A STUDY GUIDE ON

NEGOTIABLE INSTRUMENTS
AND OTHER ALLIED LAWS

Atty. Jose Maria B. Duhaylongsod, CTEP™

 TABLE OF CONTENTS
Preliminary Matters.......................................................................iv
Introduction..................................................................................10
1. COMMERCIAL LAW.......................................................................................... 10
1.1. Definition............................................................................................... 10
1.2. Principal Characteristics.......................................................................10
1.3. Commerce............................................................................................. 10
2. FUNDAMENTAL POSTULATES.............................................................................10
2.1. Habituality (Art. 1 CoC)........................................................................10
2.2. Rapidity (Time is of the Essence); CoC vs. Civil Code..........................10
2.3. Intent to gain......................................................................................... 11
3. CONSITUTIONAL PRIVISIONS OM COMMERCE AND TRADE....................................11
3.1. Economic Nationalism – Art. XII, Sec. 1...............................................11
3.2. Equitable Distribution of Wealth – Art. II, Secs. 9 and 10.....................11
3.3. Filipino First Policy and Nationalization Provisions – Art. II, Secs. 19
and 20........................................................................................................... 11
3.4. Power of Judicial Review – Art. VIII, Sec. 1...........................................11
Code of Commerce........................................................................12
4. APPLICABILITY................................................................................................ 12
4.1. Inapplicable (Art. 2270 Civil Code).......................................................12
4.2. Applicable.............................................................................................. 12
5. PRELIMINARY ARTICLES...................................................................................12
5.1. Who Are Merchants – Art. 1..................................................................12
5.2. Governing Laws..................................................................................... 12
5.3. Capacity to Engage in Commerce.........................................................12
5.4. Commercial Registries – Arts. 16-49.....................................................13
5.5. Form...................................................................................................... 13
5.6. Illicit Agreements..................................................................................13
5.7. Perfection.............................................................................................. 14
5.8. Indemnity Clause..................................................................................14
5.9. Rules on Interpretation.........................................................................14
5.10. Rules on Periods..................................................................................14
5.11. Places and Buildings for Commercial Transactions – Arts. 64-238
repealed by Securities Act...........................................................................15
5.12. Joint Accounts – Arts. 239-243............................................................15
5.13. Commercial Agency, Commercial Deposits, Commercial Loans,
Commercial Purchase and Sale and Barter and Transfer on Non-Negotiable
Credits (Arts. 244-348 repealed by Art. 2270, Civil Code)..........................15
6. A................................................................................................................... 15
Negotiable Instruments................................................................16
7. NATURE AND COVERAGE OF NIL...............................................................16
7.1. NIL is a Complete Law..........................................................................16
7.2. Function................................................................................................ 18
7.3. Principal Features of NI........................................................................19
7.4. Primary Provisions................................................................................21
8. FORMAL REQUISITES OF NEGOTIABLE INSTRUMENTS (MEMORIZE:
SEC.1)............................................................................................................... 23
8.1. It must be in Writing.............................................................................24
8.2. It must be Signed by Maker or Drawer.................................................25
8.3. It must contain an Unconditional Promise or Order.............................25
8.4. To Pay a Sum Certain in Money............................................................28

i MSEUF- CBA
 8.5. It Must Be Payable On Demand, or at a Fixed or Determinable Future
Time............................................................................................................. 29
8.6. It Must Be Payable to Order or to Bearer.............................................30
8.7. If NI is a Bill of Exchange, Drawee Must Be Named or Otherwise
Indicated Therein with Reasonable Certainty..............................................32
8.8. Other Matters........................................................................................ 33
9. ISSUANCE OF NEGOTIABLE INSTRUMENTS.............................................34
9.1. Definitions............................................................................................. 34
9.2. Completeness........................................................................................ 34
9.3. Delivery................................................................................................. 36
9.4. Cases of Defective Issuance..................................................................36
10. SIGNATURE AND FORGERY (MEMORIZE SEC. 18, 23, 124-125)..............37
10.1. Rules on Signatories...........................................................................37
10.2. Forgery................................................................................................ 39
10.3. Alteration............................................................................................ 43
11. CONSIDERATION......................................................................................44
11.1. Definitions........................................................................................... 44
12. NEGOTIATION........................................................................................... 45
12.1. Concept of Negotiation.......................................................................45
12.2. Indorsement........................................................................................ 45
12.3. Delivery............................................................................................... 47
12.4. Other Provisions.................................................................................. 47
13. RIGHTS OF HOLDERS...............................................................................48
13.1. Simple Holder..................................................................................... 48
13.2. Holder for Value.................................................................................. 48
13.3. Holder In Due Course (HIDC).............................................................49
13.4. Defenses.............................................................................................. 52
14. LIABILITIES OF PARTIES..........................................................................52
14.1. Primary vs. Secondary Liability (MEMORIZE: Sec. 60-62, 65-66)......52
15. PROCEDURE TO CHARGE PERSONS SECONDARILY LIABLE ON NI.......56
15.1. In General............................................................................................ 56
15.2. Presentment for Payment....................................................................58
15.3. Notice of Dishonor.............................................................................. 60
15.4. Presentment for Acceptance...............................................................63
15.5. Protest................................................................................................. 65
16. DISCHARGE............................................................................................... 67
16.1. Discharge of NI................................................................................... 67
16.2. Discharge of Persons Secondarily Liable on NI..................................68
Special Topic: Checks....................................................................69
17. DEFINITION AND CONCEPTS...........................................................................69
18. PRESENTMENT OF CHECKS............................................................................70
18.1. Within what time presented................................................................70
18.2. Effects of failure to present check......................................................70
18.3. Consequences of Unlawful Negotiation and Payments.......................70
18.4. Issues on Clearing...............................................................................70
19. CERTIFICATION OF CHECKS............................................................................70
19.1. Definition............................................................................................. 70
19.2. Effects of Certification........................................................................71
20. CROSSED-CHECKS.........................................................................................71
20.1. Nature and Procedure (Arts. 443-556 Code of Commerce)................71
20.2. Effects................................................................................................. 71
21. CRIMINAL OFFENSES INVOLVING CHECKS........................................................72
21.1. Estafa thru Issuance of Bouncing Check (Citation, Book, RPC).........72
21.2. Batas Pambansa Bilang 22 (The Bouncing Checks Law)....................72

ii
Special Topic: Other Allied Laws...................................................78
22. WAREHOUSE RECEIPTS LAW..........................................................................78
23. LETTERS OF CREDIT......................................................................................78
24. DOCUMENTS OF TITLE...................................................................................78
25. TRUST RECEIPTS LAW...................................................................................78
Annex A: CPALE Syllabus for RFBT...............................................79
26. NEGOTIABLE INSTRUMENTS AND BOUNCING CHECKS LAW...............79
26.1. Negotiable Instruments......................................................................79
26.2. Bouncing Checks.................................................................................79

iii
A Study Guide on
Negotiable Instruments
and Other Allied Laws
Atty. Jose Maria B. Duhaylongsod, CTEP

PRELIMINARY MATTERS

COURSE DESCRIPTION:

This course presents an in-depth study of the nature, kinds, and effects of
Negotiable Instruments as defined in Act No 2031, but will also use other
related legal provisions and cases decided by the Supreme Court for a
proper understanding of the foregoing concepts and development of the
skills to apply these in real-life scenarios. Additionally, the Course will
provide an overview on allied instruments such as Warehouse Receipts,
Documents of Title, Letters of Credit and Trust Receipts. Furthermore,
an introduction on the Law on Bouncing Checks, Philippine Deposit
Insurance Corporation, New Central Bank Act, General Banking Law,
Bank Secrecy Laws, Anti-Money Laundering Act and Intellectual Property
Code will also be given.1 The lessons shall be presented in the manner
organized herein, which is designed to provide the students with an
overview of the relevant laws and the Philippine legal system which will
guide them in the study of legal principles relating to the subject matter,
by exposing them to relevant primary and secondary materials and

’19 B.S. Accountancy, Philippine School for Business Administration – Q.C., 17 4 th
Diploma Program in Corporate Finance, Ateneo Graduate School of Business Center for
Continuing Education; ’16 Chartered Trust and Estate Planner (CTEP ®), American
Association of Financial Managers; Graduate Member of the Registered Financial
Planners Institute and a candidate for the RFP certification and designation; ’11 J.D.,
second honors, Ateneo Law School; and, ’07 A.B. POS., Ateneo de Manila University. The
author is a part-time lecturer at the Manuel S. Enverga University Foundation and
teaches Regulatory Framework for Business Transactions, Law on Agency, Trusts and
Partnerships, and Philippine Corporate Law. He is a partner in the Docena Jularbal-
Docena and Duhaylongsod Law Office.

JMBD: Transcribed, encoded and edited by the aforesaid. This is principally patterned,
essentially based on and lifted from the Outline of Atty. Alexander C. Dy [the SYLLABUS]
as used in the Ateneo Law School – the contents were partially rearranged and slightly
edited to suit the students’ needs for purely educational purposes. Ultimately, while
personal input has been added, this work is modelled to preserve the essence of the
original. For the purpose of making this a bit shorter and up to date, there are some
areas which were rearranged and paraphrased, while some of the examples, citations
and illegible portions were entirely omitted. Other materials were also incorporated to
supplement the existing content. Note that this Study Guide is NOT FOR SALE, is
meant purely for educational purposes only and is legally sanctioned by the Intellectual
Property Code, specifically under the FAIR USE DOCTRINE. Absolutely no
infringement is intended. Lastly, as the law is a discipline that is never static, this Study
Guide will always remain “a work in progress.” See also VILLANUEVA, Cesar L.,
COMMERCIAL LAW REVIEW (2015)

1
These will be covered by separate Study Guides.

iv MSEUF- CBA
facilitating discussions on the application of these principles upon actual
or hypothetical cases. Lastly, the subject matter is cumulative by nature;
thus, each lesson is necessarily integrated unto the next, culminating in a
comprehensive final exam.

REFERENCES:

Mandatory:

In accordance with the resolution of the Board of Accountancy, we intend

to cover the following:

The Negotiable Instruments Law [NIL], Act No. 2031 (1911).

An Act to Ordain and Institute the Civil Code of the
Philippines [Civil Code], Republic Act No. 386 (1950)
An Act Prohibiting Disclosure of or Inquiry into, Deposits with
any Banking Institution and Providing the Penalty Therefor
[Bank Secrecy Law], Republic Act No. 1405 (1955)
An Act Establishing the Philippines Deposit Insurance
Corporation, Defining its Powers and Duties and for other
Purposes [PDIC Charter], Republic Act No. 3591 as
amended (1963)
An Act Requiring Banks, Trust Corporations, and Building
and Loan Associations, to Transfer Unclaimed Balances
Held by Them to Treasurer of the Republic of the
Philippines [Unclaimed Balances Law], Act No. 3936 as
amended by Presidential Decree No. 679 (1975)
An Act Penalizing the Making or Drawing and Issuance of a
Check without Sufficient Funds or Credit and for other
Purposes [BP 22], Batas Pambansa Bilang 22 (1979)
The New Central Bank Act [NCBA], Republic Act No. 7653
(1993)
An Act Prescribing the Intellectual Property Code and
Establishing the Intellectual Property Office, Providing for
its Powers and Functions, and for Other Purposes
[Intellectual Property Code of the Philippines], Republic
Act No. 8293 as amended (1997)
An Act Providing for the Regulation of the Organization and
Operations of Banks, Quasi-Banks, Trust Entities and for
other Purposes [The General Banking Law of 2000],
Republic Act No. 8791 (2000)
An Act Defining the Act of Money Laundering, Providing
Penalties Therefor and for other Purposes [Anti-Money
Laundering Act of 2001], Republic Act No. 9160 as
amended (2001)

Rules of Court, Rule 91 Escheats

v
Students are expected to have a copy of Act No. 2031, otherwise known
as “The Negotiable Instruments Law” (1911), at all times during class.
They are also required to have with them respective copies of all other
assigned laws, cases and readings in the Study Guide, as well as other
materials declared to be mandatory by the professor during the course.

The assigned cases refer to Decisions and Resolutions of the Supreme

Court of the Philippines, collectively referred to as “Jurisprudence.”
Copies of which may be found online at the following sites:

Publisher Web Address

Supreme Court of the http://sc.judiciary.gov.ph/jurisprudence/
Philippines
Arellano Law Foundation http://www.lawphil.net/judjuris/judjuris.
(Lawphil Project) html
Chan Robles Virtual Law http://www.chanrobles.com/cralawscde
Library cisions.htm
PhilippineLaw.info http://philippinelaw.info/jurisprudence/i
ndex.html
Securities and Exchange http://www.sec.gov.ph/
Commission

These sites are not in any way exclusive. There are others, depending on
the resourcefulness of students, which may be additional sources.

Optional:

The professor does not prescribe a single textbook; but should the
students desire, they may use any of the available literature on the
subject to aid them in understanding the lessons. However, it should be
understood that the latter, as they are merely optional references, shall
not be invoked as basis for exemption from reading the mandatory ones.

BASICS ON STUDYING THE LAW:

First. Read the legal provision very well. Your goal is to be able to
understand what it means without resort to outside material.

In analyzing the legal provisions, two things are your primary concerns:
a) Coverage; and, b) Exemptions. You have to find out what the
requirements are for the said law to be applicable on one hand, and, on
the other, the instances where, despite the presence of the requirements,
the law would not find application. For example:

“The right of the people, including those employed in

the public and private sectors, to form unions,
associations, or societies for purposes not contrary to
law shall not be abridged.”2
2
PHIL. CONST. Art. III, sec. 8

vi
What does this mean? Coverage and Exemption need the answers to the
following: who, what, when, where, how and why. Once you find out, then
you have determined coverage. However, take note that sometimes, you
do not need to answer all of these in a single provision. There are
instances that because of the nature of the law as a whole, the questions
are already answered, i.e., General Banking Law – Who: Banks. Going
back, as to “who,” it is obvious that it is answered by the phrase
“people…including those employed public and private sectors” The
remaining questions are answered by “right to form unions…not contrary
to law shall not be abridged” But again, what do these words even mean?
This will be up to the student to discover.

Second. Read the cases on the matter. There are times when a legal
provision may lead to more than one interpretation. This is where
disputes arise and these are decided by Judicial Bodies with the Supreme
Court at the apex. Once a case is ruled upon by the Supreme Court, it
then becomes part of the law of the land, which means that the
interpretation made is the correct way the law should be understood.
Thus,

“Judicial decisions applying or interpreting the laws

or the Constitution shall form a part of the legal
system of the Philippines.” 3

Third. Read the legal commentaries/annotations on the subject.

However, this is optional only. The said writings are merely aimed to
complement your understanding and supplement your knowledge on the
matter. These books often cite cases decided by the Supreme Court in the
course of explaining the legal provisions. So, if your have done the
second part of this guide, then this step will become, at best, a validation
of what you already know. The only time these readings will be able to
become truly useful is when the author annotates/comments on a
disputable provision of law that has yet to be challenged or invoked in
court.

Fourth. Read the reviewers on the specific legal field. Again, this is
optional. The value of these books is that they often present
requirements, requisites, conditions et cetera in a manner that is broken
down or enumerated already. This is because these books are exactly as
their name suggests – reviewers – meaning, the author presumes that
you have already gone through the initial steps in studying the law. The
aim to simply aid the reader in memorization and recall.

Fifth. At the end of your study, you should be able to explain the
provisions, with ease, to the professor, your parents, the jeepney/tricycle
driver and any other person who asks. Otherwise, you need to go back to
the first step and repeat the process until you are able to do so.
3
CIVIL CODE, Article 8

vii
NATURE OF THIS STUDY GUIDE:

First. It must be emphasized that this merely guides the students on

what to read and how to read them. This does not purport to be a
comprehensive body of knowledge for the subject matter. And in this
regard, the Supreme Court has declared that:

“[a]n attorney-at-law is not expected to know all the

law. For an honest mistake or error, an attorney is not
liable. Chief Justice Abbott said that, no attorney is
bound to know all the law; God forbid that it should be
imagined that an attorney or a counsel, or even a
judge, is bound to know all the law.” 4

What is important is that the students are pointed to the right direction,
or at the very least, they are guided on where to begin their study.

Second. We are studying the Law and Cases - not the books, nor the
reviewers. Students therefore are expected to have read and understood
the Law and Cases to an extent that they will be able to cite such when
questioned by the professor. As mentioned, books and reviewers may be
used to complement or supplement their readings, but these will not be
accepted as substitutes for the mandatory references.

Third. The recitation and exam questions are generally not lifted from
the examples in this study guide. It cannot be overly emphasized that,
these are meant to test the level of recall, knowledge and understanding
of the lessons, not to measure the ability to “parrot” what is written.
Again, the study guide as well as the principles herein espoused are
merely foundations and guideposts in the study of law. Therefore, nobody
should expect that recitation and exam questions be identical to those in
the study guide.

OTHER TIPS ON THE COURSE:

RECITATION:

Generally. Ordinarily, students will be called to recite at a maximum of

four (4) times during the semester: Twice prior to the Midterm
Examination and another set before the Final Examination. However, if
the person currently reciting cannot answer satisfactorily, the professor
reserves the right to call upon those people who have already recited. As
such, everybody is expected to have read and comprehended all the
assigned provisions and cases. Recitation does not involve merely
repeating what was read, as students are not expected to simply “parrot”
the readings. It must involve a deeper understanding of the concepts
4
Paguia v. Molina, A.C. No. 9881, 04 June 2014 see also Mendoza v. Mercado, A.M. No.
1484, 19 June 1980; In Re: The Complaint Against Attorney Anacleto Filart, 27
September 1919

viii
which is gained through research, case analysis and well-placed
pertinent questions directed to the professor in the course of the
discussions. As the professor expects everyone to be ready to recite at all
times, understanding must first come from the students’ own initiative.
The lectures are only to complement any points which were initially
unclear and to supplement that which they already presumed to know.

Cases. Students have to keep in mind that decisions of the Supreme

Court come as a result of the exercise of judicial power, which “includes
the duty of the courts of justice to settle actual controversies involving
rights which are legally demandable and enforceable, and to determine
whether or not there has been a grave abuse of discretion amounting to
lack or excess of jurisdiction on the part of any branch or instrumentality
of the Government”5 and “[a] judgment or final order determining the
merits of the case shall be in writing personally and directly prepared by
the judge, stating clearly and distinctly the facts and the law on which it
is based, signed by him, and filed with the clerk of the court.”6

As such, these are often, but not always, presented by the Ponente or the
writer of the opinion of the Court in a logical and concise manner. In the
simplest of terms cases may be broken down as follows:

Facts – Issue/s – Judgment and Ratio Decidendi

Given this, students must learn how to determine the ultimate facts in
order to lay the basis for the issues. This means that he or she must be
able to narrate the chain of events that led to the filing of the case and
state the factual basis of the parties’ legal positions. On the other hand,
the issue/s is/are the point/s of contention to be resolved or the legal
question/s to be answered. It often starts with “whether or not” in the
cases and it is from this point that the judgment is introduced. The latter
often presents the answer to the issue first and follows with the Ratio
Decidendi, which is where the legal bases of the answer are set forth.

ESSAY EXAMS:

Students must remember that answering questions does not only rely on
the merit of the answer itself, but is affected as well by the manner by
which it is delivered – indeed, it is not just what you say, but also how you
say it.

In order to aid students, a simple formula is being adopted: Answer,

Legal Basis, Application and Conclusion or ALAC. Thus,

(A) No, petitioner is incorrect. Private respondent is a Filipino National.

5
PHIL. CONST. Art. VIII, sec. 1
6
1997 RULES OF CIVIL PROCEDURE, Rule 36 sec. 1; see also PHIL. CONST. Art. VIII, sec. 14
(“No decision shall be rendered by any court without expressing therein clearly and
distinctly the facts and the law on which it is based.”)

ix
(L) According to Sec. 123 of the corporation code, “a foreign corporation
is one formed, organized or existing under any laws other than those of
the Philippines and whose laws allow Filipino citizens and corporations to
do business in its own country or state,” meaning if a corporation is
incorporated under the laws of the Philippines, then it is deemed a
Filipino National.

(A) In the facts presented, the Corporation is a holder of a Certificate of

Incorporation from the Securities and Exchange Commission. Therefore,
it is clear that private respondent was incorporated under Philippine
Law, more particularly, by virtue of the Corporation Code or Batas Blg.
68. The presence of incorporators and subscribers of foreign descent is
generally irrelevant to the nationality of a juridical person such as a
corporation. Absent and exceptional circumstances, it does not matter
who had caused the incorporation - what is important is the exact place
where it took place.

(C) Therefore, contrary to the assertions of petitioner and as proven by

the facts presented, under sec. 123 of the corporation code private
respondent is clearly a Filipino National.

-- GOOD LUCK!! --

x
 INTRODUCTION

1. COMMERCIAL LAW

1.1. DEFINITION

COMMERCIAL LAW is branch of private laws covering the rules the govern
rights, obligations, and relations of persons engaged in commerce
(international business traffic) or trade (domestic business traffic).

1.2. PRINCIPAL CHARACTERISTICS

THESE ARE: a) Universality – applies to all, global; b) Progressiveness –

keeps abreast of contemporary developments: i) reference to dispute
settlement; ii) specialized agencies to enforce commercial laws; and, iii)
judges delve into commercial and economic policies; c) Equitableness –
exchange of values and consideration; freedom to contract; same set of
rules; d) Uniformity – same set of rules applies to all; e) Customary –
based on customs and usage

1.3. COMMERCE

COMMERCE is a branch of human activity the purpose of which is to bring

products to the consumer by means of exchange or the operations which
tend to supply and extend them to him habitually with intent of gain.

2. FUNDAMENTAL POSTULATES

2.1. HABITUALITY (ART. 1 COC)

ART. 1, COC “merchants x x x those who, having legal capacity to engage

in commerce, habitually devote themselves thereto.” i.e., In maritime
commerce, habituality determines whether vessel is common carrier.

2.2. RAPIDITY (TIME IS OF THE ESSENCE); COC VS. CIVIL CODE

2.2.1. Perfection

2.2.1.1. Art. 54, CoC – theory of manifestation (of

acceptance)

2.2.1.2. Art. 1319, Civil Code – theory of cognition (of

acceptance)

2.2.2. Designation of Period

2.2.2.1. Art. 62, CoC – obligations without a period are

demandable 10 days after execution of contract if

11 MSEUF- CBA
 they give rise to ordinary action, and on the day after
if they involved immediate execution

2.2.2.2. Art. 1197, Civil Code – obligations without a

period, if circumstances show that a period was
intended, require action to be filed with courts to fix
the period

2.2.3. Delay and Default

2.2.3.1. Art. 63, CoC – default from the moment obligor

fails to comply with his obligations at the period
designated, without need of the creditor to make a
demand

2.2.3.2. Art. 1169, Civil Code – general rule: no demand,

no delay, except when: (a) obligation or law expressly
declares; (b) time is of the essence; or (c) demand
would be useless

2.3. INTENT TO GAIN

2.3.1. mercantilist approach; valuable consideration

essential

3. CONSITUTIONAL PRIVISIONS OM COMMERCE AND TRADE

3.1. ECONOMIC NATIONALISM – ART. XII, SEC. 1

3.1.1. It sets dual goal of dynamic productivity and a more

equitable distribution of wealth

3.1.2. It seeks complementarity between industrialization

and agricultural development; and

3.1.3. It is protective of things Filipino

3.2. EQUITABLE DISTRIBUTION OF WEALTH – ART. II, SECS. 9 AND 10

3.3. FILIPINO FIRST POLICY AND NATIONALIZATION PROVISIONS – ART.

II, SECS. 19 AND 20

READ: Manila Prince Hotel v. GSIS, 267 SCRA 408 (1997); BUT SEE
Southern Cross Cement Corp. v. Cement Manufacturers Association of
the Philippines, 465 SCRA 532 (2005)

3.4. POWER OF JUDICIAL REVIEW – ART. VIII, SEC. 1

READ: Garcia v. BOI, 191 SCRA 288 (1990)

12
 CODE OF COMMERCE
4. APPLICABILITY

4.1. INAPPLICABLE (ART. 2270 CIVIL CODE)

NOT APPLICABLE TO: a) Partnership; b) Agency; c) Guaranty; d) Loan; e)

Sales; and, f) Deposit

4.2. APPLICABLE

STILL APPLICABLE TO: a) Transportation, charter party, respondentia,

averages, maritime commerce, bottomry, bill of lading, arrival under
stress, collision; b) Joint accounts; and, c) Aval, crossed checks, letters
of credit.

