INTRODUCTION
Function and Importance of Negotiable
Instrument
1. Used as substitute for money
2. Media of exchange for most commercial
transaction
3. Medium of credit transaction
Characteristics or Features of Negotiable
Instrument
1. Negotiability
2. Accumulation of secondary contracts – as
they are transferred from one person to
another
Common Form of Negotiable Instrument
1. Promissory Notes (maker and payee)
2. Bill of Exchange (drawer, payee, drawee)
Instruments with Limited Negotiability
1. Letter of Credit – it is in favor of a
specified person and not to order
2. Treasury Warrant – payable out of a
specific fund or appropriation
3. Postal Money Order – subject to
restriction and limitations (only 1
indorsement is allowed)
4. Bill of Lading – without an unconditional
promise or order to pay sum certain in
money
5. Certificate of Stock – without an
unconditional promise or order to pay
sum certain in money
6. Warehouse Receipt – without an
unconditional promise or order to pay
sum certain in money
Chapter 1 – Form and Interpretation
Section 1. Form of Negotiable Instrument
Requirements:
(1) Must be in writing and signed by the unconditional (if the fund specified is the direct
maker or drawer
(2) Must contain an unconditional promiser or
order to pay sum certain in money
(3) Must be payable on demand, or at a fixed
or determinable future time
(4) Payable to order or bearer
(5) If the instrument is addressed to a
drawee, he must be name or otherwise
indicated therein with reasonable certain to happen though the time of
certainty happening be uncertain
Negotiable Instrument – a contractual Instrument payable upon a contingency is not
obligation to pay money negotiable, and the happening of the event does
In determining the negotiability of instrument, not cure the defect
the following must be considered:  “after date” = promissory note
1. Whole of instrument  “after sight” = bill of exchange
2. What appears on the face of the
instrument Section 5. Additional Provisions Not
3. Provision stated in Section 1 Affecting Negotiability
(1) Authorize sale of collateral securities in
case of nonpayment at maturity
(2) Authorizes a confession of judgment if not
to be paid at maturity
Section 2. Certainty as to Sum (3) Waives the benefit of any law intended
It is still sum certain money although it is paid: for advantage or protection of the obligor
(1) With interest (generally, drawee is the primary liable)
(2) By stated installments (4) Gives the hold an election to require
(3) By stated installments with a provision something to be done in lieu of payment
upon default in payment of installment or of money
interest, the whole shall become due If an instrument contains to do any act in
(4) With exchange, at fixed rate or at the addition to the payment of money, it is not
current rate negotiable
(5) With costs of collection or an attorney’s in  Confession of Judgment – written
case payment shall not be made at acknowledgment by the defendant of his
maturity indebtedness
Section 3. When promise in Unconditional
It is still an unconditional promise or order even Section 6. Validity and negotiable character of
though coupled with an instrument are not affected by the fact that
(1) Indication of a particular fund out of (1) Not dated
which reimbursement is to be made or a (2) Not specify the value given, or that any
particular account to be debited with the value has been given
amount (3) Not specify the place where it is drawn or
(2) Statement of transaction which gives rise where it is payable
to the instrument (4) Bears a seal
But to pay out of a particular fund is not (5) Designates particular kind of current
money in which payment is to be made
source of payment)
Section 7. Payable on Demand
Section 4. Determinable Future Time (1) Expressed to be payable on demand, at
(1) At a fixed after date or sight sight, or on presentation
(2) On or before a fixed or determinable (2) No time for payment is expressed
future time specified (3) Issued, accepted, or indorsed when overdue
(3) On or at a fixed period after the
occurrence of a specified event which is Section 8. Payable to Order
