San Beda 2005 Negotiable Instrument

8/22/2019 San Beda 2005 Negotiable Instrument

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San Beda College of Law6

MEMORYAIDIN COMMERCIAL LAW

I. GENERAL CONCEPTS

NEGOTIABLE INSTRUMENT (NI) A written contract for the payment ofmoney which complies with therequirements of Sec. 1 of the NIL, whichby its form and on its face, is intended asa substitute for money and passes fromhand to hand as money, so as to give theholder in due course (HDC) the right tohold the instrument free from defensesavailable to prior parties. (Reviewer onCommercial Law, Professors Sundiangand Aquino)

Functions: (Bar Review Materials in

Commercial Law, Jorge Miravite, 2002ed.)

1. To supplement the currency ofthe government.

2. To substitute for money andincrease the purchasing medium.

Legal tender That kind ofmoney which the law compels a creditorto accept in payment of his debt whentendered by the debtor in the rightamount.Note: A NI although intended to be asubstitute for money, is not legal tender.However, a check that has been clearedand credited to the account of thecreditor shall be equivalent to delivery tothe creditor of cash. (Sec. 60, NCBA)

Features: (Reviewer on CommercialLaw, Professors Sundiang and Aquino)

1. Negotiability Thatattribute or property whereby abill or note or check may passfrom hand to hand similar tomoney, so as to give the holder indue course the right to hold the

instrument and to collect the sumpayable for himself free fromdefenses.

The essence of negotiability whichcharacterizes a negotiablepaper as a credit instrumentlies in its freedom tocirculate freely as asubstitute for money.(Firestone Tire vs. CA, 353SCRA 601)

2. Accumulation of Secondary Contracts Secondary

contracts are picked up andcarried along with NI as they arenegotiated from one person toanother; or in the course ofnegotiation of negotiableinstruments, a series of juridicalties between the parties theretoarise either by law or by privity.

Applicability:

General Rule: The provisions of the NILare not applicable if the instrumentinvolved is not negotiable.

Exception: In the case ofBorromeo vs.Amancio Sun, 317 SCRA 176, the SCapplied Section 14 of the NIL by analogyin a case involving a Deed of Assignmentof shares which was signed in blank tofacilitate future assignment of the sameshares. The SC observed that thesituation is similar to Section 14 wherethe blanks in an instrument may be filledup by the holder, the signing in blankbeing with the assumed authority to doso.

The NIL was enacted for the purpose offacilitating, not hindering or hampering

transactions in commercial paper. Thus,the statute should not be tampered withhaphazardly or lightly. Nor should it bebrushed aside in order to meet thenecessities in a single case. (MichaelOsmea vs. Citibank, G.R. No. 141278,March 23, 2004 Callejo J.)

Kinds of NI1. PROMISSORY NOTE (PN)

An unconditional promise in writing by

one person to another signed by themaker engaging to pay on demand or at afixed or determinable future time, a sumcertain in money to order or to bearer.(Sec. 184)

2. BILL OF EXCHANGE (BE)

An unconditional order in writingaddressed by one person to another,signed by the person giving it, requiringthe person to whom it is addressed to payon demand or at a fixed or determinable

COMMERCIAL LAW COMMITTEECHAIRPERSON: Garny Luisa Alegre ASST. CHAIRPERSON:Jayson OS Ramos EDP: Beatrix I. Ramos SUBJECT HEADS:Marichelle De Vera (Negotiable Instruments Law); Jose Fernando Llave (Insurance); Aldrich Del Rosario(Transportation Laws);Shirley Mae Tabangcura, Bon Vincent Agustin (Corporation Law); Karl Steven Co (Special Laws); John Lemuel Gatdula(Banking Laws); Robespierre CU (Law on Intellectual Property)

NEGOTIABLE INSTRUMENTS LAW (NIL)(Act No. 2031, effective June 2, 1911)


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future time a sum certain in money toorder or to bearer. (Sec. 126)

CHECK- A bill of exchange drawn on abank payable on demand. (Sec. 185). It isthe most common form of bill ofexchange.

OTHER FORMS OF NI1. Certificate of deposit issued by

banks, payable to the depositor or hisorder, or to bearer

2. Trade acceptance3. Bonds, which are in the nature of

promissory notes4. Drafts, which are bills of exchange

drawn by one bank upon another5. Debenture All of these must comply with Sec. 1,NIL.Note: Letters of credit are not negotiablebecause they are issued to a specifiedperson.

Instances when a BE may be treated asa PN

a. The drawer and the drawee arethe same person; or

b. Drawee is a fictitious person; or

c. Drawee does not have the capacityto contract. (Sec. 130)

d. Where the bill is drawn on aperson who is legally absent;

e. Where the bill is ambiguous (Sec.17[e])

Parties to a NI1. Promissory Note

a. Maker one who makespromise and signs the instrumentb. Payee party to whom thepromise is made or theinstrument is payable.

2. Bill of Exchangea. Drawer one who gives the order

to pay money to a third partyb. Drawee person to whom the bill

is addressed and who is orderedto pay. He becomes an acceptorwhen he indicates his willingnessto pay the bill

c. Payee party in whose favor thebill is drawn or is payable.

DISTINCTIONS

PROMISSORYNOTE

BILL OFEXCHANGE

Unconditional

promise

Unconditional order

Involves 2 parties Involves 3 parties

Maker is primarilyliable

Drawer is onlysecondarily liable

Only onepresentment: forpayment

Two presentments:for acceptance andfor payment

NEGOTIABLEINSTRUMENTS

NON-NEGOTIABLEINSTRUMENTS

Only NI aregoverned by the NIL.

Application of theNIL is only byanalogy.

Transferable by

negotiation or byassignment.

Transferable only by

assignment

A transferee can bea HDC if all therequirements arecomplied with

A transferee remainsto be an assigneeand can never be aHDC

A holder in duecourse takes the NIfree from personaldefenses

All defensesavailable to priorparties may beraised against thelast transferee

Requires clean title,one that is free fromany infirmities in

the instrument anddefects of title ofprior transferors.(Notes and Cases onBanks, NegotiableInstruments andother CommercialDocuments,Timoteo B. Aquino)

Transferee acquiresa derivative titleonly. (Notes and

Cases on Banks,NegotiableInstruments andother CommercialDocuments, TimoteoB. Aquino)

Solvency of debtor isin the senseguaranteed by theindorsers becausethey engage that the

instrument will beaccepted, paid orboth and that theywill pay if theinstrument isdishonored. (Notesand Cases on Banks,NegotiableInstruments andother CommercialDocuments, TimoteoB. Aquino)

Solvency of debtor isnot guaranteed underArt. 1628 of the NCCunless expresslystipulated. (Notes and

Cases on Banks,NegotiableInstruments and otherCommercialDocuments, TimoteoB. Aquino)



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BILLOF EXCHANGE CHECK Not necessarilydrawn on a deposit.The drawee need notbe a bank

It is necessary thata check be drawnon a bank deposit.Otherwise, therewould be fraud.

Death of a drawer ofa BOE, with theknowledge of thebank, does notrevoke the authorityof the drawee topay.

Death of thedrawer of a check,with the knowledgeof the bank,revokes theauthority of thebanker to pay.

May be presented forpayment withinreasonable time afterits last negotiation.

Must be presentedfor payment withina reasonable timeafter its issue.

May be payable ondemand or at a fixedor determinablefuture time

Always payable ondemand

NEGOTIABLEINSTRUMENT

NEGOTIABLEWAREHOUSE

RECEIPT

If originally payable tobearer, it will alwaysremain so payableregardless of mannerof indorsement.

If payable tobearer, it will beconverted into areceipt deliverableto order, if

indorsed specially.A holder in due coursemay obtain titlebetter than that ofthe one whonegotiated theinstrument to him.

The indorsee, evenif holder in duecourse, obtains onlysuch title as theperson who causedthe deposit hadover the goods.

