixed maturity provides
that the maker has the option to extend time of
payment until the happening of a contingency, the
date is uncertain and the instrument is
non-negotiable.
Sum to be paid with exchange
Payable on demand or at a fixed or determinable

future time
The exchange is the charge for the expense of

providing funds at the place where the instrument is
payable to cover such instrument which is issued at
another place. It may be at a fixed rate or at the
current rate. It is applicable only to foreign bills (De
Leon, 2010).
1. Payable on demand The holder may call for

payment any time, likewise, the maker may also pay
any time and the refusal of the holder to accept
payment shall stop the running of interest should
there be any, but obligation to pay the note subsist.
Inland bill of exchange v. Foreign bill of exchange
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 (NIL,
Sec 7).
c. 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 (ibid).
An inland BOE is one which is, or on its face purports

to be, both drawn and payable within the Philippines
and any other bill is a foreign bill.
NOTE: Unless the contrary appears on the face of the bill,
the holder may treat it as an inland bill (Sec. 109, NIL).
Sum to be paid with costs of collection and/or

attorneys fees
2. At a fixed time A term or time instrument is

payable only upon the arrival of the time for
payment.
It does not affect the certainty of the amount payable

at maturity since the increase in the amount due,
even if uncertain, takes place after maturity when the
instrument ceases to be negotiable in the full
commercial sense (De Leon, 2010).
3. At a determinable future time - An instrument is

payable at a determinable future time which is
expressed to be payable:
a. At a fixed period after date or sight; or
b. On or before a fixed or determinable future
time specified therein; or
c. On or at a fixed period after the occurrence of a
specified event which is certain to happen, though
the time of happening be uncertain (NIL, Sec. 4).
Payable in Philippine Peso

The money referred into may be our legal tender or
foreign currency. An instrument is still negotiable
although the amount to be paid is expressed in
currency that is not legal tender so long as it is
expressed in money (PNB v Zulueta, 101 Phil 1071).
NOTE: An agreement to pay in foreign currency is valid (RA
8183).
23

MERCANTILE LAW
Payable to order
Fictitious-Payee rule
The instrument is payable to order where it is drawn

payable to the order of a specified person or to him
or to his order. It may be drawn payable to the order
of: (PaDD JoinSH)
1. A Payee who is not a maker, drawer, or drawee;
2. The Drawer or maker; or
3. The Drawee; or
4. Two or more payees Jointly; or
5. One or some of Several payees; or
6. The Holder of an office for the time being (Sec.
8, NIL).
A check is a bill of exchange (BOE) drawn on a bank

payable on demand. It is either an order or a bearer
instrument but when the payee is fictitious or not
intended to be the true recipient of the proceeds of
the check, the check is considered as a bearer
instrument and as such it does not require
indorsement to be validly negotiated. It is negotiable
by mere delivery (Divina, 2010, citing PNB v.
Rodriguez, 566 SCRA 513).
Payable to bearer (ENaF PaLa)
A fictitious payee is not limited to person having no

real existence. An actual, existing, and living payee
may also be fictitious if the maker of the check did
not intend for the payee to in fact receive the
proceeds of the check (Ibid., pg. 10, PNB case citing
Sec. 9[c], NIL).
1.
2.
3.
4.
5.
Application of the fictitious-payee rule
When it is Expressed to be so payable; (e.g. I

promise to pay to bearer P10,000.00)
When it is payable to a person Named therein or
bearer; (e.g. Pay to P or bearer P10,000.00)
When it is payable to the order of a Fictitious
person or non-existing person, and such fact was
known to the person making it so payable; (e.g.
Pay to John Doe or order)
When the name of the Payee does not purport to
be the name of any person; (Pay to cash)
When the only or the Last indorsement is an
indorsement in blank (NIL, Sec 9).
Who bears the loss in a fictitious-payee situation

In a fictitious-payee situation, the drawee bank is
absolved from liability and the drawer bears the loss.
When faced with a check payable to a fictitious
payee, it is treated as a bearer instrument that can be
negotiated by delivery. The underlying theory is that
one cannot expect a fictitious payee to negotiate the
check by placing his indorsement thereon. And since
the maker knew this limitation, he must have
intended for the instrument to be negotiated by mere
delivery. Thus, in case of controversy, the drawer of
the check will bear the loss (Ibid).
Illustration
Back of NI (indorsement)
Pay to A
Pay to B
Sgd. P
Sgd. A
Sgd. B
Exception to the fictitious-payee rule

A showing of commercial bad faith on the part of the
drawee or any transferee of the check for that
matter, will work to strip it of this defense (Ibid).
Difference between having a check payable to a

fictitious payee and payable to a specified payee
If a check is payable to a specified payee, it is an
order instrument, which requires indorsement from
the payee or holder before it may be validly
negotiated; but it may nevertheless be considered as
a bearer instrument if it is payable to the order of a
fictitious or non-existing person, and such fact is
known to the person making it so payable. Thus,
checks issued to Prinsipe Abante or Si Malakas at
si Maganda, who are well-known characters in
Philippine mythology, are bearer instruments
because the named payees are fictitious and
non-existent (ibid., pg. 9-10).

2014 GOLDEN NOTES
When drawee must be named with reasonable

certainty
1.
2.
3.
24
In a BOE, the drawee must be named or

otherwise designated with reasonable certainty
(NIL, Sec. 1).
A bill may be addressed to two or more drawees
jointly, but not to two or more drawees in the
alternative or in succession (NIL, Sec. 127). Eg.
An instrument may be addressed to A and B
but not to A or B.
An instrument payable to the order of the
bearer has been held to be an instrument
payable to order (10 C.J.S. 575-576).

Provisions that do not affect the negotiability of an
instrument (DVNo S. CurSECo Law)
1.
2.
3.
4.
5.
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 (NIL, Sec.
184).
Omission of Date
Non-specification of Value given or that any
value had been given
Non-specification of place where it is drawn or
payable
Bears a Seal
Designation of particular kind of Currency in
which payment is to be made. (Sec. 6, NIL.)
2. Bill of exchange (BOE) An unconditional order in

writing addressed by one person to another
signed by the person giving it, requiring the
person to whom it is addressed to pay on
demand or at a fixed or determinable future time
a sum certain in money to order or to bearer
(Sec. 126, NIL).
Additional provisions which:

1. Authorizes the sale of collateral Securities on
default
2. Gives the holder an Election to require
something to be done in lieu of payment of
money.
3. Authorizes Confession of judgment on default
4. Waives the benefit of the Law intended for the
protection of the obligor (NIL, Sec. 5).
NOTE: A check is a bill of exchange drawn on a bank

payable on demand (Sec 185, NIL).
Promissory note v. Bill of exchange
Undertaking
As to number
of original
parties
Q: B borrowed Php1 million from L and offered to

him his BMW car worth Php 1 Million as collateral. B
then executed a promissory note that reads: I, B,
promise to pay L or bearer the amount of Php1
Million and to keep my BMW car (loan collateral)
free from any other encumbrance. Signed, B. Is this
note negotiable? (2011 Bar Question)
As to liability
of parties
As to number
of
presentments
needed
A: No, since it contains a promise to do an act in

addition to the payment of money.
NOTE: What will not affect the negotiability of the
instrument is an additional provision which gives an
election to require something to be done in lieu of payment
of money.
PROMISSORY
NOTE
Promise to
pay
2 parties
Maker is
primarily
liable
Only 1
presentment
(for
payment) is
needed
BILL OF EXCHANGE
Order to pay
3 parties (upon
acceptance of the
drawee)
Drawer is
secondarily liable
2 presentments
(for acceptance
and for payment)
are generally
needed
A bill of exchange is not considered as an

assignment of funds in the hands of the drawee
A bill of exchange itself does not operate as an
assignment of the funds in the hands of the drawee
available for the payment thereof, and the drawee is
not liable on the bill unless and until he accepts the
same (Sec. 127, NIL).
Q: A writes a promissory note in favor of his

creditor, B. It says: Subject to my option, I promise
to pay B Php1 Million or his order or give Php1
Million worth of cement or to authorize him to sell
my house worth Php1 Million. Signed, A. Is the
note negotiable? (2011 Bar Question)
A bill of exchange may be addressed to more than

one drawee
A: No, because the exercise of the option to pay

lies with A, the maker and debtor.
A bill of exchange may be addressed to two or more

drawees jointly, whether partners or not; but not to
two or more drawees in the alternative or in
succession (Sec. 128, NIL).
Note: In order not to affect the negotiability of the

instrument, the option must be with the holder/creditor.
KINDS OF NEGOTIABLE INSTRUMENTS
Instances when a bill of exchange may be treated as

promissory note
Kinds of negotiable instruments
1. Where in a bill the drawer and the drawee are the

same person (Sec. 130, NIL)
1. Promissory notes (PN) An unconditional promise

in writing made by one person to another, signed
25

MERCANTILE LAW
2. The drawee is a fictitious person (Sec. 130, NIL)
3. The drawee does not have the capacity to
contract (Sec. 130, NIL)
4. Where the instrument is so ambiguous that there
is doubt whether it is a bill or a note, the holder
may treat it as either at his election (NIL, Sec.
17[e])
Acceptance of the bill of exchange by the drawee is

not an important requisite for the instruments
negotiability
The acceptance of a bill of exchange is not important
in the determination of its negotiability. The nature of
acceptance is important only in the determination of
the kind of liabilities of the parties involved (PBCOM v
Aruego, 102 SCRA 530).
Parties to a negotiable instrument and their

liabilities
Drawer v. Maker
PARTIES
FUNCTION
Drawer The person who
issues and draws
the bill.
BOE
Drawee
The party upon

whom the bill is
drawn.
LIABILITY
Secondarily
liable, except
when
drawee
refused to
accept
Not liable
until he
becomes
acceptor
Kind of
involved
NI
Liability
Limitation of
Liability
The party to whom The party to

payment is
whom
originally payable. payment is
originally
payable.
Acceptor The acceptor is the Primarily
drawee who
liable
accepts the bill
DRAWER
MAKER
Issues a BOE
Issues a PN
Only
secondarily
liable
Can limit his
liability
by
putting
without
recourse
Primarily
liable
Cannot limit
liability
Payee
PARTIES
Maker
PN
Payee
COMPLETION AND DELIVERY

Steps in the issuance of a negotiable instrument
1. The mechanical act of writing the instrument
completely and in accordance with Sec. 1 of NIL.
2. Delivery of the complete instrument by the maker
or the drawer to the payee or holder with the
intention of giving effect to it.
FUNCTION
LIABILITY
One who makes Primarily
the promise and liable
signs the
instrument.
The party to
whom
payment is
originally
payable.
Delivery
It refers to the transfer of possession, actual or
constructive, from one person to another (NIL, Sec.
191), with the intent to transfer title to payee and
recognize him as holder thereof.
Incomplete instrument
Referee in case of need
An instrument is incomplete when it is wanting in any

material particular (NIL, Sec. 14).
Referee in case of need is the person named by the

drawer or indorser in the NI as the one to whom the
holder may resort in case the BOE is dishonored by
non-acceptance or non-payment.
Various situations involving negotiable instruments

1. Incomplete instrument
a. Delivered
i. With forgery and alteration
ii. Without forgery and alteration
b. Not delivered
NOTE: It is the option of the holder to refer to the referee

in case of need or not as he may see fit (Sec. 131, NIL.)

2014 GOLDEN NOTES
26

2. Complete instrument
a. Delivered
b. Not delivered
Effect of ante-dating or post-dating an instrument

If the instrument is ante-dated or post-dated, the
instrument is not invalid by that fact alone, provided
it is not done for illegal or fraudulent purpose (Sec.
12, NIL).
COMPLETION OF BLANKS
Rule when an instrument is complete and delivered

Meaning of a material particular
If an instrument is complete and delivered without
forgery and alteration, all parties are bound.
It is any particular proper to be inserted in a

negotiable instrument to make it complete.
INSERTION OF DATE
Prima facie authority to fill up the blanks
Necessity of a date in order to make an instrument
negotiable
A signature on a blank paper delivered by the person

making the signature in order that the paper may be
converted into a negotiable instrument operates as a
prima facie authority to fill it up as such for any
amount (ibid).
GR: The date is not essential to the negotiability of

the instrument (not one of the requirements under
sec. 1).
NOTE: If the negotiable instrument is dated, such date is
deemed a prima facie proof that it is the true date of the
making, drawing, acceptance or indorsement of the
instrument (NIL, Sec. 11).
NOTE: In order, however, that any such instrument when

completed may be enforced against any person who
became a party thereto prior to its completion, it must be
filled up strictly in accordance with the authority given and
within a reasonable time (ibid).
XPNs: Date is important to determine maturity:

1. Where the instrument is payable within a specified
period after date, or after sight.
2. When the instrument is payable on demand, date
is necessary to determine whether the instrument
was presented within a reasonable time from issue,
or from the last negotiation.
3. When the instrument is an interest-bearing one, to
determine when the interest starts to run.
Effect if a completed instrument was negotiated to a

holder in due course
After completion, the completed instrument which
was subsequently negotiated to a HIDC, is valid and
effectual for all purposes in his hands, and he may
enforce it as if it had been filled up strictly in
accordance with the authority given and within a
reasonable time (ibid).
Instance when a holder may insert the date in an

instrument
NOTE: Hence, the defense that the blanks were filled up

beyond the authority given and/ or beyond the reasonable
time, is not available as against a HIDC. This defense is
merely a personal one.
1. Where an instrument expressed to be payable at a

fixed period after date is issued undated, or
2. Where the acceptance of an instrument payable at
a fixed period after sight is undated (NIL, Sec. 13).
INCOMPLETE BUT DELIVERED INSTRUMENTS

(Sec. 14)
Effect of insertion of a wrong date
Person authorized to fill up the blanks in an

incomplete but undelivered instrument
The insertion of a wrong date does not avoid the

instrument in the hands of a subsequent holder in
due course, but as to a HIDC, the date so inserted is
to be regarded as the true date (ibid.).
The holder has a prima facie authority to complete it

(NIL, Sec. 14).
NOTE: With respect to the person who inserted the wrong

date, however, the instrument is avoided (Bank of Houston
v. Day, 145 Mo. Appl. 410, 122 SW 756).
27

