By: Joyce Briones notes from Agbayani; with case doctrines
2C 2004-2005
Negotiable Instruments Law
Post-midterms Reviewer
IV. Rights of the Holder
Section 51. Right of holder to sue; payment.
The holder of a negotiable instrument may sue thereon in his own
name; and payment to him in due course discharges the
instrument.
Rights of a holder in general:
1. sue on the instrument in his own name
2. receive payment and if the payment is in due course, the
instrument is discharged
Right to sue
• in his own name
• even if holder only for collection or as a pledge of the instrument
Right of transferee of unindorsed instrument
• believed that the possessor of an unendorsed instrument payable
to order may sue in his own name if the transferor could have
done so
o transfer for value, but without indorsement, of an
instrument which is payable to order vests in the
transferee such title as the transferor had therein1
Effect of payment to the holder
• discharges the instrument
• payment in due course is payment made:
1. at or after the maturity of the instrument
2. to the holder thereof
3. in good faith and without notice that his title is defective
Section 52. What constitutes a holder in due course.
A holder in due course is a holder who has taken the instrument
under the following conditions:
(a) That it is complete and regular upon its face;
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Sec. 49. Transfer without indorsement; effect of. - Where the holder of an
instrument payable to his order transfers it for value without indorsing it,
the transfer vests in the transferee such title as the transferor had therein,
and the transferee acquires in addition, the right to have the indorsement
of the transferor. But for the purpose of determining whether the
transferee is a holder in due course, the negotiation takes effect as of the
time when the indorsement is actually made.
(b) That he became the holder of it before it was
overdue, and without notice that it had been
previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) 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.
Presumption holder in due course
• generally, every holder is presumed prima facie to be a holder in
due course
o who claims otherwise must prove that the holder
acquired the instrument with 1 or more of the conditions
lacking
Acquisition of complete and regular instrument
• instrument must be complete and regular on its face
• not regular on its face e.g. check containing unmistakable
evidence on its face that it had been altered whether innocently or
not
where instruments held complete, regular - e.g. omission is material
Acquisition before instrument is overdue
• one taking past due paper is chargeable with notice of all equities
between the original parties, but not with equities between the
intermediate indorsers
• if the instrument is overdue, it is also a notice that it has been
dishonored
• instrument is overdue after the date of maturity
• knowledge of the holder that at the time of acquisition thereof
that 1 installment or interest or both is unpaid is notice that the
instrument is overdue
• as to interest - one who purchases in good faith an instrument
upon which the interest is overdue is a holder in due course
Acquisition in good faith, meaning
• refers to indorsee or transferee, not to the seller of the paper
• taking in good faith = if the holder does not take in bad faith, his
good faith is sufficiently shown
o bad faith = he must have knowledge of facts which
render it dishonest for him to take a particular piece of
negotiable paper; knowledge of some truth that would
prevent action by those commercially honest men for
whom the law is made
By: Joyce Briones notes from Agbayani; with case doctrines 2
2C 2004-2005

Meaning of holder in good faith e.g.

• holder without knowledge or notice of equities of any sort which
A B C --- D
could be set up against a prior holder of the instrument maker bearer steals, knows that note was stolen
• absence of knowledge of the defense, when the instrument is negotiates to
taken, is the essential element in the matter of good faith D on Dec. 1,
1951
Effect of failure to make inquiry
• failure to inquire after notice of facts merely sufficient to cause a
person of ordinary prudence to make inquiry as to an infirmity in a • D cannot be considered a holder in due course
negotiable instrument and defect in the holder’s title, is not • But if on Dec. 1, 1951, D did not know of the theft by C, D would
evidence of purchaser’s bad faith be considered holder in due course, the other conditions being
• test for determining whether a holder acquires an instrument in present
good faith: whether his purpose was dishonest • chargeable with notice:
o subjective test of honesty, not objective test of due care 1. one taking an overdue instrument
2. one acquiring an instrument for a grossly inadequate
When failure to inquire amounts to bad faith consideration
• held that failure to make inquiry, when circumstances strongly
indicate defect, renders the holder not a holder in due course Good faith means lack of notice of defect or infirmity
• willful failure of purchasing a note, with actual knowledge of • defect of title: when person obtaining the instrument or any
suspicious circumstances to make inquiries amount to bad faith signature thereto by fraud, duress or force and fear, or other
unlawful means, or for an illegal consideration, or when he
Acquisition for value negotiates it in breach of faith, or under such circumstances as
• holder must take instrument “for value” amount to fraud (Sec. 55)
• where holder gave no valuable consideration for the transfer of • notice of an infirmity in the instrument or defect in the title of the
the instrument to him, he cannot be a holder in due course negotiator: person must have had actual knowledge of the
infirmity or defect, or knowledge of such facts that his action in
Effect of inadequacy of consideration taking the instrument amounted to bad faith (Sec. 56)
• except in cases specified by law, lesion or inadequacy of cause
shall not invalidate a contract, unless there has been fraud, Defects of title
mistake or undue influence (Art. 1355 CC) • defects of title defined by Sec. 55 to cover:
• inadequacy of consideration is not a sufficient ground for either o all situations which at common law were known as
legal or equitable relief, yet it may be shown as evidence of fraud equitable defenses and
• mere fact of inadequacy of consideration has very little weight, o equities of ownership where there was breach of faith in
when standing alone, but coupled with other elements tending to negotiation
show fraud, it becomes a very material factor of constructive fraud
• under Sec. 55, defective title of a person over an instrument may
Effect where sum is trifling - may be implied notice that there was result from the ff.:
something wrong with the negotiable instrument 1. acquisition of the instrument by fraud
2. acquisition of the instrument by force, duress or fear
Acquisition without notice of defect of title or of infirmity - at the time the 3. acquisition of the instrument by unlawful means
instrument was negotiated to the holder, he had no notice of any infirmity 4. acquisition of the instrument for an illegal consideration
in the instrument or defect of title of the person negotiating it 5. negotiation of the instrument in breach of faith
6. negotiation of the instrument under circumstances that amount to
fraud

• one acquiring an instrument with knowledge of any of the

foregoing defects of title of the person negotiating is not a holder
in due course

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By: Joyce Briones notes from Agbayani; with case doctrines
2C 2004-2005
Defenses
• include:
1. mistake
2. absence and failure of consideration (Sec. 28)
3. minority and other forms of incapacity to contract (Sec. 22)
4. lack of authority of an agent (Sec. 19, etc.)
• one acquiring an instrument with knowledge of any of the
foregoing defenses is not a holder in due course
Infirmities - include things that are wrong with the instrument itself:
1. wrong date inserted where the instrument is expressed to be
payable at a fixed period after sight is undated (Sec. 13)
2. filling up of a blank instrument not strictly in accordance with the
authority given or not within reasonable time, where it was
delivered wanting in a material particular (Sec. 14)
3. filling up and negotiating without authority an incomplete and
undelivered instrument (Sec. 15)
4. lack of valid and intentional delivery of a mechanically complete
instrument (Sec. 16)
5. agent signing per procuration beyond the scope of his authority
(Sec. 21)
6. forgery (Sec. 23)
7. material alteration (Sections 124 and 125)
• notice by the holder of an instrument of any of the foregoing, at
the time of negotiation of the instrument to him, would render
him not a holder in due course
Holder to whom cashier’s check is not duly indorsed and negotiated is not
holder in due course (Mesina v. IAC)
Buyer finance company, in sale on credit is not holder in due course of
promissory note negotiated to it by seller (Consolidated Plywood
Industries, Inc. v. IFC Leasing and Acceptance Corp.)
May a payee be a holder in due course?
• payee may be a holder in due course under any circumstances in
which he meets the requirements of Sec. 52
May the drawee be a holder in due course?
• holder = 1 who has taken the instrument as it passes along in the
course of negotiation towards the drawee and not the drawee,
who, on the acceptance and payment of the instrument, thereby
strips it of all negotiability and reduces it to a mere voucher or
proof of payment
• drawee of a draft is not holder in due course
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• drawee of a check to whom it is presented for payment is not
even a holder; cannot be a holder in due course
May the pledgee be a holder in due course?
• pledgee for value in good faith of a complete unmatured note,
without notice of equities, is a holder in due course
RP v. Equitable Banking Corporation [irregular amount]
• Where the Bureau of Treasury had not only been negligent in
clearing its own warrants, but had, also, thereby induced the 2
banks to pay the amounts thereof to their respective depositors,
and where, moreover, the irregularity of the said warrants was
apparent on the face thereof from the viewpoint of the treasury,
and said banks had not been informed of said irregularity until
after the warrants had not been cleared and honored, it is held
that the loss of the amounts is mainly imputable to the acts and
omissions of the treasury, for which the 2 banks should not and
cannot be penalized. The gross negligence is shown that the 24
warrants involved in the case are over P5,000 and are beyond the
authority of the Treasury.
PNB v. Seeto [unreasonable length of time]
• A delay of 27 days from the date of indorsement to that of the
presentation of the check for payment at the drawee bank, is
unreasonable, and consequently, discharges completely the
indorser from liability.
Chan Wan v. Tan Kim and Chen So [notice of dishonor]
• Wan Chan gave no indication how he got the checks. The trial
court surmised that he got them after they had been returned,
since they were presented to EBC with “account closed” stamped
on them. As such, Chan Wan knew that the checks had been
dishonored.
STELCO Marketing Corp. v. CA [overdue, not in good faith and for value]
• STELCO is not a holder in due course because there is no evidence
whatever that STELCO’s possession of Check No. 765380 ever
dated back to any time before the instrument’s presentment and
dishonor. There is no evidence whatsoever that the check was
ever given to it, or indorsed to it in any manner or form in
payment of an obligation or as security for an obligation, or for
any other purpose before it was presented for payment. STELCO
never became a holder for value and that nowhere in the check
itself does the name of STELCO Marketing appear as payee,
indorsee or depositor thereof.
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By: Joyce Briones notes from Agbayani; with case doctrines
2C 2004-2005
Bataan Cigar and Cigarette Factory v. CA and SIHI
• SIHI is not a holder in due course because knowing it is a crossed
check, it still accepted it.
• Effects of crossing a check:
1. the check may not be encashed but only deposited in the bank
2. the check may be negotiated only once – to one who has an
account with the bank
3. the act of crossing the check serves as 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 for due course
State Investment House, Inc. v. IAC and Chua
• A crossed check should put the payee on inquiry and upon him
devolves the duty to ascertain the holder’s title to the check or the
nature of his possession. Failing in this respect, the payee is
declared guilty of gross negligence amounting to legal absence of
good faith and thus, the holder of the check is not a holder in due
faith.
• That the subject checks had been issued subject to the condition
that Chua on due date would make the back up deposit for said
checks but which condition apparently was not made, thus
resulted in the non-consummation of the loan intended to be
granted, constitutes a good defense against SIHI who is not a
holder in due course.
State Investment House, Inc. v. CA and Moulic
• SIHI is a holder in due course. The evidence shows that:
(a) on their faces the checks were complete and regular on its
face
(b) SIHI bought the said checks before their due dates
(c) SIHI took the checks in good faith and for value
(d) SIHI was never informed nor made aware that the checks
were issued to Victoriano merely as security and not for value
Banco Atlantico v. Auditor General [notice of infirmity]
• BA was not a holder in due course. The check for $90K was a
demand note. The amount was quite big. It was the (Boncan)
payee who made the request that the same not be presented for
collection until a fixed date in the future. This was proof of the
glaring infirmity or defect in the instrument. BA had knowledge of
the infirmity and defect of the defect. The fact that it had honored
the check was proof not only of gross negligence but also of the
special treatment BA accorded to Boncan.
4
Salas v. CA
• Filinvest Finance & Leasing Corp. holds the instrument free of any
defect of title and free from defenses available to prior parties
among themselves and may enforce payment of the instrument
for the full amount thereof. The instrument was complete and
regular upon its face, FFL became holder before overdue and
without notice that it was dishonored, FFL took it in good faith and
for value and had no notice of infirmity or defect in the title.
Consolidated Plywood Industries v. IFC Leasing and Acceptance Corp.
• Considering that the promissory note is not a negotiable
instrument, it follows that IFC can never be a holder in due
course, but remains an assignee of the note in question. IFC, as a
finance company, which actively participates in a transaction of
this type, cannot be regarded as a holder in due course of the
note.
• Even if the promissory note was negotiable, IFC is still not a
holder in due course. It had actual knowledge of the fact that
seller-assignor’s right to collect the purchase price was not
unconditional and subject to the condition that tractors sold were
not defective.
De Ocampo v. Gatchalian
• Where a holder’s title is defective or suspicious, it cannot be
stated that the payee acquired the check without the knowledge
of said defect in holder’s title, and for this reason the presumption
that it is a holder in due course or that it acquired the instrument
in good faith does not exist.
• De Ocampo received the checks under circumstances that should
have put him in inquiry as to why and wherefore of the possession
of the check by Gonzales and why he used it to pay his wife’s
account: Gatchalian had no obligation or liability to Ocampo Clinic,
the amount of the check did not correspond to the hospitalization
expenses and that the check was crossed.
BPI v. CA
• BPI was not a holder in due course because the note was not
indorsed to BPI by the payee, CBTC. Only a negotiation by
indorsement could have operated as a valid transfer to make BPI
a holder in due course. It acquired the note from CBTC by the
contract of merger or sale between the two banks. BPI, therefore,
took the note subject to the Holdout Agreement.
Montinola v. PNB
• One who received a check by indorsement to him of only part of
its face value, and who was not the payee, could not be
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By: Joyce Briones notes from Agbayani; with case doctrines
2C 2004-2005
considered a holder of the instrument. An indorsement which
purports to transfer to the indorsee only a part of the amount
payable does not operate as negotiation of the instrument. The
transferee could not be considered an indorsee and at most was a
mere assignee subject to all defenses available to drawer.
• Where a check was issued by a provincial treasurer as drawer and
the check was transferred to Montinola about 2 and a half years
later, he could not be considered as a holder in due course since
the check was already overdue.
People v. Maniego
• Ubay cannot be a holder in due course because there was
connivance in malversing among him, Pamintuan and Maniego.
UCPB v. IAC
• Makati Bel-Air was a party to the contract of sale with Altiura
Investors, Inc., for which the manager’s check was issued for
payment. It was fully aware at the time it received the check that
there was, or had arisen, at least partial failure of consideration
since it was unable to comply with the obligation to deliver the
office space agreed upon. It was also aware that UCPB had been
informed by Altiura of the claimed defect in Makati Bel-Air’s title to
the manager’s check or its right to the proceeds thereof.
Mesina v. IAC
• A person who became the holder of a cashier’s check as endorsed
by the person who stole it and who refused to say how and why it
was passed to him is not a holder in due course.
Associated Bank v. CA
• The bank was not a holder in due course. It was negligent when it
permitted the encashment of the checks by Sayson. It allowed
Sayson to encash the check notwithstanding the absence of
authority from Melissa. The proceeds of the check belong to
Melissa’s RTW and when the bank allowed Sayson to encash the
checks, it did so at its own peril.
Yang v. CA
• David is a holder in due course. He took the instrument for
valuable consideration of US$360K and was not grossly negligent
in ascertaining Chandiramani’s possession of the check.
Sec. 53. When person not deemed holder in due course. - Where an
instrument payable on demand is negotiated on an unreasonable
length of time after its issue, the holder is not deemed a holder in
due course.
5
What constitutes unreasonable length of time:
• 9 months’ delay
• negotiation after issue of a note, 20 months or 6 months
Held not to be negotiation for an unreasonable length of time
• note is negotiated 30 days after its issue
• note is negotiated 16 months after issue, if the payments of
monthly interests were made to the payee
• even 3 years when interest for demand notes paid
• where a certified check which was held for nearly 6 months to
secure performance of a government contract when negotiated
and presented within a few days after completion of the contract
o reason: holder of a certified check is placed on the same
footing as a depositor, and the certifying bank can not
complain of any delay within the statute of limitations as
it is benefited by such delay
Sec. 54. Notice before full amount is paid. - Where the transferee
receives notice of any infirmity in the instrument or defect in the
title of the person negotiating the same before he has paid the full
amount agreed to be paid therefor, he will be deemed a holder in
due course only to the extent of the amount therefore paid by him.
e.g. A draws a bill for P1,000 with B as payee and X as drawee
B indorses it to C, who fails to give value therefore
C indorses it to D on July 1, 1950, who, on maturity date, pays C only
P400, the amount he paid before he had notice, even if he pays the
balance of P600 afterwards
Sec. 55. When title defective. - The title of a person who negotiates
an instrument is defective within the meaning of this Act when he
obtained the instrument, or any signature thereto, by fraud,
duress, or force and fear, or other unlawful means, or for an illegal
consideration, or when he negotiates it in breach of faith, or under
such circumstances as amount to a fraud.
Defective title in general
• title of a person in an instrument becomes defective either:
1. in the acquisition - when he obtains the instrument of any
signature thereto by
a. fraud
b. duress or force and fear
c. other lawful means or
d. for an illegal consideration
2. in the negotiation – title of a person becomes defective when he
negotiates it
a. with breach of faith
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By: Joyce Briones notes from Agbayani; with case doctrines
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b. under such circumstances as amount to fraud
Fraud
e.g. brokers represent that they had already bought stocks when in fact
they have not and on the strength of that representation, C gives them a
check
Duress or force or fear
e.g. Upon A’s threat to kill B unless B signs a check in A’s favor, B signs a
check payable to the order of A
Other unlawful means
e.g. note is stolen or where a person acquires a note by indorsement of a
part thereof
Illegal consideration
e.g. A gives a check to B in consideration of B’s undertaking to beat up C,
A’s rival, within an inch of his life
Negotiation in breach of faith
e.g. negotiates a note which is already paid
negotiates a note which he holds only as a collateral or security
negotiates a note after he fails to deliver the valuable consideration
PCIB v. CA
• The title of the person negotiating the checks was defective
because the instrument was obtained by fraud and unlawful
means, and the proceeds of the checks were not remitted to the
payee. Instead of paying the checks to the CIR, for the settlement
of the appropriate quarterly percentage taxes of Ford, the checks
were diverted and encashed for the eventual distribution among
the members of the syndicate.
Sec. 56. What constitutes notice of defect. - To constitutes notice of
an infirmity in the instrument or defect in the title of the person
negotiating the same, the person to whom it is negotiated must
have had actual knowledge of the infirmity or defect, or knowledge
of such facts that his action in taking the instrument amounted to
bad faith.
Notice of defect of title in general
• transferee must have actual knowledge either:
1. of the defect or infirmity
2. such facts that his action in taking the instrument amounts to bad
faith
• does not wholly eliminate the duty of inquiry
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• circumstantial evidence may be so strong and decisive that to
ignore it would not only be negligence but an act of bad faith
Actual knowledge
• knowledge is required, not mere suspicion, surmise or fear
• knowledge of exact truth is not necessary
Taking amounting to bad faith
• bad faith consists in guilty knowledge, or willful ignorance,
showing a vicious or evil mind
• while mere suspicion is not enough, where there is knowledge of
suspicious circumstances, coupled with means of verifying them,
taking the instrument may amount to bad faith
Sec. 57. Rights of holder in due course. - A holder in due course
holds the instrument free from any defect of title of prior parties,
and free from defenses available to prior parties among
themselves, and may enforce payment of the instrument for the full
amount thereof against all parties liable thereon.
Rights of a holder in due course
1. sue on the instrument in his own name
2. receive payment and if payment is in due course, the instrument
is discharged
3. holds the instrument free from any defect of title of prior parties
and free from defenses available to prior parties among
themselves
4. enforce payment of the instrument for the full amount thereof
against all parties liable thereon
Legal or equitable defenses
• legal defenses – can be set up even against a holder in due course
Equitable or personal defenses
• those which grow out of the agreement or conduct of a particular
person in regard to the instrument which renders it inequitable for
him, though holding legal title, to enforce it against the defendant,
but which are not available against bona fide purchasers for value
without notice
• can be set up against persons not holders in due course but not
against holders in due course
• available only against that person or a subsequent holder who
stands in privity with him
Legal or real defenses
• those that attach to the instrument itself and can be set up
against the whole world, including a holder in due course
• attach to the res i.e., the instrument itself
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• right sought to be enforced has never existed or ceased to exist o where the corporation has the power to issue negotiable
• defense against everybody paper but the issuance was not authorized for the
particular purpose for which it is issued
Enforcement of instrument subject to real defenses
• it cannot be enforced against the person to whom the legal 14. want of authority of agent where he has apparent authority
defense is available 15. insanity
• can be enforced against those whom such a defense is not o where there is no notice of insanity on the part of the one
available such as in the case of forgery, persons precluded from contracting with the insane person
setting it up 16. illegality of contract where form or consideration is illegal
• general rule: real defense is a defense which the person against
whom one is endeavoring to recover may set up and that person Absence or failure of consideration
is usually the person primarily liable upon the instrument • general rule: want of consideration can be raised only as between
the immediate parties
To whom defenses are available o but the defense may also be raised against any holder
• rule: defense available to the makers will not be available to the who takes the instrument with notice of the want or
indorser, nor will a defense available to the indorser be available failure of consideration
to the maker
• in a bill of exchange, the want or failure of consideration may be
Where action against joint debtors interposed in action brought by the payee against the drawer, or
• where the action is against joint makers, a defense belonging by the indorsee against the payee indorsing, or by the drawer
personally to one of them will not be available to the other co- against the acceptor, but not in an action between the payee and
maker acceptor
• where the defense of 1 defendant goes to the merits of the case • in the latter case, the defense is available only if there is no
defeating plaintiff’s right to recover, it is available to the benefit of consideration received by the defendant for his liability and the
the other defendant plaintiff must have given no consideration for his title
o defenses which are derived from the nature of the
obligation Want of delivery of complete instrument - applies also where the
instrument is stolen
Examples of personal defenses
1. absence or failure of consideration Fraud in inducement
2. want of delivery of complete instrument • when, through insidious words or machinations or 1 of the
3. insertion of wrong date contracting parties, the other is induced to enter into a contract
o where it is payable at a fixed period after date and issued which, without them, he would not have agreed to
undated or • relates to the quality, quantity, value or character of the
o where it is payable at a fixed period after sight and the consideration of the instrument
acceptance is undated • there is misrepresentation of facts touching the inducement or
desirability of the contract
4. filling up of blank contrary to authority given or not within • one knew that he was signing a negotiable paper, and therefore
reasonable time, where the instrument is delivered necessarily signed with knowledge that the instrument would
5. fraud in inducement probably pass into the hands of an innocent purchaser but was
6. acquisition of instrument by force, duress or fear deceived into signing for a larger amount than he intended or on
7. acquisition of the instrument by unlawful means different terms
8. acquisition of the instrument for an illegal consideration • question of simple fraud is also largely one of negligence: Did a
9. negotiation in breach of faith person who has signed the instrument and let it get into the hands
10. negotiation under circumstances that amount to fraud of other parties, or into circulation, act with negligence?
11. mistake o if he did, it is a personal defense
12. intoxication according to better authority
13. ultra vires acts of corporations