ASSIGNMENT NEGOTIATIONPertains to contractsin general

Pertains to NI

Holder takes the

instrument subject tothe defensesobtaining among theoriginal parties

Holder in due course

takes it free frompersonal defensesavailable among theparties

Governed by the CivilCode

Governed by the NIL

II. NEGOTIABILITY

Form of NI: (Sec. 1) Key: WUPOA

1. Must be in Writing and signed by themaker or drawer;

2. Must contain an Unconditionalpromise 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 tobearer; and

5. When the instrument is addressed toa drawee, he must be named orotherwise indicated therein withreasonable certainty.

Determination of negotiability:a. Whole instrument

b. What appears on the face of theinstrumentc. Requisites enumerated in Sec.1 of theNILd. Should contain words or terms ofnegotiability. (Gopenco, Commercial LawBar Reviewer, cited in Aquino, p. 23)

In determining the negotiability of aninstrument, the instrument in its entiretyand by what appears on its face must beconsidered. It must comply with the


NEGOTIABLEINSTRUMENT NEGOTIABLEDOCUMENT OFTITLE

Subject is money Subject is goods

Is itself theproperty with value

The document is amere evidence oftitle the things ofvalue being the goodsmentioned in thedocument

Has all therequisites of Sec. 1of NIL

Does not have theserequisites

A holder of NI may

run after thesecondary partiesfor payment ifdishonored by theparty primarilyliable.

Intermediate parties

are not secondarilyliable if thedocument isdishonored.

A holder, if aholder in duecourse, mayacquire rights overthe instrumentbetter than hispredecessors.

A holder can neveracquire rights to thedocument betterthan hispredecessors.


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requirements of Sec. 1 of the NIL. (CaltexPhils. v. CA, 212 SCRA 448)

The acceptance of a bill of exchange is

not important in the determination of itsnegotiability. The nature of acceptance isimportant only on the determination ofthe kind of liabilities of the partiesinvolved (PBCOM vs. Aruego, 102 SCRA530)

REQUISITES OF NEGOTIABILITYa. It must be writing and signed by themaker or drawer

Any kind of material that substitutespaper is sufficient.

With respect to the signature, it is

enough that what the maker or draweraffixed shows his intent to authenticatethe writing. (Notes and Cases on Banks,Negotiable Instruments and otherCommercial Documents, Timoteo B.

Aquino)b. Unconditional Promise or Order topay a sum certain in moneyUnconditional promise or order

Where the promise or order is made todepend on a contingent event, it isconditional, and the instrument involvedis non-negotiable. The happening of theevent does not cure the defect.

The unconditional nature of thepromise or order is not affected by:a) An indication of a particular fund out

of which reimbursement is to bemade, or a particular account to bedebited with the amount; or

b) A statement of the transaction whichgives rise to the instrument

Where the promise or order is subjectto the terms and conditions of thetransaction stated, the instrument is

rendered non-negotiable. The NI must beburdened with the terms and conditionsof that agreement to destroy itsnegotiability. (Cesar Villanueva,Commercial Law Review, 2004 ed.)

But an order or promise to pay out of aparticular fund is NOT unconditional.(Sec. 3)

FUND FORREIMBURSEMENT

PARTICULAR FUNDFOR PAYMENT

Drawee pays thepayee from his own

funds; afterwards,

There is only one act-the drawee pays

directly from the

the drawee payshimself from theparticular fundindicated.

particular fundindicated. Payment issubject to thecondition that thefund is sufficient.

Particular fundindicated is NOT thedirect source ofpayment but only thesource of reimbursement.

Particular fundindicated is thedirect source ofpayment.

Postal money orders are not negotiableinstruments. Some of the restrictionsimposed by postal laws and regulationsare inconsistent with the character ofnegotiable instruments. (Phil. EducationCo. vs. Soriano, 39 SCRA 587)

Treasury warrants are non-negotiablebecause there is an indication of the fundas the source of payment of thedisbursement. (Metrobank vs. CA, 194SCRA 169)

Payable in sum certain in money

An instrument is still negotiablealthough the amount to be paid isexpressed in currency that is not legaltender so long as it is expressed inmoney. (PNB vs. Zulueta, 101 Phil 1071,

Sec.6 (e)). The certainty is however not affectedalthough to be paid:

a. With interest; orb. By stated installments; orc. By stated installmentswith an acceleration clause;d. With exchange; ore. With cost of collection orattorneys fees.(Sec. 2)

The dates of each installment must befixed or at least determinable and the

amount to be paid for each installment. A sum is certain if the amount to beunconditionally paid by the maker ordrawee can be determined on the face ofthe instrument and is not affected by thefact that the exact amount is arrived atonly after a mathematical computation.(Notes and Cases on Banks, NegotiableInstruments and other CommercialDocuments, Timoteo B. Aquino)

ACCELERATIONCLAUSE

INSECURITYCLAUSE

EXTENSIONCLAUSE



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A clause thatrenders wholedebt due anddemandableupon failure of

obligor tocomply withcertainconditions.

Provisions inthe contractwhichallows theholder to

acceleratepayment ifhe deemshimselfinsecure.

Clauses inthe face oftheinstrumentthat extend

the maturitydates;a. At theoption ofthe holder;b. Extensionto a furtherdefinitetime at theoption ofthe makeror acceptorc. Automa tically upon

or after aspecified actor event.

Instrument isstill negotiable

Instrumentis renderednon-negotiablebecause theholderswhim andcapriceprevailwithout thefault and

control ofthe maker

Instrumentis stillnegotiable(Notes andCases onBanks,NegotiableInstrumentsand otherCommercialDocuments,

Timoteo B.Aquino)

EXTENSIONCLAUSE

EXTENSION UNDERSEC. 120(f)

Stated on the face ofthe instrument

Agreement binding theholder;a. To extend the timeof payment orb. Postpone theholders right toenforce the instrument

Parties are bound

because they took theinstrument knowingthat there is anextension clause

Binds the person

secondarily liable (andtherefore cannot bedischarged fromliabilities if:a. He consents orb. Right of recourse isexpressly reserved.(Notes and Cases onBanks, NegotiableInstruments and otherCommercialDocuments, TimoteoB. Aquino)

c. Payable on Demand or at fixed ordeterminable future time

PAYABLE ONDEMAND

PAYABLE AT AFIXED OR

DETERMINABLEFUTURE TIME

a. Where expressedto be payable ondemand, at sightor onpresentation;

b. Where no periodof payment isstated;

c. Where issued,accepted, or indorsedafter maturity (onlyas between

immediate parties).(Sec. 7)

a. At a fixed periodafter date orsight;

b. On o r before afixed ordeterminablefuture timespecifiedtherein; or

c. On or at a fixedperiod after theoccurrence of a

specified event,which is certain tohappen, though thetime of happening isuncertain. (Sec. 4)

If the day and the month, but not theyear of payment is given, it is notnegotiable due to its uncertainty.(Pandect of Commercial Law and

Jurisprudence, Justice Jose Vitug, 1997ed.)

d. Payable to Order or to BearerPayable to Order

The instrument is payable to orderwhere it is drawn payable to the order ofa specified person, or to him or his order.(Sec. 8)

The payee must be named orotherwise indicated therein withreasonable certainty.

The instrument may be made payableto the order of:

a. A payee who is not the maker,drawer or drawee

b. The drawer or makerc. The draweed. 2 or more payees jointlye. One or some of several payeesf. The holder of an office for a time

beingPayable to Bearer

The instrument is payable to bearer:a. When it is expressed to be so

payable; orb. When it is payable to a person named

therein or to bearer; or



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c. When it is payable to the order of afictitious or non-existing person, andsuch fact was known to the personmaking it so payable; or

d. When the name of the payee does notpurport to be the name of anyperson; or

e. When the only or last indorsement isan indorsement in blank. (Sec. 9)

Note: An instrument originally payable tobearer can be negotiated by meredelivery even if it is indorsed especially.If it is originally a BEARER instrument, itwill always be a BEARER instrument.

As opposed to an original orderinstrument becoming payable to bearer,

if the same is indorsed specially, it canNO LONGER be negotiated further bymere delivery, it has to be indorsed.

A check that is payable to the order ofcash is payable to bearer. Reason: Thename of the payee does not purport to bethe name of any person. (Ang Tek Lian vs.CA, 87 Phil. 383)FICTITIOUS PAYEE RULE It is not necessary that the personreferred to in the instrument is really

non-existent or fictitious to make theinstrument payable to bearer. The personto whose order the instrument is madepayable may in fact be existing but he istill fictitious or non-existent under Sec.9(c) of the NIL if the person making it sopayable does not intend to pay thespecified persons. (Reviewer onCommercial Law, Professors Sundiangand Aquino)

e. Identification of Drawee

Applicable only to a bill of exchange A bill may be addressed to 2 or more

drawees jointly whether they arepartners or not but not to 2 or moredrawees in the alternative or insuccession. (Sec. 128)

OMISSIONS &PROVISIONS THATDO NOT AFFECT

NEGOTIABILITY

ADDITONALPROVISONS NOT

AFFECTINGNEGOTIABILITY

a. It is not dated;b. It does not

GENERAL RULE: Ifsome other act is

specify thevalue given orthat any

value has been

given;c. It does not

specify theplace where itis drawn orwhere it ispayable;

d. It bears a seal;

e. It designates aparticular kindof currentmoney in whichpayment is tobe made. (Sec.