MERCANTILE LAW
Distinctions among Sec. 14, 15, and 16
SEC 14
Incomplete
instrument
which has been
delivered by the
maker or the
drawer to the
payee or holder.
1. Where
instrument is
wanting in any
material
particular, the
person in
possession has
prima facie
authority to
complete it by
filing up blanks
therein.
2. When the
instrument is
merely a
signature on
blank paper
delivered by
person making
the signature in
order that the
paper may be
converted into a
NI, the person in
possession has
prima facie
authority to fill
up as such for
any amount.
SEC 15
Incomplete
and
undelivered
instrument.
SEC 16
Complete
instrument but
undelivered.
Instrument
will not be a
valid
contract in
the hands of
any holder, if
completed
and
negotiated
without
authority.
1. If instrument
is not in
possession of
party who
signed, a valid
and intentional
delivery by him
is prima facie
presumed.
out about the transaction, he directed the drawee

bank to dishonor the check. When Evelyn encashed
the check, it was dishonored. Is Lorenzo liable to
Evelyn? (2006 Bar Question)
A: Yes. This covers the delivery of an incomplete
instrument, under Section 14 of the Negotiable
Instruments Law, which provides that there was
prima facie authority on the part of Nicky to fill-up
any of the material particulars thereof. Having done
so, and when it is first completed before it is
negotiated to a holder in due course like Evelyn, it is
valid for all purposes, and she may enforce it within a
reasonable time, as if it had been filled up strictly in
accordance with the authority given.
INCOMPLETE AND UNDELIVERED INSTRUMENTS
(Sec. 15)
Rule when an instrument is incomplete and
undelivered
2. If holder is
HIDC, valid
delivery by all
parties prior to
him so as to
make them
liable to him is
conclusively
presumed.
Where an incomplete instrument has not been

delivered, the holder, whether HIDC or not, cannot
validly enforce such instrument against the party
whose signature was placed before delivery (NIL, Sec.
15).
NOTE: Non-delivery of an incomplete instrument is a real
defense (ibid.)
Enforcement of the instrument against the party

whose signature was placed after delivery
The instrument can be validly enforced against the
party whose signature was placed after delivery like
an indorser because the indorser warrants the
instrument to be genuine and in all respect what it
purports to be.
NOTE: An HIDC cannot hold liable a maker for instruments
which are incomplete and undelivered even supposing that
the note was stolen, filled-up, and was subsequently
negotiated. The law is specific that the instrument is not a
valid contract in the hands of any holder. The phrase any
holder includes a HIDC.
NOTE: The holder

must only act in
accordance with
the authority
granted him,
otherwise it may
be used as a
defense against
him.
COMPLETE BUT UNDELIVERED (Sec. 16)

Effect if an instrument is undelivered
It is incomplete and revocable until delivery of the
instrument for the purpose of giving it effect (NIL,
Sec. 16). Delivery is essential to the validity of any
negotiable instrument (Sundjang, 2009).
Q: Lorenzo signed several blank checks instructing

Nicky, his secretary, to fill them as payment for his
obligations. Nicky filled one check with her name as
payee, placed P30,000.00 thereon, endorsed and
delivered it to Evelyn as payment for goods the
latter delivered to the former. When Lorenzo found
2014 GOLDEN NOTES
28

Where a debtor who drew two checks payable to his
creditor never delivered the checks to his creditor
and a third party was able to collect the proceeds of
the checks by forging the endorsement of the
creditor as payee, the creditor has no cause of action
against anyone on the basis of the checks, since the
payee acquires no interest in the check until its
delivery to him (Development Bank of Rizal v. Sim
Wei, 219 SCRA 736).
Immediate parties
Immediate parties are persons having knowledge of
the conditions or limitations placed upon the delivery
of an instrument. It means privity, and not proximity.
Remote parties
Persons without knowledge as to the conditions or
limitations placed upon the delivery of an instrument,
even if he is the next party physically.
However, in another case, the Court held that the

payee of a check can sue a collecting bank to whom
the check was deposited with a forged endorsement
even if the check was never delivered to the payee, to
avoid a circuity of suits (Westmont Bank v. Ong, 375
SCRA 212).
SIGNATURE
Validity of signature in a negotiable instrument
NOTE: The defense of want of delivery of a complete

instrument is only a personal defense which means that it is
only available against a holder NOT in due course.
A party may use his full name, surname, initials or

even any mark in signing a negotiable instrument to
indicate his intention to bind himself.
Issuance of an instrument
NOTE: A signature maybe made in any manner as long as

the person signing has the intention to be bound.
The instrument is deemed issued upon the first

delivery of the instrument, complete in form, to a
person who takes it as holder (NIL, Sec. 191).
Persons liable on an instrument
Conditional delivery or delivery for a special purpose
GR: Only persons whose signatures appear on an

instrument are liable thereon (NIL, Sec. 18).
The delivery is made conditional or for a special

purpose if it was made not for the purpose of
transferring the property (title) to the instrument. In
such case, if the instrument lands in the hands of a
HIDC (one who does not know of the conditional
delivery or of its special purpose), the instrument is
treated as if there is no condition.
XPNs: Notwithstanding the absence of their

signatures in their own names, the following persons
are deemed liable: (TraP FAP)
1. Person who signs in Trade or assumed name (Sec.
18, NIL.) Party who signed must have intended to
be bound by his signature.
2. Principal who signs through a duly authorized
agent and such agent discloses the name of his
principal and adding words to show he is merely
signing in a representative capacity (NIL, Sec. 19, 20).
3. Forger (NIL, Sec. 23)
4. Acceptor, who makes his acceptance of a bill on
a separate paper (NIL, Sec. 134)
5. Person, who makes a written Promise to accept the
bill before it is drawn (NIL, Sec. 135)
if such delivery was made to a holder not in due

course, prior parties are not bound by the instrument
(NIL, Sec. 16).
NOTE: The law contemplates that the condition is orally or
verbally conveyed to the holder upon delivery, because of
the rule that the negotiability is determined only upon the
face of the instrument.
Presumption as to delivery
NOTE: Where a signature is so placed upon the instrument

that it is not clear in what capacity the person signed, he is
deemed to be an indorser (NIL, Sec. 17[f]), not a maker or
drawer.
If the instrument is in the possession of a HIDC, valid

delivery is conclusively presumed.
Q: Juan borrowed P10,000 from Joe as evidenced by

a promissory note. All other requisites of
negotiability are present except that Juan did not
affix his usual signature thereon as he was ailing at
that time and was only able to put X in the blank
space meant for the signature of the maker. Is the
If the instrument is in the possession of a party other

than a HIDC, possession of such party constitutes only
prima facie presumption of delivery.
29

MERCANTILE LAW
requisite that the instrument must be signed by the
maker complied with?
defense that can be invoked by a minor. However, it

is not a defense which may be setup by parties other
than a minor.
A: Yes. The letter X is sufficient to comply with the

requirement. It appears from the problem that such
letter was adopted by Juan with the intent to
authenticate the instrument. It is not necessary that
the signature is the usual signature of the maker.
2. Incapacitated person An incapacitated person

may also use as a real defense his incapacity to enter
into a contract. Contract entered into by the
incapacitated are voidable. Incapacitated persons
include: a) insane or demented persons and b) deaf
and blind who does not know how to write.
SIGNING IN TRADE NAME
3. Corporation - Issuance or indorsement of an

instrument by a corporation acting beyond its powers
is a REAL defense.
As a general rule, only persons whose signatures

appear on an instrument are liable thereon. But one
who signs in a trade or assumed name is liable as if he
signed his own name (NIL, Sec. 18). It is necessary,
however, that the party who signed intended to be
bound by his signature.
Transfer of instrument by a minor

While a minor is not bound by his indorsement for
lack of capacity, he is however not incapacitated to
transfer his rights.
SIGNATURE OF AGENT
Requisites for an agent to be exempt from liability
Minor can be bound by his representation that he is

of legal age
1. He is duly authorized
2. He adds words to his signature indicating that he
signs as an agent/representative and
3. He discloses the name of his principal (NIL, Sec.
20).
Where he committed actual fraud by specifically

stating that he is of legal age, a minor can be bound
by his signature in an instrument (PNB v. CA, G.R. No.
L-34404, June 25, 1980).
Legal effects of an agents signature
Q: A executed a promissory note in favor of M which

reads:
Provided that the above requisites are complied with,

the legal effects of an agents signature in a
negotiable instrument are:
1. His signature will bind his principal; and
2. He will be exempt from personal liability.
I promise to pay P (16 years old) or order

P10,000.
Sgd. M
P indorsed it to A.
Procuration
1. May A collect from M notwithstanding that P, the
indorser is a minor?
2. In case that A cannot collect from M, can he
collect from P?
It is the act by which a principal gives power to

another to act in his place as he could himself (Fink v.
Scott, 143 S.E. 305)
Effect of a signature by procuration
A:
1. Yes. A can collect from M. Notwithstanding the
fact that A is a minor, the indorsement of P (the
minor) passes title to A (the holder). M cannot
invoke the defense of minority because such
defense would only be available to P.
It operates as notice or a warning that the agent has

but a limited authority to sign and the principal is
bound only in case the agent in so signing acted
within the actual limits of his authority (NIL, Sec. 21).
2. No. A cannot collect from P, as he has a real

defense of minority on his part.
INDORSEMENT BY MINOR OR CORPORATION

Effects of indorsement made by an infant or a
corporation
1. Minor A contract entered into by a minor is
voidable, at the option of the minor. It is a real
2014 GOLDEN NOTES
30

FORGERY
since the payee merely used one action to reach, by

desirable shortcut, the person who ought in any
event to be ultimately liable as among the innocent
persons. The payee is allowed to directly recover
from the collecting bank to simplify proceedings
(Westmont Bank v. Ong, G.R. No. 132560, Jan. 30,
2002).
Forgery
It is the counterfeit making or fraudulent alteration of
any writing. It happens when a signature is affixed by
one who does not claim to act as an agent and who
has no authority to bind the person whose signature
he has forged (NIL, Sec. 23).
Effects of forgery
GR: It does not avoid the instrument but only the
forged signature. The signature is wholly inoperative.
In other words, rights may still exist and be enforced
by virtue of such instrument as to those signatures
thereto are found to be genuine.
Burden of proof in proving forgery

Forgery, as any other mechanism of fraud must be
proven clearly and convincingly, and the burden of
proof lies on the party alleging forgery (Chiang Yia
Min v. CA, G.R. No. 137932, Mar. 28, 2001).
However, a forged indorsement prevents any

subsequent parties from acquiring any right against
any party prior to the forgery. Such forged
indorsement cuts off the rights against prior parties
to the forger (Cut-off rule).
Extent and effects of forgery

1. Only the signature forged or made without
authority is the one inoperative, the instrument
itself and the genuine signatures are valid.
2. An instrument indorsed which on its face is
payable to bearer may be enforced by the holder
to whose title over the instrument the forged
signature is not necessary.
3. The instrument can be enforced against those
who are precluded from setting up forgery.
XPNs:
1. If the party against whom it is sought to enforce
such right is precluded from setting up forgery or
want of authority (NIL, Sec. 23).
2. Where the forged signature is not necessary to the
holders title, in which case, the forgery may be
disregarded (NIL, Sec. 48).
Illustration
Persons precluded from setting up the defense of
forgery
Pay to P or order P10,000 30 days after sight.

(Sgd)D, (forged by P)
1.
Those who admit/warrant the genuineness of

the signature such as indorsers, persons
negotiating by delivery and acceptor; (NIL, Sec
56).
2.
Those who by their acts, silence, or negligence,

are estopped from claiming forgery;
3.
A holder of a bearer instrument who

subsequently negotiates such instrument with a
prior forged indorsement (forged indorsement is
not necessary to his title it being a bearer
instrument).
To X
P presented the instrument for acceptance. X
accepted the instrument without detecting the
forgery. P then indorses the bill to A, A to B, B to C,
the present holder. In this case, if after 30 days the
holder presented the instrument to X for payment
the latter is liable despite the forgery, because by
preclusion, the acceptor admits the genuineness of
the drawers signature (See Sec. 62, NIL)
A payee may sue the collecting bank for the amount
of the checks it paid under a forged indorsement
even when the instrument has not been delivered to
him
The collecting bank is liable to the payee and must
bear the loss because it is its legal duty to ascertain
that the payees indorsement (signature), its
customer, was genuine before cashing the check.
That there was no delivery yet and therefore he
never became the owner of the check is immaterial
31

MERCANTILE LAW
Liabilities of the parties to a negotiable instrument
where an indorsement is forged
or A, because were it not for the forgery of X the

instrument will not reach the possession of C.
b. If the instrument is payable to bearer, the
indorsement of X is not necessary to vest title to C
because negotiation on bearer instrument requires
only delivery.
ORDER INSTRUMENTS
ORDER PROMISSORY
ORDER BILL OF
NOTE
EXCHANGE
Prior parties are not Prior parties are not
bound. Forged signature bound. Forged signature
is wholly inoperative is wholly inoperative
unless estoppel sets in unless estoppel sets in
with regard prior parties with regard prior parties
(cut-off rule).
(cut-off rule).
Subsequent parties to
the forgery are bound
Legal consequences when a bank honors a forged

check
1. When drawer's signature is forged
Drawee-bank by accepting the check cannot set up
the defense of forgery, because by accepting the
instrument, the drawee bank admits the genuineness
of signature of drawer (BPI Family Bank v.
Buenaventura, G.R. No. 148196, Sept. 30, 2005; NIL,
Sec. 23).
Subsequent parties to
the forgery are bound
NOTE: A drawers account
cannot be charged by the
drawee.
Unless a forgery is attributable to the fault or

negligence of the drawer himself, the remedy of the
drawee-bank is against the party responsible for the
forgery. Otherwise, drawee-bank bears the loss. A
drawee-bank paying on a forged check must be
considered as paying out of its funds and cannot
charge the amount to the drawer (Samsung
Construction Co. Phils, v. Far East Bank, G.R. No.
129015, Aug. 13, 2004). If the drawee-bank has
charged drawer's account, the latter can recover such
amount from the drawee-bank (Associated Bank v.
CA, G.R. No. 107382, Jan. 31, 1996; BPI v. Case
Montessori Internationale, G.R. No. 149454, May 28,
2004).
The drawer is not liable to

the collecting bank, since
the duty of the latter is
only to the payee.
Collecting bank bears the
loss.
The payee can recover
from either the drawer or
collecting bank, but not
from the drawee unless he
accepts the bill.
BEARER INSTRUMENTS
BEARER PROMISSORY BEARER
BILL
NOTE
EXCHANGE
Prior parties liable.
Prior parties liable
However, the forged
signatory is not liable to
a party who is not a
holder in due course.
OF
However, the drawer may be precluded or estopped

from setting up the defense of forgery as against the
drawee-bank, when it is shown that the drawer
himself had been guilty of gross negligence as to have
facilitated the forgery (Metropolitan Waterworks v.
CA, G.R. No. L62943, July 14, 1986).
However, the forged

signatory is not liable to
a party who is not a
holder in due course.
2. Drawee bank versus collecting bank When the

signature of the drawer is forged, as between the
drawee-bank and collecting bank, the drawee-bank
sustains the loss, since the collecting bank does not
guarantee the signature of the drawer. The payment
of the check by the drawee bank constitutes the
proximate negligence since it has the duty to know
the signature of its client-drawer. (Philippine National
Bank v. CA, G.R. No. L-26001, Oct. 29, 1968).
Illustration
3. Forged payee's signature When drawee-bank

pays the forged check, it must be considered as
paying out of its funds and cannot charge the amount
so paid to the account of the depositor. In such case,
the bank becomes liable since its primary duty is to
verify the authenticity of the payee's signature
a. If the instrument is payable to order and the

indorsement of one of the indorsers is forged. C can
enforce the note against X and B but not against M, P