When drawn payable to the order of a specified Insertion of a wrong date will be regarded as the  Delivery – transfer of possession, actual
person or to him or his order. (he must be name true date if the holder is a holder in due course or constructive, from one person to
or otherwise indicated therein with reasonable only (Sec. 52 – Holder in Due Course) anther
certainty)  Issue – first delivery of the instrument,
Section 14. Incomplete Instrument which complete in form, to a person who takes
Section 9. Payable to Bearer has been delivered it as holder
(1) Expressed to be so payable If the instrument is wanting in any material
(2) Payable to a person named therein or particular, person in possession has a prima
bearer facie authority to complete in by filling up the
Originally an order instrument turned to blanks
bearer instrument: - To be enforce (valid), it must be filled up
(3) Payable to the order of a fictitious or non- strictly in accordance with the authority Section 17. Construction where instrument
existing person, and such fact was known given and within a reasonable time is ambiguous
to the person making it so payable - If negotiated to holder in due course, (1) Discrepancy in sum payable expressed in
(4) Name of the payee does not purport to be valid and effectual and may be enforce as words and in figures - by words but if
the name of any person if it had been filled up strictly uncertain, the figure
(5) Only or last indorsement is an Steps in issuance of negotiable instrument: (2) No date from which interest is to run -
indorsement in blank 1. Mechanical act of writing from the date of instrument, if undated,
2. Delivery from the issue
Section 10. Any terms are sufficient if it clearly (3) Between written and printed provision -
indicate an intention to conform to the Section 15. Incomplete Instrument not written prevails
requirements hereof delivered (4) Whether it is a bill or note - at holder’s
Not be a valid contract, and if completed and election
Section 11. When instrument is dated, such negotiated without authority, it is still not valid (5) Signature’s unclear intention – deemed to
date is deemed prima facie to be the true date of against the holder including holder in due course be an indorser
the making, drawing, acceptance, or (6) “I promise to Pay” signed by two or more
indorsement, as the case may be. Section 16 Complete Instrument but not persons – deemed to be jointly and
delivered severally liable (solidary liable)
Section 12. Ante-dated and Post-dated Every instrument is incomplete and revocable
Instrument until delivery for the purpose of giving effect Section 18. Person Liable on an Instrument
Not invalid unless it is done for an illegal or thereto. General Rule: only persons whose signature
fraudulent purposes  Between immediate party and as to appear on an instrument as liable.
 Ante-dated (contains a date earlier that remote party - to be effectual, the Exceptions:
the true date of its issuance) delivery must be made either or under (1) Signs in a trade or assumed name
 Post-dated (date later than the true date the authority of the party making the (Pacman for Pacquiao)
of its issuance) instrument (2) Principal is liable if duly authorized agent
 Between holder in due course – signs
conclusively presumed as valid delivery (3) In case of forgery, the forger
Immediate Party – has direct contractual (4) Acceptor makes his acceptance of a bill
relation on a separate paper
Remote Party – has no direct contractual (5) Written promise to accept a bill/note
Section 13. When date may be inserted relation before it is drawn
(1) Payable at a fixed period after date but is ( A → B → C = C’s immediate party is B and A as (6) Person negotiating by mere delivery
issued undated his remote party)
(2) Payable at a fixed period after sight but
the acceptance is undated
Section 19. Signature of any party may be Need not to be adequate. Sufficient if it is a Section 31. Indorsement must be written on the
made by a duly authorized agent and no valuable one. instrument itself or upon a paper attached there
particular form of appointment is necessary to.
