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NOTES IN NEGOTIABLE INSTRUMENTS LAW

I. PRELIMINARY CONSIDERATIONS
Classes of Negotiable Instruments:
Negotiable Instrument - a written contract for the payment 1. Promissory Note (PN) - unconditional promise in writing
of money which complies with the requirements of Sec. 1 of by one person to another signed by the maker engaging
the NIL, which by its form and on its face, is intended as a to pay on demand or at a fixed or determinable future
substitute for money and passes from hand to hand as money, time, a sum certain in money to order or to bearer.
so as to give the holder in due course (HDC) the right to hold 2. Bill of Exchange (BE) -an unconditional order in writing
the instrument free from defenses available to prior parties. addressed by one person to another, signed by the person
(Reviewer on Commercial Law, Sundiang and Aquino) giving it, requiring the person to whom it is addressed to
pay on demand or at a fixed or determinable future time
Functions of Negotiable Instrument: a sum certain in money to order or to bearer.
1. Substitute for money
2. Medium of exchange Bills in Set: one composed of several parts, each part
3. Tool used in commercial transaction. numbered and containing a reference to the other parts, the
whole of the parts constituting but one bill.
Two Distinctive Features of NI: • Rights of holders where parts are negotiated
1. Negotiability - it is that attribute or property whereby a separately:
bill or note or check may pass from hand to hand similar 1. If both are HDC, the holder whose title first
to money, so as to give the holder in due course the right accrues is considered the true owner of the
to hold the instrument and to collect the sum payable bill.
for himself free from defenses. 2. But the person who accepts or pays in due
¾ Requisites of Negotiability: course shall not be prejudiced.
a. It must be in writing and signed by the maker or • Obligations of holder who indorses 2 or more parts
drawer; of the Bill in Set:
b. Must contain an unconditional promise or order to 1. The person shall be liable on every such part.
pay a sum certain in money; 2. Every indorser subsequent to him is liable on
c. Must be payable on demand, or at a fixed or the part he has himself indorsed, as if such
determinable future time; parts were separate bills.
d. Must be payable to order or to bearer; and
e. Where the instrument is addressed to a drawee, he Distinctions between a Negotiable Instrument and a
must be named or otherwise indicated therein with Negotiable Document of Title
reasonable certainty.
2. Accumulation of Secondary Contracts - secondary NEGOTIABLE INSTRUMENT NEGOTIABLE DOCUMENT
contracts are picked up and carried along with OF TITLE
Negotiable Instruments as they are negotiated from one The subject is money The subject is goods
person to another; or in the course of negotiation of
negotiable instruments, a series of juridical ties between
Has all the requisites of Does not have these
the parties thereto arise either by law or by privity. The
Sec 1 of NIL requisites
indorsers become secondarily liable to the holder.
A holder of NI may run Intermediate parties are
Distinctions: Negotiable and Non-Negotiable Instruments after the secondary parties not secondarily liable if the
for payment if dishonored document is dishonored
by the party primarily
NEGOTIABLE NON-NEGOTIABLE
Must contain all requisites Does not contain all liable
of sec.1 requisites of sec.1 A holder, if HDC, may A holder can never acquire
Transferable by Transferable by acquire rights over the rights to the document
negotiation and assignment only instrument better than his better than his predecessors
assignment predecessors
HDC can have rights A transferee acquires no
better than his transferor better right than his PROMISSORY BILL OF EXCHANGE
transferor NOTE
Prior parties warrant Prior parties do not Unconditional promise Unconditional order
payment (secondary warrant payment but Involves 2 parties Involves 3 parties
liability) merely the legality of Maker is primarily liable Drawer is only secondarily
title liable
Governed by NIL NIL only by analogy Only one presentment: for Two presentments: for
Transferee is a holder in Transferee is assignee payment acceptance and for
due course only payment
Defenses generally not All defenses available
available against last transferee
Instances when BILL may be treated as a NOTE: e. Where the instrument is addressed to a drawee, he must
1. Drawer and drawee are the same person. be named or otherwise indicated therein with reasonable
1. Drawee is a fictitious person. certainty.
2. Drawee has no capacity to contract.
3. When instrument is so ambiguous, the holder may treat 1. Must be in writing, signed by the maker or drawer;
it either as a BILL or a NOTE. - Otherwise it cannot be a substitute for money.

Other Forms of Negotiable Instruments 2. Must contain an unconditional promise or order to pay a
1. Certificate of deposit issued by banks, payable to the sum certain in money;
depositor or his order, or to bearer
2. Trade acceptance Certainty of sum payable.
3. Bonds, which are in the nature of promissory notes The sum payable is a sum certain although it is to be paid:
4. Drafts, which are bills of exchange drawn by one bank a. With interest; or
upon another b. By stated installments; or
ƒ All of these must comply with Sec. 1, NIL c. By stated installments, with a provision that, upon
Note: Letters of credit are not negotiable. default in payment of any installment or of interest,
the whole shall become due; or
Legal Tender d. With exchange, whether at a fixed rate or at the
That kind of money that the law compels a creditor to accept current rate; or
in payment of his debt when tendered by the debtor in the e. With costs of collection or an attorney's fee, in case
right amount. payment shall not be made at maturity. (sec. 2)
Acceleration clause - renders whole debt due and
Note: A negotiable instrument although intended to be a demandable upon failure of obligor to comply with certain
substitute for money, is generally not a legal tender. conditions.