2014 GOLDEN NOTES
32

(Traders Royal Bank v. Radio Philippines Network,
G.R. No. 138510, Oct. 10, 2002; Westmont Bank v.
Ong, G.R. No. 132560, Jan. 30, 2002).
2. If the instrument is payable to bearer:

a. ABC Bank, the drawee-bank, may charge the
amount thereof to the account of the drawer.
Because the forged indorsement did not prevent
the transfer of title. The remedy of the drawer is
against the forger.
b. Drawer has no cause of action against collecting
bank, since the duty of collecting bank is only to
the payee (Manila Lighter Transportation, Inc. v.
CA,G.R. No. L-50373 Feb. 15, 1990). Drawee-bank
can recover from the collecting bank because even
if the indorsement on the check deposited by the
bank's client is forged, collecting bank is bound by
its warranties as an indorser and cannot set up
defense of forgery as against drawee bank
(Associated Bank v. CA, G.R. No. 107382, Jan. 31,
1996).
4. Forged indorsement Drawer's account cannot

be charged, and if charged, he can recover from the
drawee-bank (Associated Bank v. CA, G.R. No.
107382, Jan. 31,1996).
a.
The Drawer has no cause of action against
collecting bank, since the duty of collecting bank
is only to the payee (Manila Lighter
Transportation, Inc. v. CA,G.R. No. L-50373 Feb.
15, 1990).
b. Drawee-bank can recover from the
collecting bank because even if the indorsement
on the check deposited by the bank's client is
forged, collecting bank is bound by its
warranties as an indorser and cannot set up
defense of forgery as against drawee bank
1996, Great Eastern Life Ins. Co. v. Hongkong &
Shanghai Bank, G.R. No. 18657, Aug. 23, 1922).
Q: P sold to M 10 grams of shabu worth

Php5,000.00. As he had no money at the time of the
sale, M wrote a promissory note promising to pay P
or his order Php5,000. P then indorsed the note to X
(who did not know about the shabu), and X to Y.
Unable to collect from P, Y then sued X on the note.
X set up the defense of illegality of consideration. Is
he correct? (2011 Bar Question)
Q: X fraudulently obtained possession of the check

and forged Ps signature and then indorsed and
deposited the check with XYZ bank which honored
the check and placed the amount thereof to his
credit. Thereafter, XYZ Bank indorsed the check to
the drawee bank-ABC bank which paid it and
charged the account of the drawer. lllustrate the
liability of a drawer and a drawee-bank in an 1)
instrument payable to order and in an 2) instrument
payable to bearer in case of a forgery on payees
signature.
A: No, since X, a general indorser, warrants that the

note is valid and subsisting.
Remedy of the drawee bank in case of a forged
indorsement
The drawee bank may not debit the account of the
drawer but may generally pass liability back through
the collection chain to the party who took from the
forger and, of course, to the forger himself, if
available. If the forgery is that of the payee's or
holder's indorsement, the collecting bank is held
liable, without prejudice to the latter proceeding
against the forger.
Pay to P or order P10,000.

(Sgd)D
To: ABC Bank
A:
1.If the instrument is payable to order,
a. The drawee bank is liable to the drawer for the
amount of the check and his account cannot be
charged because the indorsement of the payee is a
forgery. Hence, it is wholly inoperative and
therefore, ABC Bank has no right to ask the drawer
for its payment.
b. XYZ Bank is however, liable to the drawee bank
because of his warranty as an indorser. (See
Sec.66)
c. D, the drawer, is not liable on the check because
its order is to pay P or his order and not to any
other person.
Since a forged indorsement is inoperative, the

collecting bank had no right to be paid by the drawee
bank. The former must necessarily return the money
paid by the latter because it was paid wrongfully
1996).
33

MERCANTILE LAW
Liability of the drawee bank and the drawer for the
amount paid on checks with forged indorsements, if
the same was due to the negligence of both the
drawee bank and the drawer
CONSIDERATION
Consideration
It is an inducement to a contract that is the cause,
price or impelling influence, which induces a party to
enter into a contract.
The loss occasioned by such negligence should be

divided equally between the drawer/depositor and
the drawee.
NOTE: Every negotiable instrument is deemed prima facie

to have been issued for a valuable consideration (NIL, Sec.
24).
Q: X entrusted his check books, credit cards,

passbooks, bank statements and cancelled checks to
his secretary. He also introduced the secretary to
the bank for purposes of reconciliation of his
accounts. Subsequently, Xs secretary forged his
signature on the checks and was able to withdraw
his money. Is the drawee bank liable for the
amounts withdrawn by the secretary?
Holder for value

A holder for value is one who has given a valuable
consideration for the instrument. A holder for value is
deemed as such not only as regards the party to
whom the value has been given to by him but also in
respect to all those who became parties prior to the
time when value was given.
A: No, he is precluded from setting up the forgery

due to his own negligence in entrusting to his
secretary his credit cards and check book including
the verification of his statements of account (Ilusorio
v. CA, G.R. No. 139130, Nov. 27, 2002).
NOTE: 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 (NIL, Sec.
27).
Q: The drawers signature was forged. There is,

however, a provision in the monthly bank statement
that if the drawers signature was forged, the
drawer should report it within 10 days from receipt
of the statement to the drawee. The drawer,
however failed to do so. What will be its effect
insofar as the drawers right is concerned?
A: The failure of the drawer to report the forgery
within ten days from receipt of the monthly bank
statement from the drawee bank does not preclude
the drawer from questioning the mistake of the
drawee bank despite the provision (BPI v. CASA
Montessor, G.R. No. 149454, May 28, 2004).
Value
It is any consideration sufficient to support a simple
contract.
NOTE: An antecedent or pre-existing debt constitutes value
and is deemed such whether the instrument is payable on
demand or at a future time (NIL, Sec. 25).
Want or absence of consideration v. Failure of

consideration
WANT OR ABSENCE OF
CONSIDERATION
Total lack of any valid
consideration for the
contract
Q: If forgery was committed by an employee of the

drawer whose signature was forged, does the
relationship amount to estoppel such that the
drawer is precluded in recovering from the drawee
bank?
A: The bare fact that the forgery was committed by
an employee of the party whose signature was forged
can not necessarily imply that such partys negligence
was the cause of the forgery in the absence of some
circumstances raising estoppel against the drawer
(Samsung Construction Co. v. Far East Bank and Trust
Company, G.R. No. 129015, Aug. 13, 2004).
FAILURE OF
CONSIDERATION
Failure or refusal of one
of the parties to do,
perform or comply with
the
consideration
agreed upon
Effect of want of consideration

It becomes a matter of defense as against any
person not a holder in due course, thus, a PERSONAL
defense (NIL, Sec. 28).
Effect of partial failure of consideration
Partial failure of consideration is a defense pro tanto,
whether the failure is an ascertained and liquidated
amount or otherwise (ibid.).

2014 GOLDEN NOTES
34

Inadequacy of consideration
Sec. 29)
May always show, by
parol evidence, that he
is only such
Cannot avail of the
defense
of
absence/failure
of
consideration against a
holder not in due course
May sue reimbursement
after
paying
the
holder/subsequent
party
GR: Inadequacy of consideration does not invalidate

the instrument.
XPN: There has been fraud, mistake or undue
influence (NCC, Art. 1355).
NOTE: However, knowledge of inadequacy of consideration
would render the holder not HIDC liable (NIL, Sec. 53).
Q: X borrowed money from Y in the

amount of Php 1 Million and as payment,
issued a check. Y then indorsed the check to his
sister Z for no consideration. When Z deposited the
check to her account, the check was dishonored for
insufficiency of funds. Is Z a holder in due course?
Explain your answer (2012 Bar Question)
May avail
May not sue
Extent of liability of an accommodation party

1. Right to revoke accommodation before the
instrument has been negotiated for value.
2. Right to reimbursement from the accommodated
party the accommodated party is the real debtor.
Hence, the cause of action is not on the instrument
but on an implied contract of reimbursement.
3. Right to contribution from other solidary
accommodation maker (Sadaya v. Sevilla, G.R. No.
L-17845, Apr. 27, 1967).
A: No, Z is not a HIDC. Under Sec. 52 (c), NIL, it is

expressly provided that the instrument must be
acquired in good faith and for value to consider him a
HIDC.
ACCOMMODATION PARTY
Accommodation party
Accommodation party cannot raise the defense of

absence or want of consideration
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 (NIL, Sec.
29).
Requisites to be an accommodation party
An accommodation party who lends his name to

enable the accommodated party to obtain credit or
raise money is liable on the instrument to a holder for
value even if he receives no part of the consideration.
He assumes the obligation to the other party and
binds himself to pay the note on its due date. By
signing the note, the accommodation party thus
became liable for the debt even if he had no direct
personal interest in the obligation or did not receive
any benefit therefrom (Dela Rama v. Admiral United
Savings Bank, G.R. No. 154740, Apr. 16, 2008).
1. Accommodation party must sign as maker, drawer,

acceptor or indorser
2. No value is received by the accommodation party
from the accommodated party; and
3. The purpose is to lend the name.
NOTE: It does not mean, however, that one cannot be an
accommodation party merely because he has received
some consideration for the use of his name. The phrase
without receiving value therefor only means that no
value has been received for the instrument and not for
lending his name.
Holder for value may recover from

accommodation
party
notwithstanding
knowledge of such fact
an
his
This is so because an accommodation party is liable

on the instrument to a holder for value,
notwithstanding that such holder at the time of
taking the instrument knew him to be only an
accommodation party. The accommodation party is
liable to a holder for value as if the contract was not
for accommodation. It is not a valid defense that the
accommodation party did not receive any valuable
consideration when he executed the instrument. Nor
is it correct to say that the holder for value is not a
holder in due course merely because at the time he
Accommodation party v. Regular party

ACCOMMODATION PARTY
Signs an instrument
without receiving value
therefor (NIL, Sec. 29)
Purpose of signing is to
lend his name to
another person (NIL,
Cannot
disclaim
personal liability by
parol evidence
REGULAR PARTY
Signs the instrument
for value (NIL, Sec.
24)
Not for that purpose
35

MERCANTILE LAW
acquired the instrument, he knew that the indorser
was only an accommodation party (Ang Tiong v. Ting,
G.R. No. L-26767, Feb. 22, 1968).
indorsers liable if the

party primarily liable
does not pay.
Accomodation made by a corporation
payment
against
immediate parties.
MODES OF NEGOTIATION
The issue or indorsement of a negotiable paper by a

corporation without consideration and for the
accommodation of another is ultra vires. Hence, one
who has taken the instrument with knowledge of the
accommodation nature thereof cannot recover
against a corporation where it is only an
accommodation party (Crisologo-Jose v. CA, G.R. No.
80599, Sept. 15, 1989).
Modes of negotiation
1. If payable to bearer- it is negotiated by mere
delivery
2. If payable to order- it is negotiated by the
indorsement of the holder completed by delivery
(NIL, Sec. 30).
Delivery of negotiable instrument
NEGOTIATION
Delivery means transfer of possession, actual or
constructive, from one person or another (NIL, Sec.
191).
Negotiation
Negotiation is the transfer of an instrument from one
person to another so as to constitute the transferee
the holder thereof (Sec. 30).
NOTE: Where the instrument is no longer in the possession

of the party whose signature appears thereon, there is a
prima facie presumption of a valid and intentional delivery
by him (NIL, Sec. 16).
NOTE: A holder is the payee or indorsee of a bill or note,

who is in possession of it, or the bearer thereof (NIL, Sec.
191).
Effect if a bearer instrument is negotiated by

indorsement and delivery
Methods of transferring an instrument

1.
2.
3.
A bearer instrument, even when indorsed specially,

may nevertheless be further negotiated by delivery,
but the person indorsing specially shall be liable as
indorser to only such holders as make title through
his indorsement (once a bearer instrument, always a
bearer instrument) (NIL, Sec. 40).
Issuance first delivery of the instrument

complete in form to a person who takes it as a
holder.
Negotiation
Assignment transfer of the title to the
instrument, with the assignee generally taking
only such title as his assignor has, subject to all
defenses available against the assignor.
NOTE: This rule applies only to instruments originally

payable to bearer. It does not apply to instruments
originally payable to order converted to bearer because the
only or last indorsement is in blank.
DISTINGUISHED FROM ASSIGNMENT
Q: A makes a promissory note payable to bearer and

delivers the same to B. B, however, endorses it to C
in this manner:
Negotiation v. Assignment
NEGOTIATION
Only
a negotiable
instrument may be
negotiated.
The transferee, if he is
a HIDC may acquire
better rights than his
transferor.
The holder can hold
the drawer and the
ASSIGNMENT
Non-negotiable
instrument may be
assigned absent any
prohibition
against
assignment written on
its face.
The transferee can
have no better right
than his transferor; he
merely steps into the
shoes of the assignor
The transferee has no
right of recourse for

2014 GOLDEN NOTES
"Payable to C. Signed: B."

Later, C, without indorsing the promissory note,
transfers and delivers the same to D. The note is
subsequently dishonored by A. May D proceed
against A for the note? (1998 Bar Question)
A: Yes. D may collect from A. The note made by A is a
bearer instrument. Where an instrument, payable to
bearer, is indorsed, it may nevertheless be further
negotiated by delivery. Despite the special
indorsement made by B, the note remained a bearer
instrument and can be negotiated by mere delivery.
36

When C delivered and transferred the note to D, the
latter became a holder thereof. As such, D can
proceed against A.
Different kinds of indorsement

1.
Q: X executed a promissory note with a face value of

Php50,000.00, payable to the order of Y. Y indorsed
the note to Z, to whom Y owed Php30,000.00. If X
has no defense at all against Y, for how much may Z
collect from X? (2011 Bar Question)
Special (NIL, Sec. 34) Specifies the person to

whom or to whose order the instrument is to be
payable. Also known as specific indorsement or
indorsement in full.
NOTE: An instrument payable to bearer indorsed
specially may nevertheless be negotiated by delivery
(once a bearer always a bearer) (NIL, Sec. 40).
A: Php 50,000.00, but with the obligation to hold

Php20,000.00 for Y's benefit.
2.
Effect of assignment of a negotiable instrument

The transferee does not become a holder and he
merely steps into the shoes of the transferor. Any
defense available against the transferor is available
against the transferee (Salas v. CA, G.R. No. 76788
Jan. 22, 1990).
Blank (NIL, Sec. 34) Specifies no indorsee.

a. Instrument is payable to bearer and may be
negotiated by delivery;
b. May be converted to special indorsement by
writing over the signature of the indorser in
blank any contract consistent with the character
of indorsement (NIL, Sec. 35).
3. Restrictive (NIL, Sec. 36) When the instrument:

a. Prohibits further negotiation of the
instrument (it destroys the negotiability of the
instrument);
b. Constitutes the indorsee the agent of the
indorser; (NIL, Sec. 36)
c. Vests the title in the indorsee in trust for or
to the use of some persons.
Effect of the delivery of an order instrument without

indorsement
The transfer operates as an ordinary assignment (NIL,
Sec. 49). 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 transfereror.
NOTE: But mere absence of words implying power to

negotiate does not make an instrument restrictive.
4. Qualified (NIL, Sec. 38) Constitutes the indorser

a mere assignor of the title to the instrument
made by adding to the indorsers signature
words like, without recourse, sans recourse or at
the indorsees own risk (this serves as an
ordinary equitable assignment) (NIL, Sec. 38).
NOTE: For the purpose of determining whether the

transferee is a HIDC, the negotiation takes effect at the
time when the indorsement is actually made.
KINDS OF INDORSEMENTS
Indorsement
It is the signing of the name of the indorser on the
instrument with the intent to transfer title to the
same.
5.
Absolute The indorser binds himself to pay:

a. Upon no other condition than failure of prior
parties to do so
b. Upon due notice to him of such failure
6.
Conditional Right of the indorsee is made to

depend on the happening of a contingent event.
Party required to pay may disregard the
conditions (NIL, Sec. 39).
Where the indorsement should be placed

1. On the instrument itself; or
2. On a separate piece of paper attached to the
instrument called allonge (NIL, Sec. 31)
NOTE: The condition refers to the indorsement not on

the instrument itself.
Rules on indorsement
7.
GR: Indorsement must be of the entire instrument

(NIL, Sec. 32).
Joint Indorsement made payable to 2 or more

persons who are not partners (NIL, Sec. 41).
NOTE: All of them must indorse unless the one
indorsing has authority to indorse for the others.
1. Irregular (NIL, Sec. 64) A person who,

not otherwise a party to an instrument,
places thereon his signature in blank
before delivery.
XPN: When the instrument has been paid in part.

