BUSINESS LAW REVIEW

NOTES ON: NEGOTIABLE INSTRUMENTS LAW

A) Basic Concepts

(1) What are negotiable instruments?

(a) They are written contracts for the payment of money; by its form, intended as a
substitute for money and intended to pass from hand to hand, to give the holder in due
course the right to hold the same and collect the sum due.

(2) Characteristics of negotiable instruments:

(a) Negotiability – right of transferee to hold the instrument and collect the sum due
(b) Accumulation of secondary contracts – instrument is negotiated from person to
person

(3) What are the phases in the life of a negotiable instrument?

(a) Issuance – first delivery of the instrument, complete in form, to a person who takes it
as a holder (Sec. 191)
(b) Negotiation – transfer of the instrument and title thereof to another person
1. Indorsement with delivery, in case of order instruments.
a. Indorsement – a signature on the instrument by the previous holder thereof
with the intent of transferring title thereto to a subsequent party.
2. Mere delivery, in case of bearer instruments.
(c) Presentment for acceptance in certain bills (Sec. 143)
(d) Acceptance – one completed by delivery and notification (Sec. 191)
(e) Dishonor by non-acceptance
(f) Presentment for payment
(g) Dishonor by non-payment
(h) Notice of dishonor
(i) Protest in certain cases (Sec. 118, 152 and 167)
(j) Discharge (Sec. 51, 119)

(4) What are the differences between negotiable instruments and non-negotiable instruments?
Negotiable instruments Non-negotiable instruments
Contains all the requisites of Sec. 1 of Does not contain all the requisites of
the NIL Sec. 1 of the NIL
Transferred by negotiation Transferred by assignment
Holder in due course may have better Transferee acquires rights only of his
rights than transferor transferor
Prior parties warrant payment Prior parties merely warrant legality
of title
Transferee has right of recourse Transferee has no right of recourse
against intermediate parties

(5) What are the differences between negotiable instruments and negotiable documents of
title?
Negotiable instruments Negotiable documents of title
Contains all the requisites of Sec. 1 of Does not contain all the requisites of
the NIL Sec. 1 of the NIL
Have right of recourse against No secondary liability of intermediate
intermediate parties who are parties
secondarily liable
Holder in due course may have better Transferee merely steps into the shoes
rights than transferor of transferor
Subject is money Subject is goods
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Part V – Negotiable Instruments Law
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 Instrument itself is property of value Instrument is merely evidence of title;
thing of value are the goods
mentioned in the document

(6) What is a promissory note?

(a) It is an unconditional promise to pay in writing 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 bearer. When the note is drawn to maker's own order, it is
not complete until indorsed by him. (Sec. 184, NIL1)
(b) The parties to a promissory note are (1) the maker and the (2) payee.

(7) What is a bill of exchange?

(a) It is 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 bearer. (Sec.
126)
(b) The parties to a promissory note are (1) the drawer, (2) the payee and (3) the
drawee/acceptor.

(8) What are the differences between a promissory note and a bill of exchange?
Promissory Note Bill of exchange
Contains an unconditional promise to Contains an unconditional order to
pay pay
Involves two (2) parties Involves three (3) parties
Maker primarily liable Drawer only secondarily liable
Only one presentment needed – for Generally two presentments needed –
payment for acceptance and for payment

(9) What is a check?

(a) It is a bill of exchange drawn on a bank and payable on demand. (Sec. 185)

(10) What are the distinctions between a check and a bill of exchange?
Check Bill of exchange
Always drawn upon a bank or a May or may not be drawn against a
banker bank
Always payable on demand May be payable on demand or at a
fixed or determinable future time
Not necessary that it be presented for Necessary that it be presented for
acceptance acceptance
Drawn on a deposit Not drawn on a deposit
The death of a drawer of a check, The death of the drawer of the
with knowledge by the banks, revokes ordinary bill does not revoke the
the authority of the banker to pay authority of the drawee to pay
Must be presented for payment within May be presented for payment within
a reasonable time after its issue (6 a resonable time after its last
months) negotiation

(11)What are the distinctions between a promissory note and a check?

Promissory note Check
There are two (2) parties: the maker There are three (3) parties: the drawer,
and the payee the drawee bank and the payee
May be drawn against any person, not Always drawn against a bank

1All citations refer to the Negotiable Instruments Law (Act No. 2031) unless otherwise stated.
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Part V – Negotiable Instruments Law
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 necessarily a bank
May be payable on demand or at a Always payable on demand
fixed or determinable future time
Contains a promise to pay Contains an order to pay

(a) If a check is crossed, this signifies that the check's proceeds shall only be deposited
and not encashed and released to the holder. It adds a layer of security for the drawer
in order to ensure that only the proper party shall receive payment, as the manner of
transfering the funds through bank accounts can be traced through the bank system.
(b) If the drawer to a check would like to secure the payment of the check (in order to
avoid its dishonor and consequent liability under the provisions of B.P. 22 or the
Bouncing Checks Law), he may obtain a certified check. It is a kind of check whose
payment is ensured by the bank, signifying that available funds will cover the amount
of the check upon its presentment to the drawee. Technically, what the drawee
actually does is to purchase a certified check with the drawee bank (by payment of a
nominal bank fee) and depositing the amount of the check with the bank. Such
amount will not be credited to the drawer's account but will be set aside by the bank
in a fund, which it will use to reimburse itself once it has made payment of the
certified check.

(12) Other forms of negotiable instruments include (1) certificates of deposits, (2) trade
acceptances, (3) bonds in the nature of promissory notes, (4) drafts which are bills of
exchange drawn by one bank on another, and (5) letters of credit.

(13) What is a trust receipt?

(a) It is a security transaction intended to aid in the financing of importers and retailers
who do not have sufficient funds to finance their transaction and acquire credit except
to use as collateral for the merchandise imported.

B) Requisites of Negotiability

(1) What are the requisites of negotiability?