6)

required other thanor in addition to

payment of money,the instrument is

not negotiable.(Sec. 5)

EXCEPTIONS:

a. Authorizes thesale ofcollateralsecurities ondefault;

b. Authorizesconfession ofjudgment ondefault;

c. Waives thebenefit of lawintended toprotect thedebtor; or

d. Allows thecreditor theoption torequiresomething inlieu of money.

III. INTERPRETATION OF NEGOTIABLEINSTRUMENTS (Sec. 17)

a. Discrepancy between the amountin figures and that in words thewords prevail, but if the wordsare ambiguous, reference will bemade to the figures to fix theamount.

b. Payment for interest is providedfor interest runs from the dateof the instrument, if undated,from issue thereof.

c. Instrument undated considerdate of issue.

d. Conflict between written andprinted provisions writtenprovisions prevail.

e. When the instrument is so ambiguousthat there is doubt whether it is abill or note, the holder may treatit as either at his election;

f. If one signs without indicating in whatcapacity he has affixed hissignature, he is considered anindorser.

g. If two or more persons sign Wepromise to pay, their liability is



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joint (each liable for his part) butif they sign I promise to pay,the liability is solidary (each canbe compelled to comply with the

entire obligation). (Sec. 17)

IV. TRANSFER AND NEGOTIATION

INCIDENTS IN THE LIFE OF A NI (1Agbayani, 1992 ed.)

a. Issueb. Negotiationc. Presentment for acceptance, in certainkinds of Bills of Exchanged. Acceptanceh. D ishonor by non-acceptancei. P resentment for payment

j. D ishonor by non-paymentk. N otice of dishonorl. D ischarge

MODES OF TRANSFERa. Negotiation the transfer of the

instrument from one person toanother so as to constitute thetransferee as holder thereof.(Sec.30)

b. Assignment The transferee does notbecome a holder and he merely steps intothe shoes of the transferor. Any defense

available against the transferor isavailable against the transferee. (Notesand Cases on Banks, NegotiableInstruments and other CommercialDocuments, Timoteo B. Aquino)

Assignment may be effected whetherthe instrument is negotiable or non-negotiable. (Sesbreo vs. CA, 222 SCRA466)

HOW NEGOTIATION TAKES PLACEa. Issuance first delivery of theinstrument complete in form to a personwho takes it as a holder. (Sec. 191)

Steps:1. Mechanical act of writing the

instrument completely and inaccordance with therequirements of Section 1;and

2. The delivery of the completeinstrument by the maker ordrawer to the payee orholder with the intention of

giving effect to it. (The Law

on Negotiable Instrumentswith Documents of Title,Hector de Leon, 2000 ed.)

b. Subsequent Negotiation

1. If payable to bearer, anegotiable instrument may benegotiated by mere delivery.

2. If payable to order, a NI maybe negotiated by indorsementcompleted by delivery

Note: In both cases, delivery must beintended to give effect to the transfer ofinstrument. (Development Bank vs. SimaWei, 219 SCRA 736)c. Incomplete negotiation of orderinstrument

Where the holder of an instrument

payable to his order transfers it for valuewithout indorsing it, the transfer vests inthe transferee such title as the transferorhad therein and he also acquires the rightto have the indorsement of thetransferor. But for the purpose ofdetermining whether the transferee is aholder in due course, the negotiationtakes effect as of the time when theindorsement is made. (Sec. 49)d. Indorsement

Legal transaction effected by theaffixing one's signature at the:

a. Back of the instrumentorb. Upon a paper (allonge) attached

thereto with or withoutadditional words specifying theperson to whom or to whoseorder the instrument is to bepayable whereby one not onlytransfers legal title to thepaper transferred but likewiseenters into an implied guarantythat the instrument will be dulypaid (Sec. 31)

GENERAL RULE: Indorsement mustbe of the entire instrument.

EXCEPTION: Where instrument hasbeen paid in part, it may be indorsedas to the residue. (Sec. 32)

Kinds of Indorsement:A. SPECIAL Specifies the person towhom or to whose order, the instrumentis to be payable (Sec. 34)B. BLANK Specifies no indorsee:

1. Instrument becomespayable to bearer and may be

negotiated by delivery (Sec. 34)COMMERCIAL LAW COMMITTEECHAIRPERSON: Garny Luisa Alegre ASST. CHAIRPERSON:Jayson OS Ramos EDP: Beatrix I. Ramos SUBJECT HEADS:Marichelle De Vera (Negotiable Instruments Law); Jose Fernando Llave (Insurance); Aldrich Del Rosario(Transportation Laws);Shirley Mae Tabangcura, Bon Vincent Agustin (Corporation Law); Karl Steven Co (Special Laws); John Lemuel Gatdula(Banking Laws); Robespierre CU (Law on Intellectual Property)


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2. May be converted tospecial indorsement by writingover the signature of indorser inblank any contract consistent

with character of indorsement(Sec. 35)

C. ABSOLUTE One by which indorserbinds himself to pay:

1. Upon no other conditionthan failure of prior parties to doso;2. Upon due notice to himof such failure.

D. CONDITIONAL Right of the indorseeis made to depend on the happening of acontingent event. Party required to paymay disregard the conditions. (Sec. 39)

E. RESTRICTIVE An indorsement isrestrictive, when it either:

a. Prohibits further negotiation ofthe instrument; or

b. Constitutes the indorsee theagent of the indorser; or

c. Vests the title in the indorsee intrust for or to the use of someother persons. But mere absenceof words implying power tonegotiate does not make anindorsement restrictive. (Sec. 36)

F. QUALIFIED Constitutes the indorser

a mere assignor of the title to theinstrument. (Sec. 38)

It is made by adding to the indoser'ssignature words like "sans recourse,without recourse", "indorser not holder","at the indorser's own risk", etc.G. JOINT Indorsement payable to 2 ormore persons (Sec. 41)H. IRREGULAR A person who, nototherwise a party to an instrument,places thereon his signature in blankbefore delivery (Sec. 64)

Other rules on indorsement;1. Negotiation is deemed prima facie tohave been effected before the instrumentis overdue except if the indorsementbears a date after the maturity of theinstrument. (Sec. 45)2. Presumed to have been made at theplace where the instrument is datedexcept when the place is specified. (Sec.46)3. Where an instrument is payable to theorder of 2 or more payees who are not

partners, all must indorse unlessauthority is given to one. (Sec. 41)4. Where a person is under obligation toindorse in a representative capacity, he

may indorse in such terms as to negativepersonal liability. (Sec. 44)

RENEGOTIATION TO PRIOR PARTIES(Sec. 50)

Where an instrument is negotiatedback to a prior party, such party mayreissue and further negotiate the same.But he is not entitled to enforce paymentthereof against any intervening party towhom he was personally liable. Reason:To avoid circuitousness of suits.

STRIKING OUT INDORSEMENT The holder may at any time strike outany indorsement which is not necessaryto his title. The indorser whoseindorsement is struck out, and allindorsers subsequent to him, are therebyrelievedfrom liability on the instrument.(Sec. 48)

CONSIDERATION FOR THE ISSUANCE ANDSUBSEQUENT TRANSFER

Every NI is deemed prima facie to havebeen issued for a valuable consideration.Every person whose signature appearsthereon is presumed to have become aparty thereto for value. (Sec. 24)

What constitutes value:a. An antecedent or pre-existing debtb. Value previously givenc. Lien arising from contract or byoperation of law. (Sec. 27)

V. HOLDERS

HOLDER

A payee or endorsee of a bill or notewho is in possession of it or the bearerthereof. (Sec. 191)

RIGHTS OF HOLDERS IN GENERAL(Sec. 51)a . May sue thereon in his own nameb. Payment to him in due coursedischarges the instrument

The only disadvantage of a holder whois not a holder in due course is that thenegotiable instrument is subject to



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defenses as if it were non-negotiable.(Chan Wan vs. Tan Kim, 109 Phil. 706)

Holder In Due Course (HDC)

A holder who has taken the instrumentunder the following conditions: KEY: C OV I

1. Instrument is complete and regularupon its face;

2. Became a holder before it wasoverdue and without notice that ithad been previously dishonored;

3. For value and in good faith; and4. At the time he took it, he had no

notice of any infirmity in theinstrument or defect in the title of

the person negotiating it. (Sec. 52)

Rights of a HDC:1. May sue on the instrument in his own

name;2. May receive payment and if payment

is in due course, the instrument isdischarged;

3. Holds the instrument free from anydefect of title of prior parties andfree from defenses available toparties among themselves; and

4. May enforce payment of the

instrument for the full amountthereof against all parties liablethereon. (Secs. 51 and 57)

Every holder of a negotiableinstrument is deemed prima facie aholder in due course. However, thispresumption arises only in favor of aperson who is a holder as defined inSection 191 of the NIL. The weight ofauthority sustains the view that a payeemay be a holder in due course. Hence,the presumption that he is a prima facieholder in due course applies in his favor.(Cely Yang vs. Court of Appeals, G.R. No.138074, August 15, 2003)

Holder Not In Due Course

One who became a holder of aninstrument without any, some or all ofthe requisites under Sec. 52 of the NIL.