Incidents in “Life” of Negotiable Instrument When promise is unconditional


1. Issue An unqualified order or promise to pay is unconditional
2. Delivery though coupled with:
3. Negotiation a. An indication of a particular fund out of which
4. Presentment for acceptance, in certain kinds of bills of reimbursement is to be made or a particular
exchange account to be debited with the amount; or
5. Acceptance b. A statement of the transaction which gives rise to
6. Dishonor by non-acceptance the instrument.
7. Presentment for payment ¾ An order or promise to pay out of a particular fund is not
8. Dishonor by non-payment unconditional.
9. Notice of dishonor FUND FOR PARTICULAR FUND FOR
10. Discharge REIMBURSEMENT PAYMENT
Drawee pays the payee There is only one act: the
Issue - the first delivery of the instrument, complete in form, from his own funds; drawee pays directly from
to a person who takes it as a holder. afterwards, the drawee the particular fund
pays himself from the indicated. Payment is
Delivery - transfer of possession, actual or constructive, from particular fund indicated. subject to the condition
one person to another that the fund is sufficient.
Holder – refers to the: Particular fund indicated Particular fund indicated is
a. The payee or indorsee of a bill or note who is in is NOT the direct source the direct source of
possession of it, or of payment but only the payment.
b. The bearer thereof (sec.191) source of reimbursement.
Bearer - the person in possession of a bill or note which is Indication in the Indication in the
payable to bearer. instrument does not instrument makes the
Person - includes a body of persons, whether incorporated or affect the unconditional promise or order
not. nature of the promise or conditional.
order.
II. FORM AND INTERPRETATION OF INSTRUMENTS
3. Payable on demand or at a fixed determinable future
time;
Requisites of Negotiability (Sec. 1, NIL
a. It must be in writing and signed by the maker or drawer;
Certainty of time of payment
b. Must contain an unconditional promise or order to pay a
An instrument is payable at a determinable future time which
sum certain in money;
is expressed to be payable:
c. Must be payable on demand, or at a fixed or
a. At a fixed period after date or sight; or
determinable future time;
b. On or before a fixed or determinable future time
d. Must be payable to order or to bearer; and
specified therein; or
c. On or at a fixed period after the occurrence of a purpose of negotiable instrument as a tool in
specified event which is certain to happen, though commercial dealings will be greatly hampered.
the time of happening be uncertain. (Reviewer on Commercial Law, Sundiang and
Aquino)
¾ An instrument payable upon a contingency is not ¾ A bill may be addressed to more than one drawee
negotiable, and the happening of the event does not jointly, whether they are partners or not; but not to
cure the defect. (sec. 4) two or more drawers in the alternative or in
¾ A promise to pay “when able,” “as soon as I can”, etc., succession. (Sec. 128)
without specification of an absolute date is not
negotiable. However, there is a difference of opinion as Test of Negotiability: presence of requirements in Section 1
to whether it is a conditional promise or an absolute of NIL.
promise to pay at un unreasonable time:
a. Under the first view, negotiability is destroyed Factors that Determine Negotiability:
both by the condition and by want of a fixed 1. The whole instrument itself
time for payment; 2. Only what appears on the face of the instrument
b. Under the second view, by the general principle 3. Provisions of the NIL, Sec.1
that a promise to pay within a reasonable time
is not so certain as to render BAR QUESTION (Q): Which of the following
an instrument negotiable. stipulations or features of a promissory notes (PN)
Aftersight Draft - payable only after the expiration of the affect or do not affect its negotiability, assuming
stipulated period from acceptance (legal sight). that the PN is otherwise negotiable? Indicate your
answer by writing the paragraph number of the
When payable on demand: stipulation or feature of the PN as shown below and
a. When it is so expressed to be payable on demand, or your corresponding answer, either ‘Affected” or
at sight, or on presentation; or “Not affected.” Explain.
b. In which no time for payment is expressed. (a) The date of the PN is “February 30, 2002.”
Note: Where an instrument is issued, accepted, or indorsed (b) The PN bears interest payable on the last day
when overdue, it is, as regards the person so issuing, of each calendar quarter at a rate equal to 5%
accepting, or indorsing it, payable on demand. above the then prevailing 91-day Tbill rate as
published at the beginning of such calendar
4. Payable to order or to bearer quarter.
(c) The PN gives the maker the option to make
When payable to order payment either in money or in quantity of
The instrument is drawn payable: palay of equivalent value.
a. To the order of a specified person or (d) The PN gives the holder the option either to
b. To him or his order. require payment in money or to require the
¾ The payee must be named or otherwise indicated therein maker to serve as the bodyguard or escort of
with reasonable certainty. the holder for 0 days.
¾ It may be drawn payable to the order of:
a. A payee who is not maker, drawer, or drawee; or SUGGESTED ANSWER (SA):
b. The drawer or maker; or (a) NOT AFFECTED. The date is not one of the
c. The drawee; or requirements for negotiability.
d. Two or more payees jointly; or (b) NOT AFFECTED. The interest is to be computed
e. One or some of several payees; or at a particular time and is determinable. It
f. The holder of an office for the time being. does not make the sum uncertain or the
promise conditional.
When payable to bearer. (c) AFFECTED. Giving the maker an option renders
a. When it is expressed to be so payable; or the promise conditional.
b. When it is payable to a person named therein or (d) NOT AFFECTED. Giving the holder an option
bearer; or does not make the promise conditional.
c. When it is payable to the order of a fictitious or
non-existing person, and such fact was known to the Additional provisions not affecting negotiability.
person making it so payable; or General Rule: the instrument is non -negotiable if it contains
d. When the name of the payee does not purport to be a promise or order to do any act in addition to the payment
the name of any person; or of money.
e. When the only or last indorsement is an indorsement Exceptions:
in blank. (Sec. 9) a. authorizes the sale of collateral securities in case
the instrument be not paid at maturity; or
5. Identification of the drawee b. authorizes a confession of judgment if the
¾ Where the instrument is addressed to a drawee instrument be not paid at maturity; or
(meaning in a bill of exchange), he must be named c. waives the benefit of any law intended for the
or otherwise indicated with reasonable certainty. advantage or protection of the obligor; or
The holder must know to whom he should present it d. gives the holder an election to require something to
for acceptance and/or payment; otherwise, the be done in lieu of payment of money.
g. Where an instrument containing the word "I promise to
ƒ Confession of judgment – a written statement signed by pay" is signed by two or more persons, they are deemed
the defendant, setting forth the basis of liability and to be jointly and severally liable thereon. (sec. 17)
authorizing the entry of judgment thereon.
ƒ Kinds of confession of judgment Consideration
a. cognivit actiomen – literally means “he has ¾ Presumption of consideration. - every negotiable
confessed action”. It is a written confession of instrument is deemed prima facie to have been issued
action by the defendant acknowledging is for a valuable consideration; and every person whose
indebtedness to the plaintiff after the action has signature appears thereon to have become a party
been filed. It is given after the action is brought to thereto for value.
save expenses. ¾ Value - any consideration sufficient to support a simple
b. relicta verificationem – literally means “his contract. An antecedent or pre-existing debt constitutes
pleadings being abandoned.” It is confession of value; and is deemed such whether the instrument is
judgment by withdrawal of the defense. payable on demand or at a future time.
¾ Holder for value – one who has given a valuable
Note: However, warrants of attorney to confess judgment, consideration for the instrument issued or negotiated to
are not authorized nor contemplated by our law. They are him.
void as against public policy because they enlarge the field • What constitutes holder for value:
for fraud, because under these instruments, the promissory where value has at any time been given for the
bargains away his right to a day in court. The NIL does not instrument, the holder is deemed a holder for value
sanction nor validated any provision otherwise illegal. in respect to all parties who become such prior to
that time.
Omissions and Provisions that do not affect Negotiability • where the holder has a lien on the instrument
(Sec. 6) arising either from contract or by implication of law,
The validity and negotiable character of an instrument are he is deemed a holder for value to the extent of his
not affected by the fact that: lien.
a. it is not dated; or ¾ Effect of want of consideration: a matter of defense as
b. does not specify the value given, or that any value against any person not a holder in due course; and
had been given therefore; or partial failure of consideration is a defense pro tanto,
c. does not specify the place where it is drawn or the whether the failure is an ascertained and liquidated
place where it is payable; or amount or otherwise.
d. bears a seal; or Absence of consideration – total lack of any valid
e. designates a particular kind of current money in consideration for the contract is only a personal defense.
which payment is to be made.
¾ if it is not dated, the instrument will be considered to be Failure of consideration – failure or refusal or one party
dated as of the time it was issued. to do, perform or comply with the consideration agreed
¾ consideration for the instrument is presumed. (art. 154 upon is also only a personal defense.
NCC & sec. 25 NIL)
¾ sec. 73 specifies where presentment for payment should
be made when the place of payment is not specified III. TRANSFER AND NEGOTIATION

Rules of construction: Types of transfers:


a. Where the sum payable is expressed in words and also in 1. Assignment - transfer of title to the instrument, with the
figures and there is a discrepancy between the two, the assignee generally taking only such title as his assignor
sum denoted by the words is the sum payable; but if the has, subject to all defenses available against his
words are ambiguous or uncertain, reference may be had assignor;
to the figures to fix the amount; 2. Negotiation - transfer of a negotiable instrument from
b. Where the instrument provides for the payment of one person to another made in such a manner as to
interest, without specifying the date from which interest constitute the transferee the holder thereof
is to run, the interest runs from the date of the 3. By Operation of Law – such as by succession, by
instrument, and if the instrument is undated, from the insolvency.
issue thereof;
c. Where the instrument is not dated, it will be considered Distinctions between Negotiation and Assignment
to be dated as of the time it was issued;
d. Where there is a conflict between the written and
NEGOTIATION ASSIGNMENT
printed provisions of the instrument, the written
1. Refers only to 1. Refers generally to an
provisions prevail; negotiable ordinary contract;
e. Where the instrument is so ambiguous that there is
instruments;
doubt whether it is a bill or note, the holder may treat it
2. The transferee is a 2. The transferee is an
as either at his election;
holder; assignee;
f. Where a signature is so placed upon the instrument that
3. A holder in due course 3. An assignee is subject
it is not clear in what capacity the person making the
is subject only to real to both real and
same intended to sign, he is to be deemed an indorser;
defenses; personal defenses;
4. A holder in due course 4. Generally, an assignee
may acquire a better merely steps into the c. To transfer his rights as such indorsee,
right than that of a shoes of the assignor; where the form of the indorsement
prior party authorizes him to do so.
5. A general indorser 5. An assignor does not But all subsequent indorsees acquire only the
warrants the solvency warrant the solvency of title of the first indorsee under the restrictive
of prior parties; prior parties unless indorsement. (sec. 37)
expressly stipulated or
the insolvency is known ƒ Such indorsement destroys the negotiability of
to him; the instrument and bars further negotiation to
6. An indorser is not 6. An assignor is liable a holder in due course.
liable unless there be even without notice of d. Qualified - constitutes the indorser a mere assignor
presentment and dishonor; of the title to the instrument. (sec. 38)
notice of dishonor; • made by adding to the indorser's signature words
7. Negotiation is 7. Governed by Arts. 1624 like "sans recourse,” “without recourse",
governed y the NIL. to 1635 (on assignment "indorser not holder", "at the indorser's own
of credits) of the Civil risk", etc.
Code. • The purpose of this kind of indorsement is to
transfer title without guaranteeing payment by
Methods of negotiation the primary party.
1. Order Instrument – Indorsement and Delivery. • It does not mean, however, that the qualified
2. Bearer Instrument – Delivery only. indorser incurs no liability at all. The effect is
merely to limit his liability. He is secondarily
Indorsement - legal transaction effected by the writing of liable for breach of is warranties as an indorser
one's own name at the: under Sec. 65. Thus, he is liable if the
a. back of the instrument or instrument is dishonored by NON-ACCEPTANCE
b. upon a paper (allonge) attached thereto with or or NON-PAYMENT due to:
without additional words specifying the person to a. forgery;
whom or to whose order the instrument is to be b. lack of good title to the instrument
payable whereby one not only transfers legal title to indorsed;
the paper transferred but likewise enters into an c. lack of capacity to contract on the part of
implied guaranty that the instrument will be duly prior parties; or
paid. d. the fact that the instrument was valueless
¾ General Rule: indorsement must be of the entire or not valid at the time of the indorsement
instrument. which fact was known to him.
Exception: where instrument has been paid in part, it e. Conditional - right of the indorsee is made to
may be indorsed as to the residue. depend on the happening of a contingent event
¾ Kinds of indorsement: • Party required to pay may disregard the
a. Special - specifies the person to whom or to whose conditions.
order, the instrument is to be payable (sec. 34) • This kind of indorsement has no effect on the
b. Blank - specifies no indorsee: further negotiation of the instrument. The
• Instrument is payable to bearer and may be party required to pay, if he chooses, may make
negotiated by delivery (sec. 34) payment, disregarding the condition without
• May be converted to special indorsement by incurring any liability because he is expressly
writing over the signature of indorser in blank authorized to do so under Sec. 39. But the
any contract consistent with character of person who received payment will hold the
indorsement. proceeds subject to the right of the conditional
c. Restrictive - when the indorsement either: indorser.
i. Prohibits further negotiation of the
instrument; or f. Absolute - one by which indorser binds himself to
ii. Constitutes the indorsee the agent of the pay:
indorser; or i. upon no other condition than failure of
iii. Vests the title in the indorsee in trust for prior parties to do so; and
or to the use of some other persons. But ii. upon due notice to him of such failure.
mere absence of words implying power to g. Joint - indorsement of instrument payable to 2 or
negotiate does not make an indorsement more persons; all must indorse in order for the
restrictive. transaction to operate as a negotiation.
• A restrictive indorsement confers upon the • Exceptions to the rule requiring joint
indorsee the right: indorsement:
a. To receive payment of the instrument; a. Where the payees or indorsees are
partners; and
b. To bring any action thereon that the
indorser could bring; b. Where the payee or indorsee indorsing
has authority to indorse for the
others.
h. Irregular - a person who, not otherwise a party to 2. Where it was made or accepted for
an instrument, places thereon his signature in blank accommodation and has been paid by the
before delivery. party accommodated;
3. In other cases, where the instrument is
¾ Rules on Indorsements: discharged when acquired by a prior party.

• Effect of transfer without indorsement:


a. transfer vests in the transferee such title as the IV. HOLDERS
transferor had therein (assignment), and
b. the right to have the indorsement of the Classes of holders:
transferor. 1. simple holder (sec. 51)
à For the purpose of determining whether the 2. holder for value (sec. 26)
transferee is a holder in due course, the 3. holder in due course (sec.52, 57)
negotiation takes effect as of the time when
the indorsement is actually made.
à Applicable only to order instruments Holder in Due Course
ƒ holder who has taken the instrument under the following
• Indorsement of a bearer instrument: where an conditions:
instrument, payable to bearer, is indorsed specially,
it may nevertheless be further negotiated by a. That it is complete and regular upon its face;
delivery; but the person indorsing specially is liable b. That he became the holder of it before it was
as indorser to only such holders as make title overdue, and without notice that it has been
through his indorsement. previously dishonored, if such was the fact;
Note: The rule only applies to originally bearer c. That he took it in good faith and for value;
instruments. If it is originally a BEARER instrument, d. That at the time it was negotiated to him, he had
it will always be a BEARER instrument. As opposed no notice of any infirmity in the instrument or
to an original order instrument becoming payable to defect in the title of the person negotiating it.
bearer, if the same is indorsed specifically, it can NO
LONGER be negotiated further by mere delivery, it ¾ When title defective - The title of a person who
has to be indorsed. negotiates an instrument is defective when he obtained
the instrument or any signature thereto, by:
• Striking out indorsements: the holder may at any a. fraud,
time strike out any indorsement, which is not b. duress, or force and fear,
necessary to his title. The indorser whose c. other unlawful means,
indorsement is struck out and all indorsers d. illegal consideration,
subsequent to him, are thereby relieved from e. negotiation in breach of faith,
liability on the instrument. f. circumstances amounting to fraud.
à If the instrument is payable to bearer on its face,
then whether or not there are indorsements on the ¾ What constitutes notice of defect . - The person to
back of the instrument would be immaterial to the whom it is negotiated must have:
title of the bearer, who is presumptively the owner a. actual knowledge of the infirmity or defect, or
and holder by his mere possession of such b. knowledge of such facts that his action in taking the
instrument. None of the indorsement would be instrument amounted to bad faith. (sec. 56)
necessary to it’s title since mere delivery would
have been sufficient to transfer title from one ¾ Notice before full amount is paid - where the
holder to another. transferee receives notice of any infirmity in the
à Where the instrument is payable to order on its instrument or defect in the title of the person
face, the situation is different. First, the negotiating the same before he has paid the full amount
indorsement of a special indorsee is necessary for agreed to be paid, he will be deemed a holder in due
the further negotiation of the instrument. Second, course only to the extent of the amount paid by him.
the last indorsement controls the method of further
negotiation. ¾ When person not deemed a holder in due course -
where an instrument payable on demand is negotiated on
• When prior party (reacquirer) may negotiate: where an an unreasonable length of time after its issue, the holder
instrument is negotiated back to a prior party, such party is not deemed a holder in due course.
may reissue and further negotiate the same. But he is • Reasonable time, what constitutes. - regard is to be
not entitled to enforce payment thereof against any had to the
intervening party to whom he was personally liable. a. nature of the instrument,
à In the following cases, a prior party cannot further b. the usage of trade or business with respect to
negotiate the instrument: such instruments, and the
1. Where it is payable to the order of a third c. facts of the particular case.
person, and has been paid by the drawer; • Effect: in the hands of any holder other than a
holder in due course, a negotiable instrument is
subject to the same defenses as if it were non- IN A BILL OF 1. Drawer
negotiable. EXCHANGE 2. Acceptor
3. Indorsers
¾ General Rule: every holder is deemed prima facie to be 4. Persons negotiating by delivery
a holder in due course
Exception: when it is shown that the title of any person 1. Parties Primarily Liable
who has negotiated the instrument was defective, the a. Maker (Sec. 60)
burden is on the holder to prove that he or some person • engages to pay according to the tenor of the
under whom he claims acquired the title as holder in due instrument; and
course (shifting of burden of proof). • admits the existence of the payee and his then
Limitation: the last-mentioned rule does not apply in capacity to indorse at the time of the making of
favor of a party who became bound on the instrument the note.
prior to the acquisition of such defective title. (sec. 59) • A person placing his name on the face of a note
is prima facie a maker and liable as such; and
¾ Rights of a holder in due course: he is presumed to have acted with care and to
a. he may sue on the instrument in his own name; have signed the instrument with full knowledge
b. he may receive payment and if payment is in due of its contents.
course, the instrument is discharged. b. Acceptor or Drawee (Sec. 62)
c. holds the instrument free from any defect of title of • engages to pay according to the tenor of his
prior parties, acceptance;
d. holds the instrument free from defenses available to • admits:
prior parties among themselves, and 1. the existence of the drawer,
e. may enforce payment of the instrument for the full 2. the genuineness of his signature and
amount thereof against all parties liable thereon. 3. his capacity and authority to draw the
instrument; and
¾ Payment in due course is payment made:
4. the existence of the payee and his then
a. at or after the maturity of the instrument
capacity to indorse.
b. to the holder thereof
Note: the drawee is not liable until he accepts
c. in good faith and without notice that his title is the instrument
defective.
• Where a check is certified by a bank, it is
equivalent to an acceptance. Since certification is
¾ Shelter Rule:
equivalent to acceptance, a bank which has
a. derives his title through a holder in due course, and
certified a check whether at the request of the
b. who is not himself a party to any fraud or illegality
holder or of a drawer, has the same liabilities and
affecting the instrument, has all the rights of such
makes the same warranties as an acceptor. It
former holder in respect of all parties prior to the
cannot, after certification, question the
latter.
genuineness of the drawer’s signature. If it
¾ Rights of a Holder NOT in Due Course discovers that such signature is forged subsequent
to certification but prior to payment, it cannot
1. He may sue on the instrument in his own name;
refuse to pay on the check. If its discovery comes
2. He may receive payment and if the payment is in
after it has paid the check, it cannot recover back
due course, the instrument is discharged;
what it paid on the ground of mistaken payment
3. He is entitled to the instrument but holds it subject
to the same defenses as if it were non-negotiable; unless the holder is guilty of fraud or negligence.
and
4. He has all the rights of the holder in due course
from whom he derived his title in respect of all • If a drawee-bank accepts or pays a check despite
parties prior to such holder, provided he is not a stop payment order from the drawer, through
himself a party to any fraud or illegality affecting oversight or otherwise, it cannot refuse to pay the
the instrument. holder or recover what has been paid; neither
may it debit the drawer’s account unless the
acceptance nor payment was made prior to the
V. LIABILITIES OF PARTIES receipt of the order.