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Acquisition of instrument by force, duress or fear
• duress – depriving one of his will and understanding by threats or
unlawful means, so that a PN obtained from him is not his free
and voluntary act
Mistake - should refer to substance of the thing which is the object of the
contract, or those conditions which have principally moved one or both
parties to enter into the contract
Intoxication - as against a bona fide holder, it has been determined in
some jurisdictions that intoxication is no defense
o reason: when a man has voluntarily put himself in such a
condition that a loss must fall on 1 of 2 innocent persons,
it should fall on him who occasioned it
o if drunkenness were a defense, it would clog and
embarrass the circulation of commercial paper
Examples of real defenses
1. alteration
2. want of delivery of incomplete instrument
3. duress amounting to forgery
4. fraud in factum or fraud in esse contractus
5. minority
6. marriage in the case of a wife
7. insanity where the insane person has a guardian appointed by the
court
8. ultra vires act of corporation, where the corporation is absolutely
prohibited by its charter or statute from issuing any commercial
paper under any circumstances
9. want of authority of agent
10. execution of instrument between public enemies
11. illegality of contract where it is the contract or instrument itself
which is expressly made by the statute
12. forgery
Alteration – under Sec. 124, a holder in due course may enforce the
instrument according to its original tenor
Spoliation – same as where the alteration is made by a party that a holder
in due course can recover on the original tenor of the instrument; where a
material alteration was made by a party and constituted a forgery, the
original debt as well as the instrument is discharged
Duress amounting to forgery - ordinarily an equitable defense
• if there is physical pressure, as when the defendant himself moves
the pen under coercion through such external facts as
imprisonment or fear of injury to life and limb or less serious
pressure which actually overcomes his will, it is more than duress
8
and amounts to forgery, and therefore, such duress is a legal or
real defense
Fraud in factum or fraud in esse contractus
• fraud in factum exists in those cases in which a person, without
negligence, has signed an instrument which was, in fact, a
negotiable instrument, but was deceived as to the character of the
instrument and without knowledge of it
• essential element in fraud in factum: maker or indorser must have
exercised ordinary diligence and in no manner contributed
negligently to the imposition
• test as to whether an artifice or trick of this character constitutes
forgery: whether the signature is procured in such manner as to
be the voluntary act of the signer
• if it is procured in such manner that it is without the assent of the
signer and not a voluntary act on his part, he is not liable
• reason: theory that the instrument that never existed
Minority
• available only to the minor and his indorsement passes title to
the indorsee but it does not bind him so as to make him liable
thereon
• defense is not total
• where the minor has kept the whole of the valuable consideration
received by him, he cannot interpose his minority as a defense
• where he has kept only a part, the defense is only to the extent
of the benefit received by the minor
Marriage in case of wife
• if conjugal partnership of gains, husband has administration:
defense where, without the consent of the husband, the wife
issues an instrument chargeable against the conjugal property
• if absolute community of property: defense where without the
consent of the husband, the wife issues an instrument chargeable
against the community property; defense is available to the
husband or heirs, not to the wife
Marriage in case of husband
• if conjugal partnership of gains: defense is available to the wife or
heirs if the instrument is issued for purposes other than those
specified in Articles 161 and 162 CC
• if absolute community of property: defense is available to the wife
or heirs where the husband issues an instrument chargeable
against the common property without the consent of the wife
Insanity
• contracts with a person who has been adjudged judicially to be
insane and for whom a committee or guardian has been appointed
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2C 2004-2005
to care for his interests are not valid and cannot be enforced is
disaffirmed or avoided
• defense is available as between immediate parties and against a
holder in due course or bona fide holder for value
Instruments executed between enemies in time of war are void
Illegality of contract in certain cases
• where it is the contract or instrument itself which is expressly
made illegal by statute, the illegality of the contract or instrument
is a real or legal defense
• illegality of contract is a personal or equitable defense where what
the law declares to be illegal is not the instrument itself but
merely the manner of execution or the consideration given
Usury notes
• all covenants and stipulations contained in bonds, bills, notes and
other contracts or evidences of debts, whereby there shall be
stipulated a higher rate of interest than is allowed by the Usury
Law shall be avoided (Sec. 7, Usury Law)
• law avoids merely the agreed interest but does not avoid the
transaction completely
• saving clause: nothing in said section shall be construed to
prevent the purchase by an innocent purchaser of a negotiable
mercantile paper, usurious or otherwise, for valuable
consideration before maturity, when there has been no intention
on the part of said purchaser to evade the provisions in this Act
and said purchase was not a part of the original usurious
transaction
Gambling notes (Art. 2014CC, Sec. 9, Act 1757) - there is also a saving
clause
Confession of judgment - declared void by judicial decision
Sunday notes – instruments made or drawn on Sundays; not a defense
against a holder in due course where there is nothing on the face of the
instrument to indicate that fact
Other possible defenses
1. blank signature
2. bankruptcy or insolvency
3. counterclaims and set-offs
4. discharge
5. lack of revenue stamps
9
Blank signature
• where there is no intention to issue the negotiable instrument, it
amounts to forgery and is a legal or real defense
• intention to issue a negotiable instrument but the blank signature
is filled up contrary to authority or is not filled up within
reasonable time, it is an equitable defense
Bankruptcy or insolvency of party primarily liable
• 2 legal situations involving the defense of bankruptcy or
insolvency:
1. party primarily liable on the instrument – where it is the party
liable who is bankrupt or insolvent, it is no defense
2. the one negotiating who is bankrupt or insolvent
o if negotiation is made within 30 days before the filing of a
petition for insolvency or against him, the negotiation is
void
Counterclaims and set-offs
• not considered generally as a defense
• between the original parties, or parties between whom there is a
privity, a set-off may be pleaded to the negotiable instrument the
same as it may be to a non-negotiable instrument
• as between remote parties not holders in due course --- general
rule: in an action by an indorsee, independent demands against
the payee cannot be set-off, but only such equities which arise out
of the instrument itself
• set-off or counterclaim is not available against a holder in due
course
Discharge
• if the discharged, anyone who has been a party to it may set up
against the holder a defense that it has been extinguished as an
existing contract and that the holder or payee holds it as a mere
receipt or voucher
• payment in due course i.e., at or after the date of maturity by the
principal debtor, is a defense against any holder
• as against a holder in due course, where the party paying the
instrument does not observe the precautions of taking up the
paper or of having the payment made indorsed thereon, it is not a
defense
Requirement of revenue stamp
• National Internal Revenue Code requires placing of documentary
stamps on:
o each bank check, draft, or certificate of deposit not
drawing interest
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2C 2004-2005
o order for the payment of any sum of money drawn upon
or issued by any bank, trust company, or any person/s,
companies or corporations, at sight or on demand
o all bills of exchange
o drafts, or certificates of deposit drawing interest, or
orders for the payment of any sum of money otherwise
than at sight or on demand
o all negotiable PN, except bank notes issued for
circulation, and on each renewal of any such note
o any acceptance of payment of any bill of exchange or
order for the payment of money purporting to be drawn
in a foreign country but payable in the Philippines
o all foreign bills of exchange and letters of credit including
orders, by telegraph or otherwise, for the payment of
money issued by express or steamship companies or by
any person/s drawn in but payable out of the Philippines
in a set of 3 or more according to the custom of
merchants and bankers
• effect of failure to stamp:
o not be recorded nor shall it or any copy thereof or any
record of transfer of the same be admitted or used in
evidence in any court until the requisite stamp/s shall
have been affixed thereto and cancelled
o no notary public or other officer authorized to administer
oaths shall add his jurat or acknowledgment to any
document subject to documentary stamp tax unless the
proper documentary stamps are affixed thereto and
cancelled
Sec. 58. When subject to original defense. - In the hands of any
holder other than a holder in due course, a negotiable instrument is
subject to the same defenses as if it were non-negotiable. But a
holder who derives his title through a holder in due course, and
who is not himself a party to any fraud or illegality affecting the
instrument, has all the rights of such former holder in respect of all
parties prior to the latter.
Rights of holder not in due course
1. sue on the instrument in his own name
2. receive payment and if payment is in due course, the instrument
is discharged
3. holds the instrument subject to the same defenses as it were non-
negotiable
4. holder not in due course who derives his title through a holder in
due course and who is not himself a party to any fraud or illegality
affecting the instrument, has all the rights of such former holder
in respect of all parties prior to the latter
10
Holder acquiring from holder in due course
• general rule: equitable defenses can be interposed against a
person not a holder in due course
o exception: a holder who derives his title through a holder
in due course and who is not himself a party to any fraud
or illegality affecting the instrument, has all the rights of
such former holder in respect to all parties prior to the
latter
• 2 requisites:
1. he derived from his title from a holder in due course
2. he was not himself a party to any fraud or illegality affecting the
instrument
• burden of proof to show predecessor holder in due course: holder
who derives title from a holder in due course; must be proven as
an independent fact
As to the one not holder in due course reacquiring from holder in due
course
• rule: if the original payee of a note unenforceable for lack of
consideration repurchases the instrument after transferring it to a
holder in due course the paper against becomes subject in the
payee’s hands to the same defenses to which it would have been
subject as if the paper had never passed through the hands of a
holder in due course
o same is true where the instrument is retransferred to an
agent of the payee
Consolidated Plywood v. IFC Leasing
• Even assuming that the subject promissory note is negotiable,
IFC, a financing company which actively participated in the sale on
installment of the subject 2 Allis Crawler tractors, cannot be
regarded as holder in due course of said notes. It follows that
IFC’s rights under the promissory note are subject to all defenses
that the petitioners have against the seller-assignor, Industrial
products Marketing.
Sec. 59. Who is deemed holder in due course. - Every holder is
deemed prima facie to be a holder in due course; but 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. But the last-mentioned rule does not apply in
favor of a party who became bound on the instrument prior to the
acquisition of such defective title.
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2C 2004-2005
• presumption arises only in favor of a person who is a holder that
is, a payee or indorsee who is in possession of the draft, or the
bearer thereof
• in order to be a holder, one must be in possession of the note or
the bearer thereof
• 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 under whom he claims, acquired the title as
holder in due course
• presumption not applicable when the holder’s title was defective
or suspicious
o reason: guilty maker or holder of an instrument vitiated
by fraud or illegality will naturally seek to put in the
hands of some other person in order to cut off the
defense to which the instrument is subject, and a
presumption arises against the bona fide of the transfer
• last mentioned rule: shifting of burden of proof to the holder
where it is shown that there is a defect in the title of any person
who has negotiated it
o not shifted because does not apply in favor of a party
who became bound on the instrument prior to the
acquisition of the defective
o question is one of substantive law rather than that of
burden of proof: whether a defendant who has no
defense of his own, and admits his liability as such, can
set up collateral equities (defenses) existing in favor of
other persons
De Ocampo v. Gatchalian
• The presumption under Sec. 59 would not apply because there
was a defect in the title of a holder because the instrument was
not payable to the holder Gonzales or bearer and there is no
evidence that the check was acquired in good faith.
Mesina v. IAC
• A person who became the holder of a cashier’s check as endorsed
by the person who stole it and who refused to say how and why it
was passed to him is not a holder in due course. He had notice of
the defect of his title over the check from the start.
Asia Banking Corporation v. Ten Sen Guan
• ABC is not a bona fide holder of the draft. It failed to give an
authentic account of the transaction: its nature in NY, when and
how it acquired the draft and when and to whom it paid the
money and how much it paid and by whom it was actually paid.
11
Fossum v. Fernandez
• Fernandez Hermanos was unable to specify or point out any
specific defect in the chain, or how, or in what manner or
particular it does not comply with the conditions or terms of the
contract.
V. LIABILITIES OF PARTIES
Sec. 60. Liability of maker. - The maker of a negotiable instrument,
by making it, engages that he will pay it according to its tenor, and
admits the existence of the payee and his then capacity to indorse.
Maker primarily liable
• to pay absolutely the note according to its original tenor
• presumed to have acted with care and to have signed the
document in question with full knowledge of its contents unless
fraud is proven
Liability of two or more makers
• when 2 or more makers sign jointly and severally, each of them is
individually liable for the payment of the full amount of their
obligation even if 1 of them did not receive part of the value given
therefor, as he would be considered an accommodation party
Payee’s existence, etc.
• maker also admits the existence of the payee and his capacity to
indorse by merely signing his name in a note
• maker is precluded from setting up the following defenses:
1. that the payee is a fictitious person
2. payee was insane, a minor or a corporation acting ultra vires
PNB v. Maza & Macenas
• Having signed the 2 promissory notes, Maza and Macenas are
liable as makers thereof and must therefore pay as promised,
despite having done so in accommodation of another party. The
liability of a maker on the instrument is primary and
unconditional.
Araneta v. Perez
• Perez is liable as maker of the PN and cannot escape liability by
alleging that he spent the money for medical treatment. It is not
the payee’s concern how the proceeds were spent.
Sec. 61. Liability of drawer. - The drawer by drawing the
instrument admits the existence of the payee and his then capacity
to indorse; and engages that, on due presentment, the instrument
will be accepted or paid, or both, according to its tenor, and that if
it be dishonored and the necessary proceedings on dishonor be
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2C 2004-2005
duly taken, he will pay the amount thereof to the holder or to any
subsequent indorser who may be compelled to pay it. But the
drawer may insert in the instrument an express stipulation
negativing or limiting his own liability to the holder.
Drawer secondarily liable
• engages merely that the bill will be accepted or paid or both,
according to its tenor, and that he will pay only when:
1. it is dishonored
2. necessary proceedings of dishonor are duly taken
• impliedly engages to be so secondarily liable
• if a bill is not paid, the drawer becomes liable for the payment of
its value to the holder provided that notice of dishonor is given
• in the absence of due presentment, the drawer is not liable
To whom drawer secondarily liable
1. holder or
2. if any of the indorsers intervening between the holder, the drawer
will be liable to that indorser so compelled to pay
Is drawer of unaccepted bill primarily liable?
• held that until the bill has been accepted, the drawer is the
primary debtor and after acceptance, the drawee or acceptor is
the principal debtor and the drawer becomes secondarily liable
o liability is same as first indorser
o under Sec. 61: WON bill is accepted, the drawer is not
absolutely required to pay
o under Sec. 192: person primarily liable is one “who by
the terms of the instrument is absolutely required to pay
the same,” --- drawer is not primarily liable even if bill is
unaccepted
Payee’s existence – by signing his name on the bill as drawer, admits the
existence of payee and his then capacity to indorse
Negatives his liability
• law allows the drawer to negative or limit his liability by express
stipulation, by adding his order to pay the words:
o “without recourse”
o “I shall not be liable in case of non-payment or non-
acceptance”
PNB v. Picornell
• Picornell is liable as drawer. The fact that he is commission agent
of Hyndman does not change his liability nor the claim that the
tobacco was of inferior quality.
12
Tan Sin v. Yu Biao
• The drawer is liable. There was no proof that he was deceived
into signing. He cannot allege that he did not read first nor know
the contents of the instrument because he is of age and a
businessman, and his signature was genuine.
Banco Atlantico v. Auditor General
• Where a bank to which a check was negotiated encashes the same
without first clearing it with the drawee bank, contrary to normal
banking practice, and the check is dishonored by the drawee bank
on the ground that the drawer had ordered payment to be
stopped because the check was fraudulently altered, the
encashing bank assumes the risk and no right of payment could
be acquired by the latter against any party thereto.
Sec. 62. Liability of acceptor. - The acceptor, by accepting the
instrument, engages that he will pay it according to the tenor of his
acceptance and admits:
(a) The existence of the drawer, the genuineness of his signature,
and his capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
Acceptor primarily liable
• to pay absolutely according to the tenor of his acceptance
• acceptor is a drawee who accepts the bill
• before acceptance, the drawee is not liable on the bill
• if he wants to escape liability, must show that he is a mere agent
of the drawer or allege and prove any other defense which he has
to the liability
• prevailing view: same rule in Sec. 62 applies in case of a drawee
who pays a bill without having previously accepted it
Acceptor to pay according to tenor of his acceptance
• while the maker of a note engages to pay according to the tenor
of the note, an acceptor engages to pay according to the tenor of
his acceptance
o if his acceptance is general, the tenor of the bill is the
same as the tenor of his acceptance
e.g. bill is payable “30 days after sight”
drawee accepts it but payable “60 days after sight”
• engages to pay the bill “60 days after sight” = tenor of his
acceptance
Where original tenor is altered before acceptance
e.g. bill is originally for P1,000
it is altered by the payee B to P4,000
drawee X accepts it
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2C 2004-2005
Q: How much is X liable to a holder in due course?
• first view: altered tenor is tenor of acceptance
• second view: original tenor is tenor of acceptance
Effect of Section 124
• Sec. 124: a holder in due course can recover only the original
tenor of the instrument taken from the standpoint of the person
principally liable
o refers to the original tenor of the instrument taken from
the standpoint of the person principally liable
Admission of drawer’s existence, etc.
• acceptor admits:
1. drawer’s existence
2. genuineness of the drawer’s signature
3. capacity and authority of the drawer to draw the instrument
• does not admit the genuineness of the indorser’s
signature
Effect of acceptor’s admissions
1. precluded from setting up the defense that the drawer is non-
existent or fictitious
2. cannot claim that drawer’s signature is a forgery
3. drawee cannot escape liability by alleging want of consideration
between him and the drawer
Payee’s existence – admits the existence of the payee and his capacity to
indorse
Fossum v. Fernandez
• Fernadez Hermanos is liable as acceptor. He accepted the bill of
exchange as drawn. Having received the chain and accepted the
draft, he is at least primarily liable for payment of debt.
PNB v. CA
• PNB is liable and cannot recover from PCIB. As drawee, it paid
the bill without having previously accepted it. By not returning
the check to PCIB, it indicated that nothing’s wrong with the check
and would honor the same. It induced PCIB to believe the check
was genuine and good in every respect, to pay the amount to
Augusto Lim even if the signatures of the General Manager and
Auditor of GSIS were forged.
13
PNB v. National City Bank of NY
• Where a check is accepted or certified by the bank on which it is
drawn, the bank is estopped to deny the genuineness of the
drawer’s signature and his capacity to issue the instrument.
The Phil. Bank of Commerce v. Aruego
• Jose Aruego is personally liable as drawee/acceptor of the drafts.
Contrary to his claim of signing as an agent for Philippine
Education Foundation Company, he did not indicate such when he
signed.
Sec. 63. When a person deemed indorser. - A person placing his
signature upon an instrument otherwise than as maker, drawer, or
acceptor, is deemed to be indorser unless he clearly indicates by
appropriate words his intention to be bound in some other
capacity.
• one making a note payable to his own order does not, by
indorsement thereof, assume liability as indorser
Indication to be bound otherwise than as indorser
• one who signs otherwise than as maker, drawer or acceptor, will
not be deemed an indorser if he indicates by appropriate words
his intention to be bound in some other capacity
• an indorser upon a PN or bill of exchange who indorsers for the
purpose of identifying the person only and not for the purpose of
incurring any liability as to the payment of such PN or bill of
exchange incurs no liability
• anyone who assumes the responsibility of identifying the payee of
a check is answerable to the bank cashing the check if the bank
pays its amount to such payee so identified
Admissibility of parol evidence
• legal effect of a blank indorsement cannot be changed by parol
proof or by evidence from other source
• one who indorsers in blank cannot show by parol that he signed
merely as agent for a prior party and was not individually liable;
he is an indorser
• intent to be bound in some other capacity must be indicated in the
indorsement or on the face of the instrument and cannot be
shown by parol
Ang Tiong v. Ting
• Felipe Ang is liable as a general indorser. He engaged that on due
presentment, it shall be accepted or paid, or both, and that if it be
dishonored he will pay the amount to the holder. He is liable even
if he signed only as an accommodation party.
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2C 2004-2005
Sec. 64. Liability of irregular indorser. - Where a person, not
otherwise a party to an instrument, places thereon his signature in
blank before delivery, he is liable as indorser, in accordance with
the following rules:
(a) If the instrument is payable to the order of a third person, he is
liable to the payee and to all subsequent parties.
(b) If the instrument is payable to the order of the maker or
drawer, or is payable to bearer, he is liable to all parties
subsequent to the maker or drawer.
(c) If he signs for the accommodation of the payee, he is liable to
all parties subsequent to the payee.
Irregular indorser - 3 requisites:
1. he must not otherwise be a party to the instrument – not maker,
drawer, acceptor or regular indorsee
2. he must sign the instrument in blank
3. he must sign before delivery
• “irregular” because he indorses in an unusual, singular or peculiar
manner
• name appears where we would naturally expect another name
“before delivery”
• Ogden uses the word “initial” to modify “delivery”
• seems to include not only the original delivery to the payee but
also every delivery from the party accommodated to the
subsequent party
Application of Section 64
• where the signature in blank is placed on the instrument before
delivery
• deals only with liability of irregular indorser to the payee
• does not fix the rights of various irregular indorsers as between
themselves (governed by Sec. 68)
Sec. 65. Warranty where negotiation by delivery and so forth. —
Every person negotiating an instrument by delivery or by a
qualified indorsement warrants:
(a) That the instrument is genuine and in all respects what it
purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract;
(d) That he has no knowledge of any fact which would impair the
validity of the instrument or render it valueless.
14
But when the negotiation is by delivery only, the warranty extends
in favor of no holder other than the immediate transferee.
The provisions of subdivision (c) of this section do not apply to a
person negotiating public or corporation securities other than bills
and notes.
Application of Section 65 - treats of the warranties and liabilities of:
1. person negotiating by mere delivery
2. person negotiating by qualified indorsement
Liability of person negotiating by delivery
• person negotiating by mere delivery becomes liable to the holder
only when the holder cannot obtain payment from the person
primarily liable by reason of the fact that any of the warranties of
the person negotiating by delivery is or becomes false
Person negotiating by mere delivery is liable to the holder if the holder
cannot collect from the maker:
1. warranty as to genuineness - e.g. if instrument is altered or maker’s
signature if forged
2. warranty as to good title - e.g. if title is defective because instrument
was acquired by means of fraud
3. warranty as to capacity to contract – e.g. maker is a minor, lunatic or
other cases of incompetency
4. warranty as to ignorance of certain facts - e.g. maker was insolvent at
the time of negotiation of the instrument
• if party negotiating by delivery knew that maker was insolvent
and concealed that fact: liable
• if did not know: not liable
• if party negotiating by delivery knew but concealed that the
instrument is not valid for want of consideration: liable
• if did not know: not liable
To whom warranties extend - in favor of no holder other than the
immediate transferee
Warranties not exclusive
• may be extended by analogy to like situations
• e.g. when an indorser, without recourse to a note secured by a
lien, released the lien after he had indorsed it to the holder, said
indorser is liable for breach of warranty
Liability of qualified indorser
• same warranties as those of a person negotiating by mere
delivery
• only difference: while the person negotiating by mere delivery is
liable only to his immediate transferee, the person negotiating by
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2C 2004-2005
qualified indorsement is liable to all parties who derive their title
through his indorsement
Nature of liability
• secondarily liable only when the person primarily liable cannot pay
for any other reason than the violation of the 4 warranties
Metropol v. Sambok Motors Co.
• Appellant, by indorsing the note “with recourse” does not make
itself a qualified indorser but a general indorser who is secondarily
liable.
Sec. 66. Liability of general indorser. - Every indorser who indorses
without qualification, warrants to all subsequent holders in due
course:
(a) The matters and things mentioned in subdivisions (a), (b), and
(c) of the next preceding section; and
(b) That the instrument is, at the time of his indorsement, valid and
subsisting;
And, in addition, he engages that, on due presentment, it shall be
accepted or paid, or both, as the case may be, according to its
tenor, and that if it be 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.
Application of Section 66 - deals with liability or warranties of one
negotiating by general indorsement
• includes indorser for collection
Liability of general indorser
1. that the instrument is genuine and in all respects what it purports
to be
2. that he has a good title to it
3. that all prior parties had capacity to contract
4. that the instrument is, at the time of his indorsement, valid and
subsisting
• 4th warranty is different from that of qualified indorser or
person negotiating by delivery
• warrants that the instrument he is indorsing is valid and
subsisting regardless of whether he is ignorant of that
fact or not
• does not run in favor of holders who are parties to the
illegal transaction
15
To whom warranties extended
• only to subsequent holders in due course
• opinion: no reason why the warranties of a general indorser
should not run in favor of any person to whom the instrument is
negotiated as in Sec. 65 - law does not use the word “only”
o extend to the ff:
1. subsequent holders in due course
2. person who derive their title from holders in due course
3. immediate transferees, even if they are not holders in
due course
Warranties do not extend to drawee
• does not warrant the genuineness of the drawer’s signature to the
drawee
o since the drawee is not a holder in due course under Sec.
52 nor a holder under Sec. 191
Other liability of general indorser
• engages that, on due presentment, it shall be accepted or paid, or
both, as the case may be, according to its tenor, and that if it be
dishonored and the necessary proceedings of dishonor be duly
taken, he will pay the amount to the holder, or to any subsequent
indorser who may be compelled to pay it
• similar to secondary liability of the drawer
General indorser is secondarily liable
• liable if for any reason, the person primarily liable cannot pay
• secondarily liable if the instrument is dishonored
• held that the law does not require that the reason for dishonor be
established
Indorser’s liability where person primarily liable is insolvent
• general indorser is liable
• NIL specifies and defines his liability and parol testimony is not
admissible to explain or defeat such liability
When parol evidence is admissible as to extrinsic agreement of indorser
• held that any prior or contemporaneous conversation in
connection with a note or its indorsement may be proved by oral
evidence, and that an extrinsic agreement between indorsers and
indorsee which cannot be embodied in the instrument without
impairing its credit is provably by parol
o provided that such extrinsic agreement should not vary,
alter or destroy the obligations attached by law to the
indorsement
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2C 2004-2005