5. PRELIMINARY ARTICLES

5.1. WHO ARE MERCHANTS – ART. 1

5.1.1. Definition: Art. 1, Par. 1: “those who, having legal

capacity to engage in commerce, habitually devote
themselves thereto.”

5.1.2. Requisites: (i) habituality; (ii) engaged in commerce

not just as an incident to profession; and (iii) in his own
name, not just as agent.

5.1.3. Presumption: Art. 3: Legal presumption of engaging

in commerce: from announcement

5.1.4. Art. 1, Par. 2 on commercial or industrial associations

repealed by Corporation Code for corporations and Civil
Code for partnerships. See Discussions on Art. 15.

5.2. GOVERNING LAWS

ON ACTS OF COMMERCE (whether or not by merchants) – Art. 2: a)

Provisions of CoC; b If none, usages of commerce generally observed in
each place; c) If none, Civil Law

SOURCES: a) Principal sources: commercial legislation, contracts,

commercial usages and practices, civil law, judicial decisions; b) Indirect
sources: natural law, scientific law, explanatory notes and preamble to
laws, foreign commercial legislation and case law.

ON COMMERCIAL CONTRACTS – ART. 50: a) Provisions of CoC; b) If none,

special laws; and, c) If none, Civil Law.

13
 5.3. CAPACITY TO ENGAGE IN COMMERCE

5.3.1. Capacity (Art. 4)

5.3.1.1. Age of Majority

5.3.1.2. Free disposition of property

5.3.2. Restrictions on Capacity

5.3.2.1. Minority (Art. 5)

Capacity of minors to engage in commerce: through legal guardian

repealed by Rules of Court.

5.3.2.2. Married Women (Art. 6-12)

Capacity of wife to enter into commercial transactions

repealed/amended by Art. 73 and other provisions of Family Code

5.3.2.3. Nationality (Art. 15)

Foreigners and foreign corporations, who are governed by laws of their

country with respect to capacity to contract, only apply to individuals, as
provisions on foreign corporations doing business in the Philippines
superseded by Corporation Code.

5.3.3. Disqualifications

5.3.3.1. Absolute disqualifications – Art. 13: civil

interdiction, insolvency, prohibition by special law

5.3.3.2. Relative disqualifications – Art. 14: amended by

Revised Administrative Code.

5.4. COMMERCIAL REGISTRIES – ARTS. 16-49

repealed by National Internal Revenue Code and Civil Code on

partnerships provisions

5.5. FORM

5.5.1. General Rule

Art. 51: valid and enforceable in any form or language, but if amount
exceeds 1,500 pesetas (P300), testimony not allowed unless supported by
some other evidence. Compare with Statute of Frauds

5.5.2. Exceptions

14
Art. 52: a) Contracts which, in accordance with CoC or special laws,
must be reduced to writing or require forms for efficacy; and, b)
Contracts executed in foreign countries in which laws require certain
forms or formalities, even if Philippine law does not so require.

5.6. ILLICIT AGREEMENTS

Art. 53: do not give rise to obligations or causes of action even should
they refer to commercial transactions

5.7. PERFECTION

IF BY CORRESPONDENCE – Art. 54: from the moment an answer is made

accepting the offer

IF AGENT OR BROKER INTERVENES – Art. 55: when the contracting parties

shall have accepted his offer.

5.8. INDEMNITY CLAUSE

Art. 56: If penalty is fixed, remedy of injured party is to demand

fulfillment of the contract or the penalty stipulated; recourse to one of
these actions shall extinguish the other unless the contrary is stipulated.

5.9. RULES ON INTERPRETATION

Art. 57: interpretation and compliance in good faith and full

enforceability of their provisions in their plain, usual and proper
meanings.

Art. 58: in case of conflicts between copies of the contract, and an agent
should have intervened in its negotiation, that which appears in the
agent’s book shall prevailed provided they are kept in accordance with
law.

Art. 59: In case of doubt, and the rules enunciated cannot resolve the
conflict, issues shall be decided in favor of the debtor.

5.10. RULES ON PERIODS

Art. 60: In computation of days, months and years, day has 24 hours,
months as designated in Gregorian calendar, and year has 365 days. See
Art. 13 of Civil Code, where month is 30 days unless named. Also, in
Namarco v. Tecson, 29 SCRA 70 (1969), leap year taken into
consideration for prescription purposes.

Art. 61: General rule, days of grace not recognized, except if stipulated
in contract or by law. EX: Sec. 230 of Insurance Code gives 30 days
grace period to pay premium in life insurance contracts.

15
Art. 62: If obligation has no period fixed by contract or by CoC, then
demandable 10 days after execution of contract if they give rise to
ordinary action, and on the day after if they involved immediate
execution.

Art. 63: Default (mora) in performance of commercial obligations shall

commence: a) in contracts where a day for performance is fixed by
contract or law, on the day following their maturity; and, b) otherwise,
from the day on which the creditor makes a judicial demand on the
debtor and notifies him of the protest for loss and damages made against
him. BUT SEE Art. 1197, Civil Code, which requires parties to go to court
to have period fixed.

5.11. PLACES AND BUILDINGS FOR COMMERCIAL TRANSACTIONS –

ARTS. 64-238 REPEALED BY SECURITIES ACT.

5.12. JOINT ACCOUNTS – ARTS. 239-243

CUENTAS EN PARTICIPACION, while still in force, hardly used vis-à-vis

corporations and partnerships

5.13. COMMERCIAL AGENCY, COMMERCIAL DEPOSITS, COMMERCIAL

LOANS, COMMERCIAL PURCHASE AND SALE AND BARTER AND
TRANSFER ON NON-NEGOTIABLE CREDITS (ARTS. 244-348
REPEALED BY ART. 2270, CIVIL CODE)

6. A

16
 NEGOTIABLE INSTRUMENTS
Act No. 2013 (1911)

7. NATURE AND COVERAGE OF NIL7

7.1. NIL IS A COMPLETE LAW

7.1.1. Coverage

ACT NO. 2031 OR THE NEGOTIABLE INSTRUMENTS LAW was enacted 03

February 1911 and made effective ninety days after its publication in the
Official Gazette.8

THE NIL applies only to negotiable instruments (“NI”) and covers the
entire subject of NI and must be treated as a complete body of law upon
the subject and controlling on all cases to which it is applicable. 9 READ:
Osmena v. Citibank & Tan, G.R. No. 141278, 23 March 2004;
READ: BPI v. Court of Appeals & Marasigan, G.R. No. 120639, 25
September 1998; READ: Roman Catholic Bishop of Malolos Inc. v.
IAC & Roses-Francisco Realty, G.R. No. 72110, 16 November 1990

7.1.2. Exceptions10

7.1.2.1. Crossed Checks

ARTS. 443 TO 556 OF THE CODE OF COMMERCE OF 1888. THE EFFECTS

OF CROSSING A CHECK. Among the different types of checks issued by a
drawer is the crossed check. The Negotiable Instruments Law is silent
with respect to crossed checks, although the Code of Commerce makes
reference to such instruments. This Court has taken judicial cognizance
of the practice that a check with two parallel lines in the upper left hand
corner means that it could only be deposited and could not be converted
into cash. Thus, the effect of crossing a check relates to the mode of
payment, meaning that the drawer had intended the check for deposit
only by the rightful person, i.e., the payee named therein. The crossing
may be "special" wherein between the two parallel lines is written the
name of a bank or a business institution, in which case the drawee should
pay only with the intervention of that bank or company, or "general"
wherein between two parallel diagonal lines are written the words "and
Co." or none at all, in which case the drawee should not encash the same
but merely accept the same for deposit. In Bataan Cigar v. Court of
Appeals, we enumerated the effects of crossing a check as follows: (a) the
check may not be encashed but only deposited in the bank; (b) the check
may be negotiated only once – to one who has an account with a bank;
7
ACT NO. 2013 “The Negotiable Instruments Law” (1911) [“NIL”]; Take Note: unless
otherwise indicated any reference to Section or Sec. shall refer to the NIL
8
Sec. 198
9
VILLANUEVA, at 382 citing Bank of Italy v. Symmes 118 Cal. Appl. 716 5 P.2d 956
10
see also Sec. 195-196

17
and (c) the act of crossing the check serves as a warning to the holder
that the check has been issued for a definite purpose so that he must
inquire if he has received the check pursuant to that purpose; otherwise,
he is not a holder in due course.11

7.1.2.2. Letters of Credit12

DEFINITION. It may be defined as that written matter which a merchant

addresses to another merchant, requesting the delivery to holder of a
certain sum of money, or, even if the persons have no such qualification,
one issued for the purpose of attending to a commercial transaction. 13
(Improve citation)

LETTERS OF CREDIT ARE NOT NIS WITHIN THE NIL. The letter of credit
evolved as a mercantile specialty, and the only way to understand all its
facets is to recognize that it is an entity unto itself. The relationship
between the beneficiary and the issuer of a letter of credit is not strictly
contractual, because both privity and a meeting of the minds are lacking,
yet strict compliance with its terms is an enforceable right. Nor is it a
third-party beneficiary contract, because the issuer must honor drafts
drawn against a letter regardless of problems subsequently arising in the
underlying contract. Since the bank’s customer cannot draw on the
letter, it does not function as an assignment by the customer to the
beneficiary. Nor, if properly used, is it a contract of suretyship or
guarantee, because it entails a primary liability following a default.
Finally, it is not in itself a negotiable instrument, because it is not payable
to order or bearer and is generally conditional, yet the draft presented
under it is often negotiable. READ: Transfield Philippines v. Luzon
Hydro Corporation et al., G.R. No. 146717, 22 November 2004

7.1.2.3. Shares of Stock

STOCK CERTIFICATES. Besides, in Philippine jurisprudence, a certificate

of stock is not a negotiable instrument. "Although it is sometime
regarded as quasi-negotiable, in the sense that it may be transferred by
endorsement, coupled with delivery, it is well-settled that it is non-
negotiable, because the holder thereof takes it without prejudice to such
rights or defenses as the registered owner/s or transferror's creditor may
have under the law, except insofar as such rights or defenses are subject
to the limitations imposed by the principles governing estoppel."14

7.1.2.4. Postal Money Orders

11
Bank of America, NT & SA v. Associated Citizens Bank et al., G.R. Nos. 141001 &
141018, 21 May 2009
12
CODE OF COMMERCE (1888), ARTS. 567-572. See also --
13
MARTIN, at 57
14
De los Santos vs. McGrath, 96 Phil. 577; Tan v. Securities and Exchange Commission,
et al., G.R. No. 95696, 03 March 1992

18
POSTAL MONEY ORDERS. It is not disputed that our postal statutes were
patterned after statutes in force in the United States. For this reason,
ours are generally construed in accordance with the construction given
in the United States to their own postal statutes, in the absence of any
special reason justifying a departure from this policy or practice. The
weight of authority in the United States is that postal money orders are
not negotiable instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs.
Stock Drawers National Bank, 30 Fed. 912), the reason behind this rule
being that, in establishing and operating a postal money order system,
the government is not engaging in commercial transactions but merely
exercises a governmental power for the public benefit. x x x It is to be
noted in this connection that some of the restrictions imposed upon
money orders by postal laws and regulations are inconsistent with the
character of negotiable instruments. For instance, such laws and
regulations usually provide for not more than one endorsement; payment
of money orders may be withheld under a variety of circumstances (49
C.J. 1153).15

7.1.2.5. Treasury Warrants

TREASURY WARRANTS ARE NOT NIS. But this treasury warrant is not
within the scope of the negotiable instruments law. For one thing, the
document bearing on its face the words "payable from the appropriation
for food administration," is actually an order for payment out of "a
particular fund," and is not unconditional, and does not fulfill one of the
essential requirements of a negotiable instrument. (Section 3 last
sentenced and section 1[b] of the Negotiable Instruments Law.) In the
United States, government warrants for the payment of money are not
negotiable instruments nor commercial proper.16

7.2. FUNCTION

SUBSTITUTE FOR MONEY. The primary purpose of negotiability is to allow

bills and notes the effect which money, in the form of government bills
and notes, supplies in the commercial world. It allows men of undoubtful
credit to carry on a business enterprise upon their promissory notes, bills
of exchanges and checks, knowing that other businessmen will treat
these promises as cash. Furthermore, the purpose of such is to allow bills
and notes to go from hand to hand in the commercial markets and to take
the part of money in commercial transactions.17

7.2.1. General Rule

ART. 1249 OF THE CIVIL CODE OF THE PHILIPPINES. Payment thru

mercantile documents (i.e., NI) shall produce effect of payment only
15
Philippines Education Co., Inc. v. Soriano et al., G. R. No. L-22405, 30 June 1971
16
Abubakar v. The Auditor General, G.R. No. L-1405, 31 July 1948
17
MARTIN, T. C., I Commentaries and Jurisprudence on the Philippine Commercial Laws,
[MARTIN], at 62-63

19
when: a) they have been encashed; or, b) through the fault of the creditor
they have been impaired.

SEC. 60 OF THE NEW CENTRAL BANK ACT (“NCBA”). Checks

representing demand deposits do not have legal tender power and their
acceptance in the payment of debts, both public and private, is at the
option of the creditor. EX: cashier’s or manager’s check, vacillating
ruling. MANAGER’S CHECK IS NOT LEGAL TENDER. READ: Pabugais v.
Sahijwani, G.R. No. 156846, 23 February 2004

7.2.2. Exceptions

SEC. 60 OF THE NCBA: Check which has been cleared and credited to
creditor’s account shall be equivalent to delivery the creditor of cash.
SOMETIMES A CHECK IS CONSIDERED AS GOOD AS CASH . It is a well-
known and accepted practice in the business sector that a Cashier's
Check is deemed as cash. Moreover, since the said check had been
certified by the drawee bank, by the certification, the funds represented
by the check are transferred from the credit of the maker to that of the
payee or holder, and for all intents and purposes, the latter becomes the
depositor of the drawee bank, with rights and duties of one in such
situation. Where a check is certified by the bank on which it is drawn, the
certification is equivalent to acceptance. Said certification "implies that
the check is drawn upon sufficient funds in the hands of the drawee, that
they have been set apart for its satisfaction, and that they shall be so
applied whenever the check is presented for payment. It is an
understanding that the check is good then, and shall continue good, and
this agreement is as binding on the bank as its notes in circulation, a
certificate of deposit payable to the order of the depositor, or any other
obligation it can assume. The object of certifying a check, as regards
both parties, is to enable the holder to use it as money." When the holder
procures the check to be certified, "the check operates as an assignment
of a part of the funds to the creditors." Hence, the exception to the rule
enunciated under Section 63 of the Central Bank Act to the effect "that a
check which has been cleared and credited to the account of the creditor
shall be equivalent to a delivery to the creditor in cash in an amount
equal to the amount credited t o his account" shall apply in this case. 18
NEVERTHELESS, the mere issuance of a manager’s check does not ipso
facto work as an automatic transfer of funds to the account of the payee.
In case the procurer of the manager’s or cashier’s check retains custody
of the instrument, does not tender it to the intended payee, or fails to
make an effective delivery, we find that Sec. 16, on undelivered
instruments under the Negotiable Instruments Law, is applicable. 19
READ: RCBC v. Hi-Tri Development Corporation and Bakunawa,
G.R. No. 192413, 13 June 2012
18
New Pacific Timber v. Seneris, G.R. No. 41764, 19 December 1980; but see Roman
Catholic Bishop of Malolos v. IAC G.R. No. 72110, 16 November 1990
19
Rizal Commercial Banking Corporation v. Hi-Tri Development Corporation & Luz R.
Bakunawa, G.R. No. 192413, 13 June 2012

20
STALE CHECKS. A stale check is one which has not been presented for
payment within a reasonable time after its issue. It is valueless and,
therefore, should not be paid. Under the negotiable instruments law, an
instrument not payable on demand must be presented for payment on the
day it falls due. When the instrument is payable on demand,
presentment must be made within a reasonable time after its issue. In
the case of a bill of exchange, presentment is sufficient if made within a
reasonable time after the last negotiation thereof. 20

IMPAIRMENT IS NOT DISHONOR. Surely, for a check to the dishonored

upon presentment on the one hand, and to be state for not being
presented at all in time, on the other, are incompatible developments that
naturally have variant legal consequences. Thus, if needed the check in
question had been dishonored, then there can be no doubt that
petitioner's redemption was null and void. On the oher hand, if it had
only become stale, then it becomes imperative that the circumstances
that caused its non-presentment be determined, for if this was not due to
the fault of the petitioner, then it would be unfair to deprive him of the
rights he had acquired as redemptioner, particularly, the value of the
check has otherwise been received or realized by the party concerned.21

7.3. PRINCIPAL FEATURES OF NI

7.3.1. Negotiability

NATURE. The language of negotiability which characterize a negotiable

paper as a credit instrument is its freedom to circulate as a substitute for
money. Hence, freedom of negotiability is the touchtone relating to the
protection of holders in due course, and the freedom of negotiability is
the foundation for the protection which the law throws around a holder
in due course (11 Am. Jur. 2d, 32). This freedom in negotiability is totally
absent in a certificate indebtedness as it merely to pay a sum of money to
a specified person or entity for a period of time. “The accepted rule is
that the negotiability or non-negotiability of an instrument is determined
from the writing, that is, from the face of the instrument itself. In the
construction of a bill or note, the intention of the parties is to control, if it
can be legally ascertained. While the writing may be read in the light of
surrounding circumstance in order to more perfectly understand the
intent and meaning of the parties, yet as they have constituted the
writing to be the only outward and visible expression of their meaning,
no other words are to be added to it or substituted in its stead. The duty
of the court in such case is to ascertain, not what the parties may have
secretly intended as contradistinguished from what their words express,
but what is the meaning of the words they have used. What the parties
meant must be determined by what they said.”22

20
The International Corporate Bank v. Sps. Gueco, G.R. No. 141968, 12 February 2001
21
Crystal v. CA, G.R. No. L-35767, 18 June 1976

21
 7.3.2. Accumulation of Secondary Contracts

Negotiation is not Assignment. Firstly, it is important to bear in mind

that the negotiation of a negotiable instrument must be distinguished
from the assignment or transfer of an instrument whether that be
negotiable or non-negotiable. Only an instrument qualifying as a
negotiable instrument under the relevant statute may be negotiated
either by indorsement thereof coupled with delivery, or by delivery alone
where the negotiable instrument is in bearer form. A negotiable
instrument may, however, instead of being negotiated, also be assigned
or transferred. The legal consequences of negotiation as distinguished
from assignment of a negotiable instrument are, of course, different. A
non-negotiable instrument may, obviously, not be negotiated; but it may
be assigned or transferred, absent an express prohibition against
assignment or transfer written in the face of the instrument: “The words
"not negotiable," stamped on the face of the bill of lading, did not destroy
its assignability, but the sole effect was to exempt the bill from the
statutory provisions relative thereto, and a bill, though not negotiable,
may be transferred by assignment; the assignee taking subject to the
equities between the original parties.”23

7.3.3. Holder in Due Course

WHAT IS A HIDC? The NIL defines a HIDC under Sec. 52 and further
states in Sec. 59 that every holder is deemed prima facie a holder in due
course. However, when it is shown that the title of any person who has
negotiated the instrument was defective, the burden is on the holder to
prove that he or some person under whom he claims, acquired the title as
holder in due course.24

CONSEQUENCES OF NOT BEING A HIDC. However, the fact that

respondents are not holders in due course does not automatically mean
that they cannot recover on the check. The Negotiable Instruments Law
does not provide that a holder who is not a holder in due course may not
in any case recover on the instrument. The only disadvantage of a holder
who is not in due course is that the negotiable instrument is subject to
defenses as if it were non-negotiable.25

22
Traders Royal Bank v. Court of Appeals et al., G.R. No. 93397, 03 March 1997 citing
Caltex v. Court of Appeals, 121 SCRA 448
23
Sesbreño v. Court of Appeals, G.R. No. 89252, 24 May 1993
24
Bataan Cigar and Cigarette Factory, Inc. v. CA and State Investment House Inc., G.R.
No. 93048, 03 March 1994
25
Dino v. Sps. Loot, G.R. No. 170912, 19 April 2010

22
 7.4. PRIMARY PROVISIONS

7.4.1. Form of Negotiable Instruments26 (Sec 1)

7.4.2. Promissory Notes27

JURISPRUDENTIAL DEFINITION. A promissory note is a solemn

acknowledgment of a debt and a formal commitment to repay it on the
date and under the conditions agreed upon by the borrower and the
lender. A person who signs such an instrument is bound to honor it as a
legitimate obligation duly assumed by him through the signature he
affixes thereto as a token of his good faith. If he reneges on his promise
without cause, he forfeits the sympathy and assistance of this Court and
deserves instead its sharp repudiation.28

7.4.3. Bills of Exchange29

7.4.3.1. Checks30

JURISPRUDENTIAL DEFINITION. An ordinary check refers to a bill of

exchange drawn by a depositor (drawer) on a bank (drawee), requesting
the latter to pay a person named therein (payee) or to the order of the
payee or to the bearer, a named sum of money. The issuance of the check
does not of itself operate as an assignment of any part of the funds in the
bank to the credit of the drawer. Here, the bank becomes liable only after
it accepts or certifies the check. After the check is accepted for payment,
the bank would then debit the amount to be paid to the holder of the
check from the account of the depositor-drawer. x x x There are checks of
a special type called manager’s or cashier’s checks. These are bills of
exchange drawn by the bank’s manager or cashier, in the name of the
bank, against the bank itself. Typically, a manager’s or a cashier’s check
is procured from the bank by allocating a particular amount of funds to
be debited from the depositor’s account or by directly paying or
depositing to the bank the value of the check to be drawn. Since the bank
issues the check in its name, with itself as the drawee, the check is
deemed accepted in advance. Ordinarily, the check becomes the primary
obligation of the issuing bank and constitutes its written promise to pay
upon demand.31

MANAGER’S CHECK. A manager’s check is one drawn by the bank’s

manager upon the bank itself. It is similar to a cashier’s check both as to

26
Sec. 1
27
Sec. 184
28
Dela Rama Co V. Admiral United Savings Bank, G.R. No. 154740, 16 April 2008
29
Sec. 126-183
30
Sec. 185-189; see also Sec. 443-556 of the Code of Commerce of the Philippines
(1888)
31
Rizal Commercial Banking Corporation v. Hi-Tri Development Corporation & Luz R.
Bakunawa, G.R. No. 192413, 13 June 2012

23
effect and use. A cashier’s check is a check of the bank’s cashier on his
own or another check. In effect, it is a bill of exchange drawn by the
cashier of a bank upon the bank itself, and accepted in advance by the
act of its issuance.[29] It is really the bank’s own check and may be
treated as a promissory note with the bank as a maker.[30] The check
becomes the primary obligation of the bank which issues it and
constitutes its written promise to pay upon demand. The mere issuance
of it is considered an acceptance thereof. If treated as promissory note,
the drawer would be the maker and in which case the holder need not
prove presentment for payment or present the bill to the drawee for
acceptance.32 (READ: Rizal Commercial Banking Corporation v. Hi-
tri Development Corporation & Bakunawa, G.R. No. 192413, 13
June 2012)

MANAGER’S CHECKS MAY BE COUNTERMANDED. The foregoing rulings

clearly establish that the drawee bank of a manager's check may
interpose personal defenses of the purchaser of the manager's check if
the holder is not a holder in due course. In short, the purchaser of a
manager's check may validly countermand payment to a holder who is
not a holder in due course. Accordingly, the drawee bank may refuse to
pay the manager's check by interposing a personal defense of the
purchaser. Hence, the resolution of the present case requires a
determination of the status of Odrada as holder of the manager's checks.
READ: RCBC v. Odrada, G.R. No. 219037, 19 October 2016; While
indeed, it cannot be said that manager’s and cashier’s checks are pre-
cleared, clearing should not be confused with acceptance. Manager’s and
cashier’s checks are still the subject of clearing to ensure that the same
have not been materially altered or otherwise completely counterfeited.
However, manager’s and cashier’s checks are pre-accepted by the mere
issuance thereof by the bank, which is both its drawer and drawee. Thus,
while manager’s and cashier’s checks are still subject to clearing, they
cannot be countermanded for being drawn against a closed account, for
being drawn against insufficient funds, or for similar reasons such as a
condition not appearing on the face of the check. Long standing and
accepted banking practicesdo not countenance the countermanding of
manager’s and cashier’s checks on the basis of a mere allegation of
failure of the payee to comply with its obligations towards the purchaser.
On the contrary, the accepted banking practice is that such checks are as
good as cash. READ: Metrobank v. Chiok, G.R. No. 172652, 26
November 2014.

7.4.3.2. Bills in Set33

7.4.3.3. Drafts

32
The International Corporate Bank v. Sps. Gueco, G.R. No. 141968, 12 February 2001,
supra.
33
Sec. 178-183

24
DEFINITION. A draft is a form of a bill of exchange used mainly in
transactions between persons physically remote from each other. It is an
order made by one person, say the buyer of goods, addressed to a person
having in his possession funds of such buyer ordering the addressee to
pay the purchase price to the seller of the goods. Where the order is
made by one bank to another, it is referred to as a bank draft. 34 To begin
with, we may say that a demand draft is a bill of exchange payable on
demand (Arnd vs. Aylesworth, 145 Iowa 185; Ward vs. City Trust
Company, 102 N.Y.S. 50; Bank of Republic vs. Republic State Bank, 42
S.W. 2d, 27). Considered as a bill of exchange, a draft is said to be, like
the former, an open letter of request from, and an order by, one person
on another to pay a sum of money therein mentioned to a third person,
on demand or at a future time therein specified (13 Words and Phrases,
371). As a matter of fact, the term "draft" is often used, and is the
common term, for all bills of exchange. And the words "draft" and "bill of
exchange" are used indiscriminately (Ennis vs. Coshoctan Nat. Bank, 108
S.E., 811; Hinnemann vs. Rosenback, 39 N.Y. 98, 100, 101; Wilson vs.
Bechenau, 48 Supp. 272, 275). On the other hand, a bill of exchange
within the meaning of our Negotiable Instruments Law (Act No. 2031)
does not operate as an assignment of funds in the hands of the drawee
who is not liable on the instrument until he accepts it. This is the clear
import of Section 127. It says: "A bill of exchange of itself does not
operate as an assignment of the funds in the hands of the drawee
available for the payment thereon and the drawee is not liable on the bill
unless and until he accepts the same." In other words, in order that a
drawee may be liable on the draft and then become obligated to the
payee it is necessary that he first accepts the same. In fact, our law
requires that with regard to drafts or bills of exchange there is need that
they be presented either for acceptance or for payment within a
reasonable time after their issuance or after their last negotiation thereof
as the case may be (Section 71, Act 2031). Failure to make such
presentment will discharge the drawer from liability or to the extent of
the loss caused by the delay (Section 186, Ibid.)35

7.4.4. Certificates of Time Deposit

RATIONALE. On this score, the accepted rule is that the negotiability or

non-negotiability of an instrument is determined from the writing, that is,
from the face of the instrument itself. 9 In the construction of a bill or
note, the intention of the parties is to control, if it can be legally
ascertained. 10 While the writing may be read in the light of surrounding
circumstances in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to be the
only outward and visible expression of their meaning, no other words are
to be added to it or substituted in its stead. The duty of the court in such

34
Bank of the Philippines Islands v. Commissioner of Internal Revenue, G.R. No.
137002, 27 July 2006
35
Republic of the Philippines v. Philippine National Bank et al., G.R. No. L-16106, 30
December 1961

25
case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the
meaning of the words they have used. What the parties meant must be
determined by what they said. 11 Contrary to what respondent court
held, the CTDs are negotiable instruments. The documents provide that
the amounts deposited shall be repayable to the depositor. And who,
according to the document, is the depositor? It is the "bearer." The
documents do not say that the depositor is Angel de la Cruz and that the
amounts deposited are repayable specifically to him. Rather, the amounts
are to be repayable to the bearer of the documents or, for that matter,
whosoever may be the bearer at the time of presentment.36

7.4.5. Title of the Act,37 Definition and Meaning of Terms, 38

Application and Cases Not Provided For, 39 Repeals,40 and
Effectivity41

WHAT IS REASONABLE? [I]n determining what is a “reasonable time,”

regard is to be had to the nature of the instrument, the usage of trade or
business with respect to such instruments, and the facts of the particular
case. The test is whether the payee employed such diligence as a prudent
man exercises in his own affairs.42

8. FORMAL REQUISITES OF NEGOTIABLE INSTRUMENTS

(MEMORIZE: SEC.1)

SUBSTANTIAL COMPLIANCE.43 As long as a commercial paper conforms

with the definition of a bill of exchange, that paper is considered a bill of
exchange.44 The nature of acceptance is important only in the
determination of the kind of liabilities of the parties involved, but not in
the determination of whether a commercial paper is a bill of exchange or
not.45

EXAMPLE. The electronic messages are not signed by the investor-clients

as supposed drawers of a bill of exchange; they do not contain an
unconditional order to pay a sum certain in money as the payment is
36
Caltex (Phils.) v. Court of Appeals & Security Bank and Trust Company, G.R. No.
97753, 10 August 1992
37
Sec. 190
38
Sec. 191-194
39
Sec. 195-196
40
Sec. 197
41
Sec. 198
42
The International Corporate Bank v. Sps. Gueco, G.R. No. 141968, 12 February 2001,
supra
43
Sec. 10; but see Sec. 8
44
JMBD: This principle also applies to promissory notes and other instruments covered
by the NIL.
45
The Philippine Commerce Bank v. Aruego, G.R. Nos. L-25836-37, 31 January 1981;
see also, Sps. Violago v. BA Finance Corporation & Violago, G.R. No. 158262, 21 July
2008

26
supposed to come from a specific fund or account of the investor-clients;
and, they are not payable to order or bearer but to a specifically
designated third party. Thus, the electronic messages are not bills of
exchange. As there was no bill of exchange or order for the payment
drawn abroad and made payable here in the Philippines, there could have
been no acceptance or payment that will trigger the imposition of the
DST under Section 181 of the Tax Code. READ: HSBC v. Commissioner
of Internal Revenue, G.R. No. 166018, 04 June 2014

8.1. IT MUST BE IN WRITING46

8.1.1. Purpose

TO PREVENT FRAUD. What is required is that agreement be in writing as

the rule is in fact founded on “long experience that written evidence is so
much more certain and accurate than that which rests in fleeting
memory only, that it would be unsafe, when parties have expressed the
terms of their contract in writing, to admit weaker evidence to control
and vary the stronger and to show that the parties intended a different
contract from that expressed in the writing signed by them.” Thus, for
the parol evidence rule to apply, a written contract need not be in any
particular form, or be signed by both parties. As a general rule, bills,
notes and other instruments of a similar nature are not subject to be
varied or contradicted by parol or extrinsic evidence.47
WHEN FORM IS ESSENTIAL TO VALIDITY. Contracts shall be obligatory, in
whatever form they may have been entered into, provided all the
essential requisites for their validity are present. However, when the law
requires that a contract be in some form in order that it may be valid or
enforceable, or that a contract be proved in a certain way, that
requirement is absolute and indispensable. In such cases, the right of the
parties stated in the following article cannot be exercised. 48

8.1.2. “Physical Integrity of Whole Instrument” Rule

NEGOTIABILITY DETERMINED ONLY FROM FACE OF NI ITSELF AND NOT

ELSEWHERE.49 On this score, the accepted rule is that the negotiability or
non-negotiability of an instrument is determined from the writing, that is,
from the face of the instrument itself. 9 In the construction of a bill or
note, the intention of the parties is to control, if it can be legally
ascertained. 10 While the writing may be read in the light of surrounding
circumstances in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to be the
only outward and visible expression of their meaning, no other words are

46
Sec. 1(a)
47
Inciong, Jr. v. CA & Phil. Bank of Communications, G.R. No. 96405, 26 June 1996
48
CIVIL CODE, Art. 1356 et seq.
49
VILLANUEVA, at 388 citing Des Moines Saving Bank v. Arthur, 163 Ia 205, 143 NW 556

27
to be added to it or substituted in its stead. The duty of the court in such
case is to ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the
meaning of the words they have used. What the parties meant must be
determined by what they said.50

8.2. IT MUST BE SIGNED BY MAKER OR DRAWER51

8.2.1. General Rule

THE RULE. No person is liable on the instrument whose signature does

not appear thereon.52 But, to be considered as a signature, no particular
form is required - any inscription, stamping will be sufficient.

FORM AND LOCATION. What is essential is that the signer has intended to
adopt the signature on the instrument as his own and to obligate himself
for its payment. It may be the full name, surname only, or even initials. It
can also come in any other form, using any tool of inscription, printed,
typed or even stamped. The important thing really is that the maker or
drawer intends to be bound by it.53

8.2.2. Exceptions

8.2.2.1. Trade or assumed name54

8.2.2.2. By agent55

8.3. IT MUST CONTAIN AN UNCONDITIONAL PROMISE OR ORDER56

8.3.1. Reason

This is due to the purpose - NIs are substitutes for money, medium of
exchange for commercial and credit transactions, and are means of
immediate payment.57

8.3.2. Form

WHERE MUST THE PROMISE OR ORDER BE? The promise or order must be
expressly found on the NI itself, as mere existence of debt does not

50
Caltex (Phils.) v. Court of Appeals and Security Bank and Trust Company, G.R. No.
97753, 10 August 1992
51
Sec. 1(a)
52
Sec. 18
53
DE LEON, Hector S., THE PHILIPPINE NEGOTIABLE INSTRUMENTS LAW, at pp. 15
54
Sec. 18
55
Sec. 19-21
56
Sec. 1(b)
57
DE LEON, at p. 4

28
amount to a promise.58 No specific words are required (i.e., “Good for” or
“Due” or “I will pay”) and words of courtesy will not destroy negotiability
(“X will oblige Y by paying”), but a mere request or authorization is not
enough.

GENERALLY. A mere acknowledgment of debt is not a promise to pay

within the NIL, except if the date of payment is mentioned (“payable
on”); or, words of negotiability are used used (“Due to X or order”).
HOWEVER, THERE ARE INSTANCES WHEN IS AN ACKNOWLEDGEMENT OF
DEBT IS A PROMISE TO PAY. "An acknowledgment may become a promise
by the addition of words by which a promise of payment is naturally
implied, such as, "payable," "payable" on a given day, "payable on
demand," "paid . . . when called for," . . . (10 Corpus Juris Secundum p.
523.) "To constitute a good promissory note, no precise words of contract
are necessary, provided they amount, in legal effect, to a promise to pay.
In other words, if over and above the mere acknowledgment of the debt
there may be collected from the words used a promise to pay it, the
instrument may be regarded as a promissory note. 1 Daniel, Neg. Inst.
sec. 36 et seq.; Byles, Bills, 10, 11, and cases cited . . . "Due A. B. $325,
payable on demand," or, "I acknowledge myself to be indebted to A in
$109, to be paid on demand, for value received," or, "I O. U. $85 to be
paid on May 5th," are held to be promissory notes, significance being
given to words of payment as indicating a promise to pay." 1 Daniel Neg.
Inst. see. 39, and cases cited. (Cowan vs. Hallack, (Colo.) 13 Pacific
Reporter 700, 703.)59

8.3.3. Unconditional Promise or Order

DEFINITION. Every obligation whose performance does not depend upon

a future or60 uncertain event, or upon a past event unknown to the
parties, is demandable at once. 61 If NI payable upon a contingency (“if it
rains”), it is not negotiable.62 HOWEVER, if the condition is imposed on an
indorsement,63 that does not destroy negotiability.64

PERIODS. A day certain is understood to be that which must necessarily

come, although it may not be known when.65 If obligation subject to
period (“10 days after X dies”), even if exact date not known, then it is
negotiable.66

58
VILLANUEVA, at pp 389-390
59
Pacifica Jimenez v. Jose Bucoy, G.R. No. L-10221, 28 February 1958
60
JMBD: This is traditionally understood as being “and” and not “or” otherwise it there
will be a conflict with the legal definition of a period; see CIVIL CODE, Art. 1193.
61
CIVIL CODE, Art. 1179; see also Art. 1193 (“If the uncertainty consists in whether the
day will come or not, the obligation is conditional x x x”)
62
Sec. 4
63
see discussions on Sec. 30 et seq.
64
Sec. 39
65
CIVIL CODE, Art. 1193
66
Sec. 4 (c)

29
AN INDICATION OF A PARTICULAR FUND OUT OF WHICH REIMBURSEMENT IS
TO BE MADE OR A PARTICULAR ACCOUNT TO BE DEBITED WITH THE
AMOUNT.67 But, an order or promise to pay out of a particular fund is not
unconditional.68 MEANING. A distinction must be made between the
meaning of the words “fix” and “indicate.” If the instrument fixes the
fund from where the payment has to be made, so the payment cannot be
made from other funds, this destroys negotiability. On the other hand, if
the instrument merely indicates the fund from where the payment is to
be made, so that the obligor (payor) will still be liable even if the
indicated fund is depleted, then the instrument is still negotiable. 69 Thus,
a check is negotiable while a treasury warrant is not.70

A STATEMENT OF THE TRANSACTION WHICH GIVES RISE TO THE NI.71

(EXTRINSIC REFERENCE.) Reference in a promissory note to some
extrinsic agreement, in order to destroy its negotiability, must be such as
to indicate that the paper is to be burdened with conditions of that
agreement. When reference to a simple recital of the consideration of
which the paper was given, or is a mere mention of the origin of the
transaction, its negotiability is unaffected.72

ADDITIONAL PROVISIONS NOT AFFECTING NEGOTIABILITY73 1) Authorizes

the sale of collateral securities in case the NI be not paid at maturity; 2)
Authorizes the confession of judgment if the NI be not paid at maturity:
STIPULATION IS VOID BEING CONTRARY TO PUBLIC POLICY. We are of the
opinion that warrants of attorney to confess judgment are not authorized
nor contemplated by our law. We are further of the opinion that
provisions in notes authorizing attorneys to appear and confess
judgments against makers should not be recognized in this jurisdiction by
implication and should only be considered as valid when given express
legislative sanction.74 We agree with the appellee that this kind of clauses
are void and unenforceable, as against public policy, "because they
enlarge the field for fraud, because in these instruments the promissor
bargains away his right to a day in court and because the effect of the
instrument is to strike down the right of appeal accorded by the statute."
However, if the creditor sues, the debtor can go to court and only then
confess judgment. This is valid if done by the debtor himself; 75 3) Waives

67
Sec. 3 (a)
68
Sec. 3 last ¶
69
VILLANUEVA, at p. 391
70
see § 1.4.1.2.1 supra, and § 2.3.6.1 infra.
71
Sec. 3 (b)
72
VILLANUEVA, at p. 392 citing Elizalde & Co., Inc. v. Biñan Trans. Co. (CA) 58 O.G. 5886
(1960)
73
Sec. 5
74
Philippine National Bank v. Manila Oil Refining & By-Products Company, Inc., G.R.
No. L-18103, 08 June 1922
75
VILLANUEVA, at p.404 citing Traders Insurance and Surety Company v. Dy Eng Giok et
al., G.R. No. L-9073, 17 November 1978

30
the benefit of any law intended for the advantage or protection of the
obligor; or, 4) Gives the holder an election to require something to be
done in lieu of payment of money.

WHEN NOT NEGOTIABLE. 1) Order or promise to pay out of a particular

fund is not unconditional76 TREASURY WARRANTS ARE NOT NIS. But this
treasury warrant is not within the scope of the negotiable instruments
law. For one thing, the document bearing on its face the words "payable
from the appropriation for food administration," is actually an order for
payment out of "a particular fund," and is not unconditional, and does not
fulfill one of the essential requirements of a negotiable instrument.
(Section 3 last sentenced and section 1[b] of the Negotiable Instruments
Law.) In the United States, government warrants for the payment of
money are not negotiable instruments nor commercial proper; 77 2) If
reference to transaction which gives rise to the NI subjects the NI to the
conditions of such agreement, not negotiable; 78 3) NI contains an order
or promise to do any act in addition to the payment of money is not
negotiable;79 NOTE: But nothing in this section shall validate provision
or stipulation otherwise illegal.80

8.4. TO PAY A SUM CERTAIN IN MONEY81

THE SUM PAYABLE IS CERTAIN WITHIN THE MEANING OF NIL ALTHOUGH IT

IS TO BE PAID:82 1) With interest. USURY LAW IS STILL IN EXISTENCE BUT
EFFECTIVELY SUSPENDED. The power of the CB to effectively suspend the
Usury Law pursuant to P.D. No. 1684 has long been recognized and
upheld in many cases. As the Court explained in the landmark case of
Medel v. CA,36 citing several cases, CB Circular No. 905 "did not repeal
nor in anyway amend the Usury Law but simply suspended the latter’s
effectivity;"37 that "a CB Circular cannot repeal a law, [for] only a law
can repeal another law;"38 that "by virtue of CB Circular No. 905, the
Usury Law has been rendered ineffective;"39 and "Usury has been legally
non-existent in our jurisdiction. Interest can now be charged as lender
and borrower may agree upon;”83 2) By stated installments; 3) By stated
installments, with a provision that, upon default in payment of any
installment or of interest, the whole shall become due - ACCELERATION
CLAUSE. It appears that the promissory note was secured by a mortgage
providing that, in case the mortgagor failed or refused to pay any
amortization, "all the other amortizations shall then be and become due

76
Sec. 3, last ¶
77
Abubakar v. The Auditor General, G.R. No. L-1405, 31 July 1948
78
§ 2.3.4.3 supra
79
Sec. 5 (d)
80
Sec. 5, last ¶
81
Sec. 1 (b); please relate to Sec. 5
82
Sec. 2 (a) et seq.
83
Advocates for Truth in Lending & Olaguer v. Bangko Sentral Monetary Board et al.,
G.R. No. 192986, 15 January 2013; see also, Act No. 2655 as amended by Presidential
Decree No. 1684; Central Bank Circular No. 905 series of 1982.

31
and payable and the mortgagee may forthwith foreclose this mortgage in
accordance with law". This is considered by the bank merely as optional
acceleration clause for its sole benefit. While the bank was thus granted
a permissive right to foreclose the mortgage, it is obvious that said
permissive right did not prevent all the amortizations from becoming due
and payable, because the covenant is that, upon failure to pay one
amortization, all the others "Shall then be and become due and payable",
again in mandatory vein. Under the law, the right of the bank to sue the
debtor for the whole mortgage debt had accrued when the fourth
installment was not paid, in the absence, as in this case, of any
agreement on the part of the bank that it was waiving the acceleration
clause. We need not resort to American authorities, since under article
1150 of the Civil Code, the prescriptive period for all kinds of actions
shall be counted from the day the action may be brought. There is no
pretense herein that the bank ever had waived its right to sue for the
entire obligation under the acceleration clause or for any unpaid
installment and gave corresponding notice thereof to the debtor, such
that the latter would be sure that no action could yet be filed against him
Even the citation from 54 C.J.S., p. 90, invoked by the bank in its favor,
acknowledges that "there is authority to the contrary." 84; 4) With
exchange, whether at a fixed rate or at the current rate; REPUBLIC ACT
NO. 529 AND 4100 WAS REPEALED BY REPUBLIC ACT 8183.85 But now we
have Republic Act No. 529 which expressly declares such stipulations as
contrary to public policy, void and of no effect. And, as We already
pronounced in the case of Eastboard Navigation, Ltd. v. Juan Ysmael &
Co., Inc., G.R. No. L-9090, September 10, 1957, if there is any agreement
to pay an obligation in a currency other than Philippine legal tender, the
same is null and void as contrary to public policy (Republic Act 529), and
the most that could be demanded is to pay said obligation in Philippine
currency "to be measured in the prevailing rate of exchange at the time
the obligation was incurred (Sec. 1, idem)." 86 -- EXCHANGE RATE AT THE
TIME OF PAYMENT. It follows that the provision of Republic Act 529 which
requires payment at the prevailing rate of exchange when the obligation
was incurred cannot be applied. Republic Act 529 does not provide for
the rate of exchange for the payment of obligation incurred after the
enactment of said Act. The logical Conclusion, therefore, is that the rate
of exchange should be that prevailing at the time of payment. This view
finds support in the ruling of this Court in the case of Engel vs. Velasco &
84
Intestate Estate of Ubat & Soriano v. Ubat de Montes et al and Philippine National
Bank, G.R. No. L-11633, 31 January 1961
85
An Act Repealing Republic Act Numbered Five Hundred Twenty-Nine As Amended,
Entitled "An Act To Assure The Uniform Value Of Philippine Coin And Currency,
Republic Act No. 8183, (1996). (“Section 1. All monetary obligations shall be settled in
the Philippine currency which is legal tender in the Philippines. However, the parties
may agree that the obligation or transaction shall be settled in any other currency at the
time of payment.
Sec. 2. Republic Act Numbered Five Hundred Twenty-Nine (R.A. No. 529), as amended
entitled "An Act to Assume the Uniform Value of Philippine Coin and Currency," is
hereby repealed.”)
86
Arieta v. NARIC & Manila Underwriters Insurance Co., Inc., G.R. No. L-15645, 31
January 1964

32
Co. 2 3 where this Court held that even if the obligation assumed by the
defendant was to pay the plaintiff a sum of money expressed in American
currency, the indemnity to be allowed should be expressed in Philippine
currency at the rate of exchange at the time of judgment rather than at
the rate of exchange prevailing on the date of defendant's breach. 87 THE
PARTICULAR KIND OF CURRENT MONEY PAYMENT SHOULD BE MADE. The
validity and negotiability of the instrument is not affected thereby; 88 5)
With costs of collection or any attorney’s fee, in case payment shall not
be made at maturity. NATURE OF INSTRUMENT AT MATURITY. The
instrument is no longer fully negotiable since the transferee acquiring it
would not be a holder in due course.89

8.5. IT MUST BE PAYABLE ON DEMAND, OR AT A FIXED OR

DETERMINABLE FUTURE TIME90

8.5.1. When Payable on Demand91

PAYABLE ON DEMAND. 1) When it is so expressed to be payable on

demand, or at sight, or on presentation; 2) In which no time for payment
is expressed (silent as to when payable); 3) Where an instrument is
issued, accepted, or indorsed when overdue, it is, as regards the person
so issuing, accepting, or indorsing it, payable on demand. NOTE: for
prior parties, it may be already overdue.

8.5.2. When Payable at a Determinable Future Time92

DETERMINABLE FUTURE TIME. 1) Payable at a fixed period after date or

sight; 2) Payable on or before a fixed or determinable future time
specified therein; 3) On or at a fixed period after the occurrence of a
specified event which is certain to happen, though the time of happening
be uncertain. 93 AFTER, NOT BEFORE. If the instrument indicates “before”
instead of “after,” then it becomes non-negotiable because the date of
maturity can only be ascertained after it becomes overdue.94

8.5.3. When Not Negotiable

“ON OR BEFORE” A FIXED DATE OR DETERMINABLE FUTURE TIME

SCENARIOS: 1) It is still negotiable if it contains acceleration clause due
to non-payment of installments.; 2) If it contains a clause that if the
holder feels insecure, he can ask the maker to put up additional
securities, failing which, holder can accelerate the date of maturity – 2
87
Kalalo v. Luz, G.R. No. L-27782, 31 July 1970
88
Sec. 6 (e)
89
Sec. 52 and 58
90
Sec. 1 (c)
91
Sec. 7
92
Sec. 4
93
see §§ 2.3.3 et seq.
94
VILLANUEVA, at p. 396

33
views: a) not negotiable because date of maturity uncertain; or,
b)negotiable because undertaking to put up a security is merely an
accessory obligation, and is within the control of the maker – better view;
3) If it contains a clause that if a holder feels insecure, he can accelerate
the date of maturity – 2 views: a) not negotiable because date of maturity
uncertain, since option to pay on or before should be with maker, here it
is within the control of the holder – better view; or, b) negotiable since it
still qualifies as “on or before.”

BEFORE THE PERIOD. It is not negotiable if it indicates “before” the

occurrence of a specified event which is certain to happen, because the
date of maturity can be determined only after the note has become
overdue.

CONTINGENCY. Not negotiable of payable upon a contingency 95 (i.e.,

postal money order, because while “pay to the order of”, bureau of posts
may refuse to pay on numerous grounds.)

PERIOD TO BE FIXED BY COURT. “When my means permit me to do so”

although by law will constitute a period, it is still not negotiable because
the courts will have to fix the period96

8.6. IT MUST BE PAYABLE TO ORDER OR TO BEARER97

8.6.1. Payable to Order

8.6.1.1. Where it is drawn payable to the order of a

specified person or to him or his order.

IT MAY BE DRAWN PAYABLE TO THE ORDER OF: 1) Payee who is not maker,
drawer, or drawee; 2) Drawer 98 or maker;99 3) Drawee; 4) Two or more
payees jointly; 5) One or some of several payees; or, 6) The holder of an
office for the time being.

8.6.1.2. When payable to order, the payee must be named

or otherwise indicated therein with reasonable
certainty.100

95
Sec. 4
96
VILLANUEVA, at p. 396; see CIVIL CODE, Art. 1180 (“When the debtor binds himself to
pay when his means permit him to do so, the obligation shall be deemed to be one with
a period, subject to the provisions of Article 1197.”)
97
Sec. 1 (d)
98
JMBD: If in the instrument the drawer is also the payee and it is accepted, it
becomes equivalent to a promissory note in favor of the drawer.
99
Sec. 184 (“x x x Where a note is drawn to the maker's own order, it is not complete
until indorsed by him.”)
100
VILLANUEVA, at p. 397: If the payee is left blank, the rules in Sec. 13, 14, 15 shall
govern.

34
REASONABLE CERTAINTY. Because the check was drawn “Equitable
Banking Corporation order of A/C of Caville Enterprise, Inc.,” the payee
ceased to be indicated with reasonable certainty in contravention of
Section 8 of the Negotiable Instruments Law. 3 As worded, it could be
accepted as deposit to the account of the party named after the symbols
"A/C," or payable to the Bank as trustee, or as an agent, for Casville
Enterprises, Inc., with the latter being the ultimate beneficiary. That
ambiguity is to be taken contra proferentem that is, construed against
NELL who caused the ambiguity and could have also avoided it by the
exercise of a little more care. Thus, Article 1377 of the Civil Code
provides [t]he interpretation of obscure words or stipulations in a
contract shall not favor the party who caused the obscurity.101

8.6.2. Payable to Bearer

8.6.2.1. Bearer means the person in possession of a bill or

note which is payable to bearer. 102

THE NI IS PAYABLE TO BEARER WHEN: 1) It is expressed to be so payable;

2) It is payable to a person named therein or bearer; 103 3) It is payable to
the order of a fictitious or non-existing person, and such fact was known
to the person making it so payable; 104 FICTITIOUS. A review of US
jurisprudence yields that an actual, existing, and living payee may also be
“fictitious” if the maker of the check did not intend for the payee to in
fact receive the proceeds of the check. This usually occurs when the
maker places a name of an existing payee on the check for convenience
or to cover up an illegal activity.[14] Thus, a check made expressly
payable to a non-fictitious and existing person is not necessarily an order
instrument. If the payee is not the intended recipient of the proceeds of
the check, the payee is considered a “fictitious” payee and the check is a
bearer instrument. x x x In a fictitious-payee situation, the drawee bank
is absolved from liability and the drawer bears the loss. When faced with
a check payable to a fictitious payee, it is treated as a bearer instrument
that can be negotiated by delivery. The underlying theory is that one
cannot expect a fictitious payee to negotiate the check by placing his
indorsement thereon. And since the maker knew this limitation, he must
have intended for the instrument to be negotiated by mere delivery.
Thus, in case of controversy, the drawer of the check will bear the loss.
This rule is justified for otherwise, it will be most convenient for the
maker who desires to escape payment of the check to always deny the
validity of the indorsement. This despite the fact that the fictitious payee
was purposely named without any intention that the payee should receive

101
Equitable Banking Corporation v. IAC and Co, G.R. No. 74451, 25 May 1988
102
Sec. 191
103
VILLANUEVA, at p. 402 these are not payble to bearer: Not negotiable, “X or his
collector”, “X or his agent”, “Bearer X”
104
JMBD: What is controlling is not whether the payee exists, but whether the person
issuing intended to issue NI to such payee.

35
the proceeds of the check.[15]105 The US Supreme Court held in Mueller
that when the person making the check so payable did not intend for the
specified payee to have any part in the transactions, the payee is
considered as a fictitious payee. The check is then considered as a
bearer instrument to be validly negotiated by mere delivery. x x x Thus,
the US Supreme Court held that Liberty Insurance Bank, as drawee, was
authorized to make payment to the bearer of the check, regardless of
whether prior indorsements were genuine or not. x x x However, there is
a commercial bad faith exception to the fictitious-payee rule. A showing
of commercial bad faith on the part of the drawee bank, or any transferee
of the check for that matter, will work to strip it of this defense. The
exception will cause it to bear the loss. Commercial bad faith is present
if the transferee of the check acts dishonestly, and is a party to the
fraudulent scheme; READ: PNB v. Rodriguez, G.R. No. 170325, 26
September 2008; 4) The name of the payee does not purport to be the
name of any person; PAY TO CASH. Where a check is made payable to the
order of "cash", the word cash "does not purport to be the name of any
person", and hence the instrument is payable to bearer. The drawee bank
need not obtain any indorsement of the check, but may pay it to the
person presenting it without any indorsement. . . . (Zollmann, Banks and
Banking, Permanent Edition, Vol. 6, p. 494.); 106 5) The only or last
indorsement is an indorsement in blank.107

8.6.3. Importance of Distinction

HOW NI NEGOTIATED. The distinction between bearer and order

instruments lies in their manner of negotiation. Under Section 30 of the
NIL, an order instrument requires an indorsement from the payee or
holder before it may be validly negotiated. A bearer instrument, on the
other hand, does not require an indorsement to be validly negotiated. It
is negotiable by mere delivery.108
INTENT TO NEGOTIATE PREVAILS. Contrary to what respondent court
held, the CTDs are negotiable instruments. The documents provide that
the amounts deposited shall be repayable to the depositor. And who,
according to the document, is the depositor? It is the "bearer." The
documents do not say that the depositor is Angel de la Cruz and that the
amounts deposited are repayable specifically to him. Rather, the amounts
are to be repayable to the bearer of the documents or, for that matter,
whosoever may be the bearer at the time of presentment. x x x
Petitioner's insistence that the CTDs were negotiated to it begs the
question. Under the Negotiable Instruments Law, an instrument is
negotiated when it is transferred from one person to another in such a
manner as to constitute the transferee the holder thereof, 21 and a holder
may be the payee or indorsee of a bill or note, who is in possession of it,
or the bearer thereof. 22 In the present case, however, there was no
105
Philippine National Bank v. Rodriguez, G.R. No. 170325, 26 September 2008 citing
106
Ang Tek Lian v. Court of Appeals, G.R. No. L-2516, 25 September 1950
107
Sec. 34 and 35
108
Sec. 30; Philippine National Bank v. Rodriguez, G.R. No. 170325, 26 September 2008

36
negotiation in the sense of a transfer of the legal title to the CTDs in
favor of petitioner in which situation, for obvious reasons, mere delivery
of the bearer CTDs would have sufficed. Here, the delivery thereof only
as security for the purchases of Angel de la Cruz (and we even disregard
the fact that the amount involved was not disclosed) could at the most
constitute petitioner only as a holder for value by reason of his lien.
Accordingly, a negotiation for such purpose cannot be effected by mere
delivery of the instrument since, necessarily, the terms thereof and the
subsequent disposition of such security, in the event of non-payment of
the principal obligation, must be contractually provided for. 109

8.7. IF NI IS A BILL OF EXCHANGE, DRAWEE MUST BE NAMED OR

OTHERWISE INDICATED THEREIN WITH REASONABLE CERTAINTY 110

RATIONALE. It is to be able to determine to whom must the instrument be

presented for acceptance/payment. HOWEVER, “[w]here the instrument is
wanting in any material particular, the person in possession thereof has a
prima facie authority to complete it by filling up the blanks therein. And a
signature on a blank paper delivered by the person making the signature
in order that the paper may be converted into a negotiable instrument
operates as a prima facie authority to fill it up as such for any amount. x
x x.”111

8.8. OTHER MATTERS

8.8.1. Cases

READ: Caltex v. Court of Appeals & Security Bank, G.R. No. 97753,
10 August 1992; READ: Traders Royal Bank v. Court of Appeals et
al. G.R. No. 93397, 03 March 1997; READ: Consolidated Plywood
Industries, Inc., et al. v. IFC Leasing and Acceptance Corporation
G.R. No. 72593, 30 April 1987; READ: Garcia v. Llamas G.R. No.
154127, 08 December 2003

8.8.2. Terms, when Sufficient

SUBSTANTIAL COMPLIANCE. The instrument need not follow the language

of this Act, but any terms are sufficient which clearly indicate an
intention to conform to the requirements hereof. 112

8.8.3. Provisions and Omissions not affecting Validity and/or

Negotiability of the Instrument 113

109
Caltex (Phils.) v. Court of Appeals and Security Bank and Trust Company, G.R. No.
97753, 10 August 1992
110
Sec. 1 (e)
111
Sec. 14
112
Sec. 10
113
Sec. 6

37
IRRELEVANT TO VALIDITY AND/OR NEGOTIABILITY. 1) If it is not dated,
considered dated as of time issued; 114 2) If it does not specify value
given, consideration is presumed; 115 3) If it does not specify place where
drawn or place where payable, apply the default rules; 116 4) It bears a
seal; 117 or, 5) It designates a particular currency in which payment is to
be made.

8.8.4. Rules of Construction when the instrument is

ambiguous or there are omissions therein118

INSTRUMENT CONSTRUCTION. 1) Generally, the sum expressed in words

prevail over the sum expressed in numbers, but not when the words
themselves are ambiguous; 2) Interest stipulated but with no indication
of starting date, it will run from the date of the instrument or, if undated,
from the time of issue; 3) Undated NI considered dated as of time issued;
4) Written provisions prevail over printed provisions; 5) If NI ambiguous
whether PN or BoE, holder may treat it as either; 6) If capacity of
signatory not clear, deemed an indorser; 7) “I promise to pay” signed by
2 or more, deemed joint and several (solidary).119

8.8.5.

9. ISSUANCE OF NEGOTIABLE INSTRUMENTS

9.1. DEFINITIONS

ISSUE120 means the first delivery of the instrument, complete in form, to a

person who takes it as a holder; while

DELIVERY121 is the transfer of possession actual or constructive, from one

person to another. NATURE OF DELIVERY TO PASS TITLE. Note however
that delivery as the term is used in the aforementioned provision means
that the party delivering did so for the purpose of giving effect thereto.
Otherwise, it cannot be said that there has been delivery of the
negotiable instrument. Once there is delivery, the person to whom the

114
Sec. 6 (a) in relation to Sec. 17 (c)
115
Sec. 6 (b) in relation to Sec. 24
116
Sec. 6 (b) in relation to Sec. 73 (i.e., address given in NI; usual business/residence
address; where found/last known business/residence address)
117
DE LEON, p. 50 (“At common law, a sealed instrument is non-negotiable and is subject
to the rule governing contracts under seal. Under Philippine law, there is no
distinction.”)
118
Sec. 17
119
CIVIL CODE, Art. 1207 et seq.
120
Sec. 191
121
Sec. 191

38
instrument is delivered gets the title to the instrument completely and
irrevocably.122

9.2. COMPLETENESS

9.2.1. Why?

RATIONALE. It is necessary to conform to formal requirements under Sec.

1 so the instrument can be deemed negotiable.

9.2.2. Date

GENERALLY, when the instrument is dated, the NIL creates a REBUTTABLE

PRESUMPTION - if the NI, acceptance, or any indorsement is dated, such
date is deemed prima facie123 to be the true date of making, drawing,
acceptance, indorsement.124 IN FACT, even when the instrument is ante-
or post-dated, the general rule is that the NI not invalid solely by reason
of ante- or post-dating and the person to whom it is delivered acquires
title thereto as of the date of delivery. HOWEVER, that does not apply if
the ante- or post-dating was done out of an illegal or fraudulent purpose
(i.e., circumvent laws on usury).125 BUT NOTE that the latter does not
affect a HIDC (PD).126 HOWEVER, THE DATE is not an essential element of
negotiability; however, it may become necessary (but not to make NI
negotiable) to determine its maturity, when interest is to begin to run and
reckoning point of prescription of the action.

UNDATED INSTRUMENTS. On the other hand, if the instrument is undated,

its validity not affected127 and it is GENERALLY considered as dated at time
it was issued.128 HOWEVER, there are instances when the true date may
be inserted, i.e., where NI is expressed to be payable at a fixed period
after date and where acceptance of NI payable at a fixed period after
sight and that means that the NI shall be payable accordingly on that
date. BUT, if the inserted date is wrong, this avoids the NI as to the

122
San Miguel Corporation v. Puzon, G.R. No. 167567, 22 September 2010
123
“Evidence good and sufficient on its face. Such evidence as, in the judgment of the
law, is sufficient to establish a given fact, or the group or chain of facts constituting the
party’s claim or defense, and which if not rebutted or contradicted, will remain
sufficient. Evidence which, if unexplained or uncontradicted, is sufficient to sustain a
judgment in favor of the issue it supports, but which may be contradicted by other
evidence.” see Wa-Acon v. People of the Philippines G.R. No. 164575, 06 December 2006
citing H. Black, et al., BLACK’S LAW DICTIONARY 1190 (6th ed.,1990)
124
Sec. 11
125
Sec. 12
126
Sec. 13 (“x x x The insertion of a wrong date does not avoid the instrument in the
hands of a subsequent holder in due course; but as to him, the date so inserted is to be
regarded as the true date.”)
127
Sec. 6 (a)
128
Sec. 17 (c)

39
person inserting the wrong date, BUT NOT against a HIDC, as to him, the
date so inserted is to be regarded as the true date (PD).129

NI PAYABLE ON DEMAND. If it is negotiated at an unreasonable time after

issue, holder is not deemed HIDC. 130 Furthermore, its presentment for
payment must be made within reasonable time after issue, EXCEPT for a
BoE, where presentment for payment is sufficient if made within a
reasonable time after last negotiation.131

9.2.3. Blanks

IF THE INSTRUMENT HAS BLANKS,132 these may be filled but must be

within the authority given and within a reasonable time.133

INSTRUMENT IS WANTING IN MATERIAL PARTICULAR. The person in

possession has prima facie authority to complete it by filling up blanks, if
the omission which will make instrument non-negotiable (i.e., name of
payee, name of drawer); or, the omission which will not render
instrument non-negotiable (i.e., date, place of payment, rate of
interest).134

SIGNATURE ON BLANK PAPER. If this is delivered by the person making

the signature in order that the paper may be converted into a NI, this
also operates as a prima facie authority to fill it up as such for any
amount (i.e., blank check). 135 EFFECT OF WANT OF AUTHORITY . The NI
may not be enforced against person who became party to NI prior to its
completion (not even to extent of authority given), except if NI, after
completion, is negotiated to HIDC, then it is valid and effectual for all
purposes in his hands.

9.2.4.

9.3. DELIVERY136

9.3.1. Why

129
Sec. 13
130
Sec. 53
131
Sec. 71
132
Sec. 14; see VILLANUEVA, p. 413 (“In all the above cases, there is an intention to issue
a negotiable instrument. But if a signature on a piece of paper is given only for
autograph purposes and the same is converted into a negotiable instrument, this is will
amount to forgery, constituting a valid defense even against a holder in due course.
Whether or not the instrument is filled up in accordance with the authority given,
remember that endorsers are liable on their warranties.”)
133
Sec. 193
134
Sec. 14
135
Sec. 14
136
see Sec. 191 “Issue” and “Delivery”

40
RATIONALE. The NIL states that every contract on a NI is incomplete and
revocable until delivery of the NI for purpose of giving effect thereto. 137

JURISPRUDENTIAL DEFINITION. As ordinarily understood, delivery means

the transfer of the possession of the instrument by the maker or drawer
with intent to transfer title to the payee and recognize him as the holder
thereof. x x x In Tiro v. Hontanosas we ruled that “[t]he salary check of a
government officer or employee such as a teacher does not belong to him
before it is physically delivered to him. Until that time the check belongs
to the government. Accordingly, before there is actual delivery of the
check, the payee has no power over it; he cannot assign it without the
consent of the Government.” As a necessary consequence of being public
fund, the checks may not be garnished to satisfy the judgment.138

9.3.2. General Rule and Presumptions

GENERALLY, delivery, in order to be effective, must be made either by or

done under authority of party making, drawing, accepting, or indorsing
and done for the purpose of transferring the property in the NI (not for a
conditional or special purpose only i.e., safekeeping or collection). 139
HOWEVER, the provides PRESUMPTIONS OF VALID AND INTENTIONAL
DELIVERY: 1) If NI no longer in possession of party whose signature
appears thereon – prima facie presumption, but subject to rebuttal; 2) As
between immediate parties (not just proximity, includes privity) 140 and a
remote party other than HIDC – prima facie presumption, but subject to
rebuttal.; 3) If NI in hands of HIDC – conclusive presumption, by all
parties prior to him so as to make them liable to him; and, 4) If NI is
incomplete and undelivered, presumption will not apply: NI will not, if
completed and negotiated without authority, be valid in hands of any
holder as against any person whose signature was placed thereon before
delivery.141

9.3.3.

9.4. CASES OF DEFECTIVE ISSUANCE

9.4.1. Incomplete but Delivered NI (PD)

BLANKS; WHEN MAY BE FILLED. Where the instrument is wanting in any

material particular, the person in possession thereof has a prima facie
authority to complete it by filling up the blanks therein. And a signature
on a blank paper delivered by the person making the signature in order
that the paper may be converted into a negotiable instrument operates as

137
Sec. 16
138
VILLANUEVA, at p. 408 citing De La Victoria v. Burgos, G.R. No. 111190, 27 June 1995
(citations omitted)
139
Sec. 16
140
VILLANUEVA, at p. 409 citing Howard National Bank v. Wilson, 120 Atl. 889
141
Sec. 15

41
a prima facie authority to fill it up as such for any amount. In order,
however, that any such instrument when completed may be enforced
against any person who became a party thereto prior to its completion, it
must be filled up strictly in accordance with the authority given and
within a reasonable time. But if any such instrument, after completion, is
negotiated to a holder in due course, it is valid and effectual for all
purposes in his hands, and he may enforce it as if it had been filled up
strictly in accordance with the authority given and within a reasonable
time.142

9.4.2. Incomplete and Undelivered NI (RD)

INCOMPLETE INSTRUMENT NOT DELIVERED. Where an incomplete

instrument has not been delivered, it will not, if completed and
negotiated without authority, be a valid contract in the hands of any
holder, as against any person whose signature was placed thereon before
delivery.143

9.4.3. Complete but Undelivered NI (PD)

DELIVERY; WHEN EFFECTUAL; WHEN PRESUMED. Every contract on a

negotiable instrument is incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto. As between
immediate parties and as regards a remote party other than a holder in
due course, the delivery, in order to be effectual, must be made either by
or under the authority of the party making, drawing, accepting, or
indorsing, as the case may be; and, in such case, the delivery may be
shown to have been conditional, or for a special purpose only, and not for
the purpose of transferring the property in the instrument. But where the
instrument is in the hands of a holder in due course, a valid delivery
thereof by all parties prior to him so as to make them liable to him is
conclusively presumed. And where the instrument is no longer in the
possession of a party whose signature appears thereon, a valid and
intentional delivery by him is presumed until the contrary is proved.144

MEMORIZE: Sec. 14-16; READ De La Victoria v. Burgos &

Sebreno, G.R. No. 111190, 27 June 1995

10. SIGNATURE AND FORGERY (MEMORIZE SEC. 18, 23, 124-

125)

10.1. RULES ON SIGNATORIES

GENERALLY: No person is liable on the instrument whose signature

does not appear thereon.145 EXCEPT: Persons signing in trade or
142
Sec. 14
143
Sec. 15
144
Sec. 16
145
Sec. 18

42
assumed name,146 Agent signing for principal147 Signature appears on
paper separate from NI (allonge) 148 i.e., acceptance of BoE on a separate
piece of paper149 and unconditional written promise in advance to accept
BoE before it is drawn150 Forger151 Estoppel152 and if NI can be negotiated
by mere delivery153

10.1.1. Rules on Signature of Agent

REQUISITES OF VALIDITY. The agent must be duly authorized (no form

necessary)154 (BUT if signature by procruration, it is notice that agent
has limited authority155), indicate that he is signing as agent AND the
identity of his principal.156

EFFECTS OF ABSENCE OF REQUISITES OF VALIDITY.

1) UNDISCLOSED
PRINCIPAL. Where the agent signs his name but nowhere in the
instrument has he disclosed the fact that he is acting in a representative
capacity or the name of the third party for whom he might have acted as
agent, the agent is personally liable to take holder of the instrument and
cannot be permitted to prove that he was merely acting as agent of
another and parol or extrinsic evidence is not admissible to avoid the
agent's personal liability.157 2) WANT OF AUTHORITY OF AGENT.
GENERALLY: principal not bound beyond authority of agent (RD)
EXCEPT: if agent has apparent authority (PD). READ: Francisco v.
Court of Appeals et al., G.R. No. 116320, 29 November 1999

10.1.2. Rules for Incapacitated

WANT OF CAPACITY. Indorsement or assignment by corporation or infant

passes the property therein, notwithstanding that, from want of capacity,
corporation or infant not liable thereon.158
146
Sec. 18
147
Sec. 19-21
148
Sec. 31; see also I AGBAYANI, Aguedo F., COMMENTARIES AND JURISPRUDENCE ON THE
COMMERCIAL LAWS OF THE PHILIPPINES (1992), p. 256 (“Where the indorsement is written
on paper attached to the instrument, such paper is called an “allonge”)
149
Sec. 134
150
Sec. 135
151
Sec. 23
152
Sec. 23 (x x x “unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.”)
153
Sec. 65
154
Sec. 19
155
Sec. 21
156
Sec. 20
157
Republic Planters Bank v. Court of Appeals & Canlas, G.R. No. 93073, 21 December
1992 citing Crocker National Bank vs. Say, 209 Cal. 436; 288 P. 69 (1930); Dayries vs.
Lindsly, 54 So. 791 (1911); Granada vs. PNB, 18 SCRA 1 (1966).
158
Sec. 22; see also VILLANUVA, p. 412 (“In both instances, endorsements are voidable –
valid until annulled – so good title is passed. Parties prior to corporation/minor cannot
escape liability by setting up as defense the incapacity of one of the endorsers.”)

43
Corporation (ultra vires), DISTINCTION. Absolutely prohibited by its
charter or statute from issuing any commercial paper under any
circumstances159 (RD) and it has power to issue NI but issuance was not
authorized for the particular purpose for which it was issued (PD)

MINORITY. GENERALLY: minor not liable (RD); EXCEPT: Active

misrepresentation (estoppel), Retention of fruits and benefits and
Ratification160

NATURE OF CONTRACT OF ENDORSEMENT. This contract of an infant is not

void, and that his endorsee has the right to enforce payment from all
parties prior to the infant endorser; the incapacity of the infant cannot be
availed of by prior parties. However, that does not destroy the right of
such infant endorser to disaffirm under the rules of infancy.161

INSANITY. GENERALLY: Insanity where the insane person has a

guardian appointed by the court (RD); EXCEPT where there is no notice
of insanity (PD)162

INTOXICATION (PD).

10.2. FORGERY

10.2.1. Definition and Coverage

FORGERY. The counterfeit making or fraudulent alteration of any writing

i.e., if signature is forged or made without authority of person whose
signature it purports to be (RD)163 HOWEVER, forgery of a material
particular other than signature then it is an alternation not a forgery. 164

FRAUD. GENERALLY Fraud in factum/fraud in esse contractus (RD)

amounts to forgery since no intent to issue NI (e.g., autograph)165 BUT
NOT Fraud in inducement (PD) 166 does not amount to forgery since
intent to issue NI, although defrauded.

DURESS AMOUNTING TO FORGERY. Duress amounting to forgery (RD)

amounts to forgery since no intent to sign NI (e.g., hand forced)167 BUT

159
Sec. 22
160
Sec. 22
161
VILLANUVA, p. 412 citing Murray v. Thompson, LRA 1917B, 188 SE 578
162
by analogy Sec. 22
163
Sec. 23
164
Sec. 124
165
Sec. 23
166
Sec. 55
167
Sec. 23

44
Ordinary duress, force or fear (PD)168 does not amount to forgery since
intent to sign NI, although pressured

FRAUDULENT IMPERSONATION, TWO CASES. If intent is to pay the real

person (RD)169 because signature of impostor is forgery BUT if intent is
to pay the person he is dealing with not forgery since impostor will be
merely signing in assumed name.170

10.2.2. Effects of Forgery

GENERAL RULE, NIL, SEC. 23. When signature is forged or made without
authority of person whose signature it purports to be, it (the forged
signature, not the NI) is wholly inoperative. Therefore, there is no right
to: Retain the NI, give a discharge therefor and Enforce payment thereof
against any party thereto can be acquired through or under such
signature.

EXCEPTIONS: Unless party against whom it is sought to enforce such right

is precluded from setting up the forgery or want of authority, 171 namely:
1) CONTRARY TO WARRANTY. Those who warrant or admit the
genuineness of the signature in question i.e., Acceptor, 172 Person
negotiating by delivery or by qualified indorsement173 and General
Indorser;174 2) GUILTY OF NEGLIGENCE. Those who by their acts, silence
or negligence are estopped175 from setting up the defense of forgery; snd,
3) FORGED SIGNATURE UNNECESSARY . When forged signature is
unnecessary to the tile of the holder as when the indorsement is forged
on a NI payable to bearer176 and here the NI may nevertheless be further
negotiated by delivery.

10.2.3. Promissory Notes177

MAKER’S SIGNATURE: the Maker cannot be held liable on the PN by ANY

holder, even a HIDC. HOWEVER, INDORSERS REMAIN LIABLE. It is clear
from the provision that where the signature on a negotiable instrument if
forged, the negotiation of the check is without force or effect. But does
this mean that the existence of one forged signature therein will render
void all the other negotiations of the check with respect to the other
168
Sec. 55
169
Sec. 23
170
Sec. 18
171
Sec. 23
172
Sec. 62(a): admits existence of drawer and genuineness of his signature
173
Sec. 65(a): warrants that NI is genuine and in all respects what it purports to be
174
Sec. 66(a): warrants the matters and things mentioned in Sec. 65(a)
175
CIVIL CODE, Art. 1431 et seq. (“Through estoppel an admission or representation is
rendered conclusive upon the person making it, and cannot be denied or disproved as
against the person relying thereon.”)
176
Sec. 40
177
VILLANUEVA, p. 421

45
parties whose signature are genuine? x x x In the case of Beam vs. Farrel,
135 Iowa 670, 113 N.W. 590, where a check has several indorsements on
it, it was held that it is only the negotiation based on the forged or
unauthorized signature which is inoperative. Applying this principle to
the case before Us, it can be safely concluded that it is only the
negotiation predicated on the forged indorsement that should be
declared inoperative. This means that the negotiation of the check in
question from Martin Lorenzo, the original payee, to Ramon R. Lorenzo,
the second indorser, should be declared of no affect, but the negotiation
of the aforesaid check from Ramon R. Lorenzo to Adelaida Dominguez,
the third indorser, and from Adelaida Dominguez to the defendant-
appellant who did not know of the forgery, should be considered valid
and enforceable, barring any claim of forgery.178

FORGED INDORSEMENT. 1) PAYABLE TO ORDER. The party whose

indorsement is forged and parties prior to him, including the maker,
cannot be held liable, whether or not he is a HIDC because the forged
signature, which is wholly inoperative, is the only means by which title to
the NI is acquired. 2 )PAYABLE TO BEARER. The party whose indorsement
is forged and parties prior to him including the maker may be held liable
only by a HIDC, provided that the instrument was mechanically complete
before the forgery. This is because the forged signature is not necessary
to acquire title but the defense of lack of delivery is still a PD against
those who are not HID

10.2.4. Bills of Exchange179

DRAWER’S SIGNATURE.

INDORSEMENT.

WITH ACCEPTANCE BY DRAWEE. The drawee, by accepting, cannot set up

the defense of forgery, because the when the drawer accepted the
instrument, he admitted the genuineness of the signature of the drawer.

PAYMENT IS NOT ACCEPTANCE. In National Bank vs. First National Bank

([19101, 141 Mo. App., 719; 125 S. W., 513), the court asks, if a mere
promise to pay a check is binding on a bank, why should not the absolute
payment of the check have the same effect? In response, it is submitted
that the two things, — that is acceptance and payment, — are entirely
different. If the drawee accepts the paper after seeing it, and then
permits it to go into circulation as genuine, on all the principles of
estoppel, he ought to be prevented from setting up forgery to defeat
liability to one who has taken the paper on the faith of the acceptance, or
certification. On the other hand, mere payment of the paper at the
termination of its course does not act as an estoppel. The attempt to state
a general rule covering both acceptance and payment is responsible for a
178
Republic Bank v. Ebrada, G.R. No. L-40796, 31 July 1975
179
VILLANUEVA, p. 421 et seq.

46
large part of the conflicting arguments which have been advanced by the
courts with respect to the rule. (Annotation at 12 A. L. R., 1090 1921].)180

WITHOUT ACCEPTANCE BUT THE BOE IS PAID BY DRAWEE. DRAWEE BEARS

THE LOSS. Unless a forgery or alteration is attributable to the fault or
negligence of the drawer himself, the remedy of the drawee bank that
negligently clears a forged and/or altered check for payment is against
the party responsible for the forgery or alteration, otherwise, it bears the
loss.181 A bank is bound to know the signatures of its customers; and if it
pays a forged check, it must be considered as making the payment out of
its own funds, and cannot ordinarily charge the amount so paid to the
account of the depositor whose name was forged (READ: San Carlos
Mining Co., Ltd. v. BPI & China Banking Corporation, G.R. No. L-
37467, 11 December 1933). ALSO, DRAWER CAN RECOVER FROM
DRAWEE. In cases involving a forged check, where the drawer’s signature
is forged, the drawer can recover from the drawee bank. No drawee bank
has a right to pay a forged check. If it does, it shall have to recredit the
amount of the check to the account of the drawer. The liability chain ends
with the drawee bank whose responsibility it is to know the drawer’s
signature since the latter is its customer. (READ: Associated Bank v.
Hon. Court of Appeals et al., G.R. No. 107382, 31 January 1996).
BUT DRAWER MUST NOT BE NEGLIGENT. Even if the twenty-three (23)
checks in question are considered forgeries, considering the petitioner's
gross negligence, it is barred from setting up the defense of forgery
under Section 23 of the Negotiable Instruments Law.182
DRAWEE VS COLLECTING BANK. GENERALLY: As what transpired in this
case, petitioner banks accommodated Yu Kio, being a valued client and
the president of Pipe Master, and accepted the crossed checks. They
stamped at the back thereof that “all prior indorsements and/or lack of
indorsements are guaranteed.” In so doing, they became general
endorsers. Under Section 66 of the Negotiable Instruments Law, an
endorser warrants “that the instrument is genuine and in all respects
what it purports to be; that he has a good title to it; that all prior parties
had capacity to contract; and that the instrument is at the time of his
indorsement valid and subsisting.” x x x In Associated Bank v. Court of
Appeals,[6] we held that the collecting bank or last endorser generally
suffers the loss because it has the duty to ascertain the genuineness of all
prior indorsements and is privy to the depositor who negotiated the
check. x x PBCom, as the drawee bank, cannot be held liable since it
mainly relied on the express guarantee made by petitioners, the
collecting banks, of all prior indorsements. x x x Evidently, petitioner
banks disregarded established banking rules and procedures. They were
negligent in accepting the checks and allowing the transaction to push
180
Philippines National Bank v. the National City Bank of New York et al., G.R. No. L-
43596, 31 October 1936
181
Bank of the Philippine Islands v. Buenaventura et al., G.R. No 148196, 30 September
2005
182
Metropolitan Waterworks and Sewerage System v. Court of Appeals & Philippine
National Bank, G.R. No. L-62943, 14 July 1986

47
through. In Jai-Alai Corp. of the Phil. v. Bank of the Phil. Islands,[7] we
ruled that one who accepts and encashes a check from an individual
knowing that the payee is a corporation does so at his peril. Therefore,
petitioner banks are liable to respondent Filipinas Orient. x x x In fine, it
must be emphasized that the law imposes on the collecting bank the duty
to diligently scrutinize the checks deposited with it for the purpose of
determining their genuineness and regularity. The collecting bank, being
primarily engaged in banking, holds itself out to the public as the expert
on this field, and the law thus holds it to a high standard of conduct.[8]
Since petitioner banks’ negligence was the direct cause of the
misappropriation of the checks, they should bear and answer for
respondent Filipinas Orient’s loss, without prejudice to their filing of an
appropriate action against Yu Kio. 183 EXCEPT: The 24-hour clearing
house rule is a valid rule applicable to commercial banks (Republic v.
Equitable Banking Corporation, 10 SCRA 8 [1964]; Metropolitan Bank &
Trust Co. v. First National City Bank, 118 SCRA 537). x x x It is true that
when an endorsement is forged, the collecting bank or last endorser, as a
general rule, bears the loss (Banco de Oro Savings & Mortgage Bank v.
Equitable Banking Corp., 167 SCRA 188). But the unqualified
endorsement of the collecting bank on the check should be read together
with the 24-hour regulation on clearing house operation (Metropolitan
Bank & Trust Co. v. First National City Bank, supra). Thus, when the
drawee bank fails to return a forged or altered check to the collecting
bank within the 24-hour clearing period, the collecting bank is absolved
from liability.184

10.2.5. Cases (READ ALL)

READ: Bank of the Philippine Islands v. Casa Montessori

Internationale & Yabut, G.R. No. 149454, 28 May 2004; READ:
Samsung Construction Company Philippines, Inc. v. Far East Bank
and Trust Company & Court of Appeals, G.R. No. 129015, 13
August 2004; READ: Philippine National Bank v. The National City
Bank of New York et al., G.R. No. L-43596, 31 October 1936;
READ: Philippine National Bank v. The Court of Appeals &
Philippine Commercial and Industrial Bank, G.R. No. L-26001, 29
October 1968; READ: Republic of the Philippines v. Equitable
Banking Corporation, G.R. No. L-15894, 30 January 1964; READ:
Traders Royal Bank v. Radio Philippines Network, Inc. et al., G.R.
No. 138510, 10 October 2002; READ: Philippine Commercial
International Bank v. Court of Appeals et al., G.R. No. 121413, 29
January 2001; READ: The Great Eastern Life Insurance Co. v.
Hongkong & Shanghai Banking Corporation & Philippine
National Bank, G.R. No. L-18657, 23 August 1922; READ:
Gempesaw v. The Honorable court of Appeals & Philippine Bank of
183
Metropolitan Bank and Trust Company v. Philippine Bank of Communications et al.,
G.R. No. 141208, 18 October 2007
184
Republic Bank v. Court of Appeals & First National City Bank, G.R. No. 42725, 22
April 1991

48
Communications, G.R. No. 92244, 09 February 1993; READ:
Associated Bank & Cruz v. Honorable Court of Appeals & Reyes,
G.R. No. 89802, 07 May 1992; READ: Jai Alai Corporation of the
Philippines v. Bank of the Philippine Islands, G.R. No. L-29432, 06
August 1975; READ: Metropolitan Bank & Trust Company v. Court
of Appeals et al., G.R. No. 88866, 18 February 1991.

10.3. ALTERATION

10.3.1. Definition and Coverage

GENERALLY any change in or addition to a NI is an alteration and there

is no distinction between fraudulent and innocent alteration. 185 Alteration
is NOT MATERIAL if it does not alter the effect of the NI. HOWEVER,
Alteration is MATERIAL186 (READ: Bank of America NT & SA v.
Philippine Racing Club, G.R. No. 150228, 30 July 2009) if it alters
the effect of the NI, such as changes in: 1) date; 2) sum payable, either
for principal or interest; 3) The time or place of payment; 4) The
number or the relation of the parties; 5) The medium or currency in
which payment is to be made; 6) Adds a place of payment where no place
of payment is specified; or, 7) Any other change or addition which alters
the effect of the instrument in any respect.

CHANGE IN SERIAL NUMBER OF CHECK. An alteration is said to be material

if it alters the effect of the instrument.[7] It means an unauthorized
change in an instrument that purports to modify in any respect the
obligation of a party or an unauthorized addition of words or numbers or
other change to an incomplete instrument relating to the obligation of a
party.[8] In other words, a material alteration is one which changes the
items which are required to be stated under Section 1 of the Negotiable
Instrument Law. x x x The case at the bench is unique in the sense that
what was altered is the serial number of the check in question, an item
which, it can readily be observed, is not an essential requisite for
negotiability under Section 1 of the Negotiable Instruments Law. The
aforementioned alteration did not change the relations between the
parties. The name of the drawer and the drawee were not altered. The
intended payee was the same. The sum of money due to the payee
remained the same. x x x Petitioner, thus cannot refuse to accept the
check in question on the ground that the serial number was altered, the
same being an immaterial or innocent one. READ: Philippine National
Bank v. Court of Appeals et al., G.R. No. 107508, 25 April 1996. 187

185
VILLANUEVA, p. 429
186
Sec. 125
187
JMBD: Note that this case contains several examples of material and immaterial
alterations; see also The International Corporate Bank, Inc. v. Court of Appeals &
Philippine National Bank, G.R. No. 129910, 05 September 2006

49
 10.3.2. Effect of Material Alteration

EFFECTS ON INSTRUMENT AND RULES ON LIABILITY. GENERALLY where

NI is materially altered without assent of all parties liable thereon, it is
avoided (RD) EXCEPT NI may be enforced against a party who has
himself made, authorized or assented to the alteration and subsequent
indorsers BUT if materially-altered NI is in hands of HIDC not party to
alteration, HIDC may enforce payment thereof according to the original
tenor.188 READ: Montinola v. The Philippine National Bank et al.,
G.R. No. L-2861, 26 February 1951

10.3.3.

11. CONSIDERATION

11.1. DEFINITIONS

11.1.1. Consideration

Importance: The four fundamental contracts of making, drawing,

accepting and indorsing MUST be supported by valuable consideration;
the exception is with regard to an accommodation party.189

VALUE means “valuable consideration” (could be obligation to give, to do,

or not to do; but not liberality)190 and is any consideration sufficient to
support a simple contract. 191 An antecedent or pre-existing debt
constitutes value; and is deemed as such whether the instrument is
payable on demand or at a future time.192

JURISPRUDENTIAL DEFINITION OF CONSIDERATION. Consideration is

defined as some right, interest, benefit, or advantage conferred upon the
promissor, to which he is otherwise not lawfully entitled, or any
detriment, prejudice, loss, or disadvantage suffered or undertaken by the
promisee other than to such as he is at the time of consent bound to
suffer.193

PRIMA FACIE PRESUMPTION. Every NI is deemed prima facie to have

been issued for valuable consideration and every person whose

188
Sec. 124
189
VILLANUEVA, p. 431
190
Sec. 191
191
JMBD: This is synonymous to the term “cause” as used in civil law; see CIVIL CODE,
Art 1350 (“In onerous contracts the cause is understood to be, for each contracting
party, the prestation or promise of a thing or service by the other; in remuneratory ones,
the service or benefit which is remunerated; and in contracts of pure beneficence, the
mere liberality of the benefactor.”)
192
Sec. 25
193
Olegario & Victorino v. Court of Appeals et al., G.R. No. 104892, 14 November 1994

50
signature appears thereon is deemed prima facie to have become a party
thereto for value.194

CASES. READ: Travel-on, Inc. v. Court of Appeals & Miranda, G.R.

No. L-56169, 26 June 1992; READ: Yang v. Honorable Court of
Appeals et al., G.R. No. 138074, 15 August 2003.

11.1.2. Holder for Value

IMPORTANCE. 1) To be HIDC, a holder who took the NI for value; 195 2) An

accommodation party liable to HFV, notwithstanding knowledge of HFV
of such fact.196

DEFINITION. A HFV is one who gives valuable consideration for a NI

issued or negotiated to him and where value has at any time been given
for the NI, the holder is deemed a HFV in respect to all parties who
become such prior to that time. 197 ALSO, where the holder has a lien on
the NI arising either from contract or by implication of law, he is deemed
a HFV to the extent of his lien.198

11.1.3. Accommodation Party

DEFINITION. An accommodation party is one who has signed the NI as

maker, drawer, acceptor, or indorser, without receiving value therefor,
and for the purpose of lending his name to some other person AND is
liable on NI to a HFV, notwithstanding that such HFV, at the time of
taking the instrument, knew him to be only an accommodation party. 199

CASES. READ: Lim v. Saban, G.R. No. 163720, 16 December 2004;

READ: Prudencio & Prudencio v. The Honorable Court of Appeals
et al., G.R. No. 34539, 14 July 1986; READ: Maulini et al., v.
Serrano, G.R. No. L-8844, 16 December 1914; READ: Sadaya v.
Sevilla, G.R. No. L-17845, 27 April 1967.

12. NEGOTIATION

12.1. CONCEPT OF NEGOTIATION

THREE TYPES OF TRANSFER. 1) Assignment – Assignee is merely placed

in position of assignor and acquires the instrument subject to all the
defenses that might have been set up against the original payee; 200 2)
Operation of Law – such as by succession, by insolvency; 3)
194
Sec. 24
195
Sec. 52 (c)
196
Sec. 29
197
Sec. 26
198
Sec. 27
199
Sec. 29
200
JMBD: Take note that an assignment is actually a sale.

51
Negotiation. There is negotiation when the NI is transferred from one
person to another in such manner as to constitute the transferee the
holder thereof.201

Methods of Negotiation202 1) NI payable to bearer, by delivery only; 2)

NI payable to order, by indorsement of holder and by delivery.

12.2. INDORSEMENT

12.2.1. Importance

THE INDORSEMENT. 1) Creates liability on the part of indorser i.e.,

Irregular Indorser,203 Qualified Indorser,204 General Indorser,205 and
Indorser if NI negotiable by delivery;206 and, 2) An indorsement is
necessary for valid negotiation of NI payable to order.207

12.2.2. Requisites

RULES. 1) Indorsement (signature of indorser, without additional words,

is sufficient) must be written on NI itself, or upon a paper attached
thereto; and, 2) Indorsement must be of entire NI. THUS, GENERALLY
an indorsement which purports to transfer to the indorsee a part only of
the amount payable, or which purports to transfer the NI to two or more
indorsees severally, does not operate as negotiation of the NI. EXCEPT
where NI has been paid in part, it may be indorsed as to the residue.

LACK OF INDORSEMENT. Transferee acquires only rights of the transferor;

defenses available against transferor will also be available against
transferee BUT the latter has right to require transferor to indorse the
NI. The time or reckoning point for determining whether transferee is
HIDC is as of time of actual indorsement, not at time of delivery.208

INDORSEMENT OF NI PAYABLE TO BEARER. The NI may nevertheless be

further negotiated by delivery, but the person indorsing specially is liable
as indorser to only such holders as make title through his indorsement.209

12.2.3. Kinds of Indorsement210

201
Sec. 30
202
Sec. 30
203
Sec. 64
204
Sec. 65
205
Sec. 66
206
Sec. 67
207
Sec. 30 and 49
208
Sec. 49
209
Sec. 40
210
Sec. 33

52
SPECIAL. Specifies the person to whom, or to whose order, the instrument
the NI is payable211 and indorsement of indorsee is necessary for further
negotiation of the NI212

BLANK. Specifies no indorsee and converts NI to one payable to bearer,

which may be negotiated by mere delivery. 213 BUT the holder may still
convert this to a special indorsement by writing over the signature of the
indorser in blank any contract consistent with the character of the
indorsement.214

RESTRICTIVE. An indorsement that either: prohibits further negotiation of

NI (mere absence of words on power to negotiate not restrictive) i.e.,
“Pay to X only”, constitutes indorsee as indorser’s agent. i.e., “Pay to X
as agent”, or, vests title in indorsee in trust for or to use of other persons.
i.e., “Pay to X as trustee”.215 An indorsement of this nature confers upon
indorsee right to: receive payment of NI, bring any action thereon that
indorser can bring and transfer his rights as such indorsee, where the
form of indorsement authorizes him to do so; at the same time, all
subsequent indorsees acquire only title of first indorsee under restrictive
indorsement.216

QUALIFIED. By adding to indorser’s signature words “without recourse”

or other words of similar import (without resort to a person secondarily
liable after default of person primarily liable). 217 This does not destroy
negotiability BUT constitutes indorser a mere assignor of title to the NI;
hence, limited liability (but still subject to certain warranties).218

CONDITIONAL. When the indorsement is made subject to a condition, the

party required to pay NI may disregard condition and make payment to
indorseee or his transferee whether condition has been fulfilled or not
BUT any person to whom NI so indorsed is negotiated will hold NI, or
proceeds thereof, subject to the rights of person indorsing
conditionally.219

12.2.4. Other Rules on Indorsements

RULES ON INDORSEMENTS. 1) Payable to two or more payees (who are

not partners), all must indorse unless the one indorsing is authorized by

211
Sec. 34
212
Sec. 34
213
Sec. 34
214
Sec. 35
215
Sec. 36
216
Sec. 37
217
Sec. 38
218
Sec. 65
219
Sec. 39

53
others;220 2) Payable to “cashier” (or other fiscal officer of bank or
corporation), the NI deemed prima facie to be payable to bank or
corporation of which he is such officer and may be negotiated by either
indorsement of bank or corporation or indorsement of officer; 221 3)
Misspelling or wrong designation of payee, the payee may indorse NI
adding, if he deems fit, the proper signature; 222 4) Representative
capacity: If person under obligation to indorse in representative capacity,
he may indorse in such terms as to negative personal liability; 223 5) Time
of indorsement224 PRESUMPTION. GENERALLY every negotiation is
deemed prima facie to have been effected before NI was overdue.
EXCEPT where indorsement bears date after maturity of NI; 225 and, 6)
Place of indorsement226 PRESUMPTIONS. This is used to determine
governing law and GENERALLY every indorsement is deemed prima
facie to have been made at place where NI is dated EXCEPT where
contrary appears.

STRIKING OUT INDORSEMENTS. PROCESS AND EFFECTS. Holder may at

any time strike out any indorsement which is not necessary to his title
and the indorser whose indorsement is struck out, and all indorsers
subsequent to him, are thereby relieved from liability on the NI.227

12.3. DELIVERY228

12.4. OTHER PROVISIONS

12.4.1. Continuation of Negotiable Character229

AT INCEPTION. An instrument negotiable in its origin continues to be

negotiable until it is either: restrictively indorsed (but only if it prohibits
further negotiation);230 or, discharged by payment or otherwise. BUT
AFTER MATURITY. There are two views: 1) negotiability ceases after
maturity; or, 2) negotiability continues after maturity (better view),
except that a transferee who takes NI after maturity is subject to
defenses between original parties (because he is considered a holder
with notice)

220
Sec. 41
221
Sec. 42
222
Sec. 43
223
Sec. 44
224
JMBD: This is important in determining if holder is a HIDC; see Sec. 52 (b)
225
Sec. 45
226
Sec. 46
227
Sec. 48
228
Sec. 191 (“’Delivery’ means transfer of possession, actual or constructive, from one
person to another.”); supra
229
Sec. 47
230
Sec. 36 (a)

54
 12.4.2. When Prior Party May Negotiate NI

POWER TO REISSUE AND NEGOTIATE. Where a NI is negotiated back to a

prior party, such party may, subject to NIL, reissue and further negotiate
the NI, BUT he is not entitled to enforce payment thereof against any
intervening party to whom he was personally liable.231

13. RIGHTS OF HOLDERS

13.1. SIMPLE HOLDER

DEFINITION: “holder” means payee or indorsee of a bill or note who is in

possession of it, or the bearer thereof. 232 TRANSFEREE OF UNINDORSED NI
PAYABLE TO ORDER. Transfer vests in transferee such title as transferor
had in NI.233

13.1.1. Rights

RIGHT TO SUE IN OWN NAME AND DISCHARAGE OF INSTRUMENT. He may

sue on NI in his own name (even if holder only in representative capacity
or for collection or as pledgee of NI) AND Payment to him in due course
discharges the NI (therefore, even if holder is not a HIDC, he may still
recover, albeit subject to defenses as if it were non-negotiable).234

PAYMENT SHOULD BE IN DUE COURSE. Payment is made in due course if it

is made: at or after maturity of NI; to holder thereof; and, in good faith
and without notice that holder’s title is defective.235

NI IS SUBJECT TO ORIGINAL DEFENSES.236 GENERALLY: In the hands on

any holder other than HIDC, a NI is subject to same defenses as if it were
non-negotiable. EXCEPT: A holder who derives his title through a HIDC
and who is not himself a party to any fraud or illegality affecting the NI,
has all the rights of such HIDC in respect of all parties prior to such
HIDC. = Shelter Rule.

13.2. HOLDER FOR VALUE

DEFINITION, HOLDER FOR VALUE. Where value has at any time been
given for the instrument, the holder is deemed a holder for value in
respect to all parties who become such prior to that time.237

231
Sec. 50
232
Sec. 191
233
Sec. 49
234
Sec. 51
235
Sec. 88
236
Sec. 58
237
Sec. 27

55
DEFINITION, VALUE. Value is any consideration sufficient to support a
simple contract. An antecedent or pre-existing debt constitutes value;
and is deemed such whether the instrument is payable on demand or at a
future time.238

13.2.1. Rights

RIGHT TO SUE IN OWN NAME AND DISCHARGE OF INSTRUMENT. HFV may

sue on NI in his own name and payment to him in due course discharges
the NI.239

ACCOMMODATION PARTY IS LIABLE. An accommodation party is liable on

NI to a HFV, notwithstanding that such HFV, at the time of taking the
instrument, knew him to be only an accommodation party.240

13.3. HOLDER IN DUE COURSE (HIDC)

13.3.1. What constitutes a HIDC241 (MEMORIZE: Sec. 52)

13.3.1.1.One who took the NI complete and regular upon

its face

TAKE NOTE: 1) IF INCOMPLETE, distinguish between material particular

which renders NI incomplete,242 as opposed to omission which does not
affect validity or negotiability of NI; 243 or, 2) IF IRREGULAR, distinguish
between material alteration244 as opposed to alteration which is not
material.

13.3.1.2.One who became holder before NI was overdue,

and without notice that it has been previously
dishonored, if such was the fact

IF OVERDUE (AFTER DATE OF MATURITY), this carries strong indication

that it has been dishonored, i.e., If payable on demand, presentment
must be made within reasonable time after its issue for PNs, 245 or after
the last negotiation thereof if BoE, since date of maturity is determined

238
Sec. 26
239
Sec. 51
240
Sec. 29
241
Sec. 52
242
Sec. 14
243
Sec. 6
244
Sec. 124-125
245
Sec. 71

56
by date of presentment;246 When NI payable on demand is negotiated un
unreasonable length of time after its issue, holder is not deemed HIDC;247

DETERMINATION OF REASONABLE TIME. This depends on nature of NI,

usage of trade or business, facts particular to case. 248 BUT SEE B.P.
22,249 which seems to make 90 days a reasonable period within which to
leave funds in bank to answer for a check.250

DISHONOR OF NI DOES NOT NECESSARILY NEGATE HIDC. If dishonored,

holder must have notice of dishonor (thus, if dishonor does not appear on
face of NI, holder may still be HIDC)

13.3.1.3.One who took it in good faith and for value

GOOD FAITH OF THE INDORSEE OR TRANSFEREE. To negate GF, actual

knowledge is not required, it is enough sufficient that facts are known
which show that something is wrong with transaction.251

FOR VALUE. A discount does not prevent holder from being a HIDC,
unless discount unusually large and/or other suspicious circumstances.252

BAD FAITH. Section 52(c) of the NIL states that a holder in due course is
one who takes the instrument "in good faith and for value." It also
provides in Section 52(d) that in order that one may be a holder in due
course, it is necessary that at the time it was negotiated to him he had no
notice of any infirmity in the instrument or defect in the title of the
person negotiating it. Acquisition in good faith means taking without
knowledge or notice of equities of any sort which could beset up against
a prior holder of the instrument.18 It means that he does not have any
knowledge of fact which would render it dishonest for him to take a
negotiable paper. The absence of the defense, when the instrument was
taken, is the essential element of good faith. 19 READ: Patrimonio v.
Gutierrez & Marasigan, G.R. No. 187769, 04 June 2014

13.3.1.4.One who, at the time NI was negotiated to him,

had no notice of any infirmity in the instrument or
defect in the title of the person negotiating it

246
Sec. 143 (a)
247
Sec. 53
248
Sec. 193
249
Batas Pambansa Bilang 22 “AN ACT PENALIZING THE MAKING OR DRAWING AND
ISSUANCE OF A CHECK WITHOUT SUFFICIENT FUNDS OR CREDIT AND FOR OTHER PURPOSES”
(1979) [BP 22]
250
BP 22, Sec. 2
251
Sec. 56
252
Sec. 25

57 MSEUF- CBA
DEFECTS IN TITLE Cover situations which at common law were known as
equitable defenses253 while INFIRMITIES include things wrong with NI
itself, as distinguished from those lacking in the contracts, not the NI.254

WHEN TITLE DEFECTIVE. The title of a person who negotiates a NI is

defective: IN ACQUISITION, when he obtained the NI, or any signature
thereof, by fraud, duress, or force and fear, or other unlawful means, or
for an illegal consideration; or, IN NEGOTIATION, when he negotiates it in
breach of faith, or under such circumstances as amount to fraud.255

NOTICE OF DEFECT. The person (or his agent) to whom NI is negotiated

must have had: actual knowledge of the infirmity or defect; or, knowledge
of such facts that his action in taking the NI amounted to bad faith. 256
BUT, if notice comes before amount is fully paid, the transferee will be
deemed a HIDC only to the extent of the amount therefor paid by him.257

13.3.2. Who is deemed HIDC?

PRESUMED HIDC. GENERALLY: Every holder deemed prima facie to be

HIDC, EXCEPT when it is shown that title of person who has negotiated
the NI is defective, burden is on holder to prove that he or some other
person under whom he claims acquired the title as HIDC, BUT NOT
when the party who became bound on NI prior to acquisition of defective
title.258

HOLDER ACQUIRING FROM HIDC. A holder who derives his title through a
HIDC AND who is not himself a party to any fraud or illegality affecting
the NI, has all the rights of such HIDC in respect of all parties prior to
such HIDC.259

13.3.3. Who can be HIDC?

PAYEE. Based on proper interpretation of NIL as a whole, payee may,

even if NI is not negotiated (but rather issued) to him, a payee may be a
HIDC, BUT NOT a DRAWEE, because he is not even a holder, and since
the drawee, upon acceptance and payment of the NI, thereby strips NI of
all its negotiability.
253
Sec. 55; But the term “defenses” in the general sense includes common law defenses
outside of those covered under Sec. 55, i.e., mistake; absence or failure of consideration
(Sec. 28); minority and other forms of incapacity to contract (Sec. 22); lack of authority
of agent (Sec. 19)
254
i.e., insertion of wrong date (Sec. 13); incomplete but delivered NI (Sec. 14);
incomplete and undelivered NI (Sec. 15), complete but undelivered NI (Sec. 16); agent
signing per procuration beyond scope of his authority (Sec. 21); forgery (Sec. 23);
material alteration (Secs. 124 and 125)
255
Sec. 55
256
Sec. 56
257
Sec. 54
258
Sec. 59
259
Sec. 58

58
 13.3.4. Rights of HIDC

RIGHT TO SUE, DISCHARGE, AND FREEDOM FROM DEFECTS OF TITLE AND

DEFENSES IN ENFORCEMENT. A HIDC ay sue thereon in his own name and
payment to him in due course discharges the instrument; 260 holds NI free
from any defect of title of prior parties and defenses available to prior
parties among themselves;261 and, GENERALLY may enforce payment of
NI for the full amount thereof against all parties liable thereon, 262
EXCEPT: if NI paid in part, may be indorsed as to residue; 263 there is
notice of infirmity in NI or defect in title of person negotiating NI before
amount is fully paid;264 and, in cases of material alteration. 265 READ:
Vicente de Ocampo & Co., v. Gatchalian et al., G.R. No. L-15126,
30 November 1961

13.4. DEFENSES266

13.4.1. Real or Legal Defenses (RD)

DEFINITION AND NATURE. These defenses are those which attach to the
instrument itself or the res, and can be set up against the whole world,
including a holder in due course. Here the right sought to be enforced
has never existed or ceased to exist – a case where the contract is not
merely voidable, but void. HOWEVER, the instrument can still be
enforced against other parties because real defenses can only be invoked
by those to whom these are available.

EXAMPLES. 1) Want of delivery of incomplete NI – Sec. 15; 2) Want of

authority of agent; Minority – Sec. 22; 3) Ultra vires act of corporation
absolutely prohibited by its charter or statute from issuing NI under any
circumstances – Sec. 22; 4) Insanity where insane has court appointed
guardian – Sec. 22 by analogy; 4) Forgery – Sec. 23; 5) Fraud in
factum/Fraud in esse contractus – Sec. 23 by analogy; 6) Duress
amounting to forgery – Sec. 23 by analogy; 7) Material Alteration – Sec.
125; 8) Execution of NI between public enemies; 9) Illegality of contract
where it is the contract or NI itself which is expressly made illegal by
statute.

13.4.2. Personal or Equitable Defenses (PD)

DEFINITION AND NATURE. These are defenses that grow out of the
agreement or conduct of a particular person with regard to the
instrument which renders it inequitable for him, though holding legal
260
Sec. 51
261
Sec. 57
262
Sec. 57
263
Sec. 33
264
Sec. 54
265
Sec. 124
266
AGBAYANI, p. 297 et seq.

59
title, to enforce it against the defendant, but which are not available
against bono fide purchasers for value without notice. These are
“personal” because they are available only against that person or a
subsequent holder who stands in privity to him.

EXAMPLES. 1) Insertion of wrong date – Sec. 13; 2) Incomplete but

delivered NI – Sec. 14; 3) Want of delivery of complete NI – Sec. 16; 4)
Want of authority of agent where he has apparent authority; 5) Ultra
vires act of corporations where corporation has power to issue NIs but
the issuance was not authorized for the particular purpose; 6) Insanity
where there is no notice of insanity on the part of person contracting
with the insane; Intoxication; 7) Absence or failure of consideration,
partial or total – Sec. 28; 8) Fraud in inducement – Sec. 55; 9)
Acquisition of NI by force, duress, or fear – Sec. 55; 10) Acquisition of
NI for an illegal consideration – Sec. 55; 11) Negotiation in breach of
faith – Sec. 55; 12) Negotiation under circumstances that amount to
fraud – Sec. 55; 13) Mistake; 14) Illegality of contract where form or
consideration is illegal

13.4.3.

14. LIABILITIES OF PARTIES

14.1. PRIMARY VS. SECONDARY LIABILITY (MEMORIZE: SEC. 60-62,

65-66)

PRIMARILY LIABLE are Persons who, by the terms of NI, are absolutely
required to pay the same,267 i.e., Maker (PN) and Acceptor (BoE); WHILE
those SECONDARILY LIABLE are all other parties to NI,268 i.e, Drawer and
Indorsers.

IMPORTANCE OF DISTINCTION: Failure to take any of the two steps

(presentment for payment and notice of dishonor) will discharge persons
secondarily liable.

14.1.1. Liability of Maker

DEFINITION. THE Maker is the person who issues the PN. LIABILITY:
Maker of NI, by making it ENGAGES that he will pay NI according to its
tenor (primary liability) AND ADMITS the existence of payee (cannot set
up defense that payee is fictitious) and payee’s capacity to indorse
(cannot set up defense that payee is insane, minor, corporation acting
utra vires).269 READ: Astro Electronics Corp. & Roxas v. Philippine
Export and Foreign Loan Guarantee Corporation, G.R. No. 136729,
23 September 2003

267
Sec. 192
268
Sec. 192
269
Sec. 60

60
 14.1.2. Liability of Drawer

DEFINITION: Drawer is the person who issues the BoE. LIABILITY:

Drawer, by drawing NI ENGAGES that: (secondary liability) on due
presentment, the NI will be accepted or paid, or both, according to its
tenor, AND if the NI is dishonored and the necessary proceedings on
dishonor be duly taken, he will pay the amount thereof to the holder or to
any subsequent indorser who may be compelled to pay it. At the same
time, the drawer ADMITS the existence of payee and payee’s capacity
to indorse BUT drawer may insert in NI an express stipulation
negativing or limiting his own liability to holder.270

14.1.3. Liability of Acceptor

Definition: Acceptor is the Drawee who accepts BoE. Liability:

Acceptor, by accepting NI ENGAGES that he will pay NI according to
tenor of his acceptance (primary liability) AND ADMITS the existence of
drawer (cannot set up defense that drawer is fictitious), genuineness of
drawer’s signature (cannot set up defense that drawer’s signature is a
forgery), capacity and authority of drawer to draw the NI (cannot set up
defense of want of consideration between him and drawer), existence of
payee and payee’s capacity to indorse271

TWO KINDS OF ACCEPTANCE. GENERAL, when drawee assents without

qualification to the order of the drawer; 272 and, QUALIFIED when
drawee in express terms varies the effect of the BoE as drawn.273
LIABILITY OF ACCEPTOR (GENERAL) IF ALTERATION OF BOE AFTER
ISSUANCE BUT BEFORE ACCEPTANCE. 274 There are two (2) views, either,
since acceptance is general, liable based on his acceptance of BoE as
altered; or, Since acceptance is assent to the order of the drawer (Sec.
139), then liable based on original tenor of BoE – better view.

14.1.4. Liability of Indorsers

WHO ARE INDORSERS. 1) Indorser275 - A person placing his signature

upon NI otherwise than as maker, drawer, or acceptor, is deemed
indorser unless he clearly indicates by appropriate words his intention to
be bound in some other capacity (no parol evidence allowed); 2)
Irregular Indorser276 – A person, not otherwise a party to a NI, places
thereon his signature in blank before delivery (applies whether first
delivery, i.e., issuance, or subsequent delivery), he is liable as indorser, in
270
Sec. 61
271
Sec. 62
272
Sec. 139-140
273
Sec. 139, 141
274
see Sec. 124-125
275
Sec. 63
276
Sec. 64

61
accordance with the following RULES: If NI is payable to order of a third
person, he is liable to the payee and to all subsequent parties; if NI is
payable to the order of maker or drawer, or is payable to bearer, he is
liable to all parties subsequent to the maker or drawer; and, if he signs
for the accommodation of the payee, he is liable to all parties subsequent
to the payee; 3) Indorser where NI negotiable by delivery - A person
placing his indorsement on NI negotiable by delivery incurs all the
liabilities of an indorser;277 4) Joint Indorsees - Joint payees or joint
indorsees who indorse are deemed to indorse jointly and severally; 278 5)
Agent or Broker – A broker or agent negotiating NI without
indorsement incurs all liabilities for Qualified Indorsers, 279 unless
principal’s name and his acting only as agent disclosed.280

14.1.4.1.Indorsers

TYPES. 1) General Indorser281 - A person placing his signature upon NI

otherwise than as maker, drawer, or acceptor, is deemed indorser unless
he clearly indicates by appropriate words his intention to be bound in
some other capacity (no parol evidence allowed); 2) Irregular
Indorser282 – A person, not otherwise a party to a NI, places thereon his
signature in blank before delivery (applies whether first delivery, i.e.,
issuance, or subsequent delivery), he is liable as indorser, in accordance
with the following RULES: If NI is payable to order of a third person, he
is liable to the payee and to all subsequent parties; if NI is payable to the
order of maker or drawer, or is payable to bearer, he is liable to all
parties subsequent to the maker or drawer; and, if he signs for the
accommodation of the payee, he is liable to all parties subsequent to the
payee

Liability of General Indorser 283: An indorser who indorses without

qualification: ENGAGES that (secondary liablity): on due presentment,
the NI will be accepted or paid, or both, according to its tenor AND if NI
is dishonored and the necessary proceedings on dishonor be duly taken,
he will pay the amount thereof to the holder or to any subsequent
indorser who may be compelled to pay it. He also WARRANTS to all
subsequent HIDC (includes person deriving title from HIDC and
immediate transferees, but not remote holders who are not HIDC), that:
the NI is genuine and in all respects what it purports to be (cannot set up
defense of prior forgeries or material alterations), he has good title to it
(cannot set up defense of prior parties’ defective title), all prior parties
had capacity to contract (cannot set up defense of incapacity of prior
parties), and, the NI, at time of his indorsement, is valid and subsisting
277
Sec. 67
278
Sec. 68
279
see Sec. 65
280
Sec. 69
281
Sec. 63
282
Sec. 64
283
Sec. 66

62
(cannot set up defense that person primarily liable is insolvent or did not
receive consideration)

14.1.4.2.Qualified Indorser

Liability of Qualified Indorser 284: An indorser who indorses by

qualified indorsement WARRANTS (to all subsequent holders who derive
title from his indorsement) that the NI is genuine and in all respects what
it purports to be, he has good title to it, that all prior parties had capacity
to contract, except that this warranty does not apply to a person
negotiating public or corporation securities other than bills or notes, and,
that he has no knowledge of any fact which would impair the validity of
the NI or render it valueless (therefore, he may not be liable for breach
of warranty)

LIABILITY OF PERSON NEGOTIATING BY DELIVERY285: A person who

negotiates NI by delivery WARRANTS the same things as a Qualified
Indorser, but the warranty EXTENDS ONLY TO THE IMMEDIATE
TRANSFEREE.

14.1.4.3.Special Rules on Indorsements

SPECIAL RULES. 1) Indorser where NI negotiable by delivery - A

person placing his indorsement on NI negotiable by delivery incurs all
the liabilities of an indorser;286 2) Joint Indorsees - Joint payees or joint
indorsees who indorse are deemed to indorse jointly and severally; 287 3)
Agent or Broker – A broker or agent negotiating NI without
indorsement incurs all liabilities for Qualified Indorsers, 288 unless
principal’s name and his acting only as agent disclosed.289

14.1.5. Order in Which Indorsers Liable290

ORDER OF LIABILITY. GENERALLY. As respect one another, indorsers

liable prima facie in order in which they indorse; BUT, evidence is
admissible to show that, as between or among themselves, they have
agreed otherwise. NOTE that the order in which indorsers are liable is
inter se (among themselves), but does NOT apply to the holder.

284
Sec. 55; NOTE: The liability of Qualified Indorser is based on breach of warranties,
and not because person primarily liable refuses to pay.
285
Sec. 65; NOTE: The liability of person negotiating by delivery is based on breach of
warranties, and not because person primarily liable refuses to pay.
286
Sec. 67
287
Sec. 68
288
see Sec. 65
289
Sec. 69
290
Sec. 68

63
 14.1.6.

15. PROCEDURE TO CHARGE PERSONS SECONDARILY LIABLE

ON NI

15.1. IN GENERAL

15.1.1. No Steps Necessary to Charge Persons Primarily

Liable on NI

PRIMARY LIABILITY. Presentment for payment is not necessary in order to

charge the person primarily liable on the instrument 291 i.e., PN: The
maker, by making NI, engages that he will pay it according to its tenor 292
and BoE: The acceptor, by accepting NI, engages that he will pay it
according to the tenor of his acceptance.293

15.1.2. Necessary Steps to Charge Persons Secondarily

Liable For Promissory Notes

SECONDARY LIABILITY, GENERALLY. PN must be presented for payment to

person primarily liable294 within period required,295 UNLESS presentment
for payment is not required to charge indorsers,296 or excused.297

DISHONOR BY NON-PAYMENT. If PN dishonored by non-payment,298 an

immediate right of recourse against persons secondarily liable accrues to
holder.299 Thus, notice of dishonor by non-payment must be given to
persons secondarily liable300 within time required,301 UNLESS notice of
dishonor is waived,302 dispensed with,303 or not necessary to be given to
indorsers.304

15.1.3. Necessary Steps to Charge Persons Secondarily

Liable For Bills of Exchange

291
Sec. 70
292
Sec. 60
293
Sec. 62 and 132; see process of acceptance supra
294
Sec. 70
295
Sec. 71
296
Sec. 80
297
Sec. 82
298
Sec. 83
299
Sec. 84
300
Sec. 89
301
Sec. 102
302
Sec. 109
303
Sec. 112
304
Sec. 115

64
PRESENTMENT FOR ACCEPTANCE. GENERALLY this is required in the
three cases provided by law305 AND presentment for acceptance to the
drawee OR negotiation within a reasonable time from acquisition, 306
UNLESS excused.307

DISHONOR BY NON-ACCEPTANCE. If BoE dishonored by non-acceptance, 308

an immediate right of recourse against persons secondarily liable
accrues to holder, and no presentment for payment is necessary. 309 The
holder must then treat bill as dishonored by non-acceptance, 310 thus,
notice of dishonor by non-acceptance must be given to persons
secondarily liable,311 UNLESS notice of dishonor by non-acceptance is:
waived,312 dispensed with,313 not necessary to be given to drawer, 314 or
not necessary to be given to indorsers.315

NOTICES OF DISHONOR, PROTESTS. If due notice of dishonor by non-

acceptance has been given, subsequent notice of dishonor by non-
payment is not necessary UNLESS in the meantime, NI has been
accepted.316 An omission to give notice of dishonor by non-acceptance
does not prejudice rights of HIDC subsequent to omission). 317 If BoE
appears on its face to be a foreign BoE,318 it must be duly protested319
for non-acceptance,320 UNLESS protest is waived321 or dispensed with.322

ACCEPTED OR EXCUSED THEREFROM. If BoE is accepted, or if it is not

required to be presented for acceptance, it must be presented for

305
Sec. 143
306
Sec. 144
307
Sec. 148
308
Sec. 149
309
Sec. 151
310
Sec. 150
311
Sec. 89
312
Sec. 109
313
Sec. 112
314
Sec. 114
315
Sec. 115
316
Sec. 116
317
Sec. 117
318
Sec. 129 (“Inland and foreign bills of exchange. - An inland bill of exchange is a bill
which is, or on its face purports to be, both drawn and payable within the Philippines.
Any other bill is a foreign bill. Unless the contrary appears on the face of the bill, the
holder may treat it as an inland bill.”)
319
Sec. 153 (“Protest; how made. - The protest must be annexed to the bill or must
contain a copy thereof, and must be under the hand and seal of the notary making it and
must specify: (a) The time and place of presentment; (b) The fact that presentment was
made and the manner thereof; (c) The cause or reason for protesting the bill; (d) The
demand made and the answer given, if any, or the fact that the drawee or acceptor
could not be found.”); see also Sec. 154-160
320
Sec. 152
321
Sec. 111
322
Sec. 159

65
payment to person primarily liable, 323 within period required,324 UNLESS
presentment for payment is not required to charge drawer, 325 not
required to charge indorsers,326 or excused.327

DISHONOR BY NON-PAYMENT. If BoE dishonored by non-payment,328 an

immediate right of recourse against persons secondarily liable accrues to
holder.329 Thus, notice of dishonor by non-payment must be given to
persons secondarily liable330 within time required,331 UNLESS notice of
dishonor is waived332 dispensed with333 not necessary to be given to
drawer334 or not necessary to be given to indorsers. 335 If BoE appears on
its face to be a foreign BoE, it must be duly protested for non-
payment,336 UNLESS protest is waived337 or dispensed with.338

15.1.4. Necessary Steps to Charge Persons Secondarily

Liable in Other Cases (Acceptor For Honor)

15.1.4.1.Presentment for payment and Notice of Dishonor

AGREEMENT OF ACCEPTOR FOR HONOR. The acceptor for honor, by such

acceptance, engages that he will, on due presentment, pay the bill
according to the terms of his acceptance provided it shall not have been
paid by the drawee and provided also that is shall have been duly
presented for payment and protested for non-payment and notice of
dishonor given to him.339

15.1.4.2.Protest for non-payment

PROTEST OF BILL ACCEPTED FOR HONOR, AND SO FORTH. Where a

dishonored bill has been accepted for honor supra protest or contains a
referee in case of need, it must be protested for non-payment before it is

323
Sec. 70
324
Sec. 71
325
Sec. 79
326
Sec. 80
327
Sec. 82
328
Sec. 83
329
Sec. 84
330
Sec. 89
331
Sec. 102
332
Sec. 109
333
Sec. 112
334
Sec. 114
335
Sec. 115
336
Sec. 152
337
Sec. 111
338
Sec. 159
339
Sec. 165

66
presented for payment to the acceptor for honor or referee in case of
need.340

15.2. PRESENTMENT FOR PAYMENT

15.2.1. Presentment

When Necessary: But except as herein otherwise provided, presentment

for payment is necessary in order to charge the drawer and indorsers 341
(to charge persons secondarily liable on NI). When Not Required. NO
NEED FOR PRESENTMENT. When not required to charge drawer: where
drawer has no right to expect or require that drawee or acceptor will pay
NI,342 when not required to charge indorser: where NI was made or
accepted for his accommodation and he has no reason to expect that NI
will be paid if presented, 343 or when excused,344 i.e., where, after exercise
of reasonable diligence, presentment cannot be made, when drawee is a
fictitious person, or by waiver of presentment, express or implied

15.2.2. Period to Make Presentment345

NOT PAYABLE ON DEMAND. It must be made on day it falls due, i.e., time
of maturity is at time fixed in NI without grace and if day of maturity falls
on Saturday, Sunday or holiday, on next succeeding business day, 346 or, if
payable at fixed period after date, after sight, or after happening of
specified event, time of payment determined by excluding day from
which time begins to run, and including date of payment.347

PAYABLE ON DEMAND. It must be made within a reasonable time after its

issue, EXCEPT if BoE, presentment sufficient if within a reasonable time
after last negotiation and at option of holder, may be presented before 12
noon on Saturday if not holiday.348

DELAY IN PRESENTMENT. If delay is excused by circumstances beyond

control of holder and not imputable to his default, misconduct, or
negligence, it must be made with reasonable diligence when cause of
delay ceases to operate.349

340
Sec. 167
341
Sec. 70
342
Sec. 79
343
Sec. 80
344
Sec. 82
345
Sec. 71
346
Sec. 85
347
Sec. 86
348
Sec. 85
349
Sec. 81

67
 15.2.3. What Constitutes Sufficient Presentment350

SUFFICIENT PRESENTMENT. 1) By holder, or by some person authorized to

receive payment on his behalf; 2) At a reasonable hour on a business day
i.e., if payable at a bank, during banking hours, unless person to make
payment has no funds there to meet it at any time during the day, in
which case, before bank is closed on that day; 351 3) At a proper place as
herein defined, i.e., place specified in NI, if none, address of person to
make payment given in NI, if none, usual place of business or residence
of person to make payment, or, in other cases, wherever person to make
payment can be found or at his last known place of business or
residence.352 Take note that if NI is made payable at a bank, it is
equivalent to an order to the bank to pay the same for the account of the
principal debtor;353 and, 4) To the person primarily liable on NI, or if he is
absent or inaccessible, to any person found at the place where the
presentment is made OTHERWISE, if principal debtor is dead and no
place specified – to his personal representative, if any and if can be found
with reasonable diligence,354 if persons primarily liable are liable as
partners and no place specified – to any one of them, even if firm
dissolved,355 if several persons, not partners, are primarily liable and no
place specified – to all of them356 and NI must be exhibited to person
from whom payment is demanded.357

15.2.4. If NI is Paid

REQUIREMENTS AND EFFECTS. Payment in due course is: 1) payment

made at or after maturity; 2) to holder thereof in good faith and without
notice that his title is defective; 358 and, 3) if payment is in due course, the
NI is discharged thereby.359 TAKE NOTE that the NI must be delivered up
to party paying it.360

15.2.5. If NI is Dishonored By Non-Payment

DISHONOR BY NON-PAYMENT. This occurs when: the NI is duly presented

for payment and payment is refused or cannot be obtained; or, when
presentment is excused and the NI is overdue and unpaid361

350
Sec. 72
351
Sec. 75
352
Sec. 73
353
Sec. 87
354
Sec. 76
355
Sec. 77
356
Sec. 78
357
Sec. 74
358
Sec. 88
359
Sec. 119
360
Sec. 74
361
Sec. 83

68
CONSEQUENCES RELATIVE TO HOLDER. The immediate right of recourse to
all parties secondarily liable on NI accrues to the holder, 362 but the latter
is obligated to give notice of dishonor to drawer and to each indorser;
otherwise, the NI will be discharged.363 READ: Tuazon et al., v. Heirs
of Ramos, G.R. No. 156262, 14 July 2005

15.3. NOTICE OF DISHONOR

15.3.1. When Necessary

GENERAL RULE. Except as otherwise herein provided, when NI

dishonored by non-acceptance or non-payment, notice of dishonor must
be given to drawer and to each indorser, and any drawer or indorser to
whom notice is not given is discharged. 364 READ: Gullas v. The
Philippine National Bank, G.R. No. L-43191, 13 November 1935

15.3.2. When Not Required

EXCEPTIONS. 1) Waiver: Notice of dishonor may be waived either before

time of giving notice has arrived or after omission to give notice, and
waiver may be waived or implied. 365 If waiver on Ni itself, binding on all
parties; if written above signature of indorser, binding on him only. 366
Take note that a wavier of protest is deemed waiver not only of formal
protest but also of presentment and notice of dishonor; 367 2) Notice is
dispensed with when, after exercise of reasonable diligence, it cannot be
given to or does not reach the parties sought to be charged; 368 3) Notice
is not required to charge drawer when: the drawer and drawee one and
the same person, the drawee is fictitious person or person not having
capacity to contract, the drawer is person to whom NI is presented for
payment, the drawer has no right to expect or require that drawee or
acceptor will honor the NI; or, the drawer has countermanded
payment;369 and, 4) Notice is not required to charge indorser when: the
drawee is fictitious person or person not having capacity to contract, and
indorser was aware at time of indorsement, the indorser is a person to
whom NI is presented for payment; or, when NI was made or accepted
for indorser’s accommodation.370 TAKE NOTE also, that if due notice of
dishonor by non-acceptance has been given, subsequent notice of
dishonor by non-payment is not necessary unless in the meantime, NI has
362
Sec. 84
363
Sec. 89
364
Sec. 89
365
Sec. 109
366
Sec. 110
367
Sec. 111
368
Sec. 112
369
Sec. 114
370
Sec. 115

69
been accepted;371 and, that an omission to give notice of dishonor by non-
acceptance does not prejudice rights of HIDC subsequent to omission.372

15.3.3. Period to Give Notice

WHEN SHOULD NOTICE GIVEN? Notice may be given as soon as the

instrument is dishonored and, unless delay is excused as hereinafter
provided, must be given within the time fixed by this Act (basically as
soon as Ni is dishonored).373 And if a party received notice of dishonor, he
has, after such receipt, same time to give notice to antecedent parties. 374
The period differs when the parties resides in the same375 or different376
places.

DELAY IN SENDING NOTICE. If delay is excused by circumstances beyond

control of holder and not imputable to his default, misconduct, or
negligence it must be done with reasonable diligence when cause of
delay ceases to operate.377

15.3.4. What Constitutes Sufficient Notice

15.3.4.1.By whom given

BY WHOM GIVEN. The notice may be given by or on behalf of the holder,

or by or on behalf of any party to the instrument who might be compelled
to pay it to the holder, and who, upon taking it up, would have a right to
reimbursement from the party to whom the notice is given.378

TAKE NOTE. 1) BY OR ON BEHALF OF HOLDER. Inures to benefit of all

subsequent holders and all prior parties who have right of recourse
against party to whom notice is given;379 2) BY OR ON BEHALF OF ANY
PARTY TO NI WHO MIGHT BE COMPELLED TO PAY IT TO HOLDER AND, WHO
UPON TAKING IT UP, WOULD HAVE A RIGHT OF REIMBURSEMENT FROM
PARTY TO WHOM NOTICE IS GIVEN. Inures to benefit of the holder and all
parties subsequent to the party to whom notice is given; 380 or, 3) BY
AGENT. Notice of dishonor may be given by any agent either in his own
name or in name of any party entitled to give notice, whether that party
is his principal or not.381 And if NI dishonored in hands of agent, he may
either himself give notice to parties liable, or give notice to his principal.
371
Sec. 116
372
Sec. 117
373
Sec. 102
374
Sec. 107
375
Sec. 103
376
Sec. 104
377
Sec. 113
378
Sec. 90
379
Sec. 92
380
Sec. 93
381
Sec. 91

70
If he give notice to principal, he must do so within same time as if holder,
and principal, upon receipt of such notice, has himself same time to give
notice as if agent had been independent holder.382

15.3.4.2.Form and Contents

NOTICE OF DISHONOR may be in writing or merely oral and may be given

in any terms which sufficiently identify the instrument, and indicate that
it has been dishonored by non-acceptance or non-payment.383 The notice
need not be signed and insufficient written notice may be supplemented
and validated by verbal communication (even misdescription of NI does
not vitiate notice unless party notified is misled thereby).384

15.3.4.3.How delivered

DELIVERY of the notice can be made either personally; or, by mail.385

15.3.4.4.To whom given

GENERALLY to party himself or his agent on his behalf 386 EXCEPT if

party to be notified is dead and death is known to party giving notice – to
his personal representative, if any, and if can be found with reasonable
diligenc; or, if there is none, then last residence or place of business of
deceased.387 NOTE ALSO that if parties to be notified are partners – to
any one of them, even if firm dissolved;388 or, if joint parties to be notified
are not partners –to each of them, unless one is authorized to receive for
others;389 or, if party is bankrupt – to party himself, or to his trustee or
assignee.390

15.3.4.5.Where Notice must be given

WHERE NOTICE IS TO BE SENT. Where a party has added an address to his

signature, notice of dishonor must be sent to that address; but if he has
not given such address, then the notice must be sent as follows: (a)
Either to the post-office nearest to his place of residence or to the post-

382
Sec. 94
383
Sec. 96
384
Sec. 95
385
Sec. 96; For rules on delivery by mail, see also Sec. 105 (“When sender deemed to
have given due notice. - Where notice of dishonor is duly addressed and deposited in the
post office, the sender is deemed to have given due notice, notwithstanding any
miscarriage in the mails.”) and 106 (“Deposit in post office; what constitutes. - Notice is
deemed to have been deposited in the post-office when deposited in any branch post
office or in any letter box under the control of the post-office department.”)
386
Sec. 97
387
Sec. 98
388
Sec. 99
389
Sec. 100
390
Sec. 101

71
office where he is accustomed to receive his letters; or (b) If he lives in
one place and has his place of business in another, notice may be sent to
either place; or (c) If he is sojourning in another place, notice may be
sent to the place where he is so sojourning. But where the notice is
actually received by the party within the time specified in this Act, it will
be sufficient, though not sent in accordance with the requirement of this
section.391

15.3.5.

15.4. PRESENTMENT FOR ACCEPTANCE

15.4.1. When Required

ONLY IN THE FOLLOWING CASES: 1) where BoE is payable after sight, or

in any other case where presentment for acceptance is necessary in
order to fix the maturity of the NI; 2) where BoE expressly stipulates
that it shall be presented for acceptance; and, 3) where BoE is drawn
payable elsewhere than at residence or place of business of drawee.392

15.4.2. When Excused

NEED NOT BE MADE. Presentment for acceptance is excused and a BoE

may be treated as dishonored by non-acceptance: where drawee is dead,
has absconded, is a fictitious person, or a person not having capacity to
contract by BoE; where, after exercise of reasonable diligence,
presentment cannot be made; and, where, although presentment has
been irregular, acceptance has been refused on some other ground.393

15.4.3. Effect of Failure to present

FAILURE TO PRESENT. Except as herein otherwise provided, if BoE not

presented for acceptance or negotiated within a reasonable time,
drawers and indorsers are discharged.394

15.4.4. What Constitutes Sufficient Presentment395

RULES. GENERALLY it should be made by and behalf of holder at a

reasonable hour on a business day396 before BoE is overdue397 to drawee
or some other person authorized to accept or refuse acceptance on his
behalf. EXCEPT if drawee is dead - to his personal representative; or, if
two or more drawees who are not partners – to all of them, unless one is
391
Sec. 108
392
Sec. 143
393
Sec. 148
394
Sec. 144
395
Sec. 145
396
Sec. 146; see also Sec. 72 and 85
397
see Sec. 147 for instances when delay is excused

72
authorized to receive for others; or, if bankrupt - to him or to his trustee
or assignee

15.4.5. If BoE is Accepted

15.4.5.1.What constitutes sufficient acceptance

DEFINITION. Acceptance is signification of drawee of his assent to order

of drawer.398 This is necessary because a BoE not assignment of funds in
hands of drawee, and drawee not liable on BoE unless and until he
accepts it.399 To be sufficient, The Acceptance must be in writing, signed
by drawee and must not express that drawee will perform his promise by
any other means than payment of money.400

WHERE ACCEPTANCE IS MADE. On the face of bill: The holder may require
acceptance to be written on BoE;401 if made on separate instrument: It
does not bind acceptor except in favor of person to whom it is shown and
who, on faith thereof, receives BoE for value.402

PROMISE TO ACCEPT. An unconditional promise in writing to accept BoE

before it is drawn is deemed actual acceptance in favor of every person
to whom it is shown and who, on faith thereof, receives BoE for value.403

15.4.5.2.Period to accept

GENERALLY. Drawee has 24 hours after presentment in which to decide,

and the acceptance, if given, dates as of day of presentation. 404
HOWEVER, BOE IS DEEMED ACCEPTED, Where a drawee to whom a bill is
delivered for acceptance destroys the same, or refuses within twenty-four
hours after such delivery or within such other period as the holder may
allow, to return the bill accepted or non-accepted to the holder, he will be
deemed to have accepted the same.405

15.4.5.3.Kinds of acceptance406

GENERAL. Assents without qualification to order of drawer and

acceptance to pay at particular place, is general, UNLESS it is only in
such place and not elsewhere.407

398
Sec. 132
399
Sec. 127
400
Sec. 132
401
Sec. 133
402
Sec. 134
403
Sec. 135
404
Sec. 136
405
Sec. 137
406
Sec. 139; but see Sec. 137
407
Sec. 140

73
QUALIFIED. In express terms varies effect of BoE as drawn, i.e., 1)
Conditional (pay only upon fulfillment of condition); 2) Partial (pay only
part of amount); 3) Local (pay only at a particular place); 4) Qualified as
to time; or, 5) some or one of drawees, but not all. 408 TAKE NOTE, if
qualified acceptance is taken, drawer and indorsers discharged from
liability on BoE unless they expressly or impliedly authorized, or
subsequently assented to, holder taking qualified acceptance. Thus,
drawer or indorser receiving notice of qualified acceptance must, within
reasonable time, dissent; otherwise, deemed to have assented.409

ACCEPTANCE OF INCOMPLETE BILL. A bill may be accepted before it has

been signed by the drawer, or while otherwise incomplete, or when it is
overdue, or after it has been dishonored by a previous refusal to accept,
or by non payment. But when a bill payable after sight is dishonored by
non-acceptance and the drawee subsequently accepts it, the holder, in
the absence of any different agreement, is entitled to have the bill
accepted as of the date of the first presentment.410

15.4.6. If BoE Dishonored By Non-Acceptance

INSTANCES OF DISHONOR BY NON-ACCEPTANCE. When it is duly presented

for acceptance and such an acceptance as prescribed by NIL is refused
or cannot be obtained;411 When presentment for acceptance is excused
and the BoE is not accepted;412 If holder requests that acceptance be
written on BoE and drawee refuses, holder may treat BoE as
dishonored;413 and, Holder may refuse to take qualified acceptance and
treat BoE as dishonored by non-acceptance.414

HOLDER’S RIGHTS AND DUTY IF BOE DISHONORED BY NON-ACCEPTANCE.

An immediate right of recourse against the drawer and indorsers accrues
to the holder and no presentment for payment is necessary 415 BUT holder
presenting BoE must treat BoE as dishonored by non-acceptance;
otherwise, he loses right of recourse against the drawer and indorsers.416

15.5. PROTEST

15.5.1. When Required

408
Sec. 141; but see Sec. 128 (“A bill may be addressed to two or more drawees jointly,
whether they are partners or not; but not to two or more drawees in the alternative or
in succession.”)
409
Sec. 142
410
Sec. 138
411
Sec. 149 (a)
412
Sec. 149 (b)
413
Sec. 133
414
Sec. 142
415
Sec. 151
416
Sec. 150

74
ONLY TO FOREIGN BILLS. Where a foreign bill417 appearing on its face to
be such is dishonored by non-acceptance, it must be duly protested for
non-acceptance, by non-acceptance is dishonored and where such a bill
which has not previously been dishonored by nonpayment, it must be
duly protested for nonpayment. If it is not so protested, the drawer and
indorsers are discharged. Where a bill does not appear on its face to be a
foreign bill, protest thereof in case of dishonor is unnecessary.418

15.5.2. When Dispensed With

THERE IS NO NEED TO PROTEST In any circumstances which would

dispense with notice of dishonor.419

15.5.3. Effect of Lack of Protest

IF THERE IS NO PROTEST MADE WHEN IT IS REQUIRED, the Drawer and

indorsers discharged420

15.5.4. When optional

PROTEST IS OPTIONAL where the acceptor has been adjudged a bankrupt

or an insolvent or has made an assignment for the benefit of creditors
before the bill matures, the holder may cause the bill to be protested for
better security against the drawer and indorsers.421

15.5.5. Period to Protest

RULES. GENERALLY when a bill is protested, such protest must be made

on the day of its dishonor UNLESS delay is excused as herein
provided.422 Delay in noting or protesting is excused when delay is caused
by circumstances beyond the control of the holder and not imputable to
his default, misconduct, or negligence. When the cause of delay ceases to
operate, the bill must be noted or protested with reasonable diligence.423

15.5.6. What Constitutes Sufficient Protest

15.5.6.1.By whom made

417
see Sec. 129 (“Inland and foreign bills of exchange. - An inland bill of exchange is a
bill which is, or on its face purports to be, both drawn and payable within the
Philippines. Any other bill is a foreign bill. Unless the contrary appears on the face of
the bill, the holder may treat it as an inland bill.”)
418
Sec. 152
419
Sec. 159; see Sec. 109-117
420
Sec. 152
421
Sec. 158
422
Sec. 155; note that “x x x When a bill has been duly noted, the protest may be
subsequently extended as of the date of the noting.”
423
Sec. 159

75
THE PROTEST IS MADE 1) By notary public; or, 2) by any respectable
resident of place where BoE dishonored, in presence of two or more
credible witnesses.424

15.5.6.2.How made

THE PROTEST MUST BE: 1) annexed to BoE and contain copy thereof, and
must be under hand and seal of notary making it, and must specify: a)
Time and place of presentment; b) Fact that presentment was made and
manner thereof; c) Cause or reason for protesting BoE; and, d) Demand
made and answer given, if any, or fact that drawee or acceptor cannot be
found425

PROTEST BOTH FOR NON-ACCEPTANCE AND NON-PAYMENT. A bill which

has been protested for non-acceptance may be subsequently protested
for non-payment.426

PROTEST WHERE BILL IS LOST AND SO FORTH. When a bill is lost or

destroyed or is wrongly detained from the person entitled to hold it,
protest may be made on a copy or written particulars thereof. 427

15.5.6.3.Where made

GENERALLY a bill must be protested at the place where it is

dishonored, EXCEPT that when a bill drawn payable at the place of
business or residence of some person other than the drawee has been
dishonored by nonacceptance, it must be protested for non-payment at
the place where it is expressed to be payable, and no further
presentment for payment to, or demand on, the drawee is necessary.428

15.5.7. If Accepted for Honor429

15.5.8. If Paid for Honor430

16. DISCHARGE

16.1. DISCHARGE OF NI431

16.1.1. By payment in due course by or on behalf of the

principal debtor.

424
Sec. 154
425
Sec. 153
426
Sec. 157
427
Sec. 160
428
Sec. 156
429
Sec. 161-170
430
Sec. 171-177
431
Sec. 119

76
RIGHT OF PARTY SECONDARILY LIABLE WHO DISCHARGES INSTRUMENT.
GENERALLY where NI is paid by a party secondarily liable, it is not
discharged, but party so paying it is remitted to his former rights as
regards prior parties and may strike out his own and all subsequent
indorsements and again negotiate the NI, EXCEPT where it is payable to
order of a third person and has been paid by drawer; or, where it was
made or accepted for accommodation and has been paid by party
accommodated.432

16.1.2. By payment in due course by the party

accommodated, where the NI is made or accepted for his
accommodation

16.1.3. By the intentional cancellation thereof by the holder.

CANCELLATION; UNINTENTIONAL; BURDEN OF PROOF. A cancellation made

unintentionally or under a mistake or without the authority of the holder,
is inoperative but where an instrument or any signature thereon appears
to have been cancelled, the burden of proof lies on the party who alleges
that the cancellation was made unintentionally or under a mistake or
without authority.433

16.1.4. By any other act which will discharge a simple

contract for the payment of money.

RENUNCIATION BY HOLDER. GENERALLY a holder may expressly

renounce his rights against any party to NI before, at, or after its
maturity. The Renunciation must be in writing UNLESS NI is delivered
up to person primarily liable thereon. An absolute and unconditional
renunciation of rights against principal debtor made at or after maturity
of NI discharges NI. HOWEVER a renunciation does not affect HIDC
without notice.

432
Sec. 121
433
Sec. 123

77
 16.1.5. When the principal debtor becomes the holder of the
NI at or after maturity in his own right

16.2. DISCHARGE OF PERSONS SECONDARILY LIABLE ON NI434

16.2.1. By any act which discharges the NI

16.2.2. By intentional cancellation of his signature by

holder.435

16.2.3. By discharge of prior party

16.2.4. By valid tender of payment made by prior party

16.2.5. By release of principal debtor unless holder’s right of

recourse against party secondarily liable is expressly
reserved

16.2.6. By any agreement binding upon holder to extend time

of payment or to postpone holder’s right to enforce the
NI unless made with assent of party secondarily liable or
unless holder’s right of recourse against such party is
expressly reserved

434
Sec. 120
435
see Sec. 123

78
 SPECIAL TOPIC: CHECKS
17. DEFINITION AND CONCEPTS

DEFINITION. A Check is a bill of exchange drawn against a bank that is

payable on demand.436 In Pacheco v. Court of Appeals,46 this Court has
expressly recognized that a check "constitutes an evidence of
indebtedness"47 and is a veritable "proof of an obligation."48 Hence, it can
be used "in lieu of and for the same purpose as a promissory note." 49 In
fact, in the seminal case of Lozano v. Martinez, 50 We pointed out that a
check functions more than a promissory note since it not only contains an
undertaking to pay an amount of money but is an "order addressed to a
bank and partakes of a representation that the drawer has funds on
deposit against which the check is drawn, sufficient to ensure payment
upon its presentation to the bank."51 This Court reiterated this rule in the
relatively recent Lim v. Mindanao Wines and Liquour Galleria stating that
"a check, the entries of which are in writing, could prove a loan
transaction."52 READ: Ting Ting Pua v. Spouses Benito Lo Bun Tiong
& Caroline Siok Ching Teng, G.R. No. 198660, 23 October 2013

TAKE NOTE (COMPLETE LIST, CITATIONS.) a) A check does not by itself

set a separate fund for Drawer; b) presumptions on issuance of check; c)
a check is supposed to be drawn against a previous deposit of funds,
while an ordinary bill of exchange need not be drawn against a deposit;
d) a check need not be presented for acceptance; e) ; f) ; g) h); i) Check is
not legal tender; only a substitute for money (art 1249, NCBA, case)

TYPES OF CHECKS (COMPLETE LIST, CITATIONS). 1) Cashier’s Check. One

Drawn by the cashier fo the bank, in the name of the bank agains the
bank itsel to a third person or order. One issued by an authorized officer
of a bank directed to another person, evidencing that the buyer is
authorized to demand od receive ipon purchase from the bank the
amount of money represented by the check; 2) Manager’s check. A check
drawn by the manager of the bank in the name of the bank against the
bank itself payable to a third person. It is similar to a cashier’s check in
effect and use; 3) Memorandum Check. A check in which it is written the
words “memorandum” or “memo” and “mem: signifying that the drawer
engages to pay upon presentment at maturity and if due notice of the
presentment and non payment should be given. It is a check given by a
borrower to a lender for the amount of a short loan, with the
understanding that it is not to be presented at the bank, but will be
redeemed by the maer himself when the loan falls due and which
understanding is evidenced by writing the word “memorandum” “memo”
or “mem” on the check; 4) Certified check. A certification is an
agreement whereby the bank against whom a check is drawn undertakes
to pay it any future time when presented for payment. It is also

436
Sec. 185

79
equivalent to acceptance and operated as an assignment of part of the
funds for creditors.

NOW ACCOUNTS (CITATION, BOOK). READ: People of the Philippines v.

Reyes et al., G.R. No. 154159, 31 March 2005; READ: Associated
Bank v. Tan, G.R. No. 156940, 14 December 2004

18. PRESENTMENT OF CHECKS

18.1. WITHIN WHAT TIME PRESENTED

GENERALLY. Cite sec. 186

STALE CHECK. This is one which is not presented within a reasonable

time after issue. When a check is not presented for payment within a
reasonable time after its issue, the drawer is discharged from liability
thereon to the extent of the loss caused by the delay – if ther is no loss or
injury shown, the drawer is not discharged.

INDORSERS DISCHARGED. Although a drawer of a check is discharged

from liability only to the extend of loss caused by the unreasonable delay
in tesenting the check for payment, an endorser is wholly discharged
thereby, irrespective of any question of loss or injury. READ: PNB v.
Seato. 91 Phil 756 (1952)

CLEARING PERIOD (CITATION). When a drawee bank fails to return a

forged or altered check to the collecting bank within the 24-hr clearing
period, the collecting bank is absolved from liability. READ: Republic
Bank v. Court of Appeals, 196 SCRA 100 (1991)

OBLIGATION TO PAY NOT EXTINGUISHED. If the check is not paid either

because it is dishonored or not presented, the original oblgation to pay is
not erased, for the check is a written promise to pay or written
acknowledgement of an obligation to pay, hence, the obligation lapses
only upon the expiration of the ordinary prescriptive period governing
written obligations. READ: Vermohal v. Estacio, 08 CAR 550 (1965)

18.2. EFFECTS OF FAILURE TO PRESENT CHECK

ACCEPTANCE OF CHECK, IMPLICATIONS. While it is true that the delivery

of a check produces payment only when it is encashed, pursuant to Art.
1249 of the Civil Code, the rule is otherwise if the debtor is prejudiced by
the creditor’s unreasonable delay in presentment. Therefore, the
acceptance of a check implies an undertaking of due diligence in
presenting it for payment and if he from whom is it received sustains loss
by want of such diligence, it will be held to operate as actual payment of
the debt or obligation for which the check was given.

80
 18.3. CONSEQUENCES OF UNLAWFUL NEGOTIATION AND PAYMENTS

18.4. ISSUES ON CLEARING

19. CERTIFICATION OF CHECKS

19.1. DEFINITION

CERTIFICATION DEFINED (CITE SEC.187). It is an agreement whereby the

bank, against whom a check is drawn undertakes to pay it any future
time when presented for payment. But a bank is not obligated to the
depositor to certify checks. The refusal of the bank does not dispense
with the requirement of presentment for payment since a check is of
right presentable only for payment at the bank on which it is drawn.

19.2. EFFECTS OF CERTIFICATION

EFFECTS. Certification: 1) is equivalent to acceptance and is the

operative act that makes the drawee bank liable; 2) operates as an
assignment of funds of the drawer in the hands of the drawee bank (this
means that the bank has segregated enough money from the drawer’s
account to meet the latter’s liability. Hence, there is no longer dishonor);
and, 3) if a) obtained by the holder, it discharges the persons secondarily
liable thereon (sec. 188); or, b) where the holder procures it to be
accepted or certified, drawer and all endorsers are discharged from
liability thereon, since there is no longer a chance of dishonor; HOWEVER,
if the certification was not obtained by the holder, but by others, there is
no discharge of persons secondarily liable.

TAKE NOTE ALSO, it is immaterial to such liability in favor of a holder in

due course whether the drawer had funds or not in the bank or the
drawer was indebted to the bank for more than the amount of the check.

20. CROSSED-CHECKS

20.1. NATURE AND PROCEDURE (ARTS. 443-556 CODE OF COMMERCE)

THE EFFECTS OF CROSSING A CHECK. Among the different types of

checks issued by a drawer is the crossed check. The Negotiable
Instruments Law is silent with respect to crossed checks, although the
Code of Commerce makes reference to such instruments. This Court has
taken judicial cognizance of the practice that a check with two parallel
lines in the upper left hand corner means that it could only be deposited
and could not be converted into cash. Thus, the effect of crossing a check
relates to the mode of payment, meaning that the drawer had intended
the check for deposit only by the rightful person, i.e., the payee named
therein. The crossing may be "special" wherein between the two parallel
lines is written the name of a bank or a business institution, in which
case the drawee should pay only with the intervention of that bank or

81
company, or "general" wherein between two parallel diagonal lines are
written the words "and Co." or none at all, in which case the drawee
should not encash the same but merely accept the same for deposit. In
Bataan Cigar v. Court of Appeals, we enumerated the effects of crossing a
check as follows: (a) the check may not be encashed but only deposited in
the bank; (b) the check may be negotiated only once – to one who has an
account with a bank; and (c) the act of crossing the check serves as a
warning to the holder that the check has been issued for a definite
purpose so that he must inquire if he has received the check pursuant to
that purpose; otherwise, he is not a holder in due course.437

20.2. EFFECTS

READ: Philippine Commercial International Bank v. Court of

Appeals & Ford Philippines, Inc. G.R. No. 121413, 29 January
2001; READ: Traders Royal Bank v. Radio Philippines Network et
al., G.R. No. 138510, 10 October 2002; READ: Pio Baretto Realty
Deelopment Corporation v. Court of Appeals et al., G.R. No.
132362, 28 July 2001

21. CRIMINAL OFFENSES INVOLVING CHECKS

21.1. ESTAFA THRU ISSUANCE OF BOUNCING CHECK (CITATION, BOOK,

RPC)

21.1.1. Estafa 1

21.1.2. Estafa 2

Coverage
Defects” in Provision
Elements of the Crime
Principal by Indispensible Cooperation
Estafa and bouncing Checks are Separate Crimes

21.2. BATAS PAMBANSA BILANG 22 (THE BOUNCING CHECKS LAW)

21.2.1. Purpose of the Bouncing Checks Law

THE GRAVAMEN OF THE OFFENSE punished by B.P. Blg. 22 is the act of

making and issuing a worthless check; that is, a check that is dishonored
upon its presentation for payment. It is designed to prevent damage to
trade, commerce, and banking caused by worthless checks. In Lozano v.
Martinez, this Court declared that it is not the nonpayment of an
obligation which the law punishes. The law is not intended or designed to
coerce a debtor to pay his debt. The thrust of the law is to prohibit, under
pain of penal sanctions, the making and circulation of worthless

437
Bank of America, NT & SA v. Associated Citizens Bank et al., G.R. Nos. 141001 &
141018, 21 May 2009

82
checks. Because of its deleterious effects on the public interest, the
practice is proscribed by the law. The law punishes the act not as an
offense against property, but an offense against public order. The prime
purpose of the criminal action is to punish the offender in order to deter
him and others from committing the same or similar offense, to isolate
him from society, to reform and rehabilitate him or, in general, to
maintain social order. Hence, the criminal prosecution is designed to
promote the public welfare by punishing offenders and deterring others.
x x x A criminal action has a dual purpose, namely, the punishment of the
offender and indemnity to the offended party. The dominant and
primordial objective of the criminal action is the punishment of the
offender. The civil action is merely incidental to and consequent to the
conviction of the accused. The reason for this is that criminal actions are
primarily intended to vindicate an outrage against the sovereignty of the
state and to impose the appropriate penalty for the vindication of the
disturbance to the social order caused by the offender. On the other
hand, the action between the private complainant and the accused is
intended solely to indemnify the former.438

21.2.2. Nature of the Offense

BP 22 IS MALUM PROHIBITUM. BP 22 or the Bouncing Checks Law was

enacted for the specific purpose of addressing the problem of the
continued issuance and circulation of unfunded checks by irresponsible
persons. To stem the harm caused by these bouncing checks to the
community, BP 22 considers the mere act of issuing an unfunded check
as an offense not only against property but also against public order. The
purpose of BP 22 in declaring the mere issuance of a bouncing check
as malum prohibitum is to punish the offender in order to deter him and
others from committing the offense, to isolate him from society, to reform
and rehabilitate him, and to maintain social order. The penalty is stiff. BP
22 imposes the penalty of imprisonment for at least 30 days or a fine of
up to double the amount of the check or both imprisonment and fine.439

LACK OF CRIMINAL INTENT IS IRRELEVANT. It bears repeating that the

lack of criminal intent on the part of the accused is irrelevant. The law
has made the mere act of issuing a worthless check a malum prohibitum,
an act proscribed by legislature for being deemed pernicious and inimical
to public welfare. In fact, even in cases where there had been payment,
through compensation or some other means, there could still be
prosecution for violation of B.P. 22. The gravamen of the offense under
this law is the act of issuing a worthless check or a check that is
dishonored upon its presentment for payment, not the nonpayment of the
obligation.440

BP 22 DOES NOT PUNISH NON-PAYMENT OF DEBT. What the law punishes

438
Rosario v. Co, G.R. No. 133608, 26 August 2008 (citations omitted)
439
Mitra v. People of the Philippines, G.R. No. 191404, 05 July 2010
440
Lunaria v. People of the Philippines, G.R. No. 160127, 11 November 2008

83
is the issuance of a bouncing check, not the purpose for which it was
issued nor the terms and conditions relating to its issuance. The mere act
of issuing a worthless check is malum prohibitum. x x x The gravamen of
the offense punished by B.P. 22 is the act of making and issuing a
worthless check or a check that is dishonored upon its presentation for
payment. It is not the non-payment of an obligation which the law
punishes. The law is not intended or designed to coerce a debtor to pay
his debt. The thrust of the law is to prohibit, under pain of penal
sanctions, the making of worthless checks and putting them in
circulation.441

TRANSITORY OR CONTINUING OFFENSE. Violation of B.P. Blg. 22 is in the

nature of a continuing crime. Venue is determined by the place where the
elements of making, issuing, or drawing of the check and delivery thereof
are committed.Thus, as explained in People vs. Yabut, "[t]he theory is
that a person indicted with a transitory offense may be validly tried in
any Jurisdiction where the offense was in part committed. x x x The place
where the bills were written, signed, or dated does not necessarily fix or
determine the place where they were executed. What is of decisive
importance is the delivery thereof. The delivery of the instrument is the
final act essential to its consummation as an obligation."442

EACH CHECK IS ONE OFFENSE. Besides, it is of no moment even if the

fifty (50) checks were part of the sixty-four (64) checks. Each act of
drawing and issuing a bouncing check constitutes a violation of B.P. Blg.
22. The rule that there is only one offense when the offender is moved by
one criminal intent or purpose does not apply because in a statutory
offense or malum prohibitum malice or criminal intent is immaterial. The
mischief of circulating unfunded checks is injurious not only to the payee
or holder of such checks but to society in general, and the business
community, in particular. The nefarious practice can very well pollute the
channels of trade and commerce, injure the banking system and
eventually hurt the welfare of society and the public interest.443

21.2.3. Two types of offenses covered by law

TWO OFFENSES PUNISHED BY BP 22. An analysis of Sec. 1 shows

that The Bouncing Checks Law penalizes two (2) distinct acts: First,
making or drawing and issuing any check to apply on account or for
value, knowing at the time of issue that the drawer does not have
sufficient funds in or credit with the drawee bank; and, second, having
sufficient funds in or credit with the drawee bank shall fail to keep
sufficient funds or to maintain a credit to cover the full amount of the
check if presented within a period of ninety (90) days from the date
appearing thereon, for which reason it is dishonored by the drawee bank.
In the first paragraph, the drawer knows that he does not have sufficient
441
Ong v. Court of Appeals, G.R. No. 139006, 27 November 2000
442
Ibasco v. Court of Appeals, G.R. No. 117488, 05 September 1996
443
Lim v. People of the Philippines, G.R. No. 1433231, 26 October 2001

84
funds to cover the check at the time of its issuance, while in the second
paragraph, the drawer has sufficient funds at the time of issuance but
fails to keep sufficient funds or maintain credit within ninety (90) days
from the date appearing on the check. In both instances, the offense is
consummated by the dishonor of the check for insufficiency of funds or
credit. The check involved in the first offense is worthless at the time of
issuance since the drawer had neither sufficient funds in nor credit with
the drawee bank at the time, while that involved in the second offense
is good when issued as drawer had sufficient funds in or credit with the
drawee bank when issued. Under the first offense, the ninety (90)-day
presentment period is not expressly provided, while such period is an
express element of the second offense.444

ENDORSER IS LIABLE. An endorser who passes a bad check may be held

liable under BP 22, even though the presumption of knowledge does not
apply to him, if there is evidence that at the time of endorsement, he was
aware of the insufficiency of funds. It is evident from the foregoing
deliberations that the presumption in Sec. 2 was intended to facilitate
proof of knowledge and not to foreclose admissibility of other evidence
that may also prove such knowledge. Thus, the only consequence of the
failure to present the check for payment within ninety (90) days from the
date stated is that there arises no prima facie presumption of knowledge
of insufficiency of funds. But the prosecution may still prove such
knowledge through other evidence. Whether such evidence is sufficient
to sustain probable cause to file the information is addressed to the
sound discretion of the City Prosecutor and is a matter not controllable
by certiorari. Certainly, petitioner is not left in a lurch as the prosecution
must prove knowledge without the benefit of the presumption, and she
may present whatever defenses are available to her in the course of the
trial. 445

FOREIGN CHECKS. Under the Bouncing Checks Law (B.P. Blg. 22), foreign
checks, provided they are either drawn and issued in the Philippines
though payable outside thereof . . . are within the coverage of said law.446

21.2.4. Elements of the Offense

THE ELEMENTS OF THE OFFENSE (FIRST TYPE) PUNISHED IN B.P. 22

ARE:447 (1) the making, drawing and issuance of any check of apply to
account or for value; (2) the knowledge of the maker, drawer or issuer
that at the time of issue he does not have sufficient funds in or credit

444
Bautista v. Court of Appeals, G.R. No. 143375, 06 July 2001
445
Bautista v. Court of Appeals, G.R. No. 143375, 06 July 2001
446
De Villa v. Court of Appeals, G.R. No. 87416, 08 April 1991
447
JMBD: For the second type of BP22 Violation, the elements are: 1) Drawer had
sufficient funds in or credit with the drawee bank when he issued the check: 2) Drawer
failed to maintain sufficient funds or credit with the bank to cover the check for a period
of 90 days from date of the check; and, 3) Check is presented within 90 days from the
date of the check and is dishonored due to insufficiency of funds.

85
with the drawee bank for the payment of such check in full upon its
presentment; and (c) subsequent dishonor of the check by the drawee
bank for insufficiency of funds or credit or dishonor for the same reason
had not the drawer, without any valid cause, ordered the bank to stop
payment.448

21.2.4.1.the making, drawing and issuance of any check of

apply to account or for value

VALUABLE CONSIDERATION IS PRESUMED. There is no merit in petitioner's

contention that the checks were issued without valuable consideration.
We have held that upon issuance of a check, in the absence of evidence to
the contrary, it is presumed that the same was issued for valuable
consideration, which may consist either in some right, interest, profit or
benefit accruing to the party who makes the contract, or some
forbearance, detriment, loss or some responsibility, to act, or labor, or
service given, suffered or undertaken by the other side. It is an obligation
to do, or not to do in favor of the party who makes the contract, such as
the maker or endorser.449

DATE OF ISSUANCE OF POST-DATED CHECKS. Admittedly, what are

involved here are postdated checks. Postdating simply means that on the
date indicated on its face, the check would be properly funded, not that
the checks should be deemed as issued only then. The checks in this case
were issued at the time of the signing of the Contract to Sell in August
1989.450

21.2.4.2.the knowledge of the maker, drawer or issuer that

at the time of issue he does not have sufficient funds
in or credit with the drawee bank for the payment of
such check in full upon its presentment

CREDIT CONSTRUED. The word “credit” as used herein shall be construed

to mean an arrangement or understanding with the bank for the payment
of such check.451

WHEN MUST KNOWLEDGE OF INSUFFICIENCY EXIST. It may be true that

B.P. Blg. 22 is a transitory or continuing offense and such being the case
the theory is that a person indicted with a transitory offense may be
validly tried in any jurisdiction where the offense was in part
committed. We note however that knowledge by the maker or drawer of
the fact that he has no sufficient funds to cover the check or of having
sufficient funds is simultaneous to the issuance of the instrument.452
448
Navarro v. Court of Appeals, G.R. No. 112389-90, 01 August 1994
449
Ongson v. People of the Philippines, G.R. No. 156169, 12 August 2005
450
SyCip, Jr. v. Court of Appeals, G.R. No. 125059, 17 March 2000
451
BATAS PAMABANSA BLG. 22, sec. 4
452
Uy v. Court of Appeals, G.R. No. 119000, 28 July 1997

86
THE NINETY (90)-DAY PERIOD IS NOT AMONG THESE ELEMENTS. Section 2
of BP 22 is clear that a dishonored check presented within the ninety
(90)-day period creates a prima facie presumption of knowledge of
insufficiency of funds, which is an essential element of the offense. Since
knowledge involves a state of mind difficult to establish, the statute itself
creates a prima facie presumption of the existence of this element from
the fact of drawing, issuing or making a check, the payment of which was
subsequently refused for insufficiency of funds. The term prima
facie evidence denotes evidence which, if unexplained or uncontradicted,
is sufficient to sustain the proposition it supports or to establish the facts,
or to counterbalance the presumption of innocence to warrant a
conviction.453

A NOTICE OF DISHONOR IS INDISPENSIBLE. For this presumption to arise,

the prosecution must prove the following: (a) the check is presented
within ninety (90) days from the date of the check; (b) the drawer or
maker of the check receives notice that such check has not been paid by
the drawee; and (c) the drawer or maker of the check fails to pay the
holder of the check the amount due thereon, or make arrangements for
payment in full within five (5) banking days after receiving notice that
such check has not been paid by the drawee. In other words, the
presumption is brought into existence only after it is proved that the
issuer had received a notice of dishonor and that within five days from
receipt thereof, he failed to pay the amount of the check or to make
arrangements for its payment. The presumption or prima facie evidence
as provided in this section cannot arise, if such notice of nonpayment by
the drawee bank is not sent to the maker or drawer, or if there is no
proof as to when such notice was received by the drawer, since there
would simply be no way of reckoning the crucial 5-day period. A notice of
dishonor received by the maker or drawer of the check is thus
indispensable before a conviction can ensue. The notice of dishonor may
be sent by the offended party or the drawee bank. The notice must be in
writing. A mere oral notice to pay a dishonored check will not suffice.
The lack of a written notice is fatal for the prosecution. The
requirement of notice, its sending to, and its actual receipt by, the
drawer or maker of the check gives the latter the option to
prevent criminal prosecution if he pays the holder of the check
the amount due thereon, or makes arrangements for payment in
full by the drawee of such check within five (5) banking days after
receiving notice that the check has not been paid. 454

21.2.4.3.subsequent dishonor of the check by the drawee

bank for insufficiency of funds or credit or dishonor
for the same reason had not the drawer, without any
valid cause, ordered the bank to stop payment
453
Baustista v. Court of Appeals, G.R. No. 143357, 06 July 2001
454
Dico v. Court of Appeals, G.R. No. 141669, 28 February 2005

87
TO MITIGATE THE HARSHNESS OF THE LAW IN ITS APPLICATION, the statute
provides that such presumption shall not arise if within five (5) banking
days from receipt of the notice of dishonor, the maker or drawer makes
arrangements for payment of the check by the bank or pays the holder
the amount of the check. Contrary to petitioners assertions, nowhere in
said provision does the law require a maker to maintain funds in his bank
account for only 90 days. Rather, the clear import of the law is to
establish a prima facie presumption of knowledge of such insufficiency of
funds under the following conditions (1) presentment within 90 days from
date of the check, and (2) the dishonor of the check and failure of the
maker to make arrangements for payment in full within 5 banking days
after notice thereof. That the check must be deposited within ninety (90)
days is simply one of the conditions for the prima facie presumption of
knowledge of lack of funds to arise. It is not an element of the offense.
Neither does it discharge petitioner from his duty to maintain sufficient
funds in the account within a reasonable time thereof. Under Section 186
of the Negotiable Instruments Law, a check must be presented for
payment within a reasonable time after its issue or the drawer will be
discharged from liability thereon to the extent of the loss caused by the
delay. By current banking practice, a check becomes stale after more
than six (6) months, or 180 days.455

UNCOLLECTED DEPOSITS ARE NOT THE SAME AS INSUFFICIENT FUNDS.

The prima facie presumption of deceit arises only when a check has been
dishonored for lack or insufficiency of funds. Notably, the law speaks of
insufficiency of funds but not of uncollected deposits. 456

21.2.5. Rejected Defenses

SOME OF WHICH ARE: a) Surrounding circumstances, b) Lack of

consideration; c) underlying transaction did not materialize; d) No bad
faith or malice on part of issuer, maker, drawer; e) No checking account
or account closed; f) check issued merely as a gurantee or evidence of
debt; g) prior knowledge of payee of insufficiency of funds; h) signature
of corporate officer (but not corporate employee).457

21.2.6. Payment as a Valid Defense in BP 22

PAYMENT IS A VALID DEFENSE. The prima facie presumption that the

drawer has knowledge of the insufficiency of funds or credit at the time
of the issuance, or on the presentment for payment, of the check may be
rebutted by payment of the value of the check either by the drawer or by
the drawee bank within five banking days from notice of the dishonor
given to the drawer. The payment thus becomes a complete defense
regardless of the strength of the evidence offered by the prosecution. It
455
Wong v. Court of Appeals, G.R. No. 117857, 02 February 2001
456
Dy v. People of the Philippines, G.R. No. 158312, 14 November 2008
457
VILLANUEVA, at 531- 535

88
must be presupposed, then, that the issuer received a notice of dishonor
and that, within five days from receipt thereof, he failed to pay the
amount of the check or to make arrangement for its payment.458

21.2.7. Other Successful Defenses

21.2.8. Conviction on Issuance of a Bouncing Check

THE PRESENCE OF THE SECOND ELEMENT MANIFESTS MORAL

TURPITUDE. In People vs. Atty. Fe Tuandawe held that a conviction for
violation of B.P. Blg. 22 imports deceit and certainly relates to and affects
the good moral character of a person. The effects of the issuance of a
worthless check, as we held in the landmark case of Lozano vs.
Martinez, through Justice Pedro L. Yap, transcends the private interests
of the parties directly involved in the transaction and touches the
interests of the community at large. The mischief it creates is not only a
wrong to the payee or holder, but also an injury to the public since the
circulation of valueless commercial papers can very well pollute the
channels of trade and commerce, injure the banking system and
eventually hurt the welfare of society and the public interest. Thus,
paraphrasing Blacks definition, a drawer who issues an unfunded check
deliberately reneges on his private duties he owes his fellow men or
society in a manner contrary to accepted and customary rule of right and
duty, justice, honesty or good morals.459

21.2.9. a

458
Abarquez v. Court of Appeals, G.R. No. 148557, 07 August 2003
459
Villaber v. COMELEC, G.R. No. 148326, 15 November 2001

89
 SPECIAL TOPIC: OTHER ALLIED LAWS

22. WAREHOUSE RECEIPTS LAW

23. LETTERS OF CREDIT

24. DOCUMENTS OF TITLE

25. TRUST RECEIPTS LAW

90
 BL102
Negotiable Instruments and Other Allied Laws
October 2014 (updated December 2017)
x-------------------------------------------------------x

ANNEX A: CPALE SYLLABUS FOR RFBT

26. NEGOTIABLE INSTRUMENTS AND BOUNCING CHECKS LAW

26.1. NEGOTIABLE INSTRUMENTS

26.1.1. Negotiability of instrument

26.1.2. Abnormal negotiable Instruments

26.1.3. Incomplete but delivered instruments

26.1.4. Incomplete and undelivered instruments

26.1.5. Complete but undelivered instruments

26.1.6. Instruments with forged signature

26.2. BOUNCING CHECKS

26.2.1. Checks without [sic] insufficient funds

26.2.2. Evidence of knowledge of insufficient funds

26.2.3. Duty of Drawee

26.2.4. Credit Construed

91 MSEUF- CBA