With respect to demand instruments,if it is negotiated an unreasonable lengthof time after its issue, the holder isdeemed not a holder in due course.

(Sec.53)

GENERAL RULE: Failure to make inquiryis not evidence of bad faith.

EXCEPTIONS:1. Where a holders title is defective or

suspicious that would compel areasonable man to investigate, it cannotbe stated that the payee acquired thecheck without the knowledge of saiddefect in the holders title and for thisreason the presumption that it is a holderin due course or that it acquired theinstrument in good faith does not exist.(De Ocampo vs. Gatchalian, 3 SCRA 596)2. Holder to whom cashiers check is notindorsed in due course and negotiated forvalue is not a holder in due course.(Mesina v. IAC)

Rights of a holder not in due course:1. It can enforce the instrument and sueunder it in his own name.2. Prior parties can avail against him anydefense among these prior parties andprevent the said holder from collecting inwhole or in part the amount stated in theinstrumentNote: If there are no defenses, thedistinction between a HDC and one who isnot a HDC is immaterial. (Notes andCases on Banks, Negotiable Instrumentsand other Commercial Documents,Timoteo B. Aquino)

SHELTER RULE

A holder who derives his title througha holder in due course, and who is nothimself a party to any fraud or illegalityaffecting the instrument, has all therights of such former holder in respect ofall prior parties to the latter. (Sec. 58)

ACCOMMODATION

A legal arrangement under which a

person called the accommodation party,lends his name and credit to anothercalled the accommodated party, withoutany consideration.Accommodation Party (AP)

Requisites:1. The accommodation party must sign

as maker, drawer, acceptor, orindorser;

2. He must not receive value therefor;and

3. The purpose is to lend his name orcredit. (Sec. 29)



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Note: without receiving valuetherefor, means without receivingvalue by virtue of the instrument.(Clark vs. Sellner, 42 Phil. 384)

Effects: The person to whom theinstrument thus executed is subsequentlynegotiated has a right of recourse againstthe accommodation party in spite of theformers knowledge that no considerationpassed between the accommodation andaccommodated parties. (Sec. 29)

Rights & Legal Position:1. AP is generally regarded as a surety

for the party accommodated;2. When AP makes payment to holder of

the note, he has the right to sue theaccommodated party for

reimbursement. (Agro Conglomerates,Inc. vs. CA, 348 SCRA 450)

Liability: Liable on the instrument to aholder for value notwithstanding suchholder at the time of the taking of theinstrument knew him to be only anaccommodation party. Hence, As regards,an AP, the 4th condition, i.e., lack ofnotice of infirmity in the instrument ordefect in the title of the personsnegotiating it, has no application. (StelcoMarketing Corp. vs. Court of Appeals, 210SCRA 51)

Rights of APs as against each other:May demand contribution from his co-accommodation party without firstdirecting his action against the principaldebtor provided:

a. He made the payment by virtueof judicial demand; or

b. The principal debtor is insolvent.

The relation between anaccommodation party is, in effect, one ofprincipal and surety the accommodationparty being the surety. It is a settled rule

that a surety is bound equally andabsolutely with the principal and isdeemed an original promissory and debtorfrom the beginning. The liability isimmediate and direct. (Romeo Garcia vs.Dionisio Llamas, G.R. No. 154127,December 8, 2003)

Well-entrenched is the rule that theconsideration necessary to support asurety obligation need not pass directly tothe surety, a consideration need not passdirectly to the surety, a considerationmoving to the principal alone being

sufficient. (Spouses Eduardo Evangelistavs. Mercator Finance Corp, G.R. No.148864, August 21, 2003)

VI. PARTIES WHO ARE LIABLEPRIMARY ANDSECONDARYLIABILITY OF

PARTIES

WARRANTIES OFPARTIES

Makes the partiesliable to pay the sumcertain in moneystated in theinstrument.

Impose no directobligation to pay inthe absence ofbreach thereof. Incase of breach, theperson whobreached the samemay either beliable or barred

from asserting aparticular defense.

Conditioned onpresentment andnotice of dishonor(Campos and Lopez-Campos, NegotiableInstruments Law,1994 ed.)

Does not requirepresentment andnotice of dishonor.(Campos and Lopez-Campos,NegotiableInstruments Law,1994 ed.)

1. Primarily Liable (Sec. 60 and 62,NIL)

MAKER ACCEPTOR OR DRAWEE

A. Engages to payaccording to thetenor of theinstrument; andB. Admits theexistence of thepayee and hiscapacity to indorse.

A. Engages to payaccording to thetenor of hisacceptance;B. Admits theexistence of thedrawer, thegenuineness of hissignature and hiscapacity andauthority to drawthe instrument; andC. Admits theexistence of thepayee and hiscapacity to indorse.

A bill of itselfdoes not operate asan assignment offunds in the handsof the draweeavailable for thepayment thereofand the drawee isnot liable unlessand until he



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accepts the same(Sec.127)

2. Secondarily Liable (Sec. 61, 64 and66, NIL)DRAWER GENERAL

INDORSER

IRREGULARINDORSER

A. Admitstheexistence ofthe payeeand hiscapacity toindorse;B. Engagesthat theinstrument

will beaccepted orpaid by thepartyprimarilyliable; andC. Engagesthat if theinstrument isdishonoredand properproceedingsare brought,he will pay

to the partyentitled tobe paid.

A. WarrantsallsubsequentHDC -a. That theinstrument isgenuine andin all respectwhat itpurports tobe

b. He hasgood title toit;c. All priorparties hadcapacity tocontractd. Theinstrument is,at the timeof endorse-ment, validandsubsisting.B. Engages

that theinstrumentwill beaccepted orpaid, or both,as the casemay be,according toits tenor; andC. If theinstrument isdishonoredandnecessaryproceedings

on dishonorbe dulytaken, he willpay to theparty entitledto be paid.

A person,nototherwise aparty to aninstrument,places hissignaturethereon inblankbefore

delivery.(Sec. 64)A. If instrumentpayable tothe order ofa 3rd

person, heis liable tothe payeeandsubsequentparties.B. If

instrumentpayable toorder of maker ordrawer orto bearer,he is liableto allpartiessubsequentto themaker ordrawer.C. If hesigns foraccommo-dation ofthe payee,he is liableto allpartiessubsequentto thepayee.

3. Limited Liability (Sec. 65; MetropolFinancing v. Sambok, 120 SCRA 864)

QUALIFIEDINDORSER

PERSONNEGOTIATING BY

DELIVERYEvery person

negotiatinginstrument bydelivery or by aqualifiedendorsementwarrants that:A. Instrument isgenuine and in allrespects what itpurports to be;B. He has good titleto it;C. All prior partieshad capacity tocontract;D. He has noknowledge of anyfact which wouldimpair the validityof the instrument orrender it valueless.

A. Warranties same

as those of qualified indorsers;andB. Warrantiesextend toimmediatetransferee only.

PERSONNEGOTIATING BYMERE DELIVERY

OR BY QUALIFIEDINDORSEMENT

GENERALINDORSER

No secondaryliability; but is liablefor breach ofwarranty

There is secondaryliability, andwarranties

Warrants that he hasno knowledge of anyfact which wouldimpair the validityof the instrument orrender it valueless

Warrants that theinstrument is, atthe time of hisindorsement, validand subsisting

ORDER OF LIABILITY

There is no order of liability among theindorsers as against the holder. He is freeto choose to recover from any indorser incase of dishonor of the instrument.(Notes and Cases on Banks, NegotiableInstruments and other CommercialDocuments, Timoteo B. Aquino)

As respect one another, indorsers areliable prima facie in the order in whichthey indorse unless the contrary is proven

(Sec.68)COMMERCIAL LAW COMMITTEECHAIRPERSON: Garny Luisa Alegre ASST. CHAIRPERSON:Jayson OS Ramos EDP: Beatrix I. Ramos SUBJECT HEADS:Marichelle De Vera (Negotiable Instruments Law); Jose Fernando Llave (Insurance); Aldrich Del Rosario(Transportation Laws);Shirley Mae Tabangcura, Bon Vincent Agustin (Corporation Law); Karl Steven Co (Special Laws); John Lemuel Gatdula(Banking Laws); Robespierre CU (Law on Intellectual Property)


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GENERAL RULE: One whose signaturedoes not appear on the instrument shallnot be liable thereon.