(a) According to Sec. 1 of the NIL, "(a)n instrument to be negotiable must conform to the
following requirements (Mnemonic - WUPOA):
1. It must be in writing and signed by the maker or drawer;
2. It must contain an unconditional promise or order to pay a sum certain in money;
3. It must be payable on demand or at a fixed or determinable future time;
4. It must be payable to order or bearer; and
5. Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
(b) A promissory note must possess the first four (4) requisites, whereas a bill of
exchange must possess all five (5) requisites.
(c) In order to be negotiable, there must be a writing of some kind, else there would be
nothing to be negotiated or passed from hand to hand. The writing may be in ink,
print or pencil. It may be upon parchment, cloth, leather, or any substitute of paper.
(d) It must be signed by the maker or drawer. It may consist of mere initials or even
numbers, but the holder must prove that what is written is intended as a signature of
the person sought to be charged. The signature may appear in any part of the
instrument, whether at the top, middle or bottom or at the margins.
1. Note, however, that if the signature is so placed upon the instrument that it is not
clear in what capacity the person intended to sign, he is deemed an indorser only
and not a maker or drawer. (Sec. 17)
2. Where the genuineness of the signature of the maker or drawer is denied, the
signature is nevertheless presumed valid. The maker or drawer must provide
some evidence of the signature's invalidity.
(e) The bill of exchange must contain an order, something more than the mere asking of a
favor.
(f) The sum payable must be in money only. It cannot be made payable in goods, wares,
or merchandise or in property.

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 1. The promise or order may designate "a particular kind of current money in which
payment is to be made." (Sec. 6[e])
2. The term money properly includes all legal tender.
a. Note, however, that money as used in the law is not necessarily limited to
"legal tender" as defined by law.
(g) A drawee's name may be filled in under Sec. 14.
1. Like the drawee, the payee must be named with reasonable certainty if the
instrument is payable to order (Sec. 8, par. 2)

(2) How is negotiability determined?

(a) It is determined:
1. by the provisions of the NIL, particularly Sec. 1 thereof;
2. by considering the whole instrument;
3. by what appears on the face of the instrument and not elsewhere.
(b) While the writing may be read in the light of surrounding circumstances in order to
more perfectly understood the intent of the parties, yet as they have constituted the
writing to be the only outward expression of their meaning, no other words are to be
added to it or substituted in its stead. The duty of the court in such case is to ascertain
not what the parties may have secretly intended as contradistinguished from what
their words express, but what is the meaning of the words they have used. (Caltex
[Phils.], Inc. vs. Court of Appeals, 212 SCRA 448 [1992].)

(3) For the sum to be deemed certain, the holder must be able to determine from the
instrument itself the amount he is entitled to receive at maturity.
(a) Under Sec. 2, the sum is deemed certain even if it is to be paid:
1. with interest.
a. If the interest rate is not specified, it shall be the legal rate of 6% (Art. 2209,
New Civil Code; see also BSP Circular No. 799-13)
2. in installments.
3. in installments with acceleration clause.
a. An acceleration clause is a provision that upon default in payment of any
installment or of interest, the whole shall become due and demandable.
b. The acceleration must be at the option of the maker and not the holder. If it is
the latter, the instrument is non-negotiable as the sum would not be certain.
4. with exchange, whether at a fixed or current rate.
a. The exchange rate itself must be determinable, otherwise the sum cannot be
made certain.
b. This provision is applicable only to foreign bills (i.e. drawn in one country
and payable in another). It does not apply to inland or domestic bills by
virtue of R.A. No. 8183, which mandates that all monetary obligation must
be paid in Philippine currency which is legal tender in the Philippines.
5. with costs of collection or an attorney's fee, in case payment shall not be made at
maturity.
(b) Until the instrument matures the amount payable is certain, and it may, therefore, take
the place of money; when it becomes overdue, the amount to which the holder is
entitled becomes uncertain but in this case, it has already ceased to perform the office
of money. Hence, anything which only renders the sum payable uncertain after the
instrument has ceased to be a substitute for money but which in no wise affected it
before such time, cannot impair its negotiability.
(c) If an instrument be for a specified sum of money, and also for the payment of
something else, the value of which is not ascertained but depends upon extrinsic
evidence, it would not be negotiable.

(4) The promise or order to pay must be unconditional, i.e. it is unqualified and not
dependent on any uncertain, contingent event.
(a) Even if the condition or event is very likely to occur, or indeed, even if, in fact, did
occur subsequently, the instrument remains non-negotiable, although it would, of
course, become payable at that time.
(b) However, pursuant to Sec. 3, it may contain:
1. an indication of a particular fund out of which reimbursement is to be made, or a
particular account to be debited with the amount.
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 a. But if the particular fund indicated is to be used for payment of the
instrument, then it is non-negotiable, as payment thereof would be
conditioned on the existence and sufficiency of such fund.
2. a statement of the transaction which gives rise to the instrument.
a. Normally, the words used to this effect is "for value received." Note that it is
not necessary that the transaction be mentioned in the instrument, as the
holder is presumed to hold the instrument for value unless otherwise proved.
b. If the promise or order is "subject to or governed by the terms and conditions
of our contract executed by us on _____," the instrument is not negotiable
because the obligation to pay is burdened with the terms and conditions of
another contract, subjecting recovery on the Instrument to defenses available
under the contract.
(c) In addition, the words used must indicate the obligatory nature of the instrument, and
must indicate a assumption of full responsibility for the payment thereof. A mere
promise implied by law from the existence of an indebtedness, and not from any
promissory language, is not sufficient.
(d) In the case of an order to pay, it must be in the nature of a command or imperative
direction, and, therefore, a mere request which merely asks a favor (like "I request
you to pay," or "I wish you would pay," or "I authorize you to pay," or "I hope you
will pay") supplication, or authority does not constitute an order for it does not import
a right to ask and a duty to obey.