Persons primarily liable on instrument: the person who, by 2. Parties Secondarily Liable
the terms of the instrument, is absolutely required to pay the a. Drawer (Sec. 61)
same. All other parties are "secondarily" liable. • admits the existence of the payee and his
capacity to indorse;
Classification of parties according to liability • engages that the instrument will be accepted
or paid by the party primarily liable; and
IN A PROMISSORY 1. Maker • engages that if the instrument is dishonored
NOTE 2. Indorser and proper proceedings are brought, he will
3. Persons negotiating by delivery pay to the party entitled to be paid.
b. General Indorser (Sec. 66)
• Warrants:
1. genuineness of the instrument; à instrument is genuine and in all respects what
2. his good title to it; it purports to be;
3. capacity to contract of prior parties; and à he has good title to it;
4. instrument is valid and subsisting. à all prior parties had capacity to contract;
• engages that the instrument will be accepted à he has no knowledge of any fact which would
or paid by the party primarily liable; and impair the validity of the instrument or render
• engages that if the instrument is dishonored it valueless.
and proper proceedings are taken, he will pay b. Persons Negotiating by Delivery
to the party entitled to be paid. à warranties same as those of qualified indorsers;
c. Irregular Indorser – a person, not otherwise a party and
to an instrument, places his signature thereon in à warranties extend to immediate transferee
blank before delivery. only.
Rules:
• If instrument payable to the order of a 3
rd LIABILITY WARRANTY
person, he is liable to the payee and 1. To pay a sum certain. 1. No obligation to pay.
subsequent parties. 2. Requires Notice of 2. Notice of Dishonor is not a
• If instrument payable to order of maker or Dishonor. requirement.
drawer, he is liable to all parties subsequent to 3. Action can be brought 3. Action may be brought
the maker or drawer. only on maturity of anytime.
• If he signs for accommodation of the payee, he instrument.
is liable to all parties subsequent to the payee.
BY MERE DELIVERY OR BY GENERAL INDORSER
Distinctions: QUALIFIED INDORSEMENT
1. No secondary liability; 1. With secondary liability;
PRIMARY PARTY SECONDARY PARTY
1. Unconditionally bound; 1. Conditionally bound;
2.Absolutely required to 2. Undertakes to pay only 2. Warrants that he has no 2. Warrants that the
pay upon the maturity of after certain conditions knowledge of any fact, instrument is, at the time
the instrument. have been fulfilled: which would impair the of his indorsement, valid
a. due presentment for validity of the instrument and subsisting.
payment or acceptance to or render it valueless.
primary party;
b. dishonor by such
party; and 4. Other parties who may be liable:
c. the taking of
proceedings required by General Rule: One whose signature does not appear on the
law after dishonor. instrument shall not be liable thereon.
Exceptions:
INDORSER DRAWER 1. The principal who signs through an agent is liable;
1. A party to either a note 1. A party only to a bill; 2. The forger is liable;
or a bill; 2. The drawer makes such 3. One who indorses in a separate instrument (allonge) is
2. Does not make any admission; liable;
admission regarding the 3. Makes no warranties, but 4. One who signs his assumed or trade name is liable; and
existence of the payee and he engages to pay after 5. A person negotiating by delivery (as in the case of a
his capacity to indorse; and certain conditions are bearer instrument) is liable to his immediate indorsee.
3. Has warranties. complied with.
Requisites for an Agent to escape liability :
1. must be duly authorized;
GENERAL INDORSER IRREGULAR INDORSER
2. add words to his signature indicating that he signs as an
1. Makes either a blank or 1. Always makes a blank agent, that is, for or on behalf of a principal, or in a
special indorsement; indorsement; representative capacity; and
2. Indorses the instrument 2. Indorses before its 3. disclose his principal.
after its delivery to the delivery;
payee; and 3. Liable to the payee and ¾ A signature by “procuration” operates as notice that the
3. Liable only to parties subsequent parties unless agent has but a limited authority to sign, and the
subsequent to him he signs for the principal is bound only in case the agent in so signing
accommodation of the acted within the actual limits of his authority. (sec. 21)
payee in which case he is ¾ Indorsement or assignment of the NI by a corporation or
liable only to all parties by an infant passes the property therein,
subsequent to the payee. notwithstanding that from want of capacity, the
corporation or infant may incur no liability thereon. (sec.
3. Parties with Limited Liability (sec. 65; Metropol 22)
Financing v. Sambok, 120 SCRA 864)
a. Qualified Indorser - warrants that: Accomodation Party
One who has signed the instrument as maker, drawer, a. Absence or failure of consideration, partial or total;
acceptor, or indorser, without receiving value therefor, and b. Want of delivery of complete instrument;
for the purpose of lending his name to some other person c. Insertion of wrong date in an instrument, where it is
¾ Liability: such a person is liable on the instrument to a payable at a fixed period after date and it is issued
holder for value, notwithstanding such holder, at the undated or where it is payable at a fixed period
time of taking the instrument, knew him to be only an after sight and the acceptance is undated;
accommodation party. d. Filling up of blank contrary to authority given or not
¾ Effects: within reasonable time, where the instrument is
1. accommodation party is generally regarded as a delivered;
surety for the party accommodated; e. Fraud in inducement;
2. When accommodation party makes payment to f. Acquisition of instrument by force, duress, or fear;
holder of the note, he has the right to sue the g. Acquisition of the instrument by unlawful means;
accommodated party for reimbursement. h. Acquisition of the instrument for an illegal
consideration;
¾ Rights of accommodation parties as against each other: i. Negotiation in breach of faith;
the other may demand contribution from his co- j. Negotiation under circumstances that amount to
accommodation party without first directing his action fraud;
against the principal debtor provided: k. Mistake;
1. he made the payment by virtue of judicial demand; l. Intoxication (according to better authority);
or m. Ultra vires acts of corporations where the
2. the principal debtor is insolvent. corporation has the power to issue negotiable paper
but the issuance was not authorized for the
Note: A corporation cannot act as an accommodation particular purpose for which it was issued;
party. The issuance or indorsement of negotiable n. Want of authority of agent where he has
instrument by a corporation without consideration and o. apparent authority;
for the accommodation of another is ultra vires. p. Insanity where there is no notice of insanity on the
(Crisologo v. CA, 117 SCRA 594). part of the one contracting with the insane person;
and
Order of liability of indorsers: q. Illegality of contract where the form or
1. among themselves – indorsers are liable prima facie in consideration is illegal.
the order in which they indorse; but evidence is
admissible to show that, as between or among FRAUD IN FACTUM FRAUD IN INDUCEMENT
themselves, they have agreed otherwise (sec. 68) 1. It exists in those cases in 1. It is that which related
2. to the holder – indorsers are liable in any order which a person, without to the quality, quantity,
negligence, has signed an value or character of the
VI. DEFENSES instrument which was in consideration of the
fact a negotiable instrument. In this case,
instrument, but was the signer is led by
Kinds:
deceived as to the deception to execute what
1. Real/Absolute Defenses - those that attach to the
character of the instrument he knows is a negotiable
instrument itself and are available against all holders,
and without knowledge of instrument. It implies that
whether in due course or not.
its, as where a not was the signer knew what he
Examples:
signed by one under the was signing but that he was
a. Alteration;
belief that he was signing induced by fraud to sign.
b. Non-delivery of incomplete instrument;
as a witness to a deed.
c. Duress amounting to forgery;
2. This kind of fraud is a 2. Such type of fraud is only
d. Fraud in factum or fraud in esse contractus;
real defense because there a personal defense because
e. Minority;
is no contract. It implies it does not prevent a
f. Marriage in the case of a wife;
that the person did not contract.
g. Insanity where the insane person has a guardian
know what he was signing.
appointed by the court;
But where the signer by the
h. Ultra vires acts of a corporation, where the
exercise of reasonable
corporation is absolutely prohibited by its charter or
diligence could have
statute from issuing any commercial paper under
discovered the nature of
any circumstances;
the instrument, the fraud
i. Want of authority of agent;
cannot be considered a real
j. Execution of instrument between public enemies;
defense, as where a person,
k. Illegality of contract where it is the contract or
who can read, signed a note
instrument itself which is expressly made illegal by
statute; and but failed to read it.
l. Forgery.
2. Personal/Equitable Defenses – those which are available ¾ Effects of Defenses:
only against a person not a holder in due course or a 1. Complete and undelivered instrument
subsequent holder who stands in privity with him.
Examples:
• as between immediate parties and as regards a omissions that amount to ratification, express
remote party other than a holder in due course, the or implied.
delivery must be authorized in order to be effectual Note: Persons precluded from setting up the
• where the instrument is in the hands of a holder in defense of forgery may still recover damages under
due course, a valid delivery thereof by all parties the NCC provisions on quasi-delicts.
prior to him so as to make them liable to him is • Rules on Forgery:
conclusively presumed A. Promissory Notes
• where the instrument is no longer in the possession 1. Maker’s signature forged
of a party whose signature appears thereon, a valid Order Instrument
and intentional delivery by him is presumed until a. Maker is not liable because he never
the contrary is proved became a party to the instrument.
b. Indorsers subsequent to forgery are liable
2. Incomplete but delivered instrument because of their warranties.
• where the instrument is wanting in any material c. Party who made the forgery is liable.
particular, the person in possession thereof has a Bearer Instrument