Section 26. Holder for Value Indorsement – writing of the name of the
Section 20. In order the agent not to be One who has given a valuable consideration for indorser on the instrument with the intent either
personally liable: the instrument issued or negotiated to him to transfer the title or to strengthen the security
(1) Duly authorized of the holder
(2) Adds words to his signature that he signs Section 27. Lien on Instrument Allonge – paper attached thereto where the
as an agent Considered as holder for value (taken the indorsement is located
(3) Discloses his principal instrument as collateral security for a debt has a
lien on the instrument) Section 32. Indorsement must be of entire
Section 21. Effect of Signature by instrument
Procuration (pp) Section 28. Effect of Want of Consideration Does not operate as negotiation:
Operates as notice that the agent has but a A matter of defense as against any person not a (1) To transfer to the indorsee a part only of
limited authority to sign holder in due course the amount payable
- Principal is not bound if the agent - Partial failure of consideration is a defense (2) To transfer the instrument to two or more
exceeded the actual limits of his authority pro tanto, whether the failure is an indorsees severally
ascertained and liquidated amount or Valid Negotiation:
Section 22. Effect of Indorsement by Infant otherwise  Part of the amount has already been paid,
or Corporation  Absence of Consideration – total lack of any the unpaid balance may be indorsed
Not incapacitated to transfer certain right but valid consideration
cannot be hold liable  Failure of Consideration – failure or refusal Section 33. Kinds of Indorsement
of one of the parties to do, perform, or comply (1) Special
Section 23. Forged Signature with the consideration agreed upon (2) Blank
Signature is inoperative and no rights can be (3) Restrictive
acquired through the forged signature but the Section 29. Accommodation Party (4) Qualified
instrument and genuine signatures are still valid Liable on the instrument to a holder for value (5) Conditional
 Accommodation Party – signed the
instrument without receiving value and for Section 34. Special Indorsement and Blank
the purpose of lending his name Indorsement
 Accommodated Party – one who favor Special Indorsement:
the accommodation party  Specifies the person to whom, or to
Chapter 2 – Consideration  Accommodation Bill or Note – which the whose, order, the instrument is to be
Section 24. Every instrument is deemed prima accommodation party signs payable
facie to have been issued for a valuable  Indorsement of such indorsee is
consideration, and every person whose signature Chapter 3 – Negotiation necessary to the further negotiation
appears thereon are party for value Section 30. Negotiation is the transfer of a Indorsement in Blank (Blank Indorsement):
Consideration – inducement to a contract, the negotiable instrument from one person to  Specifies no indorsee
cause in entering the contract another made in such manner as to constitute  Payable to bearer, and may be negotiated
the transferee the holder thereof by delivery
Section 25. Value  Payable to Bearer – negotiated by
Any consideration sufficient to support simple delivery Section 35. Blank indorsement may be
contract
 Payable to Order – negotiated by converted into a special indorsement by writing
- Antecedent or pre-existing debt over the signature of the indorser.
indorsement completed by delivery
constitutes value. - A bearer instrument always remain to be
a bearer instrument negotiable by mere
 delivery whether the last indorsement is Indorser annexes some other condition to his
a blank or special
Section 36. Restrictive Indorsement
 Prohibits the further negotiation
 Constitutes the indorsee the agents of
the indorser (subsequent
indorsees acquire only the title of the first Subject 40. Indorsement of Instrument
indorsee)
 Vests the title in the indorsee in trust for Even it is endorsed specially, it may nevertheless
or to the use of some other person be further negotiated by delivery
(transfer the title but cannot be
negotiated)
Mere absence of words implying power to
negotiate does not make an indorsement
restrictive
Section 37. Rights of Indorsee because of
Restrictive Indorsement
 Receive payment
 Bring any action thereon that the indorser
could bring
 Transfer his rights as such indorsee,
where the form of indorsement authorizes
him to do so
All subsequent indorsees acquire only the title of
the first indorsee
Section 38. Qualified Indorsement
- Constitutes the indorses a mere assignor
of the instrument (transfer the title
without guaranteeing payment)
- Adding to the indorser’s signature the
words “without recourse” or any words
similar
- Secondarily liable for breach of warranties
as an indorser under Section 65 but not
liable if the instrument is dishonored for
reason like insolvency of primarily liable.