(5) The instrument is payable at a determinable future time if the payment will certainly
become due and payable one time or other, though it may be uncertain when that time
will come.
(a) According to Sec. 4, an instrument is payable at a determinable future time if it is
expressed to be payable:
1. At a fixed period after date or sight;
a. After sight means after the instrument is seen by the drawee upon
presentment for acceptance (see Sec. 143[a].), or accepted by the drawee.
2. On or before a fixed or determinable future time specified therein;
3. 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.
a. A common example of the last instance is the death of a person. But, the
condition of a person attaining a certain age, or obtaining a certain degree or
distinction with a reasonable certainty of success, still makes the promise or
order conditional, and therefore the instrument non-negotiable.
(b) An instrument payable upon a contingency is not negotiable, and the happening of the
event does not cure the defect. (Sec. 4, par. 2)
(c) If an instrument is payable "on demand or (at a fixed or determinable future time)",
the payee is given unrestricted power to declare the instrument due at any time before
maturity. The exercise of his right is "not dependent upon nor does it grow out of any
act, promise, or agreement of the maker. In other words, it is a contingency over
which the maker has no control." This uncontrollable option of the payee, it has been
held, renders the note non-negotiable because it renders the time of payment
uncertain.
1. However, the instrument is not rendered non-negotiable where the holder's right
to exercise the option depends upon the happening of a specified event or
contingency over which he has no control. (see Sec. 2[c])
(d) A provision in the instrument to the effect that the maker may extend payment from
due date does not affect its negotiability as such instrument is the same as one
payable "on or before." The note would become due in any event, although the exact
time could not be determined at the time of its execution. The time at which the note
must eventually become due is, therefore, fixed and certain.
(e) A promise to pay "when able" or "as soon as I can" renders the instrument non-
negotiable because the period to pay is non-determinable.
1. Note that even if we apply Art. 1197 in relation to Art. 1180 of the NCC, the
instrument is still non-negotiable because the period shall be determined by court
action, which imposes a condition upon the instrument for its payment, rendering
it non-negotiable though the period is now made certain.

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 (6) General rule: If some other act is required other than the payment of money, the
instrument is non-negotiable.
(a) Exceptions:
1. sale of collateral securities if the instrument is not paid at maturity
a. Here, the additional act is to be performed after the date of maturity when the
instrument is no longer negotiable in the full commercial sense, (see Sec.
2[e].) Until the date of maturity, the promise is to pay money only. A
statement that an instrument is secured by a collateral, in fact, adds to the
marketability of the instrument in commerce as a substitute for money or as a
credit instrument.
2. confession of judgment if the instrument is not paid at maturity
a. A confession of judgment enables the holder to obtain a judgment without the
delay usually incident to a law suit, as it eliminates the necessity of a trial. It
is a written statement signed by the defendant, setting forth the basis of
liability and authorizing the entry of judgment thereon.
b. Warrants of attorney to confess judgment (i.e. a written document that gives
an attorney the power to confess judgment against the defendant on a debt),
however, are not authorized nor contemplated by our law. Unless expressly
authorized by statute, they are void "as against public policy because they
enlarge the field for fraud, because under these instruments, the promissor
bargains away his right to a day in court, and because the effect of the
instrument is to strike down the right of appeal accorded by statue." (PNB vs.
Manila Oil Refining & By-Products Co., 43 Phil. 444 [1922].)
c. Note that a confession of judgment should be distinguished from:
i) cognovit actionem – a written confession of action by the defendant
acknowledging his indebtedness to the plaintiff after the action has been
filed. It is valid in our jurisdiction.
ii) relicta verificationem – a confession of judgment by withdrawal of
defense. It is also valid in our jurisdiction. (It is also commonly exercised
by filing an affidavit of desistance.)
3. waiver of benefit granted by law
a. As such, a waiver of notice of dishonor (Sec. 109 and 110), of protest (Sec.
111), of presentment for payment or demand (Sec. 70), or exemption from
attachment or execution does not destroy the negotiability of an instrument.
4. election of holder to require some other act
a. If the option is with the promissor, the instrument is non- negotiable because
the holder cannot compel him to make payment in money.

(7) Under Sec. 6, the validity or negotiability of an instrument is not affected by the fact that:
(a) it is not dated;
1. An undated instrument shall be deemed dated as of the time it is issued. (Sec.
17[c]). An instrument has no inception until delivery. (Sec. 191, par. 6)
2. The date of issue or acceptance may be inserted in accordance with Sec. 13: (1)
where the instrument is expressed to be payable at a fixed period after date; or (2)
where the acceptance of an instrument payable at a fixed period after sight is
undated.
a. The insertion of a. wrong date in an undated instrument by one having
knowledge of the true date of issue or acceptance will avoid the instrument as
to him or any one claiming under him but not as to a subsequent holder in
due course who may enforce the same notwithstanding the improper date. In
the hands of a holder in due course, the date inserted, even if wrong, is to be
regarded as the true date.
3. If the interest is stipulated without specifying the date from which interest is to
run, it shall run from the date of the instrument, and if the instrument is undated,
from the date of issue thereof (Sec. 17[b]).
4. For the purpose of determining whether a party acted within a reasonable time in
making presentment for payment:
a. a promissory note requires a date of issue to be indicated therein (Sec. 70, 71)
b. a bill of exchange requires a date of the last negotiation thereof (Ibid., also
Sec. 144)
5. Instruments may be ante-dated or post-dated. (Sec. 12)
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 a. Ante-dating or post-dating an instrument does not render it invalid or non-
negotiable by that fact alone, provided this is not done for an illegal or
fraudulent purpose. It may be negotiated before or after the date given as long
as it is not negotiated after its maturity.
(b) does not specify the value given, or that any value has been given therefor;
1. Consideration is presumed though it may not be stated. (Sec. 24; see Art. 1354,
NCC)
2. This is not to say that consideration in connection with a negotiable instrument is
not essential. The law refers to the wording of the instrument not the lack of
supporting consideration which if proved will relieve the maker of the obligation
to pay when presented for payment by the payee himself.
(c) does not specify the place where it is drawn or the place where it is payable;
1. In such a case, Sec. 73 applies. Thus, payment may be made:
a. where the person to make payment resides, if his address is given in the
instrument;
b. in his usual place of business is, if there is no address given for the person;
c. wherever he may be found or at his last known place of business or residence,
in any other case.
(d) bears a seal;
1. There is no difference in legal effect between sealed and unsealed private writings
in our jurisdiction.
2. It is advisable, however, to have a bill or note appear in a public instrument so
that it will be included among the preferred credits with respect to other property
of the debtor. (see Art. 2244[4], NCC)
(e) designates a particular kind of current money in which payment is to be made.
1. The instrument is still negotiable although it is payable in foreign money which is
not current in the Philippines if the obligation may be discharged in pesos of
equivalent amount.