prima facie authority to complete it by filling up the a. Maker is not liable.
blanks therein. b. Indorsers may be made liable to those
• it must be filled up strictly in accordance with the persons who obtain title through their
authority given and within a reasonable time indorsements.
• if any such instrument, after completion, is c. Party who made the forgery is liable.
negotiated to a holder in due course, it is valid and 2. Payee’s signature forged
effectual for all purposes in his hands, and he may Order Instrument
enforce it as if it had been filled up strictly in a. Maker and payee not liable
accordance with the authority given and within a b. Indorsers subsequent to the forgery is
reasonable time. liable.
3. Incomplete and undelivered instrument c. Party who made the forgery is liable
• it will not, if completed and negotiated without Bearer Instrument
authority, be a valid contract in the hands of any a. Maker is liable. Indorsement is not
holder, as against any person whose signature was necessary to title and the maker engages
placed thereon before delivery. to pay holder.
• However, subsequent indorsers are liable. b. Party who made the forgery is liable
4. Forgery 3. Indorser’s signature forged
• counterfeit making or fraudulent alteration of any Order Instrument
writing, which may consist of: a. Maker, payee, and indorser who signature
1. signing of another’s name with intent to was forged is not liable.
defraud; or b. Indorsers subsequent to forgery are liable
2. alteration of an instrument in the name, because of their warranties.
amount, name of payee, etc. with intent to c. Party who made the forgery is liable.
defraud. Bearer Instrument
a. Maker is liable. Indorsement is not
• Effect: signature is wholly inoperative, and no right
necessary to title and the maker engages
to retain the instrument, or to give a discharge
to pay holder.
therefore, or to enforce payment thereof against
b. Indorser whose signature was forged is not
any party thereto, can be acquired through or under
liable
such signature
c. Party who made the forgery is liable.
• Exception: unless the party against whom it is
B. Bill of Exchange
sought to enforce such right is precluded from
1. Drawer’s signature forged
setting up the forgery or want of authority.
In an Order Instrument
• Cut-Off Rule
a. Drawer is not liable.
General Rule: Parties prior to the forged signature
b. Drawee is liable if it paid (nor recourse to
are cut-off from the parties after the forgery in the
drawer) because he admitted the
sense that prior parties cannot be held liable and
genuineness of the drawer’s signature.
can raise the defense of forgery. The holder can only
Drawee cannot recover from the collecting
enforce the instrument against parties who became
bank because there is no privity between
such after the forgery.
the collecting bank and the drawer. There
Exception: When the prior parties are precluded
is no warranty as to the signature of the
from setting up the defense of forgery.
drawer. (Associated Bank v. CA)
Persons precluded from setting up the defense of
c. Indorsers subsequent to forgery are liable.
forgery are:
d. Party who made the forgery is liable
1. Those who by their acts, silence, or negligence,
In a Bearer Instrument
are estopped from setting up the defense of
a. Drawer is not liable
forgery;
b. Drawee is liable if it paid. Drawee cannot
2. Those who warrant or admit the genuineness of
recover from the collecting bank because
the signature in question. These include acts or
it is bound to known the drawer’s signature setting such alteration as against an innocent
since the latter is its depositor. drawee bank who has paid the check.
c. Party who made the forgery is liable. • In cases of altered checks and checks with forged
2. Payee’s signature forged indorsements, the drawee bank must notify and
Order Instrument return them to the collecting bank before 4:00 p.m.
a. Drawer, drawee and payee not liable. Cut- of the next day of clearing, but the drawee bank
off rule applies. may still return them even after such time provided
b. Indorsers subsequent to forgery are liable. he does so within 24 hours from its discovery of the
c. Party who made the forgery is liable alteration or forged instruments so that recovery of
Bearer Instrument the amount may be had. BUT, in no event beyond
a. Drawer is liable. His indorsement is not the period fixed or provided by law for filing of a
necessary to pass title. legal action by the returning bank against the bank
b. Drawee is liable. No privity between sending the same.
drawer and payee because indorsement of Note: Alteration is only a partial real defense
payee is not necessary (Ang Tek Lian case, because a holder in due course can still enforce it
87 SCRA 383) according to its original tenor.
c. Payee is not liable
d. Collecting bank is liable because of
warranty. VII. ENFORCEMENT OF LIABILITY
e. Party who made the forgery is liable.
3. Indorser’s signature forged Presentment for payment – the presentation of an
Order Instrument instrument to the person primarily liable for the purpose of
a. Drawer, payee and indorser whose demanding and receiving payment.
signature was forged are not liable.
b. Drawee is liable if it paid. General Rules:
c. Indorsers subsequent to forgery are liable. • presentment for payment to charge persons
d. Party who made the forgery is liable. primarily liable is not necessary
Bearer Instrument • presentment for payment to charge persons
a. Drawer is liable. Indorsement is not secondarily liable is necessary
necessary to pass title. Exceptions:
b. Drawee is liable. a. drawer - where he has no right to expect or require
c. Indorser whose signature was forged is that the drawee or acceptor will pay the instrument
liable because indorsement is not (sec. 79)
necessary to pass title. b. indorser - where the instrument was made or
d. Party who made the forgery is liable. accepted for his accommodation and he has no
reason to expect that the instrument will be paid if
5. Alteration presented.
• Effect: the instrument is avoided c. when dispensed:
• Exceptions: i. where, after the exercise of reasonable
1. against a party who has himself made, diligence, presentment as required cannot
authorized, or assented to the alteration be made;
2. subsequent indorsers ii. where the drawee is a fictitious person;
3. holder in due course not a party to the iii. by waiver of presentment, express or
alteration - he may enforce payment according implied. (sec. 82)
to its original tenor d. when the instrument has been dishonored by non-
• Changes constituting material alteration: acceptance (sec. 151)
1. date;
2. sum payable, either for principal or interest; Sufficiency of presentment.
3. time or place of payment; It must be:
4. number or relations of the parties; 1. made by the holder or any person authorized to
5. medium or currency in which payment is to be receive payment on his behalf;
made; 2. at a reasonable hour on a business day;
6. that which adds a place of payment where no 3. at a proper place;
place of payment is specified; and 4. to the person primarily liable or if he is absent or
7. any other change or addition which alters the inaccessible, to any person found at the place
effect of the instrument in any respect. where the presentment is made.
Note: a material alteration is one that alters the How made:
effect of the instrument; one which changes the 1. personal demand for payment at the proper place; and
items required to be stated under Sec. 1, NIL. 2. readiness to exhibit the instrument if required, and to
• Spoliation – alteration made by a stranger. receive payment and to surrender the instrument if the
• The general rule denies the drawee bank’s right to debtor is willing to pay.
charge against the drawer’s account the amount of • Purpose of exhibition:
an altered check. However, the latter’s negligence, To enable the debtor to:
before or after the alteration, may estop him from
a. determine the genuineness of the instrument and Presentment for acceptance – the production or exhibition
the right of the holder to receive payment; and of a bill of exchange to the drawee for his acceptance or
b. to enable him to reclaim possession upon payment. payment
• When exhibition excused:
a. when debtor does not demand to see the instrument General Rule: presentment for acceptance is not necessary to
but refuses payment on some other grounds, and render any party to the bill liable.
b. when the instrument is lost or destroyed.
Exception: presentment for acceptance must be made:
When made: a. Where the bill is payable after sight, or where
• where the instrument is payable at a fixed or presentment for acceptance is necessary in order to
determinable future time, presentment must be made on fix the maturity of the instrument; or
the day it falls due
• where it is payable on demand: b. Where the bill expressly stipulates that it shall be
a. promissory note: presentment must be made within presented for acceptance; or
a reasonable time after its issue
b. bill of exchange: presentment for payment will be c. Where the bill is drawn payable elsewhere, then at
sufficient if made within a reasonable time after the the residence or place of business of the drawee.
last negotiation thereof (sec. 143)
• the check must be presented for payment within a Note: in all the above cases, the holder must either present
reasonable time after its issue or the drawer will be the bill for acceptance or negotiate it within a reasonable
discharged from liability thereon to the extent of the time; otherwise, the drawer and all indorsers are discharged.
loss caused by the delay.
How made:
Time of maturity: 1. made by or on behalf of the holder;
• every negotiable instrument is payable at the time fixed 2. at a reasonable hour;
therein without grace 3. on a business day;
• when the day of maturity falls upon a Sunday or a 4. before the bill is overdue and within reasonable
holiday, the instruments are to be presented for payment time;
on the next succeeding business day 5. to the drawee or some person authorized to accept
• when the day of maturity falls upon a Saturday: or refuse acceptance on his behalf.
ƒ Instrument is payable at a fixed or determinable
future time (time instrument) - presented for Days presentment may be made. If date of presentment is:
payment is on the next succeeding business day a. Sunday or a holiday – must be made on the next
ƒ instruments is payable on demand - at the option of succeeding business day
the holder, be presented for payment: b. Saturday – before 12:00 noon on Saturday provided
a. before 12:00 noon on Saturday when that it is not a holiday.
that entire day is not a holiday or
b. the next succeeding business day. When delay for presentment excused:
How computed: a. bill is drawn payable elsewhere than at the place of