EXCEPTIONS:

1. The principal who signs through anagent is liable;

2. The forger is liable;3. One who indorses in a separate

instrument (allonge) or where anacceptance is written on a separatepaper is liable;

4. One who signs his assumed or tradename is liable; and

5. A person negotiating by delivery (as inthe case of a bearer instrument) isliable to his immediate indorsee.

VII. DEFENSESREAL DEFENSES PERSONAL

DEFENSESThose that attachto the instrumentitself and areavailable against allholders, whether indue course or not,but only by theparties entitled toraise them. (a.k.aabsolute defenses)

Those which areavailable only against aperson not a holder indue course or asubsequent holder whostands in privity withhim. (a.k.a. equitabledefenses)

1. MaterialAlteration;

2. Want of delivery ofincompleteinstrument;

3. Duressamounting toforgery;

4. Fraud infactum orfraud in essecontractus;

5. Minority(available to

the minoronly);

6. Marriage in thecase of a wife;

7. Insanity wherethe insaneperson has aguardianappointed bythe court;

8. Ultra vires actsof acorporation

9. Want of

authority of

1. Absence or failure ofconsideration, partialor total;2. Want of delivery ofcomplete instrument;3. Insertion of wrongdate in an instrument;4. Filling up of blankcontrary to authoritygiven or not withinreasonable time;5. Fraud ininducement;6. Acquisition ofinstrument by force,

duress, or fear;7. Acquisition of theinstrument by unlawfulmeans;8. Acquisition of theinstrument for anillegal consideration;9. Negotiation inbreach of faith;10. Negotiation undercircumstances thatamount to fraud;11. Mistake;12. Intoxication

(according to better

agent;10. Execution of

instrumentbetween publicenemies;

11. Illegality ifdeclared voidfor any purpose

12. Forgery.

authority);13. Ultra vires acts ofcorporations where thecorporation has thepower to issue

negotiable paper butthe issuance was notauthorized for theparticular purpose forwhich it was issued;14. Want of authorityof agent where he hasapparent authority;15. Insanity wherethere is no notice ofinsanity on the part ofthe one contractingwith the insane person;and

16. Illegality of contract where theform or considerationis illegal.

EFFECTS OF CERTAIN DEFENSESA. MINORITY Negotiation by a minor passes title tothe instrument. (Sec.22). But the minor isnot liable and the defense is personal tohim

B. ULTRA VIRES ACTS

A real defense but the negotiationpasses title to the instrument. (Sec. 22)Note: A corporation cannot act as anaccommodation party. The issuance orindorsement of negotiable instrument bya corporation without consideration andfor the accommodation of another isultra vires. (Crisologo-Jose v. CA, 117SCRA 594)

C. INCOMPLETE AND UNDELIVERED NI(Sec. 15)

If completed and negotiated withoutauthority, not a valid contract against a

person who has signed before delivery ofthe contract even in the hands of HDC butsubsequent indorsers are liable. This is areal defense.D. INCOMPLETE BUT DELIVERED NI (Sec.14)1. Holder has prima facie authority to

fill up the instrument.2. The instrument must be filled up

strictly in accordance with theauthority given and within reasonable

timeCOMMERCIAL LAW COMMITTEECHAIRPERSON: Garny Luisa Alegre ASST. CHAIRPERSON:Jayson OS Ramos EDP: Beatrix I. Ramos SUBJECT HEADS:Marichelle De Vera (Negotiable Instruments Law); Jose Fernando Llave (Insurance); Aldrich Del Rosario(Transportation Laws);Shirley Mae Tabangcura, Bon Vincent Agustin (Corporation Law); Karl Steven Co (Special Laws); John Lemuel Gatdula(Banking Laws); Robespierre CU (Law on Intellectual Property)


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3. HDC may enforce the instrument as iffilled up according to no. 2.

E. COMPLETE BUT UNDELIVERED NI (Sec.

16)1. Between immediate parties and those

who are similarly situated, deliverymust be coupled with the intention oftransferring title to the instrument.

2. As to HDC, it is conclusively presumedthat there was valid delivery; and

3. As against an immediate party andremote party who is not a HDC,presumption of a valid andintentional delivery is rebuttable.

F. FRAUD

FRAUD IN FACTUMOR FRAUD ININDUCEMENT

FRAUD INESSES

CONTRACTUSOR FRAUD INEXECUTION

The person who signsthe instrumentintends to sign thesame as a NI but wasinduced by fraud

The person isinduced to sign aninstrument notknowing itscharacter as a billor note

G. ABSENCE OR FAILURE OF

CONSIDERATION (Sec. 28) Personal defense to the prejudicedparty and available against any personnot HDC.

H. PRESCRIPTION

Refers to extinctive prescription andmay be raised even against a HDC. Underthe Civil Code, the prescriptive period ofan action based on a written contract is10 years from accrual of cause of action.

I. MATERIAL ALTERATION

Any change in the instrument whichaffects or changes the liability of the

parties in any way.

Effects:

1. Alteration by a party Avoids theinstrument except as against theparty who made, authorized, orassented to the alteration andsubsequent indorsers.

However, if an altered instrumentis negotiated to a HDC, he mayenforce payment thereof according to

its original tenor regardless of

whether the alteration was innocentor fraudulent.

Note: Since no distinction is made, it

does not matter whether it isfavorable or unfavorable to the partymaking the alteration. The intent ofthe law is to preserve the integrity ofthe negotiable instruments.

2. Alteration by a stranger (spoliation)-the effect is the same as where thealteration is made by a party which aHDC can recover on the original tenorof the instrument. (Sec. 124)

Changes in the following constitute

material alterations:a. Date;b. Sum payable, either for principal

or interest;c. Time or place of payment;d. Number or relations of the

parties;e. Medium or currency in which

payment is to be made;f. That which adds a place of

payment where no place ofpayment is specified; and

g. Any other change or additionwhich alters the effect of theinstrument in any respect. (Sec.125)

A serial number is an item which isnot an essential requisite fornegotiability under Sec. 1, NIL, andwhich does not affect the rights ofthe parties, hence its alteration is notmaterial. (PNB vs. CA, 256 SCRA 491)



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Comparison of sections 14, 15 and 16 of the negotiable instruments law

Section 14 Section 15 Section 16

Delivery Delivered UndeliveredUndeliveredNote: Delivery may be made for aconditional or for a special purposeonly and not for the purpose oftransferring the property in theinstrument

Completeness 1. Wanting in any materia lparticular

1. Blank paper withsignature

Mechanically incomplete Mechanically complete

Authority of personin possession

1. Prima facie authority tocomplete it by filling upthe blanks therein

1.Signature operates as aprima facie authority tofill it up as such for anyamount

No authority to complete and/ornegotiate instrument

May negotiate if delivered to him by orunder the authority of the partymaking, indorsing, drawing oraccepting, as the case may be.

When enforceable If filled up strictly in accordance with authority givenand within a reasonable time

Not enforceable When delivery is made by or underauthority of the party making,indorsing, drawing or accepting, as thecase may be.

Kind of defense Personal Real Personal

Rights of holder 1. If HDC, he can enforce the instrument as completedagainst parties prior or subsequent to thecompletion

2. If not a HDC, he can enforce the instrument ascompleted only against parties subsequent to the

completion but not against those prior thereto.

None in the hands of any holder.However, the invalidity of theinstrument is only with reference toparties whose signatures appear onthe instrument after delivery, the

instrument is valid.

Can enforce the instrument.Note: Where the instrument is in thehands of a HDC, a valid deliverythereof by all parties prior to him soas to make them liable to him isconclusively presumed. Where the

instrument is no longer in thepossession of a party whose signatureappears thereon, a valid andintentional delivery to him ispresumed until the contrary is proved.