(8) When is an instrument payable on demand?

(a) If the instrument is not yet due, as regards all parties, immediate or subsequent, the
instrument is payable on demand if:
1. it is expressed to be payable on demand, or at sight, or on presentation; or
2. there is no time for payment expressed.
(b) If the instrument is overdue and it is thus issued, accepted or indorsed, as regards
immediate parties – in particular, the person issuing, accepting or indorsing the
instrument – it is payable on demand.
1. The reason here is because between immediate parties there is no difference
between a holder in due course and a person not a holder in due course. (See Sec.
52)
2. An overdue instrument is necessarily a demand paper. A holder has an immediate
right of payment for the money promised or ordered to be paid.

(9) When is an instrument payable to order?

(a) It is payable to order where it is drawn payable to the order of a specified person or to
him or his order. (Sec. 8) As such, it may be made payable to the order of:
1. a payee who is not the maker, drawer or drawee;
2. the drawer or maker;
3. the drawee;
4. two or more payees jointly;
a. in case of indorsement, both payees must indorse the instrument, unless (1)
they are partners or (2) the one indorsing has authority to indorse for the
others. (Sec. 41)
5. one or more of several payees;
a. indorsement by any of the payees is sufficient in this case.
6. the holder of an office for the time being.
(b) Note that if the instrument is payable to order, the payee must be named or otherwise
indicated therein with reasonable certainty.
1. If there is no payee, there is nobody who could give the order or authority to
collect. In other words, there would be nobody who could indorse the instrument
(see Secs. 30, 9[c].) and, therefore, there is no point considering it negotiable.
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 2. The trade name of the payee may be used.

(10) When is an instrument payable to bearer?

(a) It is payable to bearer:
1. when it is expressed to be so payable;
2. when it is payable to a person named therein or bearer;
3. when it is payable to the order of a fictitious or non-existing person, and such fact
was known to the person making it so payable;
a. The word "fictitious" is not limited to a person having no real existence, as
otherwise the word "non-existing" would have been sufficient without more.
A fictitious person is meant to be one who, though named or specified as
payee in an instrument, has no right to it because the maker or drawer so
intended and it matters not, therefore, whether the name of the payee used by
him be that one living or dead, or one who never existed.
b. If the payee is not the intended recipient of the proteeds of the instrument, the
payee is considered a "fictitious" payee and the check is a bearer instrument.
In a fictitious-payee situation, the drawee-bank, in the absence of bad faith or
gross negligence, is absolved from liability and the drawer of the check bears
the loss. This rule protects the depositary bank and assigns the loss to the
drawer of the check who was in a better position to prevent the loss in the
first place. (Philippine National Bank v. Rodriguez, 566 SCRA 513 [2008].)
4. when the name of the payee does not purport to be the name of any person;
a. In making an instrument payable to an impersonal payee, the maker or
drawer intends the same to be payable to bearer. Like the fictitious payee
bearer instrument, the indorsement of this bearer instrument by the payee is
impossible.
5. when the only or last indorsement is an indorsement in blank.
a. An indorsement in blank is one where the indorser merely signs his name
without indicating the name of the indorsee.
b. Essentially, what this does is to convert an order instrument into a bearer one.

C) Abnormalities/Deficiencies in the Instrument

(1) What are the steps in the issuance of a negotiable instrument?

(a) There are two (2) steps involved in the issuance of every negotiable instrument,
namely:
1. the mechanical act of writing the instrument completely and in accordance with
the requirements of Sec. 1; and
2. the delivery of the instrument by the maker or drawer to the payee or holder with
the intention of giving effect to it.
(b) Such instrument, complete and delivered, is negotiable and may be enforced
accordingly

(2) A subsequent holder in due course (see Sec. 52) is not affected by the following
deficiencies:
(a) Incomplete but delivered instrument (Sec. 14)
(b) Complete but undelivered instrument (Sec. 16)
(c) Complete and delivered instrument issued without consideration or a consideration
consisting of a promise which was not fulfilled (Sec. 28)
1. In all three cases above, the deficiency creates a mere personal defense which
does not affect the title of the holder in due course.

(3) A subsequent holder in due course is affected by the following abnormality/deficiency:

(a) Incomplete and undelivered instrument (Sec. 15)
(b) The maker or drawer's signature is forged (Sec. 23)
1. This time, the above circumstances create a real defense which is available
against all parties to the instrument, including a holder in due course. 2

(4) To what kind of incomplete instruments does Sec. 14 apply?

2For brevity, a holder in due course shall be referred to hereinafter as HIDC.

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 (a) When considering Sec. 14, it is important to bear in mind the distinction between two
classes of instruments:
1. Those in which obvious blanks are left at the time they are made or indorsed, of
such a character as manifestly to indicate that the instruments are incomplete until
such blanks shall be filled up;
a. One who signs or indorses such an instrument is liable to bona fide holders
thereof on the doctrine of implied authority. (National Exchange Bank v.
Lester, 194 N.Y. 464)
2. Those which are apparently complete, containing blanks only because the written
matter does not so fully occupy the entire paper as to preclude the insertion of
additional words or figures, or both.
a. The liability for the amount of the instrument which has been increased by
filling up unoccupied spaces therein is placed upon the doctrine of
negligence. (Ibid.)
(b) Sec. 14 applies only to instruments which are (1) wanting in any material particular,
or (2) where only a signature on a blank paper is delivered. If the instrument as it
originally appears is already complete on its face, Sec. 14 does not apply, and any
person or holder who introduces other matters into the instrument thereby increasing
liability therefor shall be himself liable for it except if he acted with authority.

(5) What is a material particular?