ƒ excluding the day from which the time is to begin to business or the residence of the drawee.
run, and by including the date of payment b. holder has no time, with the exercise of reasonable
ƒ applies to instruments which are payable at a fixed diligence, to present the bill for acceptance before
period after date, after sight, or after that presenting it for payment on the day that it falls
happening of a specified event. due.
Effect: does not discharge the drawers and indorsers.
Proper place for presentment:
a. Where a place of payment is specified in the instrument Where presentment is excused:
and it is there presented; a. Where the drawee is dead, or has absconded, or is a
b. Where no place of payment is specified but the address fictitious person or a person not having capacity to
of the person to make payment is given in the instrument contract by bill.
and it is there presented; b. Where presentment can not be made after the
c. Where no place of payment is specified and no address is exercise of reasonable diligence
given and the instrument is presented at the usual place c. Where, although presentment has been irregular,
of business or residence of the person to make payment; acceptance has been refused on some other ground.
d. In any other case if presented to the person to make Note: bill may be treated as dishonored by non-
payment wherever he can be found, or if presented at acceptance.
his last known place of business or residence.
Duty of holder where bill not accepted . - where a bill is
When delay in presentment excused – delay is caused by duly presented for acceptance and is not accepted within the
circumstances beyond the control of the holder and not prescribed time (24 hours – sec. 136), the person presenting it
imputable to his default, misconduct, or negligence. When must treat the bill as dishonored by non-acceptance or he
the cause of delay ceases to operate, presentment must be loses the right of recourse against the drawer and indorsers.
made with reasonable diligence.
Acceptance: the signification by the drawee of his assent to • a bill may be accepted before it has been signed by the
the order of the drawer. It is the act by which the drawee drawer, or while otherwise incomplete, or when it is
manifests his consent to comply with the request contained in overdue, or after it has been dishonored by a previous
the bill of exchange directed to him. refusal to accept, or by non payment
• when a bill payable after sight is dishonored by non-
How made : acceptance and the drawee subsequently accepts it, the
1) must be in writing holder, in the absence of any different agreement, is
2) signed by the drawee entitled to have the bill accepted as of the date of the
3) must not express that the drawee will perform his first presentment.
promise by any other means than the payment of • an unconditional promise in writing to accept a bill
money. before it is drawn is deemed an actual acceptance
• the holder of the bill presenting the same for acceptance in favor of every person who, upon the faith
may require that the acceptance be written on the bill, thereof, receives the bill for value.
and if such request is refused, may treat the bill as • where a check is certified by the bank on which it is
dishonored. drawn, the certification is equivalent to an
• where an acceptance is written on a paper other than acceptance.
the bill itself, it does not bind the acceptor except in Effect: the drawer and all indorsers are discharged
favor of a person to whom it is shown and who, on the from liability thereon.
faith thereof, receives the bill for value.
Acceptance for Honor - an undertaking by a stranger to a bill
Period for drawee to accept - allowed 24 hours after after protest for the benefit of any party liable thereon or for
presentment in which to decide whether or not he will accept the honor of the person for whose account the bill is drawn
the bill; if acceptance is given, it dates as of the day of which acceptance inures also to the benefit of all parties
presentation. subsequent to the person for whose honor it is accepted, and
conditioned to pay the bill when it becomes due if the
Constructive/Implied acceptance: where a drawee refuses original drawee does not pay it.
within 24 hours after delivery or within such other period as ƒ Requisites:
the holder may allow, to return the bill accepted or non- 1. the bill must have been protested for dishonor
accepted to the holder, he will be deemed to have accepted by non-acceptance or for better security;
the same. 2. the acceptor for honor must be a stranger and
Note: same effect if the drawee destroys the instrument. not a party already liable on the instrument;
3. bill must not be overdue;
Kinds: 4. acceptance for honor must be with the consent
1. General - assents without qualification to the order of of the holder of the instrument.
the drawer. ƒ Formalities:
2. Qualified - which in express terms varies the effect of 1. must be in writing;
the bill as drawn. 2. must indicate that it is an acceptance for
a. Conditional - makes payment by the acceptor honor;
dependent on the fulfillment of a condition 3. signed by the acceptor for honor;
therein stated. 4. must contain an express or implied promise to
b. Partial - an acceptance to pay part only of the pay money;
amount for which the bill is drawn. 5. the accepted bill for honor must be delivered
i. Local - an acceptance to pay only at a to the holder.
particular place.
ii. Qualified as to time Notice of Dishonor - notice given by the holder or his agent
iii. The acceptance of some one or more of to a party or parties secondarily liable that the instrument
the drawees but not of all. was dishonored by non-acceptance by the drawee of a bill, or
3. Constructive by non-payment by the acceptor of a bill or by non-payment
by a maker of a note.
Rights of parties as to qualified acceptance. - If such notice is given by a notary public, it is called
• Holder: he may refuse to take a qualified acceptance PROTEST.
and if he does not obtain an unqualified acceptance, he
may treat the bill as dishonored by non-acceptance. ¾ Effect of failure to give notice: parties secondarily liable
• Drawer or indorser: when he receives notice of a are discharged
qualified acceptance, he must, within a reasonable time,
express his dissent to the holder or he will be deemed to ¾ Requisites:
have assented thereto (implied assent). 1. Given by holder or his agent, or by any party who
may be compelled by the holder to pay;
Effect of taking a qualified acceptance: the drawer and 2. Given to secondary party or his agent;
indorsers are discharged from liability on the bill unless they 3. Given within the periods provided by law;
have expressly or impliedly authorized the holder to take a 4. Given at the proper place.
qualified acceptance, or subsequently assent thereto.
¾ When notice of dishonor dispensed with:
Other rules of acceptance:
1. when party to be notified knows about the dishonor, ¾ Notice may be waived either before the time of giving
actually or constructively; notice, or after the omission to give due notice. Waiver
2. if waived; and may be expressed or implied.
3. when after due diligence, it cannot be given.
¾ As to who are affected by an express waiver depends on
¾ How given: where the waiver is written:
1. by bringing verbally or 1. if it appears in the body or on the face of the
2. by writing to the knowledge of the person liable the instrument, it binds all parties; but
fact that a specified instrument, upon proper 2. if it is written above the signature of an
proceedings taken, has not been accepted or has indorser, it binds him only.
not been paid, and that the party notified is
expected to pay it. ¾ Notice of dishonor is not required to be given to the
drawer in any of the ff. cases:
¾ To whom given: 1. drawer and drawee are the same;
1. Non-acceptance (bill) – to persons secondarily 2. drawee is a fictitious person or not having the
liable, namely, the drawer and indorsers as the case capacity to contract;
may be. 3. drawer is the person to whom the instrument is
2. Non-payment (both bill and note) – indorsers. presented for payment;
Note: Notice must be given to persons secondarily 4. the drawer has no right to expect or require
liable. Otherwise, such parties are discharged. that the drawee or acceptor will honor the
Notice may be given to the party himself or to his instrument;
agent. 5. where the drawer has countermanded
payment.
¾ By whom given:
1. the holder ¾ Notice of dishonor is not required to be given to an
2. another on behalf of the holder indorser in the ff. cases:
3. any party to the instrument who may be compelled 1. drawee is a fictitious person or does not have
to pay it to the holder, and who would have a right the capacity to contract, and indorser was
of reimbursement from the party to whom notice is aware of that fact at the time he indorsed the
given. instrument;
2. indorser is the person to whom the instrument
¾ Notice of dishonor given by or on behalf of a holder is presented for payment;
inures to the benefit of: 3. instrument was made or accepted for his
a. all parties prior to the holder, who have a right accommodation.
of recourse against the party to whom the
notice is given; and ¾ If an instrument is not accepted by the drawee, there is
b. all holders subsequent to the holder giving no sense presenting it again for payment, and notice of
notice. dishonor must at once be given. If there was acceptance,
presentment for payment is still required and if payment
¾ Notice of dishonor given by or on behalf of a party is refused, there is a need for notice of dishonor.
entitled to give notice inures to the benefit of:
a. the holder; and
b. all parties subsequent to the party to whom ¾ An omission to give notice of dishonor by non-acceptance
notice is given. does not prejudice the rights of a holder in due course
subsequent to the omission.
¾ Where an instrument is dishonored in the hands of an
agent, he can do either of the ff.: Dishonor by Non-Payment
a. directly give notice to persons secondarily
liable thereon; or When instrument dishonored by non-payment:
b. give notice to his principal. In such case, he a. it is duly presented for payment and payment is
must give notice within the time allowed by refused or cannot be obtained; or
law as if he were a holder. b. presentment is excused and the instrument is
overdue and unpaid.
¾ A party giving notice is deemed to have given due notice
where: Effect of dishonor: an immediate right of recourse to all
a. the notice of dishonor is duly addressed, and parties secondarily liable thereon accrues to the holder.
b. deposited in the post-office, even when there
is miscarriage of mail. Dishonor by Non-Acceptance