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J. FORGERY Counterfeit making or fraudulentalteration of any writing, which mayconsist of:

1. Signing of anothers name with intentto defraud; or

2. Alteration of an instrument in thename, amount, name of payee, etc.with intent to defraud. (1 Agbayani,1992 ed.)

GENERAL RULE: When a signature isforged or made without the authority ofthe person, the signature (not instrumentitself and the genuine signatures) iswholly inoperative

Legal Effects:1. No right to retain the instrument2. To give a discharge therefore3. To enforce payment thereof

against any party thereto, can beacquired through or under suchsignature

EXCEPTION: Unless the party againstwhom it is sought to enforce such right isprecluded from setting up the forgery orwant of authority. (Sec.23)

Persons precluded from setting updefense of forgery

1. Those who warrant or admit thegenuineness of the signature inquestion. This includes indorsers,persons negotiating by delivery andacceptors.

2. Those who, by their acts, silence, ornegligence, are estopped from settingup the defense of forgery.

RULES ON FORGERYA. Promissory Notes

OrderInstrument

BearerInstrument

Makerssignatureforged

a. Maker is notliable becausehe neverbecame a partyto theinstrument.b. Indorserssubsequent toforgery areliable becauseof theirwarranties.c. Party whothe made the

forgery is

a. Maker is notliable.b. Party whomade theforgery isliable.c. Indorsersmay be madeliable to thosepersons whoobtain titlethrough theirindorsements.

liable.

Payeessignatureforged

a. Maker andpayee notliable.b. Indorserssubsequent toforgery areliable.c. Party whomade theforgery isliable.

a. Maker isliable.(Indorsementis notnecessary totitle and themaker engagesto pay holder)b. Party whomade theforgery isliable

Indorsers

signatureforged

a. Maker,payee andindorser whosesignature wasforged is notliable.

b. Indorserssubsequent toforgery areliable.(Because oftheirwarranties)c. Party whomade theforgery isliable.

a. Maker isliable.(indorsementis notnecessary totitle and the

maker engagesto pay theholder)b. Indorserwhosesignature wasforged notliable to onewho is not aHDC providedthe instrumentismechanicallycomplete

before theforgery.c. Party whomade theforgery isliable.

B. Bills of ExchangeOrder

InstrumentBearer

InstrumentDrawerssignatureforged

a. Drawer isnot liablebecause hewas never aparty to theinstrument.b. Drawee isliable if it paid(no recourse todrawer)because headmitted thegenuiness ofthe drawerssignature.Drawee cannotrecover from

a. Drawer is notliable.b. Drawee isliable if it paid.Drawee cannotrecover fromthe collectingbank.c. Party whomade theforgery isliable.


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the collectingbank becausethere is noprivitybetween the

collecting bankand thedrawer. Thelatter does notgive anywarrantyregarding thesignature ofthe drawer.(AssociatedBank vs. CA)c. Indorserssubsequent toforgery liable

(such ascollecting bankor lastendorser)d. Party whomade theforgery isliable

Payeessignatureforged

a. Drawer,drawee andpayee notliable.b. Indorserssubsequent to

forgery areliable. (such ascollectingbank)c. Party whomade theforgery isliable

a. Drawer isliableb. Drawee isliablec. Payee is notliable

d. Collectingbank is liablebecause of warrantye. Party whomade theforgery is liable

Indorsers

signatureforged

a. Drawer,payee andindorser whosesignature wasforged notliable.b. Drawee isliable if it paid.c. Indorserssubsequent toforgery areliable. (such ascollecting bank)d. Party whomade theforgery isliable.

a. Drawer isliable.(indorsementnot necessary totitle)b. Drawee isliable.c. Indorserwhose signaturewas forged isliable becauseindorsement isnot necessary totitle.d. Party whomade theforgery is liable.

VIII. ENFORCEMENT OF LIABILITY

A. STEPS TO CHARGE THE PARTIESLIABLEa. Primary Liability

The unconditional promise attaches the

moment the maker makes the instrumentwhile the acceptors assent to theunconditional order attaches the momenthe accepts the instrument. No further actis necessary in order for the liability toaccrue. Presentment for payment is allthat is necessary. (Notes and Cases onBanks, Negotiable Instruments and otherCommercial Documents, Timoteo B.

Aquino)b. Secondary Liability

1. Steps in promissory note(indorsers)

a. Presentment for paymentto the maker.

b. Notice of dishonor shouldbe given, if dishonored bynon-payment.

2. Steps in bill of exchangea. Presentment for acceptance in thefollowing instances:

a. Where the bill is payableafter sight, or when it isnecessary in order to fixthe maturity of theinstrument;

b. Where the bill expresslystipulates that it shall bepresented foracceptance;

c. Where the bill is drawnpayable elsewhere thanat the residence or placeof business of thedrawee. (Sec. 143)

Note: In all the above cases, the holdermust either present the bill foracceptance or negotiate it within areasonable time; otherwise, the drawerand all indorsers are discharged. (Sec.144)2. If dishonored by non-acceptance;

a. Notice of dishonor givento drawer and indorsers.b. Protest in case of aforeign bill.

3. If bill is accepted:a. Presentment for payment to the

acceptor.4. If dishonored upon presentment forpayment


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a. Notice of dishonor to personssecondarily liable.

b. Protest for dishonor by non-payment in case of foreign bill.

B. PRESENTMENT

The production of a BE to the draweefor his acceptance, or to the drawee oracceptor for payment or the productionof a PN to the party liable for thepayment of the same. (Sec. 70)

PRESENTMENT FOR PAYMENT

Consists of:

1. Personal demand for payment at theproper place; and

2. Readiness to exhibit the instrument ifrequired, and to receive payment andto surrender the instrument if thedebtor is willing to pay.

Requisites:1. Made by the holder or any person

authorized to receive payment on hisbehalf;

2. At a reasonable hour on a businessday;

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 thepresentment is made. (Sec. 72)

When should be made:

1. PN payable on demand: withinreasonable time after its issue;

2. BE payable on demand: withinreasonable time after its lastnegotiation;

3. Instrument payable on a specifieddate: on the date it falls due. (Sec.71)

Proper place:1. Place specified;2. Address of the person to make

payment is given, in case no place isspecified;

3. Usual place of business or residenceof the person to make payment, incase no place is specified and noaddress is given;

4. In any other case, wherever theperson to make payment can befound, or at his last known place ofbusiness or residence. (Sec. 73)

When not required:

1. In order to charge the drawer wherehe has no right to expect or requirethat the drawee or acceptor will paythe instrument;(Sec. 79)

2. In order to charge an indorser whenthe instrument was made or acceptedfor his accommodation and he has noreason to expect that the instrumentwill be paid if presented.(Sec. 80)

When delay in making presentment orof giving notice is excused:1. When caused by circumstancesbeyond the control of the holder; and2. Not imputable to his default,misconduct, or negligence.(Sec. 81)

When presentment for payment isexcused:

1. After exercise of reasonablediligence, it cannot be made;

2. Drawee is a fictitious person;

3. Express or implied waiver.(Sec. 82)

Exhibition

Purposes:1. To enable the debtor to determine

the genuineness of the instrumentand the right of the holder to receivepayment; and

2. To enable him to reclaim possession

upon payment. When excused:1. When debtor does not demand to see

the instrument but refuses paymenton some other grounds, and

2. When the instrument is lost ordestroyed.

Special cases1. Instrument payable at a bank Mustbe made during banking hours unlessthere are no funds to meet it at any timeduring the day, presentment at any hour

before the bank is closed on that day issufficient. (Sec. 75)2. Person liable is dead May be madeto his personal representative, if there beone, and if he can be found. (Sec. 76)

C. PRESENTMENT FOR ACCEPTANCE

When required:a. Where the bill is payable after sight,or when it is necessary in order to fixthe maturity of the instrument;


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b. Where the bill expressly stipulatesthat it shall be presented foracceptance;c. Where the bill is drawn payable

elsewhere than at the residence orplace of business of the drawee. (Sec.143)

How made:a. Where a bill is addressed to 2 or moredrawees who are not partners,presentment must be made to allb. Where drawee is dead, presentmentmay be made to his personalrepresentativec. Where the drawee is adjudged abankrupt, insolvent or made anassignment to his creditors, presentment

may be made to him or his trustee orassignee

When excused:

1. Where the drawee is dead, or hasabsconded, or is a fictitious person ora person not having capacity tocontract by bill;

2. After exercise of reasonablediligence, presentment cannot bemade;

3. Although presentment has beenirregular, acceptance has beenrefused on some other ground. (Sec.148)

If bill is duly presented for acceptanceand it is not accepted within theprescribed time, the person presenting itmust treat the bill as dishonored by non-acceptance or he loses the right ofrecourse against the drawer andindorsers. (Sec. 150)

D. ACCEPTANCE

The signification by the drawee of hisassent to the order of the drawer.