Section 39. Conditional Indorsement
liability
- Party required to pay (primarily liable)
may disregard the condition and make
payment to the indorsee or his
transferee, whether the condition has
been fulfilled or not
- Any person to whom an instrument so
indorsed is negotiated will hold the same
subject to the right of the person
indorsing conditionally
Payable to Bearer
- Person indorsing specially is liable as
indorser to only such holders as make
title through his indorsement (liable to
only holders who obtain their title throughinstrument
his indorsement)
Section 41. Indorsement payable to two or
more persons
All must indorse unless the one indorsing has (1) Section 48. Striking out of indorsements
authority to indorse for the others or (2) they are
partners
Section 42. Instrument drawn/indorsed to a
person as “cashier”
When indorsed to “cashier” or other fiscal officer Transferee for value acquires the right to have
of a bank or corporation, deemed prima facie to the indorsement of the transferor
be payable to the bank or corporation of which
he is such officer
- May be negotiated by either the
indorsement of the bank, or corporation,
or of the officer
Section 43. Indorsement where name is Negotiate
misspelled
Indorse the instrument as therein described
adding, if he thinks fit, his proper signature
Section 44. Indorsement in Representative
Capacity
If under obligation to indorse in a representative
capacity, he may indorse in such terms as to
negative personal liability (save from liability)
Section 45. Time of Indorsement
If the indorsement has no date, every
negotiation is deemed prima facie to have been
effected before it was overdue
- Importance: to determine whether the
holder is a holder in due course
Section 46. Place of Indorsement
Presumed prima facie to have been made at the
place where the instrument is dated unless
contrary appears
Section 47. Ceases the negotiability of the
Instrument negotiable in origin is always
negotiable (even though it is overdue) but
ceases when:
(1) It has been restrictively indorsed
(2) Discharged by payment or otherwise
Subsequent indorsers of indorser whose
indorsement is struck out, are relived from
liability (indorsers after him)
Section 49. Transfer without Indorsement
- Negotiation takes effect as of the time
when the indorsement is actually made
(to determine if he is a holder in due
course)
Section 50. Right of Prior Party to
- Refers to a reacquirer or a holder who
negotiates an instrument then
subsequently reacquires it
 - Not entitled to enforce payment thereof (Any circumstances as amount to a fraud) character of the consideration of the
against any intervening party to whom he instrument (he knew what he was signing
was personally liable Section 56. Notice of Defect but was induced by fraud to sign)
When person to whom it is negotiated must have
Chapter 4 – Rights of the Holder (1) Had actual knowledge of the infirmity or Section 59. Holder presumed as a Holder in
Section 51. Right of a Holder defect or Due Course
(1) Sue on the instrument on his name (2) Had knowledge of such facts that his Every holder is deemed prima facie to be a
(2) Receive payment and if the payment is in action in taking the instrument amounted holder in due course.
due course, the instrument is discharged to bad faith - When it is shown that the title of person
Payment in Due Course – payment Section 57. Rights of Holder in Due Course who negotiated it was defective, the
made at or after the maturity to the - Holds the instrument free from any defect of burden is in the holder in proving that he
holder in good faith and without notice of title of prior parties is a holder in due course.
the defect (Section 88) - Free form defenses available to prior parties
among themselves Chapter 5 – Liabilities of Parties
Section 52. Holder in Due Course - May enforce payment for the full amount Section 60. Liability (Warranty) of Maker
Holder who has taken the instrument under: against all parties liable thereon (1) He will pay it according to its tenor
(1) It is complete and regular upon its face Real Defenses not Personal Defenses can be (2) Admits the existence of the payee and his
(2) He became the holder before it was set up against to holder in due course then capacity to indorse
overdue, and without notice that it had
been previously dishonored, if such was Section 58. Defenses
the fact Holder who derives his title through a holder in
(3) He took it in good faith and for value due course, who is in good faith, has all the
(4) At the time it was negotiated to him, he rights of that holder in due course respect of all
had no notice of any infirmity in the parties prior to the holder in due course.
instrument or defect in the title of the Kinds of Defenses Parties according to liability:
person negotiating it 1. Real Defenses – defenses attach to the  Primary Liable – absolutely required to
instrument itself pay
Section 53. Person not deemed Holder in 2. Personal defenses – available only (1) Maker of promissory note
Due Course against that person or subsequent holder (2) Acceptor of a bill of exchange (ex.