(a) It may be defined as any particular proper to be inserted in a negotiable instrument to
make it complete. (Linthlicum v. Bagby, 102 Atl 997)
1. The word "material," as used in Section 14, is not synonymous with "necessary"
so as to restrict the right of filling a blank to something essential to a complete
negotiable instrument. (Johnson v. Hoover, 117 N.W. 277.)
2. The authority to complete is not an authority to alter. (Sec. 124)
(b) The power to fill in the blanks extends to every incomplete feature of the instrument.
(c) A signature on a blank paper delivered in order that it may be converted into a
negotiable instrument operates as a prima facie authority to fill it up as such for any
amount.

(6) Prior to completion, may an incomplete instrument be enforced against any party thereto?
(a) The instrument as such may only be enforced if:
1. filled up strictly in accordance with the authority given; and
2. within a reasonable time.
(b) If an instrument is incomplete when delivered, the holder has prima facie authority to
fill up the blanks thereon. If a blank paper is delivered by the person making the
signature, the holder has prima facie authority to fill it up for any amount if the
person making the signature intended to convert it into a negotiable instrument. In
either case, the presumption is that the blank was filled up in accordance with the
authority given and within a reasonable time. (Sec. 193)
(c) The person who signed his name has the burden to rebut the presumption of agency
by contrary proof of want of authority, or proving that the authority granted was
exceeded. Such "reasonable time" for filling up the instrument is to be reckoned from
the time of the issuance of the instrument because the interest involved is that of the
issuer, and not from the time of each successive negotiation.
(d) The defense that the instrument had not been filled up in accordance with the
authority given and within a reasonable time is not available as against a HIDC. It
raises merely a personal defense.

(7) If an instrument is incomplete and undelivered, may it be enforced against any party if
completed and negotiated?
(a) The answer should be qualified in accordance with Sec. 15. The fact that the
instrument is undelivered is crucial – if the deficiency is filled up without authority, it
operates as a real defense available even against a HIDC. (Sec. 58)
(b) Note that there is still a presumption of delivery as far as a HIDC is concerned. The
maker or drawer should rebut such presumption in order to escape liability.
(c) The invalidity of the above instrument is only with reference to the parties whose
signatures appear on the instrument before and not after delivery.

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 1. Therefore, an indorser to the instrument who negotiated the same after the
instrument has been apparently completed and delivered is liable therefor. The
defense abovementioned is not available to them as against any subsequent party.

(8) If an instrument is complete but undelivered, may it be enforced against any party
thereto?
(a) Every contract on a negotiable instrument is incomplete and revocable until delivery
of the instrument for the purpose of giving effect thereto. (Sec. 16)
(b) If the instrument, complete in its terms, is in the hands of a subsequent party:
1. A valid and intentional delivery is presumed until the contrary is proved.
2. If he is a HIDC, a valid delivery thereof by all parties prior to him so as to make
them liable is conclusively presumed.
a. But in a case, for example, where there was no actual delivery to anyone for
any purpose by the maker of a promissory note who was a victim of theft or
robbery committed in his house and there was nothing to show any fault or
negligence on his part, it would be unreasonable to hold him liable even to an
innocent holder for value. A note in the hands of the maker, albeit complete,
is, in law, but a blank piece of paper. Its wrongful seizure cannot create
against his will a valid contract where none existed before.
3. If they are immediate parties and/or the subsequent party is not a HIDC, the
delivery in order to be effectual must be made either by or under the authority of
the party making, drawing, accepting or indorsing, as the case may be; and in
such case the delivery may be shown to have been conditional, or for a special
purpose only, and not for the purpose of transferring the property in the
instrument.
a. The phrase immediate parties, as used in this section, has a broader meaning
than its literal signification. It "refers to those who are 'immediate' in the
sense of having or being held to know of the conditions or limitations placed
upon the delivery of the instrument." In other words, it contemplates privity
not proximity, (see Sec. 58)
b. Remote parties are parties who are not in direct contractual relation to each
other, (see Sec. 58) But if they are chargeable, for example, with knowledge
or notice of any infirmities in the instrument or defect in the title of the
person negotiating the same (see Sec. 56), they will be considered as
immediate parties for purposes of Sec. 16.
(c) The place where the instrument was written, signed, or dated does not necessarily fix
or determine the place where it was executed. What is of decisive importance is the
delivery thereof. The delivery of the instrument is the final act essential to its
consummation as an obligation. (People v. Yaibut, 76 SCRA 624 [1977]; Lim v. Court
of Appeals, 251 SCRA 408 [1995])
(d) A brief summary of the rules above follows:
1. If the instrument is incomplete and undelivered, it is invalid even against a HIDC
for want of delivery. There is however a prima facie presumption of delivery if it
is in the hands of a HIDC, which may be rebutted by proof of non-delivery.
2. If an instrument is incomplete but delivered (i.e. in the possession of another),
there is a prima facie authority to complete it by the holder thereof. If it is
wrongfully completed, it is nonetheless enforceable if delivered to a HIDC.
3. If an instrument is complete but undelivered, it is not enforceable at all. If found
in the possession of another, there is a prima facie presumption of delivery. If he
is a HIDC, the presumption becomes conclusive.

D) Ambiguities in the Instrument

(1) Where the language of the instrument is ambiguous or there are omissions therein, the
following rules of construction shall apply (Sec. 17):
(a) where there is a difference between the sum in figures and in words, the sum in words
is the sum payable; except if the sum in words is itself ambiguous or uncertain, in
which case the sum in figures is controlling.
(b) payment of interest is presumed to start from the date of the instrument; if undated,
from the date of its issue.
(c) if undated, it is presumed to be dated as of the time it is issued.
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 (d) where there is conflict between the written and printed provisions, the written ones
prevail.
(e) if there is doubt as to whether the instrument is a bill or note, it may be treated as
either by the holder.
(f) if it is unclear in what capacity a person signed the instrument, he is deemed an
indorser.
1. One who signed in the place of the maker's name is not an indorser. The provision
applies only to cases of doubt arising out of the location of the signature.
(Germania Bank v. Mariner, 109 N.W. 574.) Parol evidence is not admissible to
show that he intended to be an indorser, not a maker. (Lumbermens Nat. Bank v.
Campbell, 121 P. 427.)
(g) if an instrument contains the words "I promise to pay" and it is signed by two or more
persons, they are deemed to be jointly and severally liable thereon (i.e. solidarity
between debtors is presumed).
1. This means that anyone of the signers may be held liable for the whole amount of
the instrument. (Philippine National Bank vs. Conception Mining Co., 5 SCRA
705 [1962])
2. But "we promise to pay" signed by two makers imparts only joint liability. In a
joint obligation, there are as many debts as there are debtors, each debt being
considered distinct and separate from each other, (see Arts. 1207, 1208, Civil
Code.)