Summary of distinctions between liabilities of persons negotiating • liability of assignor exists WON he knows of illegality or non-
Party negotiating by Qualified indorser General indorser existence of credit he assigned
delivery
warranties extend extend to parties extend to parties People v. Maniego
only to immediate subsequent to them subsequent to them • An indorser who indorses without qualification, inter alia engaged
transferee that on due presentment, the instrument shall be accepted or
warranties extend to warranties extend only paid, or both, as the case may be, according to its tenor, and that
all subsequent parties to subsequent holders in if it be dishonored, and the necessary proceedings on dishonor be
who acquire title due course, subsequent duly taken, he will pay the amount thereof to the older, or to any
through his parties deriving their subsequent indorser who may be compelled to pay it.
indorsement WON title from holders in due
holders in due course course and his Metropolitan Bank v. CA
immediate transferee • Metrobank cannot contend that by indorsing the warrants in
warrants only that he warrants that the general, Golden Savings assumed that they were “genuine and in
is ignorant of any fact instrument if valid and all respects what they purport to be,” in accordance with Section
which would impair binding 66 NIL. The simple reason is that this law is not applicable to the
the validity of the non-negotiable treasury warrants.
instrument or render
it valueless Prudencio v. CA
does not engage to engages to pay the • Prudencio cannot set up defense against PNB. As accommodation
pay the instrument if holder or any makers, they are liable.
it is dishonored by intervening party who
non-acceptance of may be compelled by American Bank v. Macondray
non-payment except the holder to pay if • Macondray is not liable as indorser. The material alteration of
when dishonor arises the instrument is indorsement i.e., “waiver of protest, demand and notice of
from 4 warranties dishonored either by nonpayment” was added and the indorsement was for purposes of
non-acceptance of identification only and not to incur liability on the bill of exchange.
secondary liability is non-payment WON
limited such dishonor arises Velasco v. Tan Livan
from the warranties • Aw Yong is liable on the PNs. He indorsed them without
or from other arises qualifying.
such as insolvency
Associated Bank v. CA
not limited to 4 • The Bank stamped therein its guarantee that “all prior
warranties endorsements and/or lack of endorsements guaranteed.” By such
deliberate and positive act, the Bank had treated the said checks
Liability of indorser and assignor compared as negotiable instruments and, accordingly, assumed the warranty
of the indorser.
Assignor:
• not responsible for insolvency of the principal debtor Gullas v. PNB
• not liable to the assignee if for that reason the assignee cannot • Notice of dishonor is necessary in order to charge an indorser, and
collect from the principal debtor the right of action against him does not accrue until the notice is
• warrants the existence and legality of the credit assigned and will given.
be liable to the assignee in case the assignee can not collect from
the principal debtor where the credit assigned is illegal or non- Sec. 67. Liability of indorser where paper negotiable by delivery. —
existent Where a person places his indorsement on an instrument
negotiable by delivery, he incurs all the liability of an indorser.