NOTE: Indorsement to two or more indorsees severally
does NOT operate as a negotiation of the instrument.
37

MERCANTILE LAW
2. Facultative
Indorser
waives
presentment and notice of dishonor,
enlarging his liability and his indorsement.
Effect of indorsing an instrument to a person as

cashier or other officers of a corporation
10. Successive Indorsement to two persons or

more in succession.
NOTE: Any of them can indorse to effect negotiation of the
instrument.
The negotiable instrument is deemed prima facie

payable to the corporation of which said person is
such an officer. It may be negotiated further by either
indorsement of the corporation or indorsement of
the officer (Sec. 42).
Rights of an indorsee in a restrictive indorsement
Date of indorsement
1. To receive payment of the instrument;

2. To bring any action thereon that the indorser
could bring; and
3. To transfer his rights as such indorsee, where the
form of the indorsement authorizes him to do so
(Sec. 37, NIL).
GR: Every negotiation is deemed prima facie to have

been effected before the instrument was overdue.
XPN: Except where an indorsement bears date after
the maturity of the instrument (Sec. 45).
Continuation of negotiable character
NOTE: All subsequent indorsees acquire only the title of the

1st indorsee under the restrictive indorsement (Sec. 37,
NIL).
GR: An instrument negotiable in origin is always

negotiable until paid, which is still true even if the NI
was dishonored or is already overdue.
Effect of a qualified indorsement
XPNs:
1. When the instrument has been restrictively
indorsed;
2. When discharged by payment or otherwise
(NIL, Sec. 47)
A qualified indorsement does NOT destroy the

negotiability of the instrument. It only means that the
qualified indorser is NOT liable when the maker is
insolvent. A qualified indorser is liable only if the
instrument is dishonored by non-acceptance or
non-payment due to:
1. Forgery;
2. Lack of good title on the part of the indorser;
3. Lack of capacity to indorse on the part of the
prior parties; or
4. The fact that at the time of the indorsement,
the instrument was valueless or not valid at the
time of the indorsement which fact was known to
him.
Striking out of an indorsement

The holder may, at any time, strike out any
indorsement which is not necessary to his title.
Indorser whose indorsement is struck out, and all
indorsers subsequent to him, are relieved from
liability on the instrument (Sec. 48).
Negotiation by a prior party
Where an instrument is negotiated back to a prior
party, such party may reissue and further negotiate
the same. But, he is not entitled to enforce payment
thereof against any intervening party to whom he
was personally liable (NIL, Sec. 50). However, he may
strike out the intervening indorsements because they
are not necessary for his title and he is liable to them
because of his initial indorsement (Sec. 48, NIL).
Instances when the indorsement is considered only

as equitable assignment
1. Indorsement of only a part of the amount of the
instrument (NIL, Sec. 32)
2. In cases of qualified indorsement (NIL, Sec. 38)
3. Transfer of an instrument payable to order by
mere delivery (NIL, Sec. 49).
EX. A payee indorsed the instrument to B, then B

indorsed it to C, C to D, then D to B. B can further
negotiate the instrument. He may also strike out the
indorsement of C and D (Sundiang, 2014).
Joint indorsement
GR: All must indorse in order for the transaction to
operate as a negotiation (NIL, Sec. 41).
XPN: Only one of them may indorse in case the
1. Payees or indorsees are partners; and
2. Payee or indorsee indorsing has authority to
indorse for the others.
2014 GOLDEN NOTES
38

Where the transferee receives notice of any infirmity in the
instrument or defect in the title of the person negotiating
the same before he had paid the full amount agreed to be
paid, he will be deemed a holder in due course only to the
extent of the amount paid by him (NIL, Sec. 54).
Limitations on re-negotiation
In the following cases, a prior party cannot further
negotiate the instrument:
1. Where it is payable to the order of a third
person, and it has been paid by the drawer
(NIL, Sec. 121[a]).
2. Where it was made or accepted for
accommodation and has been paid by the
party accommodated (NIL, Sec. 121[b]).
3. In other cases, where the instrument is
discharged when acquired by a prior party
(NIL, Sec. 119[e])
.
RIGHTS OF THE HOLDER
3. Took it in good Faith and for value;

4. 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. (Sec. 52, NIL)
NOTE: Knowledge of the agent is constructive knowledge to
the principal.
A holder is presumed to be a holder in due course

GR: Every holder is deemed prima facie to be a HIDC.
Holder
XPN: When it is shown that the title of any person

who has negotiated the instrument was defective. But
this is only as regards a party who became such after
the acquisition of the defective title (NIL, Sec.59).
The payee or indorsee of a bill or note who is in

possession of it or the bearer thereof (NIL, Sec. 191).
Classes of holders
Payment in due course
1. Holders in general (Simple Holders) (NIL, Sec. 51).

2. Holders for value (NIL, Sec. 26).
3. Holders in due course (NIL, Secs. 52, 57).
In order for payment to constitute payment in due

course, it must be made:
1. At or after the maturity of the instrument
2. To the holder thereof, in good faith and without
notice that his title is defective (NIL, Sec. 88).
Rights of a holder in general

1. Right to sue
2. Right to receive payment (NIL, Sec. 51).
Availability of rights to a party who derives his title

from a holder in due course
NOTE: If the payment is in due course, the instrument is

discharged.
A holder who derives his title through a HIDC, and

who is not himself a party to any fraud or illegality
affecting the instrument has all the rights of such
former holder in respect to all parties prior to the
latter (NIL, Sec. 58).
HOLDER IN DUE COURSE (HIDC)

To be considered as a HIDC, the requisites under Sec.
52 of the NIL must be complied with. A HIDC takes a
NI under the following conditions: (COFI)
Specifically, a holder is entitled to the following

rights:
1. Hold the instrument free from defenses available
to parties among themselves;
2. Hold the instrument free from any defect of title
of prior parties;
3. Receive payment;
4. Enforce payment of the instrument for the full
amount thereof against all parties liable; and
5. Sue
1. That is Complete and regular upon its face;

NOTE: Absence of the required documentary stamp
will not make the instrument incomplete (It is not a
requisite of negotiability under Sec. 1, NIL and it is not
a material particular under Sec. 125, NIL).
2. Became the holder before it was Overdue, and

without notice that it has been previously
dishonored, if such was the fact;
Shelter principle
NOTE: If the instrument is payable on demand, the
date of maturity is determined by the date of
presentment, which must be made within a
reasonable time after its issue, if it is a note, or after
the last negotiation thereof, if it is a bill of exchange
(NIL, Secs. 71 and 143[a]).
Under the "shelter principle," the HIDC, by

negotiating the instrument, to a party not a HIDC,
transfers all his rights as such holder to the latter and
acquires the right to enforce the instrument as if he
39

MERCANTILE LAW
was a holder in due course. The principle applies to a
"sheltered" holder who is not a party to any fraud or
illegality impairing the validity of the instrument.
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
That it is complete and regular upon its face
INFIRMITY
Refers to those that
vitiate the instrument
itself
An instrument is complete when it is not wanting in

any material particular and regular when there is no
alteration apparent on the face of the instrument.
That he became the holder before it was overdue
An overdue instrument is still negotiable, and
although it is subject to defenses existing at the time
of transfer. A negotiable instrument in circulation
past its maturity date carries strong indication that it
has been dishonored. An overdue instrument puts
all person on notice that it might not have been paid
because of a valid defense to such payment (De Leon,
2010).
DEFECT
Refers to how he
obtained
the
instrument
or
the
signature thereto, as by
fraud, duress, or force
and fear, or other
unlawful means, or for
an illegal consideration
or when he negotiates
it in breach of faith, or
under
any
other
circumstances
as
amount to a fraud. (NIL,
Sec. 55)
Instances when the title of a person (transferor) is

defective
Without notice that it has been previously

dishonored, if such was the fact
1. In its acquisition When he obtained the

instrument, or any signature thereto, by fraud,
duress, or force and fear, or other unlawful means, or
for an illegal consideration.
2. In the negotiation When he negotiates it in
breach of faith, or under such circumstances as
amount to a fraud (NIL, Sec. 55)
An instrument may be dishonored either by:

1. Non-acceptance (refers to a bill of exchange) or
2. Non-payment
An overdue or dishonored instrument may still be
negotiated either by indorsement or by delivery to
the same extent as before maturity. However, in case
of negotiation of an overdue instrument, the holder
cannot be a holder in due course while in case of
negotiation of a dishonored instrument, the holder
without notice can be a holder in due course (De
Leon, 2010).
Notice of defect on the transferee

The person to whom it is negotiated must have had
actual knowledge of such facts or knowledge of other
facts that his action in taking the instrument
amounted to bad faith (NIL, Sec. 56).
That he took it in good faith and for value

Effect of notice before the full amount is paid
Good faith is the holders well founded or honest
belief that the person from whom he received the
instrument was the owner thereof, with the right to
transfer it (Duran v IAC, 138 SCRA 489).
Where the transferee receives notice

of any
infirmity in the instrument or defect in the title of the
person negotiating the same before he has paid the
full amount agreed to be paid therefor, he will be
deemed a holder in due course only to the extent of
the amount therefore paid by him (Sec. 54, NIL).
Value may be some right, interest, profit or benefit to

the party who makes the contract or some
forbearance, detriment, loan, responsibility, etc. to
the other (BPI v. Roxas, G.R. No. 157833, October 15,
2007).
Q: A drawer issued a check for the payment of a car,

which check was delivered to the agent of the owner
of the car for safekeeping. The check was then used
by the agent to pay the medical bills of his wife in a
clinic. The projected purchase did not materialize. Is
the clinic considered a holder in due course?
A: No, the rule that a possessor of the instrument is
prima facie a HIDC does not apply to the clinic

2014 GOLDEN NOTES
40

because he cannot be said to have acquired the
negotiable instrument in good faith for there was a
defect in the title of the holder (agent), since the
instrument was not payable to the agent or to
bearer; also the drawer had no account with the
clinic, the agent did not show or tell the payee why
he had the check in his possession and why he was
using it for the payment of his own account.
payment, strips the instrument of negotiability and

reduces it to a mere voucher or proof of payment.
Instances when a person is deemed not a holder in
due course
1. A holder who acquires the instrument after its
date of maturity.
2. Where an instrument payable on demand is
negotiated for an unreasonable length of time
after its issue (Sec. 53, NIL).
As holders title was defective or suspicious, it cannot

be stated that the payee acquired the check without
knowledge of said defect in holders title, the
presumption that the clinic is a HIDC does not exist
(De Ocampo & Co. v. Gatchalian, G.R. No.
L-15126, Nov. 30, 1961).
Possession of a negotiable
presentment and dishonor
instrument
NOTE: A note payable on demand is due when

payment is demanded. A check becomes overdue
when it is not presented for payment within a
reasonable time, usually 6 months from date the
thereof, afterwards, it becomes a stale check.
after
3.
It does not make the possessor a holder for value

within the meaning of the law. It gives rise to no
liability on the part of the maker or drawer or
indorsers (STELCO Marketing Corp. vs. CA, G.R. No.
96160, June 17, 1992).
Where the instrument contains an acceleration

clause, knowledge of the holder at the time of
acquisition thereof that one installment or
interest, or both, is unpaid is a notice that it is
overdue.
NOTE: Where indorsement is not dated, it is deemed
prima facie to have been negotiated before the
instrument was overdue (NIL, Sec. 45). An overdue
instrument is still negotiable but it is subject to the
defenses existing at the time of the transfer.
Q: Is a corporation to which four crossed checks

were indorsed by the payee corporation a holder in
due course and hence entitled to recover the
amount of the checks when the same had been
dishonored for the reason of payment stopped?
Rights of a holder who is not a holder in due course

The rights of a holder not a HIDC are similar to an
assignee. The other rights are:
1. He may receive payment and if the payment is in
due course, the instrument is discharged
2. He is entitled to the instrument but holds it
subject to the same defenses as if it were
non-negotiable
3. He may sue on the instrument in his own name
(Sec. 51, NIL).
A: The checks were crossed checks and specifically

indorsed for deposit to payees account only. From
the beginning, the corporation was aware of the fact
that the checks were all for deposit only to payees
account. Clearly then, it could not be considered a
HIDC (Atrium Management Corp. v. CA, G.R. No.
109491, Feb. 28, 2001).
NOTE: Presence or absence of defect or infirmity must be
determined at the time the instrument was negotiated to
the holder.
DEFENSES AGAINST THE HOLDER

Defenses against the holder
Payee as holder in due course
The defenses available against the holder are

classified as follows:
1. Real or Absolute Defenses those that are
attached to the instrument itself and are available
against all parties, both immediate and remote,
including holders in due course.
There can be no doubt that a proper interpretation of