(2) It must be emphasized that the rules in this section are applicable only when the
instrument in question is ambiguous or uncertain or when there are omissions therein. If
the terms are clear, the instrument must be enforced as it reads.

E) Signatures in the Instrument

(1) General rule: a person whose signature does not appear on the instrument is not liable.
(a) Exceptions:
1. one who signs in a trade or assumed name (Sec. 18, par. 2)
a. It is necessary, however, that the party who signed intended to be bound by
his signature.
2. a duly authorized agent (Sec. 19)
a. The requisites to show proper authority, in order to excuse the agent from
liability on the instrument, are the following:
i) the agent must be duly authorized;
ii) he must add words to his signature indicating that he signs as an agent;
and
iii) he must disclose his principal. (Sec. 20)
b. It has been held competent for the agent to sign simply the principal's name
and to show his authority to do so by other evidence.
c. The right of an agent to indorse commercial papers is a very responsible
power and will not be lightly inferred. A salesman with authority to collect
money belonging to his principal does not have the implied authority to
indorse checks received in payment. (Insular Drug Co. vs. Phil. National
Bank, 58 Phil. 634 [1933])
i) The general authority bestowed upon an agent to transact the business of
his principal does not imply an authority to accept or indorse bills so as to
charge the principal. The power to make or indorse negotiable paper must
be expressly granted; it is subject to strict interpretation and must be
perfomed in strict conformity with the terms thereof.
d. Any person who accepts for cash checks made payable to a corporation,
which can act only by agents, without making any inquiry as to the authority
of the individual to exchange checks belonging to said payee-corporation,
does so at his peril, and must abide by the consequences if the supposed agent
who indorses the same is without authority. (Jai-Alai Corp. of the Phil. vs.
Bank of P.I., 66 SCRA 29 [1975])
e. If the agent signs a note or bill in his own name and discloses no principal, he
is personally bound, and evidence to the contrary may not be admitted to
relieve him from personal liability, (see Granada v. Phil. National Bank, 18
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 SCRA 1 [1966]; see The Phil. Bank of Commerce v. Aruego, 102 SCRA 530
[1981])
i) The rule is not absolute. As between immediate parties, extrinsic
evidence may be admitted to show the real character of the transaction.
f. A signature by "procuration" (i.e. the act by which a principal gives power to
another to act in his place as he could himself) operates as a notice that the
agent has but a limited authority to sign, and the principal is bound only in
case the agent in so signing acted within the actual limits of his authority.
(Sec. 21)
i) Signing by procuration is normally expressed thus: "per procuration",
"per pro.", "per proc", "P.P." or "PP".
3. in case of forgery (Sec. 23)
a. By forgery is meant "the counterfeit-making or fraudulent alteration of a
writing, and may consist in the signing of another's name or the alteration of
an instrument in the name, amount, description of the person and the like,
with intent thereby to defraud."
i) The intent to defraud distinguishes forgery from innocent alteration and
spoliation.
b. Note that in cases of forgery, it is only the forged signature that is wholly
inoperative, and not the instrument.
c. Cutoff Rule – Parties prior to the forged signature are cut-off from the parties
after the forgery in the sense that prior parties cannot be held liable and can
raise the defense of forgery. The holder can only enforce the instrument
against parties who became such after the forgery. Although rights may exist
between and among the parties subsequent to the forged indorsement, not one
of them can acquire rights against parties prior to the forgery. Such forged
signature cuts off the rights of all subsequent parties as against parties prior to
the forgery. (Gempesaw v. CA, G.R. No. 92244, February 9, 1993) The
exceptions to the cutoff rule are:
i) Persons who warrant the genuineness of the signature in question, such as
indorsers, acceptors, and persons who negotiate by mere delivery; and
ii) Those who by their acts, silence or negligence are estopped from setting
up the defense of forgery.
d. Some of the rules regarding forgery are summarized as follows:
i) If the forged signature is that of the maker in a promissory note or the
drawer in a bill of exchange, they shall not be liable on the instrument;
the same rule is true whether it is an order or bearer instrument.
 Subsequent indorsers to an order instrument are liable; if a special
indorsement is found in a bearer instrument, it will operate to create a
specific liability on his part as regards the person obtaining title
through his indorsement.
 The drawee in a bill of exchange is liable if he paid; this is because
he admitted the genuineness of the drawer's signature in so paying
(and, in the case of drawee banks, they are presumed to know the
signature of the drawer-depositor and cannot later on refute liability
by asserting its forgery).
ii) If the forged signature is that of the payee, he shall not be liable on the
instrument except if it is a bearer instrument (because his indorsement is
not necessary in order to negotiate the instrument, as mere delivery is
sufficient);
 Subsequent indorsers to an order instrument are liable; if a special
indorsement is found in a bearer instrument, it will operate to create a
specific liability on his part as regards the person obtaining title
through his indorsement.
 The maker will not be liable in an order instrument, due to the cut-off
rule; the same is true for the drawer or drawee.
 The drawee is liable in a bearer instrument because there is no privity
of contract between the payee and the drawee, as all that is needed is
for the drawee to honor the instrument on the strength of the
genuineness of the drawer's signature.