Payable on demand is negotiated an who stands in privity with the party drawee’s acceptor)
unreasonable length of time after the issue seeking to enforce it (between original (3) Certifier of check
(reasonable time – section 193) parties or immediate parties or against  Secondarily Liable – pay the
one who is not a holder in due course instruments only after conditions have
Section 54. Notice before full amount paid Kinds of Parties been fulfilled: (a) presentment for
Holder in due course to the extent of the amount 1. Immediate Party – has direct payment or acceptance to the primary
paid by him before he received the notice of contractual relation party; (b) proper dishonor of such party;
infirmity in the instrument or defect in the title of 2. Remote Party – no direct contractual (1) Drawer of a bill
the person negotiating it relation (2) Indorses of a note or bill
Kinds of Fraud
Section 55. Defective title of a person 1. Fraud in Factum (fraud in the Section 61. Liability of Drawer
He obtained the instrument, or any signature execution) – a person, without (1) Admits the existence of the payee and his
thereto, by negligence, has signed an instrument then capacity to indorse
(1) fraud, duress, or force and fear, or other which he was deceived by the character (2) On due presentment of the instrument
unlawful means of the instrument [real defense] will be accepted or paid, or both,
(2) for an illegal consideration 2. Simple Fraud (fraud in inducement) – according to its tenor
(3) negotiates it in breach of faith relates to the quality, quantity, value, or
 (3) If it be dishonored, and necessary
proceedings on dishonor be duly taken,
he will pay the amount to the holder or to
any subsequent indorser who may be
compelled to pay it
May insert in the instrument an express
stipulation limiting his own liability
Section 62. Liability of Acceptor
Drawee of a bill is not liable before acceptance.
After his acceptance, he will pay it according to
his tenor of acceptance (not tenor of the
instrument), and admits:
(1) Existence of the drawer, the genuineness
of his signature, and his capacity and
authority to draw the instrument
(2) Existence of the payee and his then
capacity to indorse.
Section 63. Indorser
Person placing his signature upon an instrument
otherwise than as maker, drawer, or acceptor
unless he clearly indicates by appropriate words
his intention
 Person liable as guarantor – liable
only subsidiarily after the assets of the
principal debtor has been exhausted
unlike an indorser
 Person liable as surety – primarily and
absolutely liable with the principal debtor
without benefit of exhaustion of the
principal debtor’s properties and without
necessity of presentment or notice of
dishonor
Section 64. Liability of Irregular Indorser
Iregular Indorser - indorser who is not a party
to an instrument places thereon his signature in
blank before delivery
- Liable as indorser if:
(1) Payable to the order of a third person,
liable to the payee and to all
subsequent parties
(2) Payable to the order of maker or
drawer, or to bearer, liable to all
parties subsequent to the maker or
drawer
(3) For the accommodation of payee,
liable to all subsequent parties of the Section 68. Order of Liability among
payee Indorsers
Prima facie in order in which they indorse but
Section 65. Warranty of Person Negotiating evidence is admissible to show that, as between
by Delivery or By a Qualified indorsement or among themselves, they have agreed
(1) Instrument is genuine and in all respects otherwise.