NIL as a whole leads to the conclusion that a payee
may be a holder in due course under the
circumstances in which he meets the requirements of
Sec. 52 (De Ocampo v. Gatchalian, supra).
2. Personal or Equitable Defenses defenses which

are only available against a holder not in due course.
Those which grow out of the agreement or conduct
of a particular person which renders it inequitable for
him, though holding the legal title, to enforce it
against the party sought to be made liable.
Drawee as holder in due course

A drawee does not become a HIDC by simply paying a
bill. A holder refers to one who has taken the
instrument as it passes along in the course of
negotiation; whereas a drawee, upon acceptance and
41

MERCANTILE LAW
Real defenses available against a holder (IM In Ultra.
AFForD PODIF)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
presentment, F learned that T is only 15 years old. F

wants to recover from U but the latter insists that a
notice of dishonor must first be made, the
instrument being a bill of exchange. Is he correct?
(2011 Bar Question)
Incomplete and undelivered instrument

Minority (available only to the minor)
Incapacity as far as incapacitated persons are
concerned
Ultra vires acts of a corporation
Want of Authority, apparent and real
Fraudulent alteration
Forgery
Duress amounting to Forgery
Prescription
Other infirmities appearing on the face of the
instrument
Discharge in insolvency
Illegal Contract
Fraud in Factum or Esse Contractus
A: No, since F can treat U as maker due to the

minority of T, the drawee.
NOTE: Where the drawee does not have the capacity to
contract, the holder may treat the bill as a PN (Sec. 130,
NIL).
LIABILITIES OF PARTIES
Party primarily liable v. Party secondarily liable
under the Negotiable Instruments Law
PRIMARILY LIABLE
Unconditionally
bound
Personal defenses available against a holder

(InnocentS2 ADD FUn In Fraud)
1.
2.
Innocent alteration or spoliation

Discharge of party Secondarily liable by discharge
of prior party.
3. Set-off between immediate parties
4. Filling up of blanks not in accordance with the
Authority given
5. Acquisition of instrument by Duress or force and
fear; unlawful means or for an illegal
consideration
6. Discharge by payment or renunciation or release
before maturity
7. Failure or absence of consideration.
8. Undelivered complete instrument
9. Insertion of a wrong date
10. Fraud in inducement or simple fraud
Absolutely required
to pay the instrument
upon maturity
Conditionally bound
Undertakes to pay only
after the ff. conditions
have been fulfilled:
1. Due presentment for
payment or acceptance
to primary party
(Sec.143, NIL);
2. Dishonor by such party
(Sec.70, NIL);
3. Taking of proceedings
required by law (Sec.152,
NIL)
Parties primarily liable

1.
2.
3.
NOTE: Fraud in factum exists in those cases in which a

person, without negligence, has signed an instrument, but
was deceived as to the character of the instrument and
without knowledge of it, as where a note was signed by one
under the belief that he was signing as a witness to a deed.
This kind of fraud is a real defense because there is no
contract since the person did not know what he was
signing. Fraud in inducement relates to the quality,
quantity, value or character of the consideration of the
instrument. Here, deceit is not in the character of the
instrument but in its amount or terms. This exists when a
person is induced to sign a note for the price of a worthless
stock which was fraudulently represented by the payee as
to its value. Such type of fraud is only a personal defense
because it does not prevent a contract (De Leon, The
Philippine Negotiable Instruments Law, Annotated, 2010
ed.).
Maker of a promissory note;

Acceptor of a bill of exchange; and
Certifier of a check
Parties secondarily liable

1.
2.
Drawer of a bill; and

Indorser of a note or a bill
Person to whom the negotiable instrument should

be presented
NI should be presented for payment to the party
primarily liable (Sec. 72[d], NIL.):
1. Promissory note maker
2. Bill of exchange drawee/acceptor
Q: A bill of exchange has T for its drawee, U as

drawer, and F as holder. When F went to T for
2014 GOLDEN NOTES
SECONDARILY LIABLE
42

The drawee is not liable for payment of a bill of
exchange
dishonor be duly taken,

he will pay the holder.
(Sec. 66, NIL.)
Irregular indorser
a. In an order instrument,
liable to the payee and all
subsequent parties
b. If bearer instrument or
payable to order of maker
or drawer, liable to all
parties subsequent to the
maker or drawer
c. If he signs for
accommodation of the
payee, liable to all parties
subsequent to payee.
(Sec. 64, NIL.)
The mere issuance of a bill does not operate as an

assignment of the funds in the hands of a drawee.
The drawee must accept the instrument (thus,
becomes an acceptor) in order that he may be
primarily liable for the payment of a BOE.
Warranties and liabilities of parties who are
secondarily liable
ABSOLUTE LIABILITY
Drawer of a BOE
Warrants:
a. The
existence
of
payee and his then
capacity to indorse
b. That the instrument
will be accepted or paid
upon due presentment
by the party primarily
liable according to its
tenor; and
c. That if dishonored, he
will pay the party
entitled to be paid. (Sec.
61, NIL.)
LIMITED LIABILITY
Qualified Indorser
Warrants that the:
a. Instrument
is
genuine;
b. he has good title to
it;
c. capacity to contract
of all prior parties;
and
d. no knowledge of
any fact which would
impair the validity of
the
instrument.
(Sec.65, NIL.)
MAKER
Maker
The maker of a negotiable instrument, by making
such instrument:
1. Engages that he will pay it according to its tenor,
and
2. Admits the existence of the payee and his then
capacity to indorse (Sec. 60, NIL).
NOTE: He is liable to all

parties who derive their
title
through
his
indorsement.
General indorser
a. Warrants that:
i. Instrument
is
genuine
ii. He had good title
to it
iii. All prior parties
had capacity to
contract
iv. Instrument,
at
the
time
of
indorsement,
was valid and
subsisting;
b. On due presentment, it
shall be accepted or paid,
or both according to its
tenor
c. If the instrument is
dishonored
and
the
necessary proceedings on
NOTE: The maker is liable the moment he makes the NI. His
liability is primary and unconditional.
Q: On the right bottom margin of a PN appeared the

signature of the corporations president and
treasurer above their printed names with the phrase
and in his personal capacity. The corporation
failed to pay its obligation. Are the officers liable?
A: Yes, persons who sign their names on the face of
promissory notes are makers and liable as such. The
officers are co-makers and as such, they cannot
escape liability arising therefrom (Republic Planters
Bank v. CA, G.R. No. 93073, Dec. 21, 1992).
Person negotiating by
delivery
Same warranties as a
qualified indorser. But
unlike
a
qualified
indorser, a person
negotiating by mere
delivery is liable only to
his
immediate
transferee. (par. 2, Sec.
65, NIL.)
DRAWER
NOTE: Person negotiating

by mere delivery and a
qualified
indorsers
secondary
liability
is
limited, namely, to their
warranties
Drawer
The drawer, by drawing the instrument:
capacity to indorse; and
2. Engages that on due presentment the instrument
will be accepted or dishonored; and
3. That if the necessary proceedings on dishonor be
duly taken, he will pay the amount thereof to the
holder, or to any subsequent indorser who may be
compelled to pay it (Sec. 61, NIL).
43

MERCANTILE LAW
Secondary liability of the drawer
maker engages to pay the negotiable instrument

according to the tenor of the bill itself.
The drawer is secondarily liable to the following:

1. The holder or
2. To any subsequent indorser who may be
compelled to pay it (ibid.).
Q: X draws a check against his current account with

Bonifacio Bank in favor of B. Although X does not
have sufficient funds, the bank honors the check
when it is presented for payment. Apparently, X has
conspired with the bank's bookkeeper so that his
ledger card would show that he still has sufficient
funds. The bank files an action for recovery of the
amount paid to B because the check presented has
no sufficient funds. Decide the case (1998 Bar
Question).
The drawer may limit his liability to the holder

The drawer may insert in the NI an express stipulation
negativing or limiting his own liability to the holder
(ibid.).
Q: D draws a bill of exchange that states: One
month from date, pay to B or his order
Php100,000.00. Signed, D. The drawee named in
the bill is E. B negotiated the bill to M, M to N, N to
O, and O to P. Due to non-acceptance and after
proceedings for dishonor were made, P asked O to
pay, which O did. From whom may O recover?(2011
Bar Question)
A:
A: The bank cannot recover the amount paid to B for

the check. When the bank honored the check, it
became an acceptor. As acceptor, the bank became
primarily and directly liable to the payee/holder B.
The recourse of the bank should be against X and its
bookkeeper who conspired to make X's ledger show
that he has sufficient funds.
D, being the drawer.

INDORSER
ACCEPTOR
Indorser
Acceptor
A person placing his signature upon an instrument
otherwise than as maker or acceptor is deemed to be
an indorser, unless he clearly indicates by appropriate
words his intention to be bound in some other
capacity (Sec. 63, NIL).
The acceptor, by accepting the instrument:

1. Engages that he will pay the NI according to the
tenor of his acceptance; and
2. Admits the existence of the drawer, the
genuineness of his signature and his capacity and
authority to draw the instrument
capacity to indorse (Sec. 62, NIL).
NOTE: A person who places his indorsement on an bearer

instrument incurs all liabilities of an indorser (Sec. 67, NIL).
General indorser v. Irregular indorser (2005 Bar

Question)
Party who can accept the bill of exchange

GR: Only the drawee may accept. A stranger or
volunteer is not bound by acceptance.
XPN: In case of a bill which is accepted for honor
supra protest (Sec. 161, NIL).
NOTE: Drawee does not become liable until he accepts the
instrument in which case he becomes an acceptor. An
acceptor engages to pay according to the tenor of his
acceptance, which may not be the same as the tenor of the
bill itself because the acceptance may be qualified.
Difference between the liability of an acceptor or

drawee-acceptor and a maker
While both are primarily liable, the acceptor engages
to pay the negotiable instrument according to the
tenor of his acceptance. On the other hand, the
2014 GOLDEN NOTES
44
General Indorser
Makes either a blank or
special indorsement
Irregular Indorser
Always makes a blank
indorsement
Indorses the
instrument after its
delivery to the payee
Indorses before its

delivery to the payee
Liable only to parties

subsequent to him
Liable to the payee and

subsequent parties
unless he signs for the
accommodation of the
payee in which case he
is liable only to all
parties subsequent to
the payee (Sec. 64, 66,
NIL; De Leon, supra)

NOTE: The holder or subsequent indorser who tries to claim
under the instrument which had been dishonored for
"irregular indorsement" must not be the irregular indorser
himself who gave cause for the dishonor. (Gonzales v. Rizal
Commercial Banking Corporation, 508 SCRA 459)
account of the depositor for his breach of warranty

(Jai-Alai Corporation Of The Philippines v. BPI, G.R.
No. L-29432, Aug. 6, 1975).
Q: Phebean, the drawer issued a check to James.
James, subsequently indorsed it to Trude. When
Trude is about to encash the check, the drawee
Union Bank refused to encash it due to insufficiency
of funds. Trude sued James for payment of money.
James alleged that the suit should be dismissed
because Phebean is an indispensable party. Does
James argument hold water?
Qualified indorser
A qualified indorser is a person who indorses without
recourse (Sec. 65, NIL).
Drawer v. Indorser
Drawer
Party only to a bill
Makes admission as to
the existence of the
payee and his capacity
to indorse
Makes no warranties,
but engages to pay
after certain conditions
are complied with
Indorser
Party either a bill or
note
No such admission
A: No, there is no privity between the drawer and the

holder. The drawer is merely secondarily liable. As
indorser, the buyer warranted that upon due
presentment, the checks were to be accepted or paid,
or both, according to their tenor, and that in case
they were dishonored, she would pay the
corresponding amount. After an instrument is
dishonored by non-payment, indorsers cease to be
merely secondarily liable; they become principal
debtors whose liability becomes identical to that of
the original obligor (Tuazon v. Heirs of Bartolome
Ramos, G.R. No. 156262, July 14, 2005).
Has warranties
Order of liability among the indorsers
Q: X is the holder of an instrument payable to him

(X) or his order, with Y as maker. X then indorsed it
as follows: Subject to no recourse, pay to Z. Signed,
X. When Z went to collect from Y, it turned out that
Y's signature was forged. Z now sues X for collection.
Will it prosper? (2011 Bar Question)
1. Among themselves Liable prima facie in the

order in which they indorse (Sec. 68)
2. To the holder In any order
NOTE: Every indorser is liable prima facie to all indorsers
subsequent to him, but not those indorsers prior to him
(Sec. 68, NIL)
A: Yes, because X, as a qualified indorser, warrants

that the note is genuine.
Liability of an agent or broker who negotiates an

instrument without indorsement
WARRANTIES
He incurs all the liabilities prescribed to a general

indorser unless he discloses the name of his principal
and the fact that he is acting only as an agent (Sec.
69, NIL)
The following are the warranties a person provides in

negotiating an instrument:
1. That the instrument is genuine and in all
respects what it purports to be
2. That he has good title to it
3. That all prior parties had capacity to contract
4. That he has no knowledge of any fact which
would impair the validity of the instrument or
render it useless.
NOTE: Parol evidence is NOT admissible to relieve an agent

or broker whose endorsement brings him within the above
liability.
Q: Can a collecting bank debit the account of the

depositor when the checks indorsed to it (bank)
were forged?
NOTE: Indorsers liability as warrantor is distinct from his

liability to pay the instrument. Even a qualified indorser
may incur liability for breach of implied warranties. As
warrantor, his liability is unconditional.
A: Yes, because the depositor of a check as indorser

warrants that it is genuine and in all respect what it
purports to be. Thus, when the checks deposited had
forged indorsements and the collecting bank, as a
consequence of such forgery, was made to pay the
drawee bank, the collecting bank can debit the
45

MERCANTILE LAW
PRESENTMENT FOR PAYMENT
3.
Presentment for payment

It is the presentation of an instrument to the person
primarily liable for the purpose of demanding and
receiving payment.
Rule if the instrument is, by its terms, payable at a

special place
Manner of presentment
If the instrument is, by its terms, payable at a special

place, and the person primarily liable is able and
willing to pay it there at maturity, such ability and
willingness are equivalent to a tender of payment
upon his part (Sec. 70, NIL).
GR: Instrument must be exhibited to the person from

whom payment is demanded; when paid, it must be
delivered to the person paying it (Sec. 74, NIL).
XPNs: When exhibition is excused:
1. Debtor does not demand to see the instrument
and refuses payment on some other grounds; or
2. Instrument is lost or destroyed.
Requisites for a sufficient presentment for payment