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 iii) If the forged signature is that of the indorser, he shall not be liable on the
instrument except if it is a bearer instrument (again, because his
indorsement is not necessary in order to negotiate the instrument);
 Subsequent indorsers to an order instrument are liable; if a special
indorsement is found in a bearer instrument, it will operate to create a
specific liability on his part as regards the person obtaining title
through his indorsement.
 The cutoff rule applies to all indorsers, hence, all indorsers prior to
the forged indorsement shall not be liable.
 The maker will not be liable in an order instrument, due to the cut-off
rule; the same is true for the drawer or drawee.
 The drawee is liable in a bearer instrument because there is no privity
of contract between the indorser and the drawee, as all that is needed
is for the drawee to honor the instrument on the strength of the
genuineness of the drawer's signature.
iv) The rule on striking out indorsements (Sec. 48) has a significant effect on
the liability for forgery (note that the indorsement to be struck out must
not be necessary to the holder's title; examples include indorsements in a
bearer instrument, or indorsements in an order instrument that has
reverted back to a prior indorser/party). When a forged indorsement has
been struck out, it serves to excuse the indorsers subsequent to the forged
indorsement, in a way operating as an exception to the cutoff rule.
 However, in order that parties prior to the forged indorsement may be
held liable on the instrument, the holder must inform them of his
intention to strike out the forged indorsement; if they do not give
their consent to it, such refusal shall operate as an assertion of their
defense against liability through the cutoff rule; hence, the holder
will not be able to collect on those prior parties. This obviously only
applies to an order instrument; if it were a bearer instrument, the
forged signature could be stricken out without any interruption on the
title of the holder and, thus, he could collect from all prior parties.
v) In all cases, the forger is always liable. The party from whom the holder
obtained payment would be legally subrogated to the claim against the
forger. Of course, the holder can immediately go after the forger without
going after any party to the instrument first.
4. where the acceptor makes his acceptance of a bill on a separate paper (Sec. 134)
5. where a person makes a written promise to accept a bill before it is drawn (Sec.
135)

(b) The indorsement or assignment of the instrument by a corporation or an infant

(minor) passes the property therein, notwithstanding that from the want of capacity
the corporation or infant may incur no liability thereon. (Sec. 22)
1. As a general rule, contracts entered into by a minor are voidable. (Arts. 1327,
1329, 1390, NCC)
a. A minor is not bound by his indorsement for lack of capacity. He is, however,
not incapacitated to transfer certain rights. Section 22 merely provides that
the indorsement of an infant is not void and that his incapacity is not a
defense in favor of prior parties, and does not take away the infant's right to
disaffirm his indorsement and recover the instrument even against an
innocent indorsee or subsequent holder for value.
i) Note that minority is a real defense available to the minor himself to
escape liability. But it cannot be used or set up by any other party as a
personal defense. (See Secs. 57 and 58)
ii) A minor, however, may be held bound by his signature in an instrument
where he is guilty of actual fraud committed by specifically stating that
he is of age when, in fact, he is not. (see Mercado v. Espiritu, 37 Phil. 215
[1917])
b. The rule in Section 22 applies to other incapacitated persons as well. Other
persons, besides minors, who have no capacity to give consent are insane or
demented persons and deaf-mutes who do not know how to write. (Art. 1327,
NCC)
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 2. As regards corporations, Section 22 applies to cases where the corporation has
committed ultra vires acts or acts beyond its powers. It has been held that a
corporation is not liable on notes in a suit thereon by an indorsee, where the
corporation is without capacity to make the contract in fulfillment of which they
were executed. (Pearce vs. Madison & I.R. Co., 21 How [US] 441) One who
deals with the officers or agents of a corporation is bound to know their powers
and the extent of their authority. (Alexander v. Cauldwell, 83 N.Y. 480)

(2) An accomodation party, or 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, is liable on the instrument to a holder for value notwithstanding such
holder, at the time of the taking of the instrument, knew him to be only an
accommodation party. (Sec.29)
(a) Note that as regards an accommodation party, the 4 th condition under Sec. 52 of the
NIL, i.e. lack of notice of infirmity in the instrument or defect in the title of the
person negotiating it, has no application. (Stelco Marketing Corp. v. CA, G.R. No.
96160, June 17, 1992)
1. As such, it would be absurd for the accommodation party to interpose the defense
of lack of consideration against a holder of the instrument, even one who is not a
holder in due course, in order to escape liability.
(b) The accomodated party shall reimburse the accommodation party when the latter
makes payment to the holder of the notes. They have the right to be reimbursed since
the relation between them is that of a principal and surety, the accommodation party
being the surety. (Ang v. Associated Bank, G.R. No. 146511, September 5, 2007)

(3) Indorsement is an act made by a party to the negotiable instrument, signified by his
signing on the instrument itself or on a separate paper called the allonge, which operates
to transfer to the indorsee the title to the instrument.
(a) An indorsement is actually a manifestation of consent by the indorser to enter into a
contract with the indorsee to the effect of transfering his rights over the instrument,
with the accompanying warranties and liabilities attaching to the indorser as required
by law.
(b) The types of indorsement are as follows:
1. Conditional – the right of the indorsee is made to depend on the happening of a
contingent event, although the party required to pay may disregard the conditions.
(Sec. 39)
2. Restrictive – an indorsement is restrictive, when it either:
a. prohibits further negotiation of the instrument;
b. constitutes the indorsee as the agent of the indorser (e.g. indorsement for
deposit); or
c. vests the title in the indorsee in trust for or to the use of some other persons.
3. Absolute – one imposing no other conditions upon the indorser's liability to pay,
other than failure of prior parties to pay the instrument and receipt of due notice.
4. Blank – specifies no indorsee.
5. Special – specifies the person to whom or to whose order the instrument is to be
payable. (Sec. 34)
6. Qualified – constitutes the indorser a mere assignor of the title to the instrument.
(Sec. 38) This is usually done by adding words such as "sans recourse" or
"without recourse."
7. Joint – indorsement payable to the order of two or more persons. (Sec. 41) As a
general rule, all of the payees must indorse in order that the instrument may be
validly negotiated, except: a) where the payee or indorsee has authority to indorse
for the others; or b) where the payees or indorsees are partners.
8. Irregular – one made by a person not otherwise a party to the instrument. (Sec.
64)