what it purports to be - Joint payees or joint indorsees who
(2) He has a good title to it indorsed are deemed to indorse jointly
(3) All prior parties had capacity to contract and severally
(4) Has no knowledge of any fact which As to holder, which instrument has been
would impair the validity or render it dishonored, indorsers are liable in any order and
valueless none of them can interpose a defense against
 If negotiation by delivery only, warranty him an agreement among themselves
extends in favor only of his immediate
transferee Section 69. Liability of Agent or Broker
 If by qualified indorsement, to all subsequent Incurs all liabilities in Section 65 if he did not
holder discloses the name of his principal and the fact
Do not assume to pay the instrument in the that he is acting only as agent
event of its dishonor unless these four
warranties were violated. Chapter 6 – Presentment for Payment
Section 70. Effect of Want of Demand on
Section 66. Liability of General Indorser Principal Debtor
(1) Instrument is genuine and in all respects  Person primarily liable – presentment
what it purports to be is not necessary in order to charge him
(2) He has a good title to it  Secondarily Liable (drawer and
(3) All prior parties had capacity to contract indorsers) – necessary in order to
(4) Instrument is, at the time of his charge them ( if not presented, free from
indorsement, valid and subsisting liability)
(5) On due presentment, it shall be accepted If payable at a special place, ability and
or paid, or both, according to its tenor willingness on the part of the primary party to
and if properly dishonored, he will pay the pay there at maturity are equivalent to a tender
amount or offer of payment (if not paid and it is overdue,
he cannot be considered in delay but not
Section 67. Indorses of Paper Negotiable relieved from making payment)
by Delivery Presentment for Payment - presentation of a
Incurs all the liabilities of an indorser bill or not to the person primarily liable for the
(1) Indorse specially, liable only to holders purpose of demanding and receiving payment
who make title through his indorsement
(2) Indorses without qualification, as general Section 71. Date of Presentment of
indorser Instrument
  If not payable on demand – on the day it During banking hours or any hour before the  Reasonable diligence implies active search
falls due bank is closed on that day when the person to
 If payable on demand: make payment has no funds in the bank Section 83. Dishonored by Nonpayment
(1) Promissory Notes – within a (1) Duly presentment for payment and
reasonable time after its issue Section 76, 77, and 78 are applicable only if no payment is refused or cannot be obtained
(2) Bill of Exchange – within a reasonable place of payment is specified (2) Presentment is excused and the
time after its last negotiation. Section 76. Principal Debtor is Dead instrument is overdue and unpaid
Exception: - Presentment must be made to his
o Check – within a reasonable time personal representative Section 84. Liability of Secondarily Liable
after its issue Section 77. Persons Liable as Partners when Dishonored
- Made to any on them, even though there When dishonored by nonpayment, holder has the
Section 72. Sufficient Presentment has been a dissolution of the firm rights to enforce the liabilities to the secondary
(1) Made by the holder, or person authorized Section 78. Joint debtors liable
on his behalf - If not partners, presentment must be
(2) Reasonable hour (section 193) on a made to them all
business day
(3) At a proper place as defined at section 73 Section 79. Presentment Not Require to
(4) To the person primarily liable, or if he is Charge the Drawer
absent, to any person found at the place When he has no right to expect or require that
where the presentment is made the drawee or acceptor will pay the instrument
(drawer has no longer funds in the drawee;
drawer and the drawee are the same person)

Section 80. Presentment Not Require to

Section 73. Place of Presentment
In this order of presentation:
1. Specified place of payment
No specified place of payment:
2. Given address of the person to make
payment
No address is given:
3. At the usual place of business or
residence of the person to make payment
Any other case:
4. Wherever he can be found, or at his last
known place of business or residence
Section 74. Manner of Presentment
Exhibit the instrument to the person from whom
is demanded, and when it is paid must be Section 82. When Presentment may be
delivered up to that person Dispensed
- Requires personal or face to face
interaction
Section 75. Presentment of Instrument
Payable at Bank
Charge the Indorser
Instrument was made or accepted for his
accommodation and he has no reason to expect
the instrument will be paid if presented
(accommodation party)
Section 81. Excused delay in Making
Presentment
If caused by circumstances beyond the control of
the holder and not imputable to his default,
misconduct, or negligence
- When cause of delay ceases to operate,
presentment must be made with
reasonable diligence
(1) After the exercise of reasonable diligence,
presentment cannot be made
(2) Drawee is fictitious person
(3) Waiver of presentment by secondarily
liable, express or implied