Presentment for payment, to be sufficient, must be
made:
1. By the holder, or his agent authorized to receive
payment on his behalf;
2. At a reasonable hour on a business day;
3. At a proper place;
4. To the person primarily liable, or if he is absent or
inaccessible, to any person found at the place
where the presentment is made (Sec. 72, NIL).
Liability of a bank paying a certificate of deposit

payable to bearer without requiring its surrender
The bank remains liable to the holder if it
certificate of deposit payable to bearer
requiring its surrender (Far East Bank
Company v. Querimit, G.R. No. 148582,
2002).
paid the
without
& Trust
Jan. 16,
Time for presentment for payment
Payee cannot claim payment for a promissory note

which was stolen and as such is not in his possession
To make presentment for payment, it is necessary to
exhibit the instrument, which he cannot do because
he is not in possession thereof.
NECESSITY OF PRESENTMENT FOR PAYMENT
Instance when
necessary
presentment
for
payment
When dispensed with under Sec. 82, NIL such as:

a. Where, after the exercise of reasonable
diligence, presentment cannot be made
b. Where the drawee is a fictitious person
c. By waiver of presentment, express or
implied
INSTRUMENT
TIME FOR PRESENTMENT

GR: On the day it falls due (Sec.
85, NIL)
Payable at a
fixed or
determinable
future time
XPN: If the due date falls on a

Saturday, presentment must be
made on the next Monday.
is
Promissory
note payable
on demand
Presentment for payment is only necessary to charge

persons secondarily liabledrawer and indorsers
(Sec. 70, NIL).
Within a reasonable time after

its issue.
Within a reasonable time after
the last negotiation thereof (Sec.
71, NIL).
NOTE: Presentment for payment is not necessary in order

to charge the person primarily liable on the instrument.
Instance when presentment for payment is not

necessary to charge persons secondarily liable
Bill of
exchange
payable on
demand
1. As to drawer, where he has no right to expect or

require that the drawee or acceptor will pay the
instrument (Sec. 79, NIL).
2. As to 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, NIL).
2014 GOLDEN NOTES
NOTE: If presentment for payment is

made before maturity, it will not
result to a discharge of the
NOTE: Last negotiation means the

last transfer for value. Subsequent
transfers between banks for
purposes of collection are not
negotiations within Sec. 71.
Reasonable time means not more
than 6 months from the date of
issue. Beyond said period, the check
becomes stale and valueless and
thus, should not be paid.
46

NOTE: Every NI is payable at the time fixed therein without
grace.
5.
Rules on presentment for payment when maturity

date is fixed
Time of presentment where the instrument is

payable at a bank
TIME OF MATURITY
OF INSTRUMENT
On a Sunday or
holiday
Presentment must be made during banking hours,

unless the person to make payment has no funds
there to meet it at any time during the day, in which
case presentment at any hour before the bank is
closed on that day is sufficient (Sec. 75, NIL.)
On a Saturday
If instrument which
falls due on a Saturday
is payable on demand
WHEN TO PRESENT
FOR PAYMENT
On
the
next
succeeding business
day
On
the
next
succeeding business
day
Before 12:00 noon on
Saturday,
or
on
Monday, at the option
of the holder
Requisites of payment in due course

Payment is made in due course when (MHG)
1. It is made at or after the date of Maturity;
2. To the Holder thereof;
3. In Good faith and without notice that holders
title is defective (Sec. 88, NIL).
Instances when delay in making presentment is

excused
NOTE: The term in good faith refers to the maker or

acceptor and not to the holder.
1. When caused by circumstances beyond the

control of the holder; and
2. Not imputable to his default, misconduct, or
negligence (Sec. 81, NIL).
PARTIES TO WHOM PRESENTMENT FOR PAYMENT

SHOULD BE MADE
Parties to whom presentment for payment should
be made
NOTE: Only the delay in presentment is excused and not

the presentment itself. Hence, as soon as the cause of delay
ceases to operate, presentment must be made with
reasonable diligence (ibid.).
GR: Presentment for payment must be made to the

primary party; to the:
1. The maker in case of a promissory note, or
2. The acceptor in case of an accepted bill. If the
bill of exchange or check is payable on demand,
the presentment must be made to the drawee
although he is not automatically liable on the
bill.
Q: Is the bank liable to the payee for depositing and

encashing the crossed checks to an unauthorized
person?
A: Yes, the effects of crossing a check relate to the
mode of its presentment for payment. Under Sec. 72
of the NIL, presentment for payment, to be sufficient,
must be made by the holder or by some person
authorized to receive on his behalf. The checks here
had been crossed and issued for payees account
only. This only signifies that the drawer had
intended the same for deposit only by the person
indicated (Associated Bank v. CA, G.R. No. 89802,
May 7, 1992).
XPNs: Where the person/s primarily liable is/are:

1. Dead payment must be made to his personal
representative (Sec. 76, NIL).
2. Liable as partners and no place of payment
specified payment may be made to any of them
though there has been a dissolution of the firm (Sec.
77, NIL).
3. Several persons, not partners, and no place of
payment is specified payment must be made to all
of them (Sec. 78, NIL).
4. If the person primarily liable is absent or
inaccessible, then presentment must be made to any
person of sufficient discretion at the proper place of
presentment (Sec. 72[d], NIL).
Order of preference with regard to the place of

presentment
1.
2.
3.
4.
At his Last known place of business or residence

(Sec. 73, NIL).
Specified place in the instrument

Address of the person to make the payment if
given in the instrument
Usual place of business or residence of the
person to make the payment
Wherever he can be found; or
47

MERCANTILE LAW
DISPENSATION WITH PRESENTMENT OF PAYMENT
NOTICE OF DISHONOR
Effect when presentment is not made
Notice of dishonor
GR: Drawer and the indorsers are discharged from

their secondary liability.
It is a notice given by the holder to the parties

secondarily liable, drawer and each indorser, that the
instrument was dishonored by non-payment or
non-acceptance by the drawee/maker.
XPNs:
1. Presentment for payment is not required to charge
drawer and indorser when:
a. Drawer- when he has no right to expect or
require that the drawee or acceptor will pay the
b. Indorser When the NI was made or accepted
for his accommodation and he has no reason to
expect that the instrument will be paid if
presented (Sec. 80, NIL).
NOTE: Persons primarily liable need not be given notice of

dishonor because they are the ones who dishonored the
instrument.
Purposes for requiring notice of dishonor

1.
2.
2. When presentment for payment is dispensed with

under Sec. 82, NIL
3. When the BOE has been dishonored by
non-acceptance, since no PP for is necessary (Sec.
151, NIL).
Q: Notice of dishonor is not required to be made in

all cases. One instance where such notice is not
necessary is when the indorser is the one to whom
the instrument is supposed to be presented for
payment. The rationale here is that the indorser
(2011 Bar Question)
Instances when presentment for payment may be

dispensed with
1.
2.
3.
Where, after the exercise of reasonable

diligence, presentment cannot be made;
Where the drawee is a fictitious person; or
By waiver of presentment, express or implied
(Sec. 82, NIL).
A: Already knows of the dishonor and it makes no

sense to notify him of it.
Time and place of giving the notice of dishonor
1. GR: As soon as instrument was dishonored (Sec.
102, NIL.)Party is allowed one entire day for the
purpose of giving notice.
DISHONOR BY NON-PAYMENT
Instances when an instrument is dishonored by
non-payment
NON-PAYMENT UPON
DUE PRESENTATION
The instrument is duly
presented
for
payment to party
primarily liable and it
is either refused or
cannot be obtained
XPN: Delay is excused (Sec. 113, NIL).
NON-PAYMENT
W/OUT
PRESENTATION
Presentment
is
excused
and
the
instrument is overdue
and unpaid (Sec. 83,
NIL).
NOTE: An instrument cannot be dishonored by

non-payment until after the maturity.
2. Parties reside in the same place

a. Place of business Before close of business
hours on the day following
b. Residence Before the usual hours of rest on
the day following
c. By mail Deposited in the post office in time
to reach him in the usual course on the day
following (Sec. 103, NIL)
Effect of dishonor by non-payment

Subject to the provisions of the law, when the
instrument is dishonored by non-payment, an
immediate right of recourse to all parties secondarily
liable thereon accrues to the holder (Sec. 84, NIL).

2014 GOLDEN NOTES
To inform parties secondarily liable that the

maker or acceptor has failed to meet his
engagement.
To advise them that they are required to make
payment.
3. Parties reside in different places

a. By mail Deposited in the post office in time
to go by mail (actual departure in the course of
mail from the post office in which the notice was
deposited) the day following the day of
dishonor.
48

b. If no mail At a convenient hour (of the
sender) on that day, by the next mail thereafter
c. Other than by post office (e.g. personal
messenger) Within the time that notice would
have been received in due course of mail, if it
has been deposited in the post office within the
time specified in (a) (Sec. 104, NIL).
6.
7.
Parties to whom the notice of dishonor should be

given in case the instrument was dishonored in the
hands of the agent
4. Time of notice to antecedent parties Same time

for giving notice that the holder has after the
dishonor (Sec. 107, NIL).
1. To the parties secondarily liable Within the

time fixed by Secs. 102-104, and 107, otherwise, they
are discharged
2. To his principal The principal must give notice
to parties secondarily liable as if his agent were an
independent holder (Sec. 94, NIL).
NOTE: Actual receipt of the party within the time specified

by law is sufficient though not sent in the places specified
above (Sec. 108, NIL).
Instances when a negotiable

considered dishonored
instrument
Notice to joint parties who are not partners

must be given to each of them (Sec. 100, NIL)
Where a party has been adjudged a bankrupt
to the party himself or to his trustee or assignee
(Sec. 101, NIL)
is
NOTE: A party who receives notice of dishonor is entitled to

give notice of such dishonor to prior parties within the
same period of time that the holder has after the dishonor,
as if he were the said holder (Sec. 107, NIL).
A. For BOE,
1. If not accepted when presented for
acceptance; or
2. If presentment for acceptance is excused and
the bill is not accepted (Sec. 149, NIL).
PARTIES WHO MAY GIVE NOTICE OF DISHONOR

1.
2.
3.
B. For PN,
1. Not paid (that is, payment is refused or not
obtained) when presented for payment at
maturity; or
2. Where presentment is excused or waived and
the instrument is overdue and unpaid (Sec. 83,
NIL).
Holder
Another in behalf of the holder
Any party to the instrument, who may be
compelled to pay and who, upon taking it up,
would have a right to reimbursement from the
party to whom notice is given (Sec. 90, NIL)
EFFECT OF NOTICE
Liability of a person secondarily liable when the

instrument is dishonored
Effect of notice of dishonor if given by or on behalf

of the holder
After the necessary proceedings for dishonor had

been duly taken, an immediate right of recourse to all
parties secondarily liable thereon accrues to the
holder (Sec. 84).
Notice of dishonor inures to the benefit of:

1. All holders subsequent to the holder who has
given notice; and
2. All parties prior to the holder but subsequent to
the party to whom notice has been given and
against whom they may have a right of recourse
(Sec. 92, NIL)
PARTIES TO BE NOTIFIED
Parties to whom notice must be given
Effect of notice of dishonor if given by party entitled

thereto
Notice of dishonor should be given to:

1. The drawer; or
2. Indorser; or
3. His agent (Sec. 97, NIL)
4. Where party is dead to a personal
representative or sent to the last residence or
last place of business of the deceased (Sec. 98,
NIL)
5. When the parties to be notified are partners
notice to any one partner though there has been
a dissolution (Sec. 99, NIL)
Notice of dishonor inures to the benefit of:

1. The holder; and
2. All parties subsequent to the party to whom
notice is given (Sec. 93, NIL).
Effect of failure to give notice of dishonor
Any drawer or indorser to whom such notice is not
given is discharged (Sec. 89, NIL)
49

MERCANTILE LAW
NOTE: Holder is not required to notify all indorsers, he may
select to hold only one or more indorsers. Indorsers who
are discharged from liability by reason that no notice of
dishonor was given to them is still liable for breach of
warranties as to the NI.
2.
Particular indorser (if written above the

signature of such indorser) (Sec. 110, NIL).
Waiver of protest
It is the waiver of the formal instrument executed
usually by a notary public certifying that the legal
steps necessary to fix the liability of the drawee and
the indorsers have been taken. Thus, it is deemed to
be a waiver not only of a formal protest but also of
presentment and notice of dishonor (Sec. 111, NIL).
FORM OF NOTICE
Form and contents of a notice of dishonor
1.
2.
3.
Oral; or
In writing
It may be given by personal delivery, or by mail
(Sec. 96, NIL)
4. Must contain the following:
a. Description of the instrument;
b. Statement that it has been presented for
payment or for acceptance and that it has
been dishonored (If protest is necessary,
notice must also contain a statement that it
has been protested).
c. Statement that the party giving the
notice intends to look for the party
addressed for payment.
DISPENSATION WITH NOTICE

Instances when notice of dishonor is not necessary
1. Waiver of notice (Sec. 109, NIL)
2. Waiver of protest (Sec. 111, NIL)
3. When notice is dispensed with when after
exercise of reasonable diligence, notice cannot be
given or does not reach the parties sought to be
charged (Sec. 112, NIL)
4. Drawer in cases under Sec. 114, NIL.
5. Indorser in cases under Sec. 115, NIL.; and
6. Where due notice of dishonor by non-acceptance
has been given (notice of dishonor by
non-payment not necessary). (Sec. 116, NIL.)
NOTE: A written notice need not be signed, and an

insufficient notice may be supplemented or validated by
verbal communication. A misdescription of the instrument
does not vitiate the notice unless the party to whom the
notice is given is in fact misled thereby (Sec. 95, NIL).
Instances when a notice of dishonor to the drawer

may be dispensed with
WAIVER
1. When drawer and drawee is the same person
2. Drawee is fictitious or does not have the capacity
to contract
3. Drawer is the person to whom the instrument is
presented for payment (he is the one who
dishonored the instrument)
4. Drawer has no right to expect or require that the
drawee or acceptor will honor the instrument.
5. Drawer has countermanded the payment (e.g.
stop payment order) (Sec. 114, NIL.)
Waiver of notice
It is the willingness on the part of the drawer or
indorser to be bound as such even without due notice
of dishonor.
Time when a waiver of notice may be given
1.
2.
Before the time of giving notice has arrived; or

After the omission to give due notice (Sec.
109,NIL).
NOTE: The holder of two checks which were dishonored

because the drawer withdrew her funds from the bank can
hold the drawer liable even if no notice of dishonor was
given to the drawer, since the drawer had no right to
expect that the drawee bank would honor the checks.
(State Investment House, Inc. vs. Court of Appeals, 217
SCRA 32)
Ways to give a waiver of notice

It can either be:
1. Express; or
2. Implied (e.g. Payment by an indorser after he
learns of the default of the maker; admission of
liability after dishonor) (Sec. 109, NIL).
Q: P authorized A to sign a negotiable instrument in

his (Ps) name. It reads: Pay to B or order the sum
of Php1 million. Signed, A (for and in behalf of P).
The instrument shows that it was drawn on P. B
then indorsed to C, C to D, and D to E. E then treated
it as a bill of exchange. Is presentment for
Parties affected by the waiver of notice