F) Holder

(1) A holder is a payee or indorsee of a bill or note who is in possession of it or the bearer
thereof entitled to recceive the sum for which it calls. (Sec. 191)

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 (2) Under Sec. 52, a holder in due course (herein referred to as HIDC), is a holder who has
taken the instrument under the following conditions (Mnemonic – COFI):
(a) That the instrument is complete and regular upon its face;
1. An instrument is incomplete when it is wanting in any material particular
required to be inserted in a negotiable instrument. (Sec. 14)
a. A material particular refers any item which may modify in any respect the
obligation of a party to the instrument. This is also relevant in case of
material alteration; technically speaking, a material alteration is one which
changes a material particular, and hence a change in the items required to be
stated under Sec. 1 of the NIL. (See also Sec. 125)
(b) That he became the holder of it before it was overdue, and without notice that it had
been previously dishonored, if such was the fact;
1. A holder who takes an overdue instrument if put on inquiry although he is not
actually aware of any existing defense of a prior party.
2. Note that a negotiable instrument may still be negotiated even if it is overdue.
However, the effect would be to: a) make the instrument payable on demand; and
b) render the holder to be one not in due course except if he had no knowledge of
the fact that it was overdue.
(c) That he had taken in good faith and for value;
1. Although good faith on the part of the holder is presumed, such presumption is
destroyed if the payee or the indorsee acquired possession of the instrument under
circumstances that should have put him to inquiry as to the title of the holder who
negotiated the instrument. (De Ocampo v. Gatchalian, et.al., G.R. No. L-15126,
November 30, 1961)
(d) That at the time of its negotiation to him, he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it.
1. Notice to holder covers only situations where the holder had actual or chargeable
knowledge of the infirmity or defects, or knowledge of such facts that his action
in taking in instrument amounted to bad faith. (Sec. 56)
2. Defects in the title results in the acquisition or negotiation of the instrument:
a. Defects in the acquisition of the instrument may result from obtaining it or
any signature thereto by: a) fraud; b) force or duress; c) other unlawful
means; d) illegal consideration.
b. Defects in the negotiation arise when it is negotiated: a) in breach of faith; or
b) under such circumstances that amount to fraud (Sec. 55)

(3) Take note of the so called "shelter rule" under Sec. 58: a holder who derives his title
through a holder in due course, 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 of all parties
prior to the latter.
(a) Note that the "shelter rule" does not apply if the holder is a previous one who is not a
holder in due course who repurchased or reacquires the instrument either personally
or through his agent.

G) Discharge of a Negotiable Instrument

(1) Note that the nomenclature used in Sec. 119 is discharge, not extinguishment. The reason
for this is because the latter is used principally to refer to the extinction of liability on
obligations; however, the discharge of a negotiable instrument does not automatically
result into extinguishment of obligations contracted through it. What discharge of the
instrument simply does is to release all parties, whether primary or secondary, from
payment therefor, rendering the instrument without force and effect and thereby non-
negotiable.

(2) A negotiable instrument is discharged:

(a) by payment in due course by or on behalf of the principal debtor;
1. Payment by a secondarily-liable party to the instrument does not discharge it,
even if it is overdue; the reason is because the instrument may anyway be
negotiated thereafter by the paying party. The paying party is instead subrogated
to the rights of a creditor as against all prior parties. (Sec. 121)

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 2. Payment by a primarily-liable party discharges the instrument because as to him,
the liability borne of the instrument has now been extinguished. This assumes, of
course, that he would not negotiate it further.
3. Payment in due course should follow the three aspects of payment: identity,
integrity and indivisibility.
(b) by payment of an an accomodated party;
1. Note that it is payment by the accommodated party that discharges it, not the
accommodation party. If the accommodation party pays the instrument, he has a
right of recourse based on the instrument (and, incidentally, his act of
accommodation) against the accommodated party.
(c) by intentional cancellation by the holder;
1. This requires the concurrence of the following requisites:
a. The holder is the proper party to whom payment could have been made to
discharge the instrument (i.e. he is a principal creditor to the instrument);
b. The cancellation is of such nature that the instrument cannot be negotiated
anymore in its final form;
c. The cancellation was made with animus revocandi (i.e. with intent to cancel
or destroy); and
d. The cancellation was made known to the party principally liable on the
instrument.
2. If the cancellation was made by a party who was not a principal creditor to the
instrument, it shall not be discharged, and the principal creditor may ask that a
replacement negotiable instrument be constituted by the maker or drawer in his
favor.
(d) by any act which will discharge a simple contract for the payment of money (i.e.
mutuum);
1. Note that a negotiable instrument is a physical manifestation of the obligations
incurred throughout its negotiations; as such, the extinguishment of the principal
contract supported by the instrument will discharge the instrument.
2. Any of the modes of extinguishment available in the laws on obligations and
contracts are applicable here.
(e) when the principal debtor becomes the holder of the instrument at or after maturity in
his own right;
1. If the principal debtor obtains the instrument through some legal means but not as
a holder thereof, or not in his own right as a creditor to the instrument, then the
instrument is not discharged.
2. Note that this mode (which is, technically, the concept of merger as it is defined
in the law on obligations) is available only when the principal debtor becomes the
holder at or after maturity. Obtaining the instrument prior to the maturity date
does not discharge it because the instrument can still be validly negotiated at that
point.
(f) renouncement by the holder in favor of the principal debtor if made unconditionally
and absolutely.
1. Such renouncement in favor of the principal debtor must be in writing, made at or
after maturity, and made unconditionally and absolutely. (Sec. 122)
a. As part of the nature of unconditional renouncement, the instrument has to be
surrendered to the principal debtor.
2. If the renouncement is in favor of a secondary debtor to the instrument, the
instrument is not discharged and the secondary debtor is subrogated to the rights
of the holder-creditor to the instrument.

Sources: Bedan Red Book 2016; Commercial Law

Soriano, Fidelito R.; Notes in Business Law (2016)
Sundiang, Jose R. and Aquino, Timoteo B.; Reviewer on Commercial Law (2014)

- END OF BUSINESS LAW REVIEW NOTES ON: NEGOTIABLE INSTRUMENTS LAW -

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