¾ Where a party receives notice of dishonor, he has, after Instances:


the receipt of such notice, the same time for giving a. When it is duly presented for acceptance and such
notice to antecedent parties that the holder has after an acceptance is refused or can not be obtained; or
the dishonor. b. When presentment for acceptance is excused and
the bill is not accepted (sec. 149)
Effect: an immediate right of recourse against the 4. By any act which will discharge a simple contract for
drawer and indorsers accrues to the holder and no the payment of money;
presentment for payment is necessary. 5. When the principal debtor becomes the holder of
Note: where a bill is duly presented for acceptance and the instrument at or after maturity in his own right.
is not accepted within the prescribed time (24 hours),
the person presenting it must treat the bill as dishonored By any act which would discharge a simple contract:
by non-acceptance. 1. Payment or performance;
2. Loss of the thing due;
When Instrument Considered to be Dishonored 3. Condonation or remission;
a. If it is not accepted when presented for acceptance; 4. Confusion or Merger;
or 5. Compensation;
b. If it is not paid when presented for payment at 6. Novation;
maturity; or 7. Annulment or Rescission;
c. If presentment is excused or waived and the 8. Fulfillment of a resolutory condition;
instrument is past due and unpaid. 9. Prescription.

Protest - the formal instrument executed usually by a notary When persons secondarily liable on the instrument are
public certifying that the legal steps necessary to fix the discharged:
liability of the drawee and the indorsers have been taken. 1. By any act which discharges the instrument;
2. By the intentional cancellation of his signature by
¾ Effect of waiver: where protest is waived, presentment the holder;
and notice of dishonor are also deemed waived. But 3. By the discharge of a prior party;
where the notice of dishonor is waived, presentment is 4. By a valid tender of payment made by a prior party;
not waived. 5. By the release of the principal debtor, unless the
holder’s right of recourse against the party
¾ Applicability: protest is necessary only in case of foreign secondarily liable is expressly reserved;
bills of exchange which have been dishonored by non- 6. By any agreement binding upon the holder to extend
acceptance or non-payment, as the case may be. If it is the time of payment or to postpone the holder’s
not so protested, the drawer and indorsers are right to enforce the instrument.
discharged.
¾ In the following cases, the agreement to extend the time
of payment does not discharge a party secondarily liable:
¾ Foreign Bill of Exchange: 1. where the extension of time is consented to by such
1. Drawn in the Philippines but payable outside the party;
Philippines. 2. where the holder expressly reserves his right of
2. Payable in the Philippines but drawn outside the recourse against such party.
Philippines.
¾ Payment at or after maturity by a party secondarily
¾ Protest may be made by:: liable does not discharge the instrument. It only cancels
1. a notary public; or his own liability and that of the parties subsequent to
2. any respectable resident of the place where the bill him.
is dishonored, in the presence of 2 or more credible
witnesses. Effects of Renunciation:
1. A renunciation in favor of a secondary party may be
Protest for better security is one made by the holder of a bill made by the holder before, at or after maturity of
after it has been accepted but before it matures, against the the instrument. Effect: only such secondary party is
drawer and indorsers, where the acceptor has been adjudged discharged and all parties subsequent to him but the
a bankrupt or an insolvent, or has made an assignment for instrument itself remains in force.
the benefit of the creditors. 2. A renunciation in favor of the principal debtor may
be effected at or after maturity. Effect: the
instrument is discharged and all parties thereto
VIII. DISCHARGE provided the renunciation is made unconditionally
and absolutely.
Discharge of instrument - a release of all parties, whether
primary or secondary, from the obligations arising thereunder. Note: In either case, renunciation does not affect the
It renders the instrument without force and effect and, rights of a holder in due course without notice.
consequently, it can no longer be negotiated.
¾ Cancellation of an instrument includes tearing, erasure,
Instances: obliteration, or burning. It is not limited to writing of the
1. By payment in due course by or on behalf of the word ‘cancelled”, or “paid”, or drawing of criss-cross
principal debtor; lines across the instrument.
2. Payment by accommodated party;
3. Intentional cancellation by the holder; Payment for Honor - payment made by a person, whether a
party to the bill or not, after it has been protested for non-
payment, for the benefit of any party liable thereon or for countermand by the payor after
the benefit of the person for whose account it was drawn. indorsement.
o The bank’s manager signs manager’s check
¾ Requisites: while cashier’s check is signed by the bank
1. the bill has been dishonored by non-payment; cashier.
2. it has been protested for non-payment;
3. payment supra protest (another term for payment 2. Certified Check – one drawn by a depositor upon funds to
for honor because prior protest for non-payment is his credit in a bank which a proper officer of the bank
required) is made by any person, even by a party certifies will be paid when duly presented for payment
thereto;
4. the payment is attested by a notarial act of honor 3. Stale check – one which has not been presented for
which must be appended to the protest or form an payment within a reasonable time after its issue
extension of it;
5. the notarial act must be based on the declaration 4. Crossed check – when 2 parallel lines are drawn across its
made by the payor for honor or his agent of his face or across a corner thereof. If the name of a bank
intention to pay the bill for honor and for whose appears between the parallel lines, the check is said to
honor he pays. be specially crossed, and payment should be made only
if presented by the named bank. If no name appears
Note: If the above formalities are not complied with, between the parallel lines, the check is said to be
payment will operate as a mere voluntary payment and generally crossed, and payment should be made only
the payor will acquire no right to full reimbursement upon presentment by some bank.
against the party for whose honor he pays.
Effects of crossing a check:
¾ In payment for honor, the payee cannot refuse payment. a. That the check may not be encashed but only be
If he refuses, he cannot recover from the parties who deposited in the bank;
would have been discharged had he accepted the same. b. That the check may be negotiated only once to one
In acceptance for honor, the holder’s consent is who has an account with a bank; and
necessary. c. That the act of crossing the check serves as a
warning to the holder that the check has been
¾ The payor for honor is given the right to receive both the issued for a definite purpose so that he must inquire
bill and the protest obviously to enable him to enforce if he has received the check pursuant to that
his rights against the parties who are liable to him. purpose.

5. Memorandum Check – it is like an ordinary check except


IX. CHECKS that the word “memorandum,” “mem” or “memo” is
written upon the face of the check, signifying that the
Check- a bill of exchange drawn on a bank payable on drawer engages to pay the bona fide holder absolutely,
demand. and not upon a condition to pay upon presentment at
maturity and if due notice of the presentment and non-
Check distinguished from and ordinary bill of exchange payment should be given.
BILLOF EXCHANGE CHECK
Not necessarily drawn It is necessary that a check 6. Traveler’s check – one upon which the holder’s signature
on a deposit. The drawee is drawn on a bank deposit. must appear twice, one to be affixed by him at the time
need not be a bank. The drawee is always a it is issued and the second o counter-signature, to be
bank. affixed by him in the presence of the payee before it is
Death of a drawer of a Death of the drawer of a paid, otherwise it is incomplete
BOE, with the knowledge check, with the knowledge
of the bank, does not of the bank, revokes the Iron Clad Rule: Prohibits the countermanding of payment
revoke the authority of the authority of the banker to of certified checks. (Republic of the Philippines
drawee to pay. pay. v. PNB. GR No. 16106. December 1, 1961)
May be presented for Must be presented for
payment within a payment within a
reasonable time after its reasonable time after its
last negotiation because it issue.
may be further negotiated.
May be payable on demand Always payable on demand
or at a fixed or
determinable future time

Kinds of checks:
1. Manager’s / Cashier’s Check – drawn by a bank on itself
and therefore, it is a primary obligation of the bank.
o It is accepted in advance by the act of its
issuance and is not subject to