1.
All parties (if embodied on the face of the

instrument); or

2014 GOLDEN NOTES
50

acceptance necessary in this case? (2011 Bar
Question)
Effect of lack of notice of dishonor on the

instrument which is payable in installments
A: No, since the drawer and drawee are the same

person.
1. No acceleration clause Failure to give notice of

dishonor on a previous installment does not
discharge drawers and indorsers as to succeeding
installments.
Q: Juben issued to Y two post-dated checks as

security for pieces of jewelry to be sold. Y
negotiated the check to S. When Juben failed to sell
the jewelry, he withdrew all his funds from the
drawee bank. After dishonor, Juben contends that
the holder failed to give him a notice of dishonor. Is
notice of dishonor necessary?
2. With acceleration clause It depends upon

whether the clause is automatic or optional.
a. Automatic failure to give notice of dishonor as
to a previous installment will discharge the
persons secondarily liable as to the succeeding
installments;
b. Optional if not exercised, the rule would be
the same as if there is no acceleration clause. If
exercised, the rule would be the same as if the
installment contains an automatic acceleration
clause (Town Savings Bank v. CA, G.R. No. 106011,
June 17, 1993).
A: No, Juben was responsible for the dishonor of his

checks, hence, there was no need to serve him notice
of dishonor (State Investment House, Inc. v. CA, G.R.
No. 101163, Jan. 11, 1993).
Instances when it is not necessary to give a notice of
dishonor to the indorser
1.
2.
3.
DISCHARGE OF NEGOTIABLE INSTRUMENT
Drawee is fictitious or has no capacity to

contract, and indorser was aware of these facts
at the time he indorsed the instrument;
Indorser is person to whom the instrument is
presented for payment; or
Instrument was made or accepted for his
accommodation (Sec. 115, NIL).
It is the release of all parties, whether primary or

secondary, from the obligations arising thereunder. It
renders the instrument without force and effect, and
consequently, it can no longer be negotiated.
DISCHARGE OF NEGOTIABLE INSTRUMENT
Methods for discharge of instrument
EFFECT OF FAILURE TO GIVE NOTICE
1. Payment by principal debtor:

a. By or on behalf of principal debtor
b. At or after its maturity
c. To the holder thereof
d. In good faith and without notice that the
holders title is defective
2. Payment by accommodated party
3. Intentional cancellation of instrument by the
holder (by expressly stating it in the instrument
or when the instrument is torn up, burned or
destroyed)
4. Any act which discharges a simple contract for
the payment of money under Art. 1231 of the
NCC specifically remission, novation, and merger.
Effect of the omission of a previous holder to give

notice of dishonor by non-acceptance
It does not prejudice the rights of a holder in due
course subsequent to the omission to present the
instrument to the drawee for acceptance and notify
the drawer and indorsers if acceptance is refused
(Sec. 117, NIL).
Effect of failure to give notice of dishonor
GR: Any person to whom such notice is not given is
discharged, but he will still be liable for breach of
warranties pertaining to the instrument.
NOTE: Loss of the negotiable instrument will not extinguish

liability; compensation is not available so long as an
obligation is evidenced by a negotiable instrument
(Commercial Law Review, Villanueva, 2009 Edition).
XPNs:
1. Waiver (Sec. 109, NIL)
2. Notice is dispensed with (Sec. 112, NIL)
3. Not necessary to drawer (Sec. 114, NIL)
4. Not necessary to indorser (Sec. 115, NIL)
5. Reacquisition by principal debtor in his own right.

Reacquisition must be:
a. By the principal debtor
b. In his own right
51

MERCANTILE LAW
c. At or after date of maturity (instrument is
discharged; if made before, it may be
renegotiated) (Sec. 119, NIL).
subsequent indorsements, and again negotiate the

instrument.
XPNs:
1. Where it is payable to the order of a third
person, and has been paid by the drawee; and
2. It was made or accepted for accommodation,
and has been paid by the party accommodated.
DISCHARGE OF PARTIES SECONDARILY LIABLE

Methods of discharge of secondary parties (ACS
TReE)
1.
2.
3.
4.
5.
6.
Any Act which discharges the instrument;

Intentional Cancellation of his signature by the
holder
Discharge of prior party which may be made
when signature is Stricken out
Valid Tender of payment by a prior party;
Release of the principal debtor, unless holder
expressly reserves his right of recourse against
the said subsequent parties
Extension of time of payment, unless:
a. Extension is consented to by such party
b. Holder expressly reserves his right of
recourse against such party (Sec. 120, NIL)
RENUNCIATION BY HOLDER
Renunciation
It is the act of surrendering a claim or right with or
without recompense (a PERSONAL defense).
Manner of making renunciation by the holder
1.
2.
Must be written
If oral, the instrument must be surrendered to
the person primarily liable (Sec. 122, NIL).
Effects of renunciation
Q: The rule is that the intentional cancellation of a
person secondarily liable results in the discharge of
the latter. With respect to an indorser, the holder's
right to cancel his signature is: (2011 Bar Question)
1. Made in favor of principal debtor made at or

after the maturity (made absolutely and
unconditionally) of the instrument discharges the
2. Made in favor of a secondary party may be made
by the holder before, at or after maturity discharges
only the secondary parties and all subsequent to him
(Sec. 122, NIL).
3. Renunciation does not affect the rights of a
holder in due course without notice (Sec. 120, NIL)
A: Limited to the case where the indorsement is not

necessary to his title.
Effects of payment by persons secondarily liable
1. Instrument is not discharged
2. It only cancels his own liability and that of the
parties subsequent to him
3.
Rule regarding the cancellation of an instrument
GR: Instrument may be renegotiated
It is presumed intentional. It is inoperative if

unintentional, or under a mistake or without the
authority of the holder. But where an instrument or
any signature appears to have been cancelled, the
burden of proof lies on the party alleging that the
cancellation was made unintentionally, or under a
mistake or without authority (Sec. 123, NIL).
XPNs:
a. Where it is payable to the order of a third person,
and has been paid by the drawer; and
b. Where it is paid by the accommodated party
NOTE: (a) and (b) has the same effect as payment by
the party primarily liable.
4. Person paying is remitted to his former rights (as

regards prior parties) and he may strike out his own
and all subsequent indorsements (Sec. 121, NIL).
RIGHTS OF A PARTY WHO DISCHARGED THE
INSTRUMENT
GR: The party so discharging the instrument is
remitted to his former rights as regards all prior
parties, and he may strike out his own and all
2014 GOLDEN NOTES
52

MATERIAL ALTERATION
Q: Can a drawee who accepts a materially altered

check recover from the holder and the drawer?
(2011 Bar Question)
CONCEPT
Material alteration
A: No, he cannot recover from either of them.
It is any change in the instrument which affects or

changes the liability of the parties in any way.
There is no material alteration when the serial

number of a check had been altered
Instances that constitute material alteration

Any alteration which changes:
1. Date
2. Sum payable, either for principal or interest
3. The time or place of payment
4. Number or the relations of the parties
5. Currency in which payment is to be made
6. Adds a place of payment where no place is
specified
7. Any other change or addition which alters the
effect of the instrument (Sec. 125, NIL.)
An alteration is said to be material if it alters the

effect of the instrument. It means an unauthorized
change in an instrument that purports to modify in
any respect the obligation of a party or an
unauthorized addition of words or numbers or other
change to an incomplete instrument relating to the
obligation of a party. The alteration of the serial
number of a check did not change the relations
between the parties nor the effect of the instrument.
Hence, the alteration on the serial number of a check
is not a material alteration (International Corporate
Bank vs. CA, G.R. No. 141968, Feb. 12, 2001).
NOTE: The change in the date of indorsement is not

material where the date is not necessary to fix the maturity
of the instrument.
Q: A material alteration of an instrument without

the assent of all parties liable thereon results in its
avoidance, except against: (2011 Bar Question)
Spoliation
A: A party who has made, authorized or assented to

the alteration and subsequent indorser.
It refers to material alteration of an instrument done

by a stranger. It has the same effect as alteration.
ACCEPTANCE
EFFECT OF MATERIAL ALTERATION
DEFINITION
Effect of material alteration of a negotiable

instrument without the assent of all parties liable
thereon
Acceptance of a bill
It is a signification by the drawee of his assent to the
order of the drawer (Sec. 132, NIL).
1.
Avoids the instrument except against:

a. A party who has made the alteration;
b. A party who authorized or assented to the
alteration; or
c. The indorsers who indorsed subsequent to
the alteration (because of their warranties).
2. If negotiated to a HIDC, he may enforce the
payment thereof according to its original tenor
against the person not a party to the alteration. He
may also enforce payment thereof against the party
responsible for the alteration for the altered amount.
3. If negotiated to a holder not a HIDC, he cannot
enforce payment against the person not a party prior
to the alteration. He may, however enforce payment
according to the altered tenor from the person who
caused the alteration and from the indorsers (Sec.
124 NIL)
Requisites for acceptance

1. In writing, except constructive acceptance and to a
foreign bill payable in another state (unless the other
state requires for written acceptance);
2. Signed by the drawee (without it, he is not liable);
3. Must express a promise to pay money (not goods);
4. Delivered to the holder (before delivery or
notification, acceptor may revoke or cancel his
acceptance).
Effect of acceptance
Upon acceptance, the bill, in effect becomes a note.
The drawee who thereby becomes an acceptor
assumes the liability of the maker (who has primary
liability) and the drawer, that of the first indorser.
53

MERCANTILE LAW
Q: A bill of exchange states on its face: One (1)
month after sight, pay to the order of Mr. R the
amount of Php50,000.00, chargeable to the account
of Mr. S. Signed, Mr. T. Mr. S, the drawee, accepted
the bill upon presentment by writing on it the words
I shall pay Php30,000.00 three (3) months after
sight. May he accept under such terms, which
varies the command in the bill of exchange? (2011
Bar Question)
Kinds of qualified acceptance

1. Conditional makes payment by the acceptor
dependent on the fulfillment of a condition therein
stated.
2. Partial an acceptance to pay part only of the
amount for which the bill is drawn.
3. Local an acceptance to pay only at a particular
place.
4. Qualified as to time a bill is accepted to be paid on
or after a specified date.
5. As to drawee - acceptance of some one or more of
the drawees but not of all (Sec. 141, NIL).
A: Yes, since a drawee is allowed to effect a qualified

acceptance in which case he shall be liable according
to the tenor of his acceptance.
Q: X, drawee of a bill of exchange, wrote the words:
Accepted, with promise to make payment within
two days. Signed, X. The drawer questioned the
acceptance as invalid. Is the acceptance valid?
Other kinds of acceptance

1. Constructive/implied (Sec. 137, NIL).
a. Drawee to whom the bill is delivered for
acceptance destroys it; or
b. Drawee refuses, within 24 hours after such
delivery, or within such time as is given him, to
return the bill accepted or non-accepted
2. Extrinsic the acceptance is written on a paper
other than the bill itself. To be binding upon the
acceptor:
a. Acceptance must be shown to the person to
whom the instrument is negotiated; and
b. Such person must take the bill for value on the
faith of such acceptance (Sec. 134, NIL).
3. Virtual
a. Unconditional promise in writing to accept a bill
b. Promise made before it is drawn
c. Any person who, upon faith thereof, receives
the bill for value (Sec. 135, NIL).
A: Yes, because the acceptance is in reality a clear

assent to the order of the drawer to pay. Qualified
acceptance as to time is allowed (Sec. 141 [d], NIL).
MANNER
Manner of making an acceptance
Acceptance may be made
1. On the bill itself,
2. On a separate paper; and if on a separate paper
a. It may be acceptance as to an existing bill; or
b. it may be acceptance as to a non-existing bill.
If the bill is non-existent, the acceptance on a
separate paper must comply with following
requirements:
1. The contemplated drawee shall describe the bill to
be drawn and promise to accept it.
2. Bill shall be drawn within a reasonable time after
such promise is written; and
3. The holder shall take the bill upon the credit of the
promise.
TIME FOR ACCEPTANCE

The drawer has 24 hours after presentment to decide
whether or not he will accept the bill. The
acceptance, if given, dates as of the day of
presentation (Sec. 136, NIL).
NOTE: Drawee bank is not entitled to 24 hours to decide
whether or not to pay a check since a check is presented for
payment, not acceptance.
Kinds of acceptance
1. General Acceptance - It assents without
qualification to the order of the drawer (Sec. 139,
NIL).
2. Qualified Acceptance - An acceptance which in
express terms varies the effect of the bill as drawn
(ibid.).
RULES GOVERNING ACCEPTANCE

Effect of accepting an instrument with a qualified
acceptance
GR: When the holder takes a qualified acceptance the
drawer and indorsers are discharged from liability on
the bill.
NOTE: A holder may refuse to accept a qualified acceptance

and if he does not obtain an unqualified acceptance, he
may treat the bill as dishonored by non-acceptance (Sec.
142, NIL).