It is the act by which the draweemanifests his consent to comply with therequest contained in the bill of exchangedirected to him.

Form: Must be in writing and signed bythe drawee and must not express that thedrawee will perform his promise by anyother means than the payment of money.(Sec. 132)

The holder of the bill presenting thesame for acceptance may require that theacceptance be written on the bill, and if

such request is refused, may treat the billas dishonored. (Sec. 133)

Kinds:

1. GENERAL - assents without

qualification to the order of thedrawer.

2. QUALIFIED - which in express termsvaries the effect of the bill as drawn.a. Conditional - makes payment by

the acceptor dependent on thefulfillment of a condition thereinstated.

b. Partial - an acceptance to paypart only of the amount for whichthe bill is drawn.

a. Local - an acceptance to pay onlyat a particular place.

b. Qualified as to timec. The acceptance of some one or

more of the drawees but not ofall. (Sec. 141)

Form:1. Must be made by or on behalf of the

holder;2. At a reasonable hour on a business

day;3. Before the bill is overdue; and4. To the drawee or some person

authorized to accept or refuse to

accept on his behalf.

Implied Acceptance

If after 24 hours, the drawee fails toreturn the instrument. He is also deemedto have accepted the instrument when hedestroys the same.

E. NOTICE OF DISHONOR

Notice given by holder or his agent toparty or parties secondarily liable thatthe instrument was dishonored by non-acceptance by the drawee of a bill or by

non-payment by the acceptor of a bill orby non-payment by the maker of a note.(Sec. 89)

Requisites:1. Given by holder or his agent, or by

any party who may be compelled bythe holder to pay (Sec. 90);

2. Given to secondary party or his agent(Sec. 97);

3. Given within the periods provided bylaw (Sec. 102); and

4. Given at the proper place (Secs. 103and 104)


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When dispensed with:1. When party to be notified knows

about the dishonor, actually orconstructively (Secs. 114-117);

2. If waived (Sec. 109); and3. When after due diligence, it cannot

be given (Sec. 112).

How given:1. By bringing verbally or2. By writing to the knowledge of the

person liable the fact that a specifiedinstrument, upon proper proceedingstaken, has not been accepted or hasnot been paid, and that the partynotified is expected to pay it.

To whom given:1. Non-acceptance (bill) to persons

secondarily liable, namely, thedrawer and indorsers as the case maybe.

2. Non-payment (both bill and note) indorsers.Note: Notice must be given topersons secondarily liable. Otherwise,such parties are discharged. Noticemay be given to the party himself orto his agent.

By whom given:1. The holder2. Another on behalf of the holder3. Any party to the instrument who may

be compelled to pay it to the holder,and who would have a right ofreimbursement from the party towhom notice is given. (Sec. 90)

DISHONOR BY NON-PAYMENT1. Payment is refused or cannot be

obtained after due presentment forpayment;

2. Presentment is excused and theinstrument is overdue and unpaid.

(Sec. 83)

Effect: There is an immediate right ofrecourse by the holder against personssecondarily liable. However, notice ofdishonor is generally required. (Sec. 84)

DISHONOR BY NON-ACCEPTANCE

Instances:1. When it is duly presented for

acceptance and such an acceptance isrefused or cannot be obtained; or

2. When presentment for acceptance isexcused, and the bill is not accepted.(Sec. 149)

Effect: Immediate right of recourse

against the drawer and indorsers accruesto the holder and no presentment forpayment is necessary. (Sec. 151)

Effect of lack of notice of dishonor on NIwhich are payable in installments

1. No acceleration clause failure togive notice of dishonor on a previousinstallment does not dischargedrawers and indorsers as tosucceeding installments.

2. With acceleration clause failure togive notice of dishonor as to previousinstallment will discharge the personssecondarily liable as to thesucceeding installments.

To whose benefit does a notice ofdishonor inure1. When given by or on behalf of aholder:

a. All parties prior to the holder,who have a right of recourseagainst the party to whom thenotice is given; and

b. All holders subsequent to theholder giving notice. (Sec. 92)2. When given by or on behalf of a partyentitled to give notice:

a. The holder; andb. All parties subsequent to the

party to whom notice is given.(Sec. 93)

Dishonor in the hands of an Agent

Agent can do either of the following:1. Directly give notice to persons

secondarily liable thereon; or

2. Give notice to his principal. In suchcase, he must give notice within thetime allowed by law as if he were aholder. (Sec. 94)

A party giving notice is deemed to havegiven due notice where:

1. The notice of dishonor is dulyaddressed, and

2. Deposited in the post-office, evenwhen there is miscarriage ofmail. (Sec. 105)


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Where a party receives notice ofdishonor, he has, after the receipt ofsuch notice, the same time for givingnotice to antecedent parties that the

holder has after the dishonor. (Sec. 107)

Waiver of Notice of Dishonor

Either before the time of giving notice,or after the omission to give due notice.Waiver may be expressed or implied.(Sec. 109)

As to who are affected by an expresswaiver depends on where the waiver iswritten:

1. If it appears in the body or onthe face of the instrument, it bindsall parties; but

2. If it is written above thesignature of an indorser, it binds himonly. (Sec. 110)

Notice of dishonor is not required to begiven to the drawer in any of the ff.cases:1. Drawer and drawee are the same;2. Drawee is a fictitious person or not

having the capacity to contract;3. Drawer is the person to whom the

instrument is presented for payment;4. The drawer has no right to expect or

require that the drawee or acceptorwill honor the instrument;

5. Where the drawer hascountermanded payment. (Sec. 114)

Notice of dishonor is not required to begiven to an indorser in the ff. cases:

1. Drawee is a fictitious person ordoes not have the capacity tocontract, and indorser was awareof that fact at the time heindorsed the instrument;

2. Indorser is the person to whomthe instrument is presented forpayment;

3. Instrument was made or acceptedfor his accommodation. (Sec. 115)

If an instrument is not accepted by thedrawee, there is no sense presenting itagain for payment, and notice of dishonormust at once be given. If there wasacceptance, presentment for payment isstill required and if payment is refused,there is a need for notice of dishonor.

(Sec. 116)

An omission to give notice of dishonorby non-acceptance does not prejudice therights of a holder in due course

subsequent to the omission. (Sec. 117)

F. FOREIGN BILL OF EXCHANGE1. Drawn in the Philippines but payable

outside the Philippines.2. Payable in the Philippines but drawn

outside the Philippines.

INLAND BE FOREIGN BEA bill which or on itsface purports to beboth drawn andpayable within the

Philippines.

One which is or onits face purports tobe drawn or payableoutside the

Philippines.

NOTICE OFDISHONOR

PROTEST

Required in inlandbill

Required in foreignbill

May be oral orwritten

Always written

May be made by aparty or agent

Made by a notarypublic or arespectable residentin the presence ofwitness

Made in residence ofparties

Made in the place ofdishonor

PROTEST

The formal instrument executedusually by a notary public certifying thatthe legal steps necessary to fix theliability of the drawee and the indorsershave been taken.

Who makes:1. A notary public; or2. Any respectable resident of the place

where the bill is dishonored, in thepresence of 2 or more crediblewitnesses. (Sec. 154)

Protest for better security Onemade by the holder of a bill after it hasbeen accepted but before it matures,against the drawer and indorsers, wherethe acceptor has been adjudged abankrupt or an insolvent, or has made anassignment for the benefit of thecreditors. (Sec. 158)


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Protest is necessary only in case offoreign bills of exchange, which havebeen dishonored by non-acceptance ornon-payment, as the case may be. If it is

not so protested, the drawer andindorsers are discharged. (Sec. 118)

ACCEPTANCE FOR HONOR

An undertaking by a stranger to a billafter protest for the benefit of any partyliable thereon or for the honor of theperson for whose account the bill isdrawn which acceptance inures also tothe benefit of all parties subsequent tothe person for whose honor it isaccepted, and conditioned to pay the billwhen it becomes due if the original

drawee does not pay it. (Secs. 161-170)Requisites:1. The bill must have been protested for

dishonor by non-acceptance or forbetter security;

2. The acceptor for honor must be astranger and not a party alreadyliable on the instrument;

3. Bill must not be overdue;4. Acceptance for honor must be with

the consent of the holder of theinstrument.

Formal requisites:1. Must be in writing;2. Must indicate that it is an acceptance

for honor;3. Signed by the acceptor for honor;4. Must contain an express or implied

promise to pay money;5. The accepted bill for honor must be

delivered to the holder.