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2C 2004-2005
e.g. A makes a note payable to bearer which is delivered to B, bearer
• B can negotiate by mere delivery – liability and warranties
under Sec. 65
• B can indorse the note – liability and warranties
o if he indorses generally – Sec. 66
o if he indorses qualifiedly – Sec. 65
Jai Alai v. BPI
• BPI is not liable; it merely relied on JCP’s indorsement. JCP
indorsed by guaranteeing all prior indorsements thereon.
Sec. 68. Order in which indorsers are liable. - As respect one
another, indorsers are liable prima facie in the order in which they
indorse; but evidence is admissible to show that, as between or
among themselves, they have agreed otherwise. Joint payees or
joint indorsees who indorse are deemed to indorse jointly and
severally.
Application of Section 68
• rule: every indorser is liable to all indorsers subsequent to him but
not those prior to him who he in turn makes liable
• applies only with respect to an indorser as against another but not
as against a holder in due course
• contemplates successive negotiations
• does not determine order of liability of joint indorsers among
themselves
• as to the holder: they are liable in any order
e.g.
B --- C --- D --- E --- F (holder)
F makes D pay
• D can file an action against C and B, indorsers prior to him but not
against E, an indorser subsequent to him
o indorsers are presumed among themselves to be liable in
the order in which they indorse
o among themselves, D can proven even by parol evidence
that their agreement was that E should be held liable first
as the law says that evidence of such fact is admissible
Joint and several liability of joint payees
e.g. A makes a note for P1,000 with A and B as payees
indorsed: To C, (Sgd.) A and B
17
• A and B are deemed jointly and severally liable; C can make any
one of them pay the P1,000
Effect of lack of notice of dishonor, etc.
• one of the joint indorsers cannot escape liability because proper
notice of dishonor was not given to his joint indorser
• if one of the joint indorsers pays the instrument, the second joint
indorser is prima facie liable to contribute and the burden of proof
to show release from such liability is upon the second indorser
• in joint and several obligations, he who made the payment may
claim from his co-debtors only the share which corresponds to
each, wit interest for the payment already made
Sec. 69. Liability of an agent or broker. - Where a broker or other
agent negotiates an instrument without indorsement, he incurs all
the liabilities prescribed by Section Sixty-five of this Act, unless he
discloses the name of his principal and the fact that he is acting
only as agent.
Application of Section 69
• refer to instruments which are payable to bearer
• liability and warranties of the agent are those stated in Section 65
• to escape personal liability as party negotiating by delivery the
agent must:
1. disclose his principal and
2. state that he is only acting as an agent
• parol evidence is not admissible to relieve an agent whose
indorsement brings him within this section
VI. PRESENTATION FOR PAYMENT
Sec. 70. Effect of want of demand on principal debtor. -
Presentment for payment is not necessary in order to charge the
person primarily liable on the instrument; but if the instrument is,
by its terms, payable at a special place, and he is able and willing
to pay it there at maturity, such ability and willingness are
equivalent to a tender of payment upon his part. But except as
herein otherwise provided, presentment for payment is necessary
in order to charge the drawer and indorsers.
Presentment for payment – production of a bill of exchange to the drawee
for his acceptance, or to the drawee or acceptor for payment or the
production of a promissory note to the party liable for payment of the same
• consists of:
1. personal demand for payment at the proper place
2. with the bill or note in readiness to exhibit it if required, and to
receive payment and surrender it if the debtor is willing to pay
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2C 2004-2005

• presentment for payment to the person primarily liable is

Presentment not necessary to charge persons primarily liable necessary to charge person secondarily liable
e.g. o otherwise, discharged
except: otherwise provided for
X
drawee e.g.
A B --- C --- D --- E --- F
holder
X
drawee
A B --- C --- D --- E --- F
A draws a bill payable to B or order holder
X, drawee, accepts the bill due on March 31, 1950
On April 1, 1950, the bill is still unpaid
• F can file an action against X and hold him liable on the bill A draws a bill payable to B or order
because presentment for payment is not necessary to charge the X, drawee, accepts the bill due on March 31, 1950
person primarily liable on the instrument On April 1, 1950, the bill is still unpaid
• rule applies also to the maker
• cannot be validly claimed that it is presentment that makes the • if F fails to make presentment for payment to X, acceptor, the
acceptor liable drawer A, and the indorsers B, C, D and E are discharged and F
o before he accepts, the drawee is a stranger to the bill but can not file an action against them
from the moment of his acceptance, he becomes bound o only debtor X would be left against whom he can enforce
as a party primarily liable on the instrument the bill

Payable at a special place - not at a specified city but e.g. a bank • if read with Sec. 70: instrument must be presented for payment
e.g. on the date and period mentioned to charge the persons
secondarily liable such as drawers and indorsers; instrument must
X be presented
drawee o payable on a fixed date - on the date of maturity
A B --- C --- D --- E --- F o PN - within a reasonable time after issue
holder o bill of exchange - within a reasonable time after last
negotiation

A draws a bill payable to B or order Necessary steps to charge persons secondarily liable
X, drawee, accepts the bill due on March 31, 1950 • if one of the ff. steps not taken, persons secondarily liable are
On April 1, 1950, the bill is still unpaid discharged and only person primarily liable is left to answer for
Bill is payable at PNB payment of instrument:

• not necessary to present for payment to X to charge him 1. in 3 cases required by law – presentment for acceptance to the
• effect of payable at special place: if X is able and willing to pay the drawee or negotiation within reasonable time after acquisition
bill at PNB at maturity, it is equivalent to a tender of payment on • unless: excused
the part of X, and the holder F loses his right to recover interest • other cases – no need for presentment
due subsequent to maturity and costs of collection but he can still
hold X liable 2. bill is dishonored by non-acceptance
a. notice of dishonor by non-acceptance must be given to persons
Rule applicable to demand notes: presentment for payment is not secondarily liable
necessary to charge the person primarily liable on the instrument • unless: excused
b. foreign bills - protest for dishonor by non-acceptance must be
Presentment necessary to charge persons secondarily liable made

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By: Joyce Briones notes from Agbayani; with case doctrines
2C 2004-2005
• unless: excused
3. if bill is accepted or if bill is not required to be presented for
acceptance – must be presented for payment to the persons
primarily liable
• unless: excused
4. if bill is dishonored by non-payment
a. notice of dishonor by non-payment must also be given to person
secondarily liable
• unless: excused
b. foreign bills – protest for dishonor by non-acceptance must be
made
• unless: excused
Necessary steps to charge persons secondarily liable in promissory notes
1. presentment for payment must be made within a period required
to the person primarily liable
• unless: excused
2. if the note is dishonored by non-payment, notice of dishonor by
non-payment must be given to the persons secondarily liable
• unless: excused
Necessary steps to charge persons secondarily liable
1. protest for non-payment by drawee is necessary to charge an
acceptor for honor or a referee in case of need
2. protest for non-payment by the acceptor for honor is also required
Clark v. Sellner
• Presentment for payment is not necessary in order to charge
the person primarily liable.
Sec. 71. Presentment where instrument is not payable on demand
and where payable on demand. - Where the instrument is not
payable on demand, presentment must be made on the day it falls
due. Where it is payable on demand, presentment must be made
within a reasonable time after its issue, except that in the case of a
bill of exchange, presentment for payment will be sufficient if made
within a reasonable time after the last negotiation thereof.
When payable at a fixed or determined time
• it depends upon whether the instrument is payable at a fixed
or determinable future time or on demand
o where the instrument is payable at a fixed or
determinable future time – presentment must be
made on the date of maturity
o where the instrument is payable on demand
note – must be presented for payment
within reasonable time for issue
19
bill – must be presented for payment within
reasonable time from last negotiation
• “last negotiation” – last transfer for value
• subsequent transfers between banks for purposes of
collection are not negotiations within the meaning of this
section
• requirement of reasonable time begins to run from the last
taking for value
• “reasonable time” – relative term
Far East Realty Investment v. CA
• Far East incurred unreasonable delay in making a formal notice of
dishonor. The check was issued on Sept. 13, 1960, but presented
on March 5, 1964, and dishonored on the same date. After
dishonor by the drawee bank, a formal notice of dishonor was
made by FERI thru a latter dated April 27, 1968.
Republic v. PNB
• Since it is admitted that the demand drafts herein involved here
have not been presented either for acceptance or for payment,
the inevitable consequence is that the appellee bank never had
any chance of accepting or rejecting them. Verily, appellee bank
never became a debtor of the payee concerned and as such the
aforesaid drafts cannot be considered as credits subject to escheat
within the meaning of the law.
International Corporate Bank v. Spouses Gueco
• 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 PN, 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.
Sec. 72. What constitutes a sufficient presentment. - Presentment
for payment, to be sufficient, must be made:
(a) By the holder, or by some person authorized to receive
payment on his behalf;
(b) At a reasonable hour on a business day;
(c) At a proper place as herein defined;
(d) To the person primarily liable on the instrument, or if he is
absent or inaccessible, to any person found at the place where the
presentment is made.
• effect of non-compliance with requisites: as if no presentment was
made namely, persons secondarily liable are discharged
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By: Joyce Briones notes from Agbayani; with case doctrines
2C 2004-2005
• presentment must be made by the holder of the instrument or by
some person authorized to receive payment on his behalf
• presentment must be made at a reasonable hour on a business
day
o reasonable hour depends upon the general custom at the
place of the particular transaction
o cannot be made on Sunday or holiday
• proper place c/o Sec. 73
• to be made to the maker, if a note, or to the acceptor, if a bill, not
to the person secondarily liable
Chan Wan v. Tan Kim
• There was no proper presentment because the checks were
crossed specially to China Bank and should have been therefore
presented by only China Bank.
Associated Bank v. CA
• Crossed checks payable to Melissa’s RTW were presented for
payment by a certain Rafael Sayson, whose authority to represent
Melissa RTW was not established. Hence there was no proper
presentment.
State Investment House v. IAC
• Since the checks were crossed to New Sikatuna, SIHI did not
make a proper presentment of the same checks because it was
not the proper party to present them for payment.
Sec. 73. Place of presentment. - Presentment for payment is made
at the proper place:
(a) Where a place of payment is specified in the instrument and it
is there presented;
(b) Where no place of payment is specified but the address of the
person to make payment is given in the instrument and it is there
presented;
(c) Where no place of payment is specified and no address is given
and the instrument is presented at the usual place of business or
residence of the person to make payment;
(d) In any other case if presented to the person to make payment
wherever he can be found, or if presented at his last known place
of business or residence.
e.g. A makes a note: “I promise to pay at the PNB, Manila, to X or order
P1,000.”
• proper place for making presentment for payment is at the PNB,
Manila, the place specified
• where the name of the bank on the check has been changed,
presentment for payment at the bank the name of which had been
substituted and not at the original named bank, is also sufficient
20
• where a note is payable at a designated branch of a trust
company, presentment at the principal office or at any other
branch is not sufficient
• PN with no place specified for payment but signed as follows:
“(Sgd.) y, 404 Regina Bldg., Manila” – proper place for making
presentment is 404 Regina Bldg., Manila
• Note does not specify place for payment nor is there address of
person to pay given but maker or acceptor resides in 12 Quiricada
St. and has a business office at 240 Calvo St. Bldg, Manila – either
place is proper
Sec. 74. Instrument must be exhibited. - The instrument must be
exhibited to the person from whom payment is demanded, and
when it is paid, must be delivered up to the party paying it.
Necessity of exhibition of instrument
• Purpose of exhibition: to enable the debtor
1. to determine the genuineness of the instrument and the right of
the holder to receive payment
2. to enable him to reclaim possession upon payment
• demand by telephone is not sufficient because exhibition of
instrument is not possible
• actual exhibition is not necessary in the ff. cases:
1. debtor does not demand to see the instrument but refuses
payment on some other grounds
2. instrument is lost or destroyed
Ansaldo v. CA
• Ansaldo alleged the failure of PCIB to exhibit to him his PN. It is
on its face a petty issue, for according to him, such an exhibition
was needful to give him an opportunity to determine the
genuineness of the instrument, this was rendered unnecessary not
only by his omission to contest it, but also by his admission of the
authenticity of the note implicit from his averment that he had
made substantial payments thereon; and he had expressly waived
“demand, presentment, protest and notice of protest and non-
payment.”
Sec. 75. Presentment where instrument payable at bank. - Where
the instrument is payable at a bank, presentment for payment must
be made during banking hours, unless the person to make payment
has no funds there to meet it at any time during the day, in which
case presentment at any hour before the bank is closed on that day
is sufficient.
• applies to an instrument which is payable at a bank
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By: Joyce Briones notes from Agbayani; with case doctrines
2C 2004-2005
• banking hours are from 9AM to 2:30PM from Monday to Friday; no
banking hours on Saturday
• presentment must be made between 9Am to 2:30PM on ordinary
days
o otherwise: presentment would not be sufficient and
persons secondarily liable on the bill are discharged
o person to make payment has until the close of banking
hours of the bank where the instrument is made payable
in which to pay it, and if before the close of such hours,
he deposits funds there enough to pay it, a demand
earlier in the day is premature
• where presentment may be made after banking hours
Sec. 76. Presentment where principal debtor is dead. - Where the
person primarily liable on the instrument is dead and no place of
payment is specified, presentment for payment must be made to
his personal representative, if such there be, and if, with the
exercise of reasonable diligence, he can be found.
Sec. 77. Presentment to persons liable as partners. - Where the
persons primarily liable on the instrument are liable as partners
and no place of payment is specified, presentment for payment
may be made to any one of them, even though there has been a
dissolution of the firm.
Sec. 78. Presentment to joint debtors. - Where there are several
persons, not partners, primarily liable on the instrument and no
place of payment is specified, presentment must be made to them
all.
• rules in all these sections apply to cases where no place for
presentment is specified
• where person primarily liable is dead – presentment for payment
must be made to his executor or administrator
1. if there be one and
2. if he can be found
• holder must use diligence to find the personal representative, if
there be one
• although the indorser himself be the personal representative,
presentment has been held necessary
• where persons primarily liable are partners – presentment may be
made to any one of the partners even if partnership has been
dissolved
o reason: each partner is an agent of the partnership
o in case of death of one of the makers who are partners,
presentment shall not be made to his personal
representative but to the surviving partner
21
• where persons primarily liable are joint debtors – presentment
must be to all of them
o if one of them is duly authorized by the others for the
purpose, presentment to him would be sufficient
Sec. 79. When presentment not required to charge the drawer. -
Presentment for payment is not required in order to charge the
drawer where he has no right to expect or require that the drawee
or acceptor will pay the instrument.
Sec. 80. When presentment not required to charge the indorser. -
Presentment is not required in order to charge an indorser where
the instrument was made or accepted for his accommodation and
he has no reason to expect that the instrument will be paid if
presented.
• these sections give the 2 exceptions to the general rule that if no
presentment for payment is made, the persons secondarily liable
are discharged
• excepts herein stated are relative
• only the drawer or indorser referred to in these sections is not
discharged, but all other parties secondarily liable are relieved of
their liability
• where drawer need not be given notice
e.g. A, drawer withdraws funds from X, drawee, so that they are not
sufficient to pay the bill
• he has no right to expect or require the drawee or acceptor would
pay the instrument
Illustrative cases. Presentment is not required to charge the drawer in the
ff. cases:
1. in case of a check upon which payment has been stopped
2. where the drawer’s balance is less than the amount of the check
3. where the drawer of a bill containing the words “Pay from
balance” had no money on deposit with the drawee but expected
to arrange with the broker to cover drafts
• mere fact that the drawer has no funds in the drawee’s hands at
the time he draws, does not render presentment unnecessary is
he still has reasonable grounds to believe that the instrument will
be paid
When indorser need not be given notice
e.g.
B --- C --- D --- E --- F
A makes a note for accommodation of B,payee
21
By: Joyce Briones notes from Agbayani; with case doctrines
2C 2004-2005
• F need not make presentment for payment to A, in order to
charge B, indorser
o reason: since B did not give value to A, B has no reason
to expect that the note will be paid upon presentment
o C, D and E are discharged as no presentment has been
made
o in effect, the accommodated party is the person primarily
liable
o accommodated payee-indorser, being in effect the person
primarily liable, is not discharged even if no presentment
for payment is made
Sec. 81. When delay in making presentment is excused. - Delay in
making presentment for payment is excused when the 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, presentment must be made with
reasonable diligence.
• what is excused here is not the making of presentment but only
delay in making presentment
• after cause of delay ceases, presentment must be made with
reasonable diligence
• excusable circumstances are those events which could not be
foreseen, or which, though unforeseen, are inevitable
• excuses for delay:
1. overwhelming calamity
2. malignant diseases
3. interruption of trade negotiations by political circumstances
4. war between maker’s and holder’s countries
5. suspension of commercial intercourse by public enemy, occupation
of country where parties reside or where instrument is payable
6. public and positive interdictions and prohibitions of state
7. impracticability of finding maker or his place of residence
Sec. 82. When presentment for payment is excused. - Presentment
for payment is excused:
(a) Where, after the exercise of reasonable diligence, presentment,
as required by this Act, cannot be made;
(b) Where the drawee is a fictitious person;
(c) By waiver of presentment, express or implied.
• what is excused is the failure to make presentment for payment,
not mere delay
22
• reasonable diligence – implies active search; holder must take all
steps likely to discover the whereabouts of the party to whom
presentment is to be made
• where drawee fictitious – presentment is not required as there is
no one to whom presentment is to be made
• waiver may be express or implied
o express waiver – e.g. “Presentment waived” in the
instrument
o implied waiver – may be manifested by any language or
conduct or any agreement between the parties
reasonably calculated to lead the holder to believe that
presentment is waived or to mislead or prevent him from
treating the bill as he otherwise would
e.g. holder failed to make presentment to the
drawee; drawer paid part of the bill and
promised orally to pay the rest
Summary of rules as to presentment for payment
1. presentment for payment is not necessary to charge persons
primarily liable
2. necessary to charge the person secondarily liable except:
a. as to drawer – Sec. 79
b. as to indorser – Sec. 80
c. when dispensed with – Sec. 82
d. when the instrument has been dishonored by non-
acceptance
Sec. 83. When instrument dishonored by non-payment. - The
instrument is dishonored by non-payment when:
(a) It is duly presented for payment and payment is
refused or cannot be obtained; or
(b) Presentment is excused and the instrument is overdue
and unpaid.
Sec. 82. When presentment for payment is excused. - Presentment for
payment is excused:
(a) Where, after the exercise of reasonable diligence, presentment, as
required by this Act, cannot be made;
(b) Where the drawee is a fictitious person;
(c) By waiver of presentment, express or implied.
• under this paragraph:
1. instrument must be duly presented for payment
2. payment is either refused or cannot be obtained
• under paragraph (b):
1. presentment for payment be excused c/o Sec. 82
2. instrument be overdue
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By: Joyce Briones notes from Agbayani; with case doctrines
2C 2004-2005
3. it be unpaid
Sec. 84. Liability of person secondarily liable, when instrument
dishonored. - Subject to the provisions of this Act, when the
instrument is dishonored by non-payment, an immediate right of
recourse to all parties secondarily liable thereon accrues to the
holder.
• as to the holder, after an instrument is dishonored by non-
payment, the persons secondarily liable thereon cease to be
secondarily liable and they become principal debtors
o provided that notice is given to them
otherwise, discharged
o after notice, holder can bring an action against any one
of them, without necessity of first bringing an action
against the person primarily liable
o where persons are secondarily liable are discharged by
dishonor and notice, while it is true that they become
principal debtors as to the holder, yet as among
themselves, persons secondarily liable are presumed
liable in the order they become parties to the instrument
PNB v. Seeto
• The unreasonable delay by the drawee, PNB, to present the check
discharged the liability of Seeto as indorser. The check was
presented 10 days after it reached Cebu.
Sec. 85. Time of maturity. - Every negotiable instrument is payable
at the time fixed therein without grace. When the day of maturity
falls upon Sunday or a holiday, the instruments falling due or
becoming payable on Saturday are to be presented for payment on
the next succeeding business day except that instruments payable
on demand may, at the option of the holder, be presented for
payment before twelve o'clock noon on Saturday when that entire
day is not a holiday.
• payment where instrument payable at fixed time – presentment
must be made on that date
• where bill is payable on a Saturday – instrument is said to be
falling due on Saturday
• where bill is payable on a Friday and that Friday is a holiday – bill
is said to have become payable on a Saturday
• time for making presentment depends upon whether the
instrument is payable at a fixed or determinable future time or on
demand
23
o instrument is payable at a fixed or determinable future
time – presentment must be made on the next
succeeding business day
Sec. 86. Time; how computed. - When the instrument is payable at
a fixed period after date, after sight, or after that happening of a
specified event, the time of payment is determined by excluding
the day from which the time is to begin to run, and by including the
date of payment.
• on the day of payment, the party liable is entitled to the whole of
that day within which to make payment
Sec. 87. Rule where instrument payable at bank. - Where the
instrument 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
thereon.
• applies only where the instrument is payable at a particular
named bank
• effect of failure to make presentment for payment – better view:
maker of a note is not discharged because primarily liable
Sec. 88. What constitutes payment in due course. - Payment is
made in due course when it is made at or after the maturity of the
payment to the holder thereof in good faith and without notice that
his title is defective.
Requisites of payment in due course:
1. payment must be made at or after the date of maturity
2. payment must be to the holder
3. payment must be made by the debtor in good faith and without
notice that the holders’ title is defective
Payment must be made to the possessor of the instrument
• possession of notes by the maker is presumptive evidence that
the notes are paid
• payee’s possession of the instrument raises the presumption that
they are not paid
Medium of payment
• in the currency stipulated (Art. 1249CC)
o if not possible, currency which is legal tender in the
Philippines
o delivery of PN payable to order, or bills of exchange or
other mercantile documents shall produce effect of
payment only when they:
have been cashed or
23
By: Joyce Briones notes from Agbayani; with case doctrines
2C 2004-2005
through the fault of the creditor, they have been
impaired
o action derived from the original obligation shall be held in
abeyance
• in case of extraordinary inflation or deflation of the currency
stipulated should supervene – value of currency at the time of the
establishment of the obligation shall be the basis of payment
o unless agreement to the contrary (Art. 1250CC)
Payment in other than legal tender
• general rule: not be considered absolute until the paper given in
payment has been itself paid
o except where the parties expressly or impliedly agree
that the claim shall be discharged by such payment
Payment through banks - a bank to which a note is sent for collection is the
agent of the owner; immaterial that the maker has requested the holder to
send the note to this bank for collection
• where a check is presented by the payee or holder to the bank on
which it is drawn, and received as a deposit and credited to his
account, this amounts, in the absence of fraud, to a payment of
the checks
VII. NOTICE OF DISHONOR
Sec. 89. To whom notice of dishonor must be given. - Except as
herein otherwise provided, when a negotiable instrument has been
dishonored by non-acceptance or non-payment, notice of dishonor
must be given to the drawer and to each indorser, and any drawer
or indorser to whom such notice is not given is discharged.
Notice of dishonor – bringing either verbally or by writing, to the
knowledge of the drawer or indorser of an instrument, the fact that a
specified negotiable instrument, upon proper proceedings taken, has not
been accepted or has not been paid, and that the party notified is expected
to pay it
• when an instrument is dishonored by non-acceptance or non-
payment, notice of dishonor must be given to persons secondarily
liable e.g. drawer and indorsers
o otherwise, such parties are discharged
24
e.g.
B --- C --- D --- E --- F
A makes a note payable to F or order
F makes a presentment for payment to A, maker, on
the date of maturity
A refuses to pay
• If F does not give notice of dishonor to B, C, D and E, and prove
the same, they are discharged and F cannot file an action against
them
• burden of proof: on the plaintiff who seeks to enforce the
defendant’s liability upon a negotiable instrument as indorser to
establish said liability by proving that notice was given to the
defendant within the time and in the manner required by the law
that the instrument in question has been dishonored
• persons primarily liable need not be given notice of dishonor
because they are the very ones who dishonor the instrument e.g.
acceptors
• Does failure to give notice of dishonor of a previous installment to
persons secondarily liable also discharge them on succeeding
installments?
o where the instrument contains no acceleration clause –
failure to give notice of dishonor on a previous
installment does not discharge drawers and indorsers as
to the succeeding installments
• holder can file an action against them for such
succeeding installment provided that as to such
succeeding installments, notice is given
o where instrument contains an acceleration clause
• automatic acceleration clause – failure to give
notice of dishonor to a previous installment will
discharge the persons secondarily liable as to
the succeeding installments
• optional acceleration clause and not exercised –
same as where there is no acceleration clause
Exceptions to requirement of notice of dishonor:
1. Sec. 109 – waiver of notice
2. Sec. 112 – when notice is dispensed with
3. Sec. 114 – when notice need not be given to drawer
a. drawer and drawee are the same person
b. is fictitious person or person not having capacity to
contract
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By: Joyce Briones notes from Agbayani; with case doctrines
2C 2004-2005
c. drawer is the person to whom the instrument is
presented for payment
d. drawer has no right to expect or require that the drawee
or acceptor will honor the instrument
e. drawer has countermanded payment
4. Sec. 115 – when notice need not be given to indorser
a. drawee is a fictitious person or person not having
capacity to contract, and the indorser was aware of that
fact at the time he indorsed the instrument
b. indorser is the person to whom the instrument is
presented for payment
c. instrument was made or accepted for his accommodation
5. Sec. 116 – notice of non-payment where acceptance refused
6. Sec. 117 – omission to give notice of dishonor
Asia Banking Corp. v. Javier
• Asia Banking Corp. was not able to prove the liability of Javier as
endorser because it gave no proof of notice of dishonor to Javier.
Firestone Tire v. CA
• The requirement of notice does not apply to withdrawal slips
because they are not negotiable.
Gullas v. PNB
• Notice of dishonor is necessary in order that the right of action
against him does not accrue until the notice is given.
Sec. 90. 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.
By whom notice is given:
1. holder
2. another in behalf of the holder
3. any party to the instrument who may be compelled to pay it to
the holder
• can give notice only to another party against whom he
has a right to reimbursement should such party giving
notice pay the instrument
4. another person in behalf of such party
Sec. 91. Notice given by agent. - Notice of dishonor may be given
by any agent either in his own name or in the name of any party
entitled to given notice, whether that party be his principal or not.
• not necessary that agent be authorized by the principal
25
• notice may be given by him:
1. in the name of any party entitled to give notice
2. in the agent’s own name
Sec. 92. Effect of notice on behalf of holder. - Where notice is given
by or on behalf of the holder, it inures to the benefit of all
subsequent holders and all prior parties who have a right of
recourse against the party to whom it is given.
Benefit – right to charge the person secondarily liable who received notice
• party to whom this benefit inures can charge the party receiving
the notice of dishonor, even if he himself did not give such notice
• notice of dishonor given by or on behalf of a holder insures to the
benefit of:
1. all parties prior to the holder, who have a right of recourse against
the party to whom the notice is given
2. all holders subsequent to the holder giving notice
Sec. 93. Effect where notice is given by party entitled thereto. -
Where notice is given by or on behalf of a party entitled to give
notice, it inures to the benefit of the holder and all parties
subsequent to the party to whom notice is given.
• notice is given by a party entitled to give notice under Sec. 90
i.e., party to the instrument who might be compelled to pay it to
the holder, and who, upon taking it up, would have a right of
reimbursement from the party to whom notice is given
• notice inures to the benefit of:
1. the holder
2. all parties subsequent to the party to whom notice is given
Sec. 94. When agent may give notice. - Where the instrument has
been dishonored in the hands of an agent, he may either himself
give notice to the parties liable thereon, or he may give notice to
his principal. If he gives notice to his principal, he must do so
within the same time as if he were the holder, and the principal,
upon the receipt of such notice, has himself the same time for
giving notice as if the agent had been an independent holder.
• Where an instrument is dishonored in the hands of an agent, he
can either:
1. directly give notice to the persons secondarily liable thereon
2. give notice to his principal
• if the agent chooses to give notice to his principal, he must give
notice within the time allowed by law as if he were a holder
• principal also has same time to give notice to the parties
secondarily liable
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2C 2004-2005
Sec. 95. When notice sufficient. - A written notice need not be
signed and an insufficient written notice may be supplemented and
validated by verbal communication. A misdescription of the
instrument does not vitiate the notice unless the party to whom the
notice is given is in fact misled thereby.
Sec. 96. Form of notice. - The notice 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. It may in all cases be given by
delivering it personally or through the mails.
Form:
1. oral
2. in writing
Contents of notice:
1. sufficient description of the instrument to identify it
2. statement that it has been presented for payment or for
acceptance and that it has been dishonored
3. statement that the party giving notice intends to look for the party
addressed for payment
Effects of defects in notice
• in writing, not signed – would not invalidate
• in writing, does not contain 2 and 3 – insufficiency can be
supplemented by oral communication stating the things lacking
• notice which contains a copy of the note and declares that
payment has been demanded and refused is sufficient
• mere statement that the note was payable and due is insufficient
notice
• misdescription of the instrument
o if not misled – will not vitiate notice
o if misled – will vitiate notice
• notice may be given by phone because notice can be given orally
o must be clearly shown that the party to be notified was
really communicated with, that is, fully identified as the
party at the receiving end of the line
Manner of giving notice
1. by personal delivery
2. by mail
• if personal service – evidence must show either actual personal
service or ordinarily intelligent, diligent effort to make personal
26
service upon the indorser at his place of business during business
hours or at his reside if he has no place of business
o if he is absent
not necessary to call a second time
notice may be left with anyone left in charge
• if no one in charge or no one there –
giving notice is deemed waived
Sec. 97. To whom notice may be given. - Notice of dishonor may be
given either to the party himself or to his agent in that behalf.
Parties to be given notice:
1. the party himself
2. agent in that behalf
• an accommodation indorser is entitled to notice
• irregular indorser must also be given notice if he is to be charged
• if notice is to be given to an agent – he must be duly authorized
to receive notice of dishonor
o if he is not – notice is not valid
Sec. 98. Notice where party is dead. - When any party is dead and
his death is known to the party giving notice, the notice must be
given to a personal representative, if there be one, and if with
reasonable diligence, he can be found. If there be no personal
representative, notice may be sent to the last residence or last
place of business of the deceased.
Requisites for notice to representative
1. death is known to the party giving notice
2. there is a personal representative
3. if with reasonable diligence he could be found
• although the party is dead, notice may be sent to the last
residence or last place of business of the deceased if:
1.his death is not known to the party giving notice
2. although his death is known to the party giving notice but there is no
personal representative
3. if there be one but he cannot be found with reasonable intelligence
Sec. 99. Notice to partners. - Where the parties to be notified are
partners, notice to any one partner is notice to the firm, even
though there has been a dissolution.
• reason: each partner is an agent of the partnership of which he is
a member
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2C 2004-2005
Sec. 100. Notice to persons jointly liable. - Notice to joint persons
who are not partners must be given to each of them unless one of
them has authority to receive such notice for the others.
• applies to parties other than joint payees and indorsees who
indorse e.g. drawers who sign a bill jointly
joint accommodation indorsers who are not jointly and
severally liable under Sec. 68
Sec. 101. Notice to bankrupt. - Where a party has been adjudged a
bankrupt or an insolvent, or has made an assignment for the
benefit of creditors, notice may be given either to the party himself
or to his trustee or assignee.
• applies to:
1. where the party secondarily liable has been declared a bankrupt or an
insolvent
2. where he has made an assignment of his properties for the benefit of
creditors
• notice may be given to either:
1. party himself
2. his trustee or assignee
Sec. 102. Time within which notice must be 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.
When notice may be given:
1. where parties reside in the same place – Sec. 103
(a) given at the place of business of the person to receive notice – must be
given before the close of business hours on the day following
(b) given at his residence - must be given before the usual hours of rest on
the day following
(c) sent by mail - must be deposited in the post office in time to reach him
in usual course on the day following
2. where parties reside in different places - Sec. 104
(a) sent by mail - must be deposited in the post office in time to go by mail
the day following the day of dishonor, or if there be no mail at a convenient
hour on last day, by the next mail thereafter
(b) given otherwise than through the post office - within the time that
notice would have been received in due course of mail, if it had been
deposited in the post office within the time specified in the last subdivision
3. notice to subsequent notice - Sec. 107
27
• where a party receives notice of dishonor - he has, after the
receipt of such notice, the same time for giving notice to
antecedent parties that the holder has after the dishonor
Sec. 113. Delay in giving notice; how excused. - Delay in giving notice of
dishonor is excused when the 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, notice must be
given with reasonable diligence.
• notice of dishonor may not be given before the date of maturity
o notice would be insufficient because an instrument
cannot be said to be dishonored for non-payment
unless presented and presentment must be
made on the date of maturity
• unless presentment is excused
instrument cannot be said to be dishonored unless it is overdue and unpaid
notice can be given only after the instrument has been actually dishonored
• notice of dishonor may be given on the date of maturity
o provided that the instrument has been presented for
payment and it has been dishonored
• purpose of prompt notice: to give persons secondarily liable every
opportunity to secure themselves such as to enable the party to
be charged and to preserve and protect his rights against prior
parties
Far East Realty Investment v. CA
• Far East incurred unreasonable delay in making a formal notice of
dishonor. The check was issued on Sept. 13, 1960, but presented
on March 5, 1964, and dishonored on the same date. After
dishonor by the drawee bank, a formal notice of dishonor was
made by FERI thru a latter dated April 27, 1968.
Lina Lim Lao v. CA
• The fact alone that Lao is the signatory of the checks merely
engenders the prima facie presumption, but it does not render her
automatically guilty under BP 22. Prosecution has the duty to
prove all the elements of the crime. Lao has a right to rebut the
presumption. No notice of dishonored was actually sent or
received by Lao. The notice was addressed to Premiere and sent
it to its main office. It was not transmitted to the Binondo branch
where Lao was holding office.
Betty King v. People
• Notice of dishonor is necessary since there is a 5-day period
within which a drawer may make payment in order to avert
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By: Joyce Briones notes from Agbayani; with case doctrines
2C 2004-2005
criminal liability. There is no showing that notice was given.
Further, the letter informing King of the dishonored checks were
“returned to sender.”
Sec. 103. Where parties reside in same place. - Where the person
giving and the person to receive notice reside in the same place,
notice must be given within the following times:
(a) If given at the place of business of the person to receive notice,
it must be given before the close of business hours on the day
following.
(b) If given at his residence, it must be given before the usual
hours of rest on the day following.
(c) If sent by mail, it must be deposited in the post office in time to
reach him in usual course on the day following.
Sec. 104. Where parties reside in different places. - Where the
person giving and the person to receive notice reside in different
places, the notice must be given within the following times:
(a) If sent by mail, it must be deposited in the post office in time to
go by mail the day following the day of dishonor, or if there be no
mail at a convenient hour on last day, by the next mail thereafter.
(b) If given otherwise than through the post office, then within the
time that notice would have been received in due course of mail, if
it had been deposited in the post office within the time specified in
the last subdivision.
“same place” – corporate limits of a town or city where the presentment is
made or where the holder resides
Notice when parties reside in the same place
e.g.
F, holder and D, indorser, reside in Manila
Instrument is dishonored on Aug. 1, 1950
• if given at the place of business of D – the notice must be given
after dishonor but not later than Aug. 2, 1950, before the close of
business hours on that day
o otherwise: notice would be too late
• if given at his residence – notice must be given after the dishonor
but not later than Aug. 2, 1950 before the usual hours of rest on
that day
• if sent by mail – notice must be deposited at the mailbox at such
time as would enable D to receive the notice not later than Aug. 2,
1950 in due course of mail
o even if due to the fault or other acts of postal authorities,
the notice does not reach the party to be given notice on
28
the day following the day of dishonor, the notice would
still be considered on time
Notice when parties reside in different places
e.g. F, holder, resides in Manila, and C, indorser, resides in Zamboanga
City
instrument is dishonored on Aug. 1, 1950
• if sent by mail – notice need not reach C on Aug. 2, 1950, the day
following the day of dishonor
o if there is no mail at a convenient hour on Aug. 2, 1950,
the notice may be deposited in the mails by the next mail
thereafter
o suppose that there is no mail on Aug. 2, 1950, or if there
is, it leaves at 3am ON Aug. 3, 1950, the notice may be
deposited at 6PM on Aug. 2, 1960, in time for 3 o’clock
mail on Aug. 3, 1950
• if sent otherwise than by mail, as by personal messenger – notice
must be sent at such time as to enable C to receive the notice
within the time he would have received it had it been mailed
Effect of notice given out of time – would not be considered to have been
given
• unless: excused
• party to receive notice would be discharged
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.
• party giving notice is deemed to have given due notice where:
1. notice of dishonor is duly addressed
2. deposited in the post-office, even when there is miscarriage in the
mail
• notice must be properly addressed, stamped and mailed
o otherwise, the notice, even though mailed, is not proper,
and the indorser will be discharged from liability
Is presumption conclusive?
• held in a Philippine case that where copy of the protest is sent by
mail in good season addressed to the drawer, “the presumption is
now conclusive that the latter received it, not having been
rebutted, or at least, contradicted”
o presumption is conclusive if not rebutted or at least
contradicted
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2C 2004-2005
Sec. 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.
Deposit in letter box - letter box must be under the control of the post-
office department
• otherwise: notice would not be deemed to have been deposited in
the post-office
Sec. 107. Notice to subsequent party; time of. - Where a party
receives notice of dishonor, he has, after the receipt of such notice,
the same time for giving notice to antecedent parties that the
holder has after the dishonor.
e.g.
Aug. 2, 1950 F, holder gives notice to E, a party
entitled to notice
E gives notice to D
• if D resides in the same place as E – E must give notice to D not
later than Aug. 3, 1950, the day following E’s receipt of notice
• if E and D reside in different places – notice must be given within
the period provided for under Sec. 104
Sec. 108. Where notice must 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-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.
Where address added to signature
• notice must be addressed to an indorser at a place which at the
time of the execution of the note was stated by him to be his
residence was sufficient
29
• same is true where the notice is addressed at the place where the
note was dated and where the indorser lived although he moved
from said place sometime not stated
Where address not given
• notice must be sent to the places stated in law
• under par. C, if E is vacationing in Baguio, notice may be sent to
him
• what is important is that the party to receive actually receives it
on time
e.g.
F, holder, meets E at Escolta and delivers to E the
notice within the time required by law
• notice would be sufficient
• “his place of business” – place where he carries business as
merchant, tradesman, professional man, or other similar trade or
calling
Sec. 109. Waiver of notice. - Notice of dishonor may be waived
either before the time of giving notice has arrived or after the
omission to give due notice, and the waiver may be expressed or
implied.
When waiver may be made
1. before the time of giving notice, such as express waiver in the
body of the instrument or added to the signature of a party
2. after omission to give due notice
• waiver is intentional relinquishment of a right; express or implied
e.g. express waiver - Y draws a bill as follows:
To X, Pay to X, or order P1,000
Notice of dishonor waived.
(Sgd.) Y
Implied waiver – may be implied from acts, declarations or silence
e.g.
F, holder of a note fails to give notice to D, an
indorser
D declares afterwards that he would pay the note
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By: Joyce Briones notes from Agbayani; with case doctrines
2C 2004-2005
• there is also implied waiver if A admits his liability afterwards and
authorizes plans for the settlement of the note or extension of
time for payment
Sec. 110. Whom affected by waiver. - Where the waiver is
embodied in the instrument itself, it is binding upon all parties; but,
where it is written above the signature of an indorser, it binds him
only.
• if the waiver is embodied in the instrument itself, it is binding
upon all parties
• if the waiver is written above the signature of an indorser, it binds
him only
Where the waiver in instrument itself
e.g.
Pay to X or order P1,000. Notice of dishonor
waived.
Sgd. Y
To C
X --- C --- D --- E --- F
• all parties are bound
• if not indorsed – necessary for F to give them notice of dishonor to
discharge them
o effect: to make the subsequent indorsers unconditionally
liable an din this sense, unconditional debtors
o such a waiver does not make the indorsers liable as co-
makers since their obligation to pay is still a contingent
liability
Waiver on the back of the instrument
• a printed waiver on the back of the instrument above the
indorsements is a waiver embodied in the instrument itself
• effect: to make all the subsequent indorsers unconditionally liable
and in this sense, unconditional debtors
• all indorsers appearing below it are bound and the holder need not
give them notice to hold them liable
Where waiver written above signature of indorser
e.g.
I promise to pay to B or order P1,000.
Sgd. A
indorsement at the back:
30
To C, (Sgd.) B
To C, Notice of dishonor waived, (Sgd.) C
To E, (Sgd.) D
To F, (Sgd.) E
• only C is bound by the waiver
• F must give notice to B, D and E to charge them
o otherwise, discharged
Sec. 111. Waiver of protest. - A waiver of protest, whether in the
case of a foreign bill of exchange or other negotiable instrument, is
deemed to be a waiver not only of a formal protest but also of
presentment and notice of dishonor.
• where protest is waived, the ff. are included and deemed waived
also:
1. presentment
2. notice of dishonor
• where presentment is waived - notice of dishonor is also waived
• where notice of dishonor is waived - presentment is not waived
Sec. 112. When notice is dispensed with. - Notice of dishonor is
dispensed with when, after the exercise of reasonable diligence, it
cannot be given to or does not reach the parties sought to be
charged.
When notice is excused
• when political disturbances interrupt and obstruct the ordinary
negotiations of trade
• prevalence of a malignant, contagious or infectious disease such
as cholera, yellow fever, plague or smallpox which has become so
extensive as to suspend all commercial business and intercourse
or to render it very hazardous to enter into the infected districts
Sec. 113. Delay in giving notice; how excused. - Delay in giving
notice of dishonor is excused when the 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, notice must be given with reasonable diligence.
• delay caused by making inquiries as to the address of the party to
receive notice is excusable where the holder does not know the
address
Sec. 114. When notice need not be given to drawer. - Notice of
dishonor is not required to be given to the drawer in either of the
following cases:
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By: Joyce Briones notes from Agbayani; with case doctrines
2C 2004-2005
(a) Where the drawer and drawee are the same person;
(b) When the drawee is fictitious person or a person not having
capacity to contract;
(c) When the drawer is the person to whom the instrument is
presented for payment;
(d) Where the drawer has no right to expect or require that the
drawee or acceptor will honor the instrument;
(e) Where the drawer has countermanded payment.
Sec. 115. When notice need not be given to indorser. — Notice of
dishonor is not required to be given to an indorser in either of the
following cases:
(a) When the drawee is a fictitious person or person not having
capacity to contract, and the indorser was aware of that fact at the
time he indorsed the instrument;
(b) Where the indorser is the person to whom the instrument is
presented for payment;
(c) Where the instrument was made or accepted for his
accommodation.
When notice is relatively excused
• as to a particular person secondarily liable on an instrument, such
as the drawer or an indorser, notice of dishonor to him is not
necessary:
1. where he has knowledge of the dishonor by means other than
through a formal notice, as when
a. he is both drawee and drawer
b. when presentment is made to him
2. where he has no reason to expect that the instrument will be
honored, as when
a. he countermanded payment or where
b. the drawee is fictitious or without capacity to contract
Illustration of drawer and drawee at the same time
e.g. A is both the drawer and drawee of the bill
• since drawee A dishonored the instrument, he does not have to be
notified to charge him
o hence, A as drawer does not have to be notified to
charge him
o under Sec. 130: holder may treat the instrument as PN,
in which case the drawer becomes the maker, and
therefore, the person primarily liable thereon, to whom
notice of dishonor is not necessary
Illustration of Fictitious Drawee
e.g. X appears to the drawee on a bill drawn by A, drawer
F is the holder
31
• if X is a fictitious persons or a minor, F can treat the bill as a note,
in which case A becomes the maker, to whom notice is not
necessary
Illustration of drawer to whom presentment made
e.g.
A is the drawer of a bill payable to B, payee
X is the drawee
Bill is payable at the office of A
B --- C --- D --- D --- E --- F(holder)
F makes presentment at A’s office
X drawee is not there but A is there
• under Sec. 72(d): F can make presentment on A who is the
person found at the place of presentment
• F need not give notice to A, drawer, as A knows already of the
dishonor
No right to require or expect payment as to drawer
1. where the drawer of a check has no account with the drawee bank
2. when the drawer of a check payable abroad has no funds with the
drawee bank to meet it
3. when the knowledge that previous drafts on the same consignee
had been dishonored
• in the foregoing cases drawer has no right of notice of dishonor
Drawer has countermanded payment
A, drawer, tells the drawee X not to pay the bill
F, holder, need not give notice to A, drawer
• an allegation that payment of a check had been countermanded is
sufficiently set out where the check was set forth with the
indorsement across the face, “Pyt. stopped.”
Drawee fictitious etc. as to indorsers
• indorser must be aware of the fact that the drawee is fictitious or
one not having the capacity to contract
o otherwise, notice of dishonor must be given to such
indorser to charge him
• fact that the indorser knew the maker to be insolvent or that the
instrument was dishonored does not dispense with the necessity
of notice
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2C 2004-2005
Illustration of indorser to whom presentment made
e.g.
A note is made payable at the office of B, payee
B --- C --- D --- E --- F
F makes presentment at B’s office but A, maker, is
not there while B is there
F makes presentment for payment to B, under Sec.
72(d)
• no need to give notice to B, indorser, to charge him
• when the note of a corporation was indorsed by its CEO, they
were not entitled to notice of dishonor
• where notes made by a corporation were indorsed for its
accommodation by its president who had the sole power to draw
checks for the company, notice to him of dishonor of the
instrument was not required since he was the person to whom it
was to be presented for payment
• indorser is entitled to notice of dishonor and is discharged if not
notified
• where the notes in question were made for the accommodation of
the payee but he died before maturity, it was held that
presentment to his administrator was not necessary
State Investment House v. CA
• Notice of dishonor was no longer necessary. Moulic could not
have expected her checks to be honored after withdrawing her
funds. She herself was responsible for the dishonor of the checks;
thus, there is no need to serve her a notice of dishonor.
Great Asian Sales v. CA
• A notice of dishonor to Great Asian was no longer necessary
because it has no right to expect payment of the checks. Some of
the checks were dishonored for reasons: “account closed,”
“account under garnishment,” “insufficiency of funds.” And, this is
also for the reason that Great Asian countermanded payment;
some of the checks were dishonored for the reason that “payment
stopped.”
Sec. 116. Notice of non-payment where acceptance refused. -
Where due notice of dishonor by non-acceptance has been given,
notice of a subsequent dishonor by non-payment is not necessary
unless in the meantime the instrument has been accepted.
32
e.g.
A bill is payable on Dec. 31, 1950
F, holder, presents it for acceptance to X, drawee, on
Dec. 1, 1950
X refuses to accept the bill
F then gives notice of dishonor to drawer A and to
indorsers B, C, D and E
• under Sec. 151: no necessity for payment
• under Sec. 115: F need not give notice of dishonor by non-
payment
e.g. suppose X, drawee, accepts the bill on Dec. 15, 1950
• F must present the bill for payment for X, drawee on Dec. 31,
1950
• If A refuses to pay – F must give notice of dishonor to A, B, C, D
and E, indorsers, in order to charge them, as in the meantime the
instrument has been accepted
Sec. 117. Effect of omission to give notice of non-acceptance. - An
omission to give notice of dishonor by non-acceptance does not
prejudice the rights of a holder in due course subsequent to the
omission.
e.g.
A is the drawer of a bill addressed to X, drawee, with
B as payee
Bill is payable on Dec. 31, 1950
B --- C --- D --- E --- F
X refuses to accept the bill
F fails to give notice to B, C, D, and E
F then negotiates the note to G, a holder in due
course
• as to G, B, C, D, and E are not discharged
o under Sec. 117: omission to give notice of dishonor by
non-acceptance does not prejudice the rights of a holder
in due course subsequent to the omission
Summary as to notice of dishonor
1. like presentment for payment, notice of dishonor need not be
given to persons primarily liable in order to charge them
2. aside from presentment for payment to persons primarily liable,
notice of dishonor to persons secondarily liable is necessary to
charge the latter except
a. when notice is waived
b. when dispensed with under Sec. 112
c. as to drawer under Sec. 114
d. as to indorser under Sec. 115
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By: Joyce Briones notes from Agbayani; with case doctrines
2C 2004-2005
e. where due notice of dishonor by non-acceptance has
been given
f. as to a holder in due course without notice
Sec. 118. When protest need not be made; when must be made. -
Where any negotiable instrument has been dishonored, it may be
protested for non-acceptance or non-payment, as the case may be;
but protest is not required except in the case of foreign bills of
exchange.
• protest is necessary for foreign bills of exchange
o optional for other negotiable instruments
• in many states, statutes make the certificate of the notary prima
facie evidence of the facts of presentment, demand, non-payment
and notice of dishonor
• while protest is not required in cases of PN and inland bills, it is
usual to protest these instruments also when dishonored since the
notary’s certificate of protest is the most convenient and certain
mode of proving the facts
Sec. 119. Instrument; how discharged. - A negotiable instrument is
discharged:
(a) By payment in due course by or on behalf of the principal
debtor;
(b) By payment in due course by the party accommodated, where
the instrument is made or accepted for his accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any other act which will discharge a simple contract for the
payment of money;
(e) When the principal debtor becomes the holder of the
instrument at or after maturity in his own right.
Payment by principal debtor
• to discharge an instrument, payment must be
1. payment in due course
2. payment made by the principal debtor
• if made before maturity – not discharged
o will merely constitute a negotiation back to the principal
debtor who can renegotiate the instrument
• where payment is made by a party who is not the primary obligor
or an accommodation party – his payment only conceals his own
liability and those who are obligated after him
Payment by a third person
• instrument is not discharged because payment is not made by the
person principally liable
33
o exception: where an instrument has been protested and
some one voluntarily makes “payment supra protest” or
“for honor”
o if intention was to give money in payment, instrument is
discharged
o CC: a third person can make payment for an obligor
Summary of discharge of payment (under Sections 119 and 121)
1. payment by person ultimately liable, whatever his position on
paper is a discharge of the instrument
2. payment by an accommodation party is not a discharge of the
instrument, whatever his position thereon and whether the
indorsement be regular or anomalous
3. payment by the (non-accommodation) drawer or indorser is not a
discharge of the instrument
principal debtor – person ultimately bound to pay the debt
Payment by check or other negotiable paper
• delivery of mercantile documents shall produce the effect of
payment only:
1. when they have actually been cashed or
2. when through the fault of the creditor, they have been impaired
• creditor is not bound to accept a check in satisfaction of his
demand because a check, even if good when offered, does not
meet the requirements of legal tender
Waiver of objection to tender of payment by legal tender
• general rule: an objection to a tender must, to be available to the
creditor, be:
o made in good time and
o grounds for object must be specified
o objection on one ground is waiver of all other objections
which could have been made at that time
• required that he makes his object at the time of offer of check,
instead of an offer of payment in money
• waiver of right to demand payment in money
• reason for rule: to afford debtor an opportunity to secure specific
money which the law prescribes shall be accepted in payment of
debts
• between accommodation party and accommodated party –
accommodated party is ultimately liable on the accommodation
instrument
o his payment in due course discharges the instrument
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2C 2004-2005
Intentional cancellation - cancellation must be:
1. intentional
2. made by the holder
• may be done by tearing the instrument up, burning it or writing
across it the word “cancelled”
• intention is an essential element of discharge of an instrument
• under Sec. 196: acts which will discharge a simple contract are to
be determined by existing legislation
o e.g. novation
o opined that Sec. 119 is meaningless and inoperative in
the light of other inclusive provisions of Sec. 119
• extension of time granted by the holder to the debtor will not
discharge the instrument – this ground is not omitted in Sec. 120
but omitted in Sec. 119
Principal debtor acquires instrument
• in order to discharge an instrument under par. (e), reacquisition
must be:
1. by the principal debtor
2. in his own right
3. at or after the date of maturity
• “in his own right” – “not in a representative capacity
• reacquisition by the principal debtor in his own right but before
maturity will not discharge instrument; will merely constitute
negotiation back to the principal debtor who may renegotiate the
instrument
Discharge by operation of law
• if a judgment is obtained on a bill or note, the bill or note is
thereby extinguished and merged in the judgment
• judgment alone, without actual satisfaction, is not extinguishment
• discharge in bankruptcy releases a bankrupt from all provable
debts
o unless otherwise provided by statute
State Investment House v. CA
• The intentional cancellation contemplated under paragraph (c) is
that cancellation effected by destroying the instrument either by
tearing it up, burning it, or writing the word “cancelled” on the
instrument. The act of destroying the instrument must also be
made by the holder of the instrument intentionally. Since Moulic
failed to get back possession of the post-dated checks, the
intentional cancellation of the said checks is altogether impossible.
34
Cebu International v. CA
• When the bank deducted the amount of the check from CIFC’s
current amount, this did not ipso facto operate as a discharge or
payment of the instrument. Although the value of the check was
deducted from the funds of CIFC, it was not delivered to the
payee, Vicente Alegre.
Sec. 120. When persons secondarily liable on the instrument are
discharged. - A person secondarily liable on the instrument is
discharged:
(a) By any act which discharges the instrument;
(b) By the intentional cancellation of his signature by the holder;
(c) By the discharge of a prior party;
(d) By a valid tender or payment made by a prior party;
(e) By a release of the principal debtor unless the holder's right of
recourse against the party secondarily liable is expressly reserved;
(f) By any agreement binding upon the holder to extend the time of
payment or to postpone the holder's right to enforce the
instrument unless made with the assent of the party secondarily
liable or unless the right of recourse against such party is expressly
reserved.
• generally courts regard Sec. 120 exclusive i.e., as a complete
codification of the law of discharge of secondary parties by the 6
methods set forth
o sound in the light of the general purpose of the law to
protect the rights of a holder in due course
• no consideration is necessary to support a discharge by intentional
cancellation of an indorser’s signature by the holder
• discharge of prior party discharges parties subsequent thereto
o reason: if subsequent party were made to pay, he would
not be able to enforce his right of recourse against him
who has been discharged by the holder
• discharge of a prior party referred to must be one that arises from
the act of the holder
o does not refer to discharge by operation of law e.g.
by bankruptcy
discharge of person not given notice of dishonor
by Statute of Limitations
Tender of payment – act by which one produces and offers to a person not
holding a claim or demand against him the amount of money which he
considers and admits to be due, in satisfaction of such claim or demand
without any stipulation or condition
• if holder releases the maker, the persons secondarily liable are
also discharged
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By: Joyce Briones notes from Agbayani; with case doctrines
2C 2004-2005
o except: holder reserves right of recourse against parties
secondarily liable
reason: implied reservation of their right against
maker
reservation must be express
• release must be a voluntary act of the holder, not by operation of
law
• if release is not for value, it is not a discharge of secondary parties
• rule: accommodation maker or acceptor is not discharged by the
holder’s release of the principal debtor even if the release be
made with knowledge and the true relation of the parties and
conversely, the release of an accommodation maker or acceptor
does not discharge the principal debtor though the latter occupies
the position of a party “secondarily liable” to the instrument
• extension of time of payment discharges the indorsers
o exceptions:
1. where the extension of time is consented to by the party
secondarily liable, he is not discharged
2. where the holder expressly reserves his right of recourse against
any party secondarily liable, the latter is not discharged
Requisites of agreement for extension of time:
1. it must be a binding contract, supported by a valuable
consideration and for a definite period
2. it must be made with the principal debtor, not within a third party
Sec. 121. Right of party who discharges instrument. - Where the
instrument is paid by a party secondarily liable thereon, it is not
discharged; but the party so paying it is remitted to his former
rights as regard all prior parties, and he may strike out his own and
all subsequent indorsements and against negotiate the instrument,
except:
(a) Where it is payable to the order of a third person and has been
paid by the drawer; and
(b) Where it was made or accepted for accommodation and has
been paid by the party accommodated.
e.g.
A, drawer of a bill addressed to X, drawee, payable to
the order of B
A --- B --- C --- D --- E --- F
D pays the bill
• effects:
1. instrument is not discharged but it discharges D, the party paying
it
35
2. D is remitted to his former rights against parties prior to him
o if D is formerly a holder in due course – even if at the
time of payment he already had notice of defects of title,
he can enforce his rights against any of them free from
defenses, as he is remitted to his former rights
o rule: if the original payee of a note unenforceable for lack
of consideration repurchases the instrument after
transferring it to a holder in due course, the paper again
becomes subject in the payee’s hands to the same
defenses to which it would have been subject if the paper
have never passed through the hands of a holder in due
course
o true where the instrument is transferred to an agent of
the payee
3. D can strike out indorsement and subsequent indorsements of E
and F
4. D can renegotiate the instrument
Exceptions to right to renegotiate
• apply only to the right to negotiate but not to the rule that the
instrument is not discharged
• party secondarily liable who pays cannot negotiate the
instrument:
1. if instead of D, it is A, drawer, who pays and as the bill as payable
to the order of a third person, B, A, can no longer negotiate the
instrument
2. or if B, payee, is an accommodated party, and B pays, he cannot
negotiate the bill, as B is the ultimate person to pay it and he
does not have the right of recourse against either X, drawee or A,
drawer
Sec. 122. Renunciation by holder. - The holder may expressly
renounce his rights against any party to the instrument before, at,
or after its maturity. An absolute and unconditional renunciation of
his rights against the principal debtor made at or after the maturity
of the instrument discharges the instrument. But a renunciation
does not affect the rights of a holder in due course without notice.
A renunciation must be in writing unless the instrument is
delivered up to the person primarily liable thereon.
• held that this section, considered in connection with Sections 119
and 120, applies only to renunciation by a unilateral act of the
holder without consideration and in cases where the instrument is
not delivered up to the person intended to be released
• renunciation – act of surrendering a right or claim without
recompense; an be applied wit equal propriety to the relinquishing
of a demand upon an agreement supported by a consideration
35
By: Joyce Briones notes from Agbayani; with case doctrines 36
2C 2004-2005

o includes: release of a claim by virtue of an accord and time a sum certain in money to order or to bearer.
satisfaction as well as gratuitous waiver of liability
Types of bill of exchange
• form: 1. draft
1. express 2. trade acceptance
2. in writing 3. banker’s acceptance
• if instrument is delivered to the person primarily liable – 4. treasury warrant
renunciation may be oral 5. money orders
• does not apply to, or prevent discharge by oral novation under 6. clean bills of exchange
which the obligation of other persons is accepted in lieu of that of 7. documentary bill of exchange
a maker of a note 8. D/A bills of exchange
• may be made by the holder: 9. D/P bills of exchange
1. before maturity 10. time or usance bills
2. at maturity 11. bills in set
3. after maturity 12. inland bills
13. foreign bills
Sec. 123. Cancellation; unintentional; burden of proof. - A
cancellation made unintentionally or under a mistake or without Draft – common term for all bills of exchange; used synonymously
the authority of the holder, is inoperative but where an instrument
or any signature thereon appears to have been cancelled, the Treasury warrants – treasury warrant “bearing on its face the words
burden of proof lies on the party who alleges that the cancellation ‘payable from the appropriation for food administration’ is actually an order
was made unintentionally or under a mistake or without authority. for payment out of a particular fund and is not unconditional, and does not
fulfill one of the essential requirements of a negotiable instrument”
Cancellation – signifies: • US: government warrants for payment of money are not
• drawing of criss-cross lines negotiable instruments nor commercial paper
• tearing
• obliterating Money order – species of draft drawn by the post-office upon another for
• erasures an amount of money deposited at the first office by the person purchasing
• burning the money order and payable at the second office to a payee named in the
• other means by which the intention to cancel the instrument may order
be evident • under restrictions and limitations which postal laws and
regulations on them and which are inconsistent with the character
• inoperative when: of nego instruments, postal money orders are not negotiable
1. made unintentionally • if at all, of limited negotiability as they may be indorsed once
2. made under mistake
3. made without authority of the holder Clean bill of exchange – to which are not attached documents of title to be
• where an instrument or signature appears to have been cancelled delivered to the person against whom the bill is drawn when he either
– party claiming that the cancellation is inoperative must prove his accepts or pays the bill
allegations
Documentary bill of exchange – to which are attached documents of title to
BILLS OF EXCHANGE be delivered and surrendered to the drawee when he accepts or pays the
bill
IX. FORM AND INTERPRETATION
D/P bill – “documents against payment bill”; sight or time bill to which are
Sec. 126. Bill of exchange, defined. - A bill of exchange is an attached documents to be delivered and surrendered to the drawee when
unconditional order in writing addressed by one person to another, he has paid the corresponding bill
signed by the person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or determinable future

36
By: Joyce Briones notes from Agbayani; with case doctrines
2C 2004-2005
D/A bill – “documents against acceptance bill”; time bill to which are
attached documents to be delivered and surrendered to the drawee when
he accepts the bill
Sight bills – bills which are payable upon presentation or at sight or on
demand
Time or usuance bills – bills which are payable at a fixed future time or at a
determinable future time
Aval – written obligation independent of that contracted by the acceptor
and indorser, securing the payment of a bill of exchange (p. 66, Agbayani)
• guarantor is called avalista
• purpose of guarantee: to secure the payment of a draft in whole
or in part, and, although it constitutes an obligation distinct and
independent of that contracted by the acceptor and indorser, it is
a commercial accessory to that of the bill of exchange the
payment of which it guarantees
Citytrust Banking Corporation v. CA
• The drawee bank is solely liable for acts not done in accordance
with the instructions of the drawer bank. The drawer is liable for
debiting the account of the purchaser despite ordering stoppage of
payment. The drawer has the duty to comply with the
instructions of the purchaser.
Phil. Bank of Commerce v. Aruego
• As long as commercial paper conforms with the definition of a bill
of exchange, that paper is considered a bill of exchange. The
nature of acceptance is important only in determination of
whether a commercial paper is a bill of exchange or not. Thus,
Aruego’s contentions that the drafts signed by him were not really
bills of exchange but mere pieces of evidence of indebtedness
because payments were made before acceptance is not
meritorious.
Sec. 127. Bill not an assignment of funds in hands of drawee. - A
bill of itself does not operate as an assignment of the funds in the
hands of the drawee available for the payment thereof, and the
drawee is not liable on the bill unless and until he accepts the
same.
e.g.
X, drawee, has not accepted the bill drawn against
him, F, holder cannot enforce it against him, even
if A has sufficient funds in the hands of X to pay for
the bill
37
• holder in due course of a dishonored bill has no cause of action
against the drawee either at law or in equity as an assignee of the
drawer’s contractual rights underlying the bill
• demand drafts not credits subject to escheat under Act 3936
Republic v. PNB
• A demand draft is a bill of exchange payable on demand; an open
letter of request from and an order by one person on another to
pay a sum of money therein mentioned to a 3rd person on demand
or at a future time therein specified. Since it is admitted that the
demand drafts herein involved have not been presented either for
acceptance or for payment, the inevitable consequence is that the
appellee bank never had any chance of accepting or rejecting
them. Verily, appellee bank never became a debtor of the payee
concerned and as such the aforesaid drafts cannot be considered
credits subject to escheat within the meaning of the law.
Sec. 128. Bill addressed to more than one drawee. - 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.
• bill may be addressed to 2 or more drawees jointly e.g. “To X and
Y”
• bill cannot be addressed to 2 or more drawees alternatively e.g.
“To X or Y”
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.
Inland bill of exchange – bill which is, or on its face purports to be, both
drawn and payable within the Philippine Islands
Foreign bill of exchange – bill which is, or on its face purports to be, drawn
or payable outside the Philippine Islands
• if on its face it purports to be
1. to be drawn in the Philippines but payable outside thereof
2. to be payable in the Philippines but drawn outside thereof
e.g.
Washington, D.C.
January 1, 1950
Pay to B or order P1,000.00 at the PNB,
Manila.
(Sgd,) A
37
By: Joyce Briones notes from Agbayani; with case doctrines
2C 2004-2005
• even if the bill is drawn in Washington, D. C. if the place where it
is drawn does not appear thereon, as when “Washington, D. C.”
are omitted, the holder may treat it as an inland bill
• importance of distinction
1. foreign bills are required to be protested
o failure to protest will discharge persons secondarily liable
thereon
2. for determination of law applicable
Sec. 130. When bill may be treated as promissory note. - Where in
a bill the drawer and drawee are the same person or where the
drawee is a fictitious person or a person not having capacity to
contract, the holder may treat the instrument at his option either
as a bill of exchange or as a promissory note.
When bill may be treated as note
1. where the drawer and drawee are the same person e.g.
o draft drawn by an agent on his principal by authority of
the principal
o draft drawn by a bank on its branch
2. where the drawee is a fictitious person
3. where the drawee has no capacity to contract
• notice of dishonor need not be given to the drawer to charge him
• treating the bill as a note would constitute the drawer, maker
• holder need not prove presentment for payment or present the bill
to the drawee for acceptance
Sec. 131. Referee in case of need. - The drawer of a bill and any
indorser may insert thereon the name of a person to whom the
holder may resort in case of need; that is to say, in case the bill is
dishonored by non-acceptance or non-payment. Such person is
called a referee in case of need. It is in the option of the holder to
resort to the referee in case of need or not as he may see fit.
• e.g.
Pay to B or order P1,000.00 In case of
need, apply to Y, 220 Regina Bldg., Escolta, Manila.
(Sgd.) A
To X
216 Regina Bldg.
Escolta, Manila
38
• bill is successively indorsed to C, D, E and F
• if X dishonors the bill, F may:
o apply to Y for payment after protesting the bill
o he may immediately go against A, drawer, C, D or E,
indorsers after due proceedings or dishonor have been
taken by him
• if referee, Y, pays, he may recover the amount
from the drawer or indorser who has named him
as referee in case of need
X. ACCEPTANCE
Sec. 132. Acceptance; how made, by and so forth. - The acceptance
of a bill is the signification by the drawee of his assent to the order
of the drawer. The acceptance must be in writing and signed by the
drawee. It must not express that the drawee will perform his
promise by any other means than the payment of money.
Acceptance – signification of the drawee of his assent to the order of the
drawer; act by which a person on whom the bill of exchange is drawn
assents to the request of the drawer to pay it
• may be:
1. actual
2. constructive
3. general
4. qualified
Requisites of actual acceptance
1. in writing
2. signed by the drawee
3. must not express that the drawee will perform his promise by any
other means than the payment of money
4. must be communicated or delivered to the holder
• acceptance is usually done by writing across the face of the bill
the word “accepted” followed by the signature of the drawee
• not required for checks, for the same are payable on demand
• without the signature of the drawee, he would not be bound,
pursuant to the principle annunciated in Sec. 18
• acceptance must be expressed to be payable in money only
• acceptance is incomplete until delivery or notification
• acceptor or drawee who has not communicated his acceptance or
transmitted the accepted bill to the holder, may revoke an
acceptance before delivery and cancel the written acceptance
• upon acceptance, the drawee becomes liable on the bill
• bill becomes in effect a note, the acceptor standing in the place of
the maker, and the drawer, in the place of the first indorser
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By: Joyce Briones notes from Agbayani; with case doctrines
2C 2004-2005
• payment is not equivalent to acceptance
o acceptance - promise to perform an act
o payment – actual performance thereof
o acceptance of a bill is the signification by the drawee of
his assent to the order of the drawer – in the case of a
check, payment on demand of a given sum of money
o actual payment of the of the amount of the check implies
not only an assent to said order and recognition of
drawee’s obligation to pay but also a compliance with
such obligation
Sumcad v. Province of Samar
• The request by PNB as drawee, from BOP for photostatic copies of
the check and the subsequent requirement by it for its
presentation to the provincial treasurer and the provincial auditor
for certification, amounted to an implied acceptance of the bank
which thereby assumed the obligation of paying the check and
holding sufficient deposit of the drawer for the purpose.
PNB v. CA
• The liability of an acceptor applies to a drawee who pays a bill
without previously accepting it.
Sec. 133. Holder entitled to acceptance on face of bill. - The holder
of a bill presenting the same for acceptance may require that the
acceptance be written on the bill, and, if such request is refused,
may treat the bill as dishonored.
Sec. 134. Acceptance by separate instrument. - Where an
acceptance is written on a paper other than the bill itself, it does
not bind the acceptor except in favor of a person to whom it is
shown and who, on the faith thereof, receives the bill for value.
Sec. 135. Promise to accept; when equivalent to acceptance. - An
unconditional promise in writing to accept a bill before it is drawn
is deemed an actual acceptance in favor of every person who, upon
the faith thereof, receives the bill for value.
Where acceptance may be written
1. on the bill itself
2. on a separate paper
a. acceptance as to an existing bill
b. acceptance as to a non-existing bill – separate paper
must comply with the following requirements:
(1) contemplated drawee shall describe the bill to be
drawn, and to promise to accept it
39
(2) bill shall be drawn within a reasonable time after
such promise is written
(3) holder shall take the bill upon the credit of the
promise
• Sec. 133: the holder has the right to require that the acceptance
must be written on the bill itself
o if drawee refuses, the holder may treat the bill as
dishonored, and he must give notice of dishonor
otherwise, parties secondarily liable are
discharged
o applicable to all bills of exchange
Sec. 134
e.g. B, payee of a bill writes to X, drawee, asking him
whether he would accept the bill
X writes back or telegraphs stating that eh accepts
the bill
• telegram that a draft “is good” in answer to a telegram asking a
bank if it would pay the draft is not an acceptance nor an
agreement to accept
• “good” constitutes an acceptance if written on the bill or check but
not when written in a collateral document such as a telegram
Sec. 135
e.g.
Before bill is drawn, B, prospective payee, writes to X,
prospective drawee, if he would accept A’s bill for
P1,000 to cover cost of goods purchased
X writes (or telegraphs) “yes”
•
promise to accept must be in writing
• although the acceptance of a bill may be conditional, a collateral
written promise to accept a bill upon a condition is not an
acceptance
e.g.
B, payee, indorses the bill to C who neither saw nor
knew of the letter of acceptance
C indorses the bill to D who saw the letter and on
faith thereof, received the bill, giving value therefor
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2C 2004-2005

• C cannot enforce the bill against A, drawee because acceptance same, or refuses within twenty-four hours after such delivery or
binds X only in favor of those to whom it is shown and who, on within such other period as the holder may allow, to return the bill
faith thereof, receive the bill for value, and C neither saw nor accepted or non-accepted to the holder, he will be deemed to have
knew of the acceptance accepted the same.
• B and D can enforce the bill against X because they received the
bill for value on faith of the separate acceptance Constructive acceptance – not in writing; there is constructive acceptance
where:
Variance between Sections 134 and 135 1. drawee to whom the bill is delivered for acceptance destroys it
2. drawee refuses, within 24 hours after such delivery, or within such time
Section 134 Section 135 as is given him, to return the bill accepted or not accepted
provides that an extrinsic provides that a promise to accept is
acceptance must be in writing and good to any person who “upon faith • in any of these cases, drawee will be deemed to have accepted
is good only to persons to whom it thereof receives the bill for value” the bill even if there is no actual written acceptance by him
is shown • drawee will be primarily liable as an acceptor
does not seem necessary that the • drawee is not entitled to keep the bill while he makes up his mind
separate acceptance be shown • bill is at all times the property of the holder and he is entitled to
have it when he wants it (Sec. 137)
enough that the bill is received on • drawee could still accept by notification within the 24 hours
faith of the separate acceptance o an extrinsic acceptance under Sec. 134 would play an
important part
Sec. 136. Time allowed drawee to accept. - The drawee is allowed
twenty-four hours after presentment in which to decide whether or • if the drawee, after returning the bill, still refused to act after the
not he will accept the bill; the acceptance, if given, dates as of the expiration of he time allowed – holder then would be require to
day of presentation. treat the bill as dishonored or lose his rights against prior parties

e.g. Mere retention is equivalent to acceptance

A bill is payable 30 days after sight
B, the payee, presents it for acceptance on Jan. 2,
1950, to X, drawee
• X has 24 hours to accept the bill
• even if he accepts the bill on Jan. 3, 1940, the acceptance will
date back to Jan. 2, 1950
• hence, date of maturity would be Feb. 1, 1950, not Feb. 2, 1950
• time allowed begins from the time of delivery and not after
demand for a return of the bill and the time for returning the bill
to the holder does not begin to run from the demand for its return
but from the date of its delivery
• Sec. 136 is not applicable to checks
o drawee bank is not entitled to 24 hours to decide
whether to pay a check or not since a check is presented
for payment, not acceptance
o if the check is presented for certification, this ruling will
not apply, as certification is equivalent to acceptance
Sec. 137. Liability of drawee returning or destroying bill. - Where a
drawee to whom a bill is delivered for acceptance destroys the
• there is conflict of authority re WON mere retention of a bill by the
drawee is acceptance
• overwhelming weight of authority is to the effect that mere failure
to return the bill within 24 hours is an acceptance
• held that the presentation for acceptance is a demand for
acceptance, which, if he bill is retained by the drawee, implies a
demand for its return if acceptance is declined
• held under Sec. 185: check was subject to the same rules, and
that failure to return within 24 hours a check sent to a drawee
bank for payment was an acceptance of a check upon which the
holder could recover against the bank, although the delay was due
to the neglect of he notary public to whom the check was handed
by the drawee bank to protest on the day of its receipt by the
bank (Wisner v. First Nat. Bank)
Sections 136 and 137 cover presentment for acceptance and payment
• does not necessarily follow that because the law is silent as to
presentment for payment that the result should be different from
the case of presentment for acceptance
• rule of Wisner case fills this gap by requiring promptness on the
part of the drawee

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o must return the instrument or be liable for its face value
as acceptor
o rule forces uniform treatment of instruments whether
presented for payment or acceptance
Cebu International v. CA
• The money market transaction between Cebu International and
Alegre is in the nature of a loan. Alegre accepted the check,
instead of requiring payment in money. Yet, when he presented it
to RCBC for encashment, the same was dishonored by non-
acceptance, with BPI’s annotation: “Check subject of an
investigation.” Under these circumstances, and after the notice of
dishonor, the holder has an immediate right of recourse against
the drawer Cebu International and consequently could
immediately file an action for the recovery of the value of the
check.
Sec. 138. 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.
Acceptance may be made
1. before the bill has been signed by the drawer
2. even when the bill is otherwise incomplete
3. even when the bill is overdue
4. even after it has been dishonored by non-acceptance or by non-payment
Sec. 139. Kinds of acceptance. - An acceptance is either general or
qualified. A general acceptance assents without qualification to the
order of the drawer. A qualified acceptance in express terms varies
the effect of the bill as drawn.
Sec. 140. What constitutes a general acceptance. - An acceptance
to pay at a particular place is a general acceptance unless it
expressly states that the bill is to be paid there only and not
elsewhere.
Sec. 141. Qualified acceptance. - An acceptance is qualified which
is:
(a) Conditional; that is to say, which makes payment by the
acceptor dependent on the fulfillment of a condition therein stated;
(b) Partial; that is to say, an acceptance to pay part only of the
amount for which the bill is drawn;
41
(c) Local; that is to say, an acceptance to pay only at a particular
place;
(d) Qualified as to time;
(e) The acceptance of some, one or more of the drawees but not of
all
Other kinds of acceptance
1. general
2. qualified
General acceptance – one that “assents without qualification to the order of
the drawer”
e.g. “Accepted, (Sgd.) X”
Qualified acceptance – one “which in express terms varies the effect of the
bills as drawn
• mere fact that the acceptance is to pay at a particular place does
not make the acceptance qualified
e.g. general acceptance
“Accepted, payable at PNB.”
Qualified acceptance
“Accepted, payable at PNB only.”
Illustrations of qualified acceptance
e.g. Conditional - “Accepted, if Y marries Z. (Sgd.)X.”
e.g. Partial - Bill is for P1,000. “Accepted, for P500.00 only. (Sgd.) X.”
e.g. Local - “Accepted, payable at PNB only (Sgd.) X.”
e.g. Qualified as to time - Bill is payable 30 days after sight. “Accepted,
payable 60 days after sight (Sgd.) X.”
e.g. One or more drawees, etc.
The drawees of a bill are X and Y, and it is accepted only by X
Sec. 142. Rights of parties as to qualified acceptance. - The holder
may refuse to take a qualified acceptance and if he does not obtain
an unqualified acceptance, he may