2014 GOLDEN NOTES
NOTE: The holder may refuse to take a qualified acceptance

and if he does not obtain an unqualified acceptance, he
54

may treat the bill as dishonored by non-acceptance
(Sudiang, 2014).
3. Where the bill is drawn payable elsewhere than

at the residence or place of business of the drawee
(par. 1, Sec. 143, NIL).
XPNs:
1. When they have expressly or impliedly authorized
the holder to take a qualified acceptance, or
2. Subsequently assent thereto
3. Implied assent (when they did not express their
dissent to the holder within a reasonable time when
they received a notice of qualified acceptance) (Sec.
142, NIL)
NOTE: The holder must either present it for acceptance or

negotiate it within a reasonable time, otherwise, the
drawer and all indorsers are discharged (Sec. 144, NIL).
TIME/PLACE/MANNER OF PRESENTMENT
Proper presentment for acceptance
NOTE: When the drawer or indorser receives notice of a

qualified acceptance, he must, within a reasonable time,
express his dissent to the holder or he will be deemed to
have assented thereto (Sundiang, 2014).
It must be made:
1. By or on behalf of the holder
2. At a reasonable hour on a business day
3. Before the bill is overdue; and
4. To the drawee or some person authorized to
accept or refuse to accept on his behalf (Sec. 145,
NIL).
Acceptance of an incomplete bill

Acceptance may be made before the bill has been
signed by the drawer or while otherwise incomplete,
or after it is overdue, or even after it has been
dishonored by non-acceptance or non-payment (Sec.
138, NIL)
WHEN
Bill addressed to
2 or more
drawees who
are not partners
Effect of the certification by the drawee bank

Certification implies that the check is drawn upon
sufficient funds in the hands of the drawee, that they
have been set apart for its satisfaction and that they
shall be so applied whenever the check is presented
for payment. Where a check is certified by the bank
on which it is drawn, the certification is equivalent to
acceptance (Secs. 187, 189, NIL; New Pacific Timber v.
Seneris, G.R. No. L-41764, Dec. 19, 1980).
Drawee is dead
PRESENTMENT MUST BE
MADE TO
All of them unless one has
authority to accept or refuse
acceptance for all, in which
case presentment may be
made to him only (Sec. 145,
[a], NIL).
Drawee's personal
representative (Sec. 145, [b],
NIL).
NOTE: Presentment is merely
permissive since it is excused by
(Sec.148a).
Drawee is
adjudged a
bankrupt or
insolvent or has
made an
assignment for
the benefit of
creditors
PRESENTMENT FOR ACCEPTANCE

Presentment for acceptance
It is the production or exhibition of a bill of exchange
to the drawee for his acceptance or payment (also
includes presentment for payment).
Necessity of presentment for acceptance
To drawee or his
trustee/assignee (Sec 145,
[c], NIL).
EFFECT OF FAILURE TO MAKE PRESENTMENT
GR: It is not necessary to render any party to the

bill liable (par. 2, Sec. 143, NIL).
Effect of failure to make presentment for payment

of a check within a reasonable time
XPNs:
1. Where bill is payable after sight, or when it is
necessary in order to fix the maturity of the
instrument
2. When bill expressly stipulates that it shall be
presented for acceptance; or
Failure to make such presentment will discharge the

drawer from liability or to the extent of the loss
caused by the delay (Sec. 186, NIL; Republic of the
Philippines vs. PNB, G.R. No. L-16106, December 30,
1961).
55

MERCANTILE LAW
Instance when delay in presentment may be
excused
Rights of a holder when bill is 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 (Sec. 151, NIL).
Where the holder of a bill drawn payable elsewhere

than at the place of business or the residence of the
drawee has no time with the exercise of reasonable
diligence, to present the bill for acceptance before
presenting it for payment on the day that it falls due
(Sec. 147, NIL).
Acceptance for honor

It is an undertaking by a stranger to a bill after protest
for the benefit of any party liable thereon or for the
honor of the person for whose account the bill is
drawn which acceptance inures to the benefit of all
parties subsequent to the person for whose honor it
is accepted, and conditioned to pay the bill when it
becomes due if the original drawee does not pay it
(Sec. 161, NIL).
Instances when presentment is excused

1. Where the drawee is dead, or has absconded, or is
a fictitious person not having capacity to contract by
bill;
2. Where, after exercise of reasonable diligence,
presentment cannot be made; or
3. Where, although presentment has been irregular,
acceptance has been refused on some other ground
(Sec. 148, NIL).
Requisites of acceptance for honor (WIS)

1. Must be in Writing
2. Must Indicate that it is an acceptance for honor
3. Must be Signed by the acceptor for honor (Sec.
162, NIL)
DISHONOR BY NON-ACCEPTENCE
Instances when
non-acceptance
bill
is
dishonored
by
PROMISSORY NOTES
1. When it is duly presented for acceptance and such
an acceptance is refused or cannot be obtained; or
2. When presentment for acceptance is excused, and
the bill is not accepted (Sec. 149, NIL).
Promissory note
NOTE: It is not sufficient that presentment for acceptance is

excused, it is also necessary that the bill remains not
accepted.
An unconditional promise in writing made by one

person to another, signed by the maker, engaging to
pay on demand, or at a fixed or determinable future
time, a sum certain in money to order or to bearer
(Sec. 184, NIL).
Duty of the holder where bill is not accepted
Special types of promissory notes
If within 24 hours after due presentment, the bill is

not accepted, the person presenting it must treat the
bill as dishonored by non-acceptance otherwise he
will lose the right of recourse against the drawer and
indorsers (Sec. 150, NIL).
1. Certificate
of
deposit
a
written
acknowledgment by a bank of the receipt of money
on deposit on which the bank promises to pay to the
depositor or to him or his order or to some other
person or to him or his order, or to a specified person
or bearer, on demand or on a fixed date, often with
interest.
2. Bonds an evidence of indebtedness issued by a
public or private corporation which constitutes a
promise, under seal, to pay money. It runs for a
longer period of time than a PN.
3. Registered bond one payable only to the
person whose name appears on the face of the
certificate.
4. Coupon bond one to which are attached
coupons which entitle the holder to interest when
due.
5. Bank Note instrument issued by a bank for
circulation as money payable to bearer on demand.
Rules when a bill is dishonored by non-acceptance

1. Right of recourse against all secondary party
accrues to the holder.
2. No presentment for payment is necessary since
dishonor of the instrument by non-payment is to be
expected.
3. If the instrument is accepted after it has been
dishonored by non-acceptance, presentment for
payment is necessary upon maturity.
4. In case of non-payment, holder must give the
corresponding notice of dishonor; otherwise,
secondary parties are discharged.

2014 GOLDEN NOTES
56

6. Due Bill - PN which shows on its face that one
person acknowledges his indebtedness to another.
The word due is commonly used.
7. Mortgage Note an instrument secured by
either a real (REM) or personal property (Chattel).
8. Title-retaining Note an instrument used to
secure the purchase price of goods. It ordinarily
provides that title to the goods shall remain in
payees name until the note is paid in full.
9. Collateral Note it is used when the maker
pledges securities to the payee to secure the
payment of the amount of the note
10. Judgment Note this is a note to which a
power of attorney is added enabling the payee to
take judgment against the maker without the
formality of a trial if the note is not paid on its due
date (De Leon, supra).
Check v. Bill of exchange
Drawee
Payability
Function
Instances when a bill of exchange may be treated as

a promissory note
1.
2.
3.
4.
Presentment for
Payment
The drawer and the drawee are the same person;

The drawee is a fictitious person;
The drawee has no capacity to contract;
The instrument is so ambiguous that there is
doubt whether it is a bill or a note (Sundiang 2014,
citing Secs. 17[e] and 130, NIL).
Discharge
of Liability
CHECKS
DEFINITION
Check
It is a bill of exchange drawn on a bank and payable
on demand (Sec. 185, NIL).
Effect of
the Death
of the
Drawer
NOTE: A check must be presented for payment within a

reasonable time after its issue or the drawer will be
discharged from liability thereon to the extent of the loss
caused by the delay.
Essential characteristics of checks

There are 2 essential distinct characteristics of
checks:
1. They are drawn on a bank; and
2. Payable instantly on demand.
Presentment for
Acceptance
Checks
Always drawn
on a bank or
banker against
a previous
deposit of
funds
Always payable
on demand
Ordinarily
intended for
immediate
payment
Must be
presented for
payment
within a
reasonable
time after its
issue(Sec.186,
NIL)
When a check
is accepted or
certified, the
drawer &
indorsers are
discharged
from liability
thereon (Sec.
188, NIL)
Death of the
drawer of a
check with the
knowledge of
the bank
revokes the
authority of
the bank to
pay.
Need not be
presented for
acceptance
(Sec. 185, NIL.)
BOE
May or may not
be drawn on a
bank and need
not be drawn
against a deposit
Either payable on
demand or at a
fixed or
determinable
future time
(Sec.4)
Intended for
circulation as
instrument of
credit
Must be
presented for
payment within a
reasonable time
after its last
negotiation
(Sec. 171, NIL)
They remain
liable despite
acceptance
(Sec. 84, NIL)
Death of the
drawer of an
ordinary bill does
not revoke the
authority of the
drawee to pay.
Must be
presented for
acceptance in
certain cases (Sec.
143, NIL.)
Q: A check was dishonored due to material

alteration. The creditor then filed an action against
drawee bank for the amount. Will the action
prosper?
57

MERCANTILE LAW
A: No. If a bank refuses to pay a check
(notwithstanding the sufficiency of funds), the
payee-holder cannot, as provided under Sections 185
and 189 of the NIL, sue the bank. The payee should
instead sue the drawer who might in turn sue the
bank. This is so because no privity of contract exists
between the drawee-bank and the payee (Villanueva
v. Nite, G.R. No. 148211, July 25, 2006).
Q: What is a crossed check? What are the effects of

crossing a check? Explain. (2005 Bar Question)
A: A crossed check is a check with two (2) parallel
lines, written diagonally on the upper right corner
thereof. It is a warning to the drawee bank that
payment must be made to the right party; otherwise
the bank has no authority to use the drawer's funds
deposited with the bank.
NOTE: 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, and the bank is not liable to the holder, unless and
until it accepts or certifies the check (Sec. 189, NIL).
To be assured that it will avoid any mistake in paying

to the wrong party, banks adopted the policy that
crossed checks must be deposited in the payee's
account. When withdrawal is made, the banks can be
sure that they are paying to the right party. The
crossing becomes a warning also to whoever deals
with the said instrument to inquire as to the purpose
of its issuance. Otherwise, if something wrong
happens to the payment thereof, that person cannot
claim to be a holder in due course. Hence, he is
subject to the personal defense on the part of the
drawer that there is breach of trust committed by the
payee in not complying with the drawer's instruction.
Stopping payment
The drawer has the right to order the drawee to stop
payment of a check and this right flows from the rule
that the issuance of a check by itself is not an
assignment of funds by the drawee. If a bank pays a
check after it has been notified to stop payment, it
pays in its own responsibility and will not be
permitted to charge the account. The drawer may
countermand payment if he has a valid defense
against the holder of the check. Thus,
countermanding of a check is proper where the
payee failed to deliver the goods that he was
supposed to deliver (Sundiang 2014, citing Bataan
Cigar and Cigarette Factory v. CA).
Hence, the effects of crossing a check are:

1. That the check may not be encashed but only
deposited in the bank;
2. That the check may be negotiated only once- to
one who has an account with a bank;
3. That the act of crossing the check serves as a
warning to the holder that the check has been issued
for definite purpose so that he must inquire if he has
received the check pursuant to the purpose.
Otherwise, he is not a HIDC (State Investment House
v. IAC, 175 SCRA 310).
KINDS
Special types of checks
1. Cashiers Check a BOE drawn by the bank upon
itself and is accepted at its issuance. It is usually
signed by the cashier of the bank.
2. Managers Check a BOE drawn by the bank
upon itself and is accepted at its issuance and signed
by a manager on behalf of a bank.
3. Certified Check Drawn by a depositor upon
funds to his credit in a bank which an officer of a bank
certifies will be paid on presentation.
4. Crossed Check Done by writing 2 parallel lines
on the left top portion of the check. The marking
signifies that the bank should pay only with the
intervention of the company only.
5. Memorandum Check A check with
Memorandum written on its face. The writing
signifies that the drawer engages to pay the bona fide
holder absolutely, without any condition concerning
its presentment
6. Travelers Checks Instruments purchased from
banks or express companies which can be used like
cash upon the second signature by the purchaser (De
Leon, supra, pg. 380-385).

2014 GOLDEN NOTES
Purpose of crossing a check

The purpose is to insure payment to the payee. It
can only be deposited but may not be converted into
cash by the drawer. Crossing a check does not
destroy its negotiability but the check may be
negotiated only once to one who has an account
with the bank (De Ocampo v. Gatchalian, 3 SCRA
596).
Stale check
A check which has not been presented for payment
within a reasonable time after its issue. It is valueless
and thus, should not be paid. A check becomes stale
6 months from date of issue.
58

When drawer of check discharged from liability
(a) The check is not presented within a reasonable
time after its issue;
(b) The drawer suffers loss; and
(c) The loss suffered by the drawer is attributable to
the delay (De Leon, 2010 p. 406)
Memorandum check
A memorandum check is an evidence of debt against
the drawer and although may not be intended to be
presented, has the same effect as an ordinary check
and if passed on to a third person, will be valid in his
hands like any other check (People v. Nitafan, G.R.
No. 75954, Oct. 22, 1992).
PRESENTMENT FOR PAYMENT
TIME
Time
A check must be presented for payment within a
reasonable time after its issue (Sec. 186, NIL).
EFFECTS OF DELAY
Effects of delay
1. The drawer will be discharged from liability
thereon to the extent of the loss caused by the delay.
(ibid.)
2. The indorser shall be discharged from liability (PNB
vs. Seeto, G.R. No. L-4388, August 13, 1952).
NOTE: PP is not dispensed with by Sec. 186 of the NIL.
Hence, if there is no PP, the drawer cannot be held
irrespective of the loss or injury suffered by the payee (Pio
Barretto Realty Corp. v. CA, G.R. No. 132362, June 28,
2001).
Q: When will the delivery of a check produce the

effect of payment even if the same had not been
encashed?
A: If the debtor was prejudiced by the creditor's
unreasonable delay in presentment. Acceptance of a
check implies an undertaking of due diligence in
presenting it for payment. If no such presentment
was made, the drawer cannot be held liable
irrespective of loss or injury sustained by the payee.
Payment will be deemed effected and the obligation
for which the check was given as conditional payment
will be discharged (Pio Barretto Realty Corp. v. CA,
supra).
59


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MERCANTILE LAW

Incidents in the life of a negotiable instrument

NEGOTIABLE INSTRUMENTS LAW

It is a written contract for the payment of money

Negotiable instrument v. Non-negotiable instrument

Negotiable instruments are not legal tender

Negotiable instruments are neither money nor legal

GR: The delivery of a negotiable instrument does

A: B. When negotiated, negotiable instruments can

1. NIL - For instruments which meet the requisites of

1. Negotiability The note may pass from hand

NEGOTIABLE INSTRUMENTS LAW

Q: A promissory note which does not have the

2. Accumulation of secondary contracts A

FORMS AND INTERPRETATION

A: B. The note can still be assigned and the maker

Form of negotiable instruments (Requisites of

Rules of construction in case of ambiguities in a

An instrument to be negotiable must conform to the

NOTE: A NI need not follow the exact language of NIL, as

Words prevail over figures

The requirements stated in Sec. 1 must appear on the face

Factors to determine the negotiability (FRI)

Rules governing the use of phrases in the negotiable

Words that appear on the Face of negotiable

NOTE: In determining the negotiability of an instrument,

The instrument must be in writing

UNIVERSITY OF SANTO TOMAS

The instrument must be signed by the maker or

However, where a signature is so placed upon the

The sum payable is a sum certain within the meaning

Unconditional promise or order to pay

Payment with interest

An unqualified order or promise to pay is

Interest at fixed rate or at increased or reduced rate

Indication of particular fund for reimbursement v.

FUND FOR PAYMENT

Payment by installment is certain if the dates of each

Payment with an acceleration clause

NOTE: An instrument which mentions a particular fund out

NEGOTIABLE INSTRUMENTS LAW

Effect if a bill or note is payable other than in money

XPNs: Negotiability is not affected if the note

GR: An extension clause does not affect the

Payable on demand or at a fixed or determinable

The exchange is the charge for the expense of

1. Payable on demand The holder may call for

Inland bill of exchange v. Foreign bill of exchange

An instrument is payable on demand:

An inland BOE is one which is, or on its face purports

Sum to be paid with costs of collection and/or

2. At a fixed time A term or time instrument is

It does not affect the certainty of the amount payable

3. At a determinable future time - An instrument is

Payable in Philippine Peso

UNIVERSITY OF SANTO TOMAS

The instrument is payable to order where it is drawn

A check is a bill of exchange (BOE) drawn on a bank