ORDINARYACCEPTANCE

ACCEPTANCEFOR HONOR

No previous protest

is required

Previous protest is

requiredConsent of holder isimplied

Consent of holder isrequired

Drawee is acceptor Acceptor must bestranger to the bill

Acceptor is primarilyliable

Acceptor issecondarily liable

PAYMENT FOR HONOR

Payment made by a person, whether aparty to the bill or not, after it has beenprotested for non-payment, for the

benefit of any party liable thereon or forthe benefit of the person for whoseaccount it was drawn.(Secs. 171-177)

Requisites:

1. The bill has been dishonored by non-payment;

2. It has been protested for non-payment;

3. Payment supra protest (another termfor payment for honor because priorprotest for non-payment is required)is made by any person, even by aparty thereto;

4. The payment is attested by a notarialact of honor which must be appendedto the protest or form an extension ofit;

5. The notarial act must be based on thedeclaration made by the payor forhonor or his agent of his intention topay the bill for honor and for whosehonor he pays.

Note: If the above formalities are notcomplied with, payment will operate as amere voluntary payment and the payorwill acquire no right to fullreimbursement against the party forwhose honor he pays.

In payment for honor, the payeecannot refuse payment. If he refuses, hecannot recover from the parties whowould have been discharged had heaccepted the same. In acceptance forhonor, the holders consent is necessary.

The payor for honor is given the rightto receive both the bill and the protestobviously to enable him to enforce hisrights against the parties who are liableto him.

BILLS IN SET One composed of several parts, eachpart being numbered and containing areference to the other parts, the whole ofthe parts constituting but one bill.

Purpose: It is usually availed of incases where a bill had to be sent to adistant place through some conveyance.If each part is sent by different means ofconveyances, the chance that at leastone part of the set would reach itsdestination would be greater.


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Rights of holders where parts arenegotiated separately

1.If both are HDC, the holder whosetitle first accrues is considered the

true owner of the bill.2.But the person who accepts or pays in

due course shall not be prejudiced.(Sec. 179)

Obligations of holder who indorses 2 ormore parts of the bill in set

1.The person shall be liable on everysuch part;

2.Every indorser subsequent to him isliable on the part he has himselfindorsed, as if such parts wereseparate bills. (Sec. 180)

IX. DISCHARGE

DISCHARGE OF NI

A release of all parties, whetherprimary or secondary, from theobligations arising thereunder. It rendersthe instrument without force and effectand, consequently, it can no longer benegotiated. (The Law on NegotiableInstruments with Documents of Title,Hector de Leon, 2000 ed.)

Instances:

1. By payment in due course by or onbehalf of the principal debtor;

2. Payment by accommodated party;3. Intentional cancellation by the

holder;

4. By any act which will discharge asimple contract for the payment ofmoney;(Sec. 119)

5. When the principal debtor becomesthe holder of the instrument at orafter maturity in his own right.

PAYMENT IN DUE COURSE Requisites:1. Payment must be made at or after

maturity.2. Payment must be made to the holder.3. Payment must be made in good faith

and without notice that the holderstitle is defective. (Sec. 88)

By whom made:a. By maker or acceptor; orb. Surety if a primary party; or

c. By an agent on behalf of theprincipal

RENUNCIATION (Sec. 122)

The act of surrendering a right orclaim without recompense, but it can beapplied with equal propriety to therelinquishing of a demand upon anagreement supported by a consideration.(1 Agbayani 1992 ed.)

Effects:1. A renunciation in favor of a secondary

party may be made by the holderbefore, at or after maturity of theinstrument. The effect is todischarge only such secondary partyand all parties subsequent to him but

the instrument itself remains inforce.

2. A renunciation in favor of theprincipal debtor may be effected ator after maturity. The effect is todischarge the instrument and allparties thereto provided therenunciation is made unconditionallyand absolutely.

Note: In either case, renunciation doesnot affect the rights of a holder in duecourse without notice.

CANCELLATION It includes the act of tearing, erasing,obliterating, or burning. It is not limitedto writing of the word cancelled, orpaid, or drawing of criss-cross linesacross the instrument. (Sec. 123) It maybe made by any other means by which theintention to cancel the instrument maybe evident.

DISCHARGE OF PERSONS SECONDARILYLIABLE

1. By any act which discharges theinstrument;2. By the intentional cancellation of his

signature by the holder;

3. By the discharge of a prior party;4. By a valid tender of payment made by

a prior party;

5. By the release of the principaldebtor, unless the holders right ofrecourse against the party secondarilyliable is expressly reserved;

6. By any agreement binding upon the

holder to extend the time of payment


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or to postpone the holders right toenforce the instrument. (Sec. 120)

In the following cases, theagreement to extend the time of

payment does not discharge aparty secondarily liable:

a) where the extension of time isconsented to by such party;

b) where the holder expressly reserveshis right of recourse against suchparty.

Payment at or after maturity by aparty secondarily liable does notdischarge the instrument. It only cancelshis own liability and that of the partiessubsequent to him. (Sec. 121)

X. CHECKS A bill of exchange drawn on a bankpayable on demand (Sec. 185)

CONCEPTS:1. Certification of Checks

An agreement whereby the bankagainst whom a check is drawn,undertakes to pay it at any future timewhen presented for payment.

Effects:a. Equivalent to acceptance (Sec.

187) and is the operative act thatmakes banks liableb. Assignment of the funds of the

drawer in the hands of thedrawee (Sec. 189)

c. If obtained by the holder,discharges the personssecondarily liable thereon (Sec.188)

2. A check of itself does not operate as anassignment of any part of the funds to thecredit of the drawer with the bank. Thebank is not liable to the holder, unless

and until it accepts or certifies the check.(Sec. 189)3. A check must be presented forpayment within reasonable time after itsissue or the drawer will be dischargedfrom liability thereon to the extent of theloss caused by the delay. (Sec. 186)

Reasonable time: (Sec. 193, NIL)a. Nature of theinstrumentb. Usage of business ortrade

c. The facts of theparticular case

4. Where the holder of a check procuresit to be accepted or certified, the drawer

and all indorsers are discharged fromliability thereon. (Sec. 186)5. Refusal of drawee bank to certify

The holder has no action against thebank but he has a right of action againstthe drawer. The drawer in turn has rightof action against the bank based on theoriginal contact of deposit between them.

Crossed Check

A check which in addition to the usualcontents of an ordinary check containsalso the name of a certain banker or

business entity through whom it must bepresented for payment.

Effects:a) That the check may not be encashed;

it may only be deposited with thebank;

b) That the check may be negotiatedonly once to a person who has anaccount with the bank; and

c) That it serves as a warning to theholder that the check has been issuedfor a definite purpose. (Bataan Cigarvs. CA, 230 SCRA 643)

The NIL is silent with respect tocrossed checks, although the Code ofCommerce makes reference to suchinstrument. Nonetheless, this Court hastaken judicial cognizance of the practicethat a check with 2 parallel lines in theupper left hand corner means that itcould only be deposited and notconverted into cash. The effects ofcrossing a check thus, relates to themode of payment, meaning that the

drawer had intended the check fordeposit only by the rightful person, i.e.,the payee named therein. (Cely Yang vs.Court of Appeals, G.R. No. 138074,August 15, 2003)

IRON CLAD RULE

Prohibits the countermanding ofpayment of certified checks. (Republic ofthe Philippines vs. PNB)Note: The holder must be a holder in duecourse before the stop payment ordermay not be successfully invoked against

him. (Mesina vs. IAC, 146 SCRA 497, 505)


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TYPES OF CHECKS (Cesar Villanueva,Commercial Law Review, 2004 ed.)

a. Cashiers Check One drawn by the cashier of a bank, inthe name of the bank against the bankitself payable to a third person. It is aprimary obligation of the issuing bank andaccepted in advance upon issuance. (Tanvs. CA, 239 SCRA 310)

b. Managers Check

A check drawn by the manager of abank in the name of the bank itselfpayable to a third person. It is similar tothe cashiers check as to the effect and

use.

c. Memorandum Check

A check given by a borrower to alender for the amount of a short loan,with the understanding that it is not to bepresented at the bank, but will be

redeemed by the maker himself when theloan falls due and which understanding isevidenced by writing the wordmemorandum, memo or mem onthe check.

d. Certified Check

An agreement whereby the bankagainst whom a check is drawnundertakes to pay it at any future timewhen presented for payment. (Sec. 187)

San Beda 2005 Negotiable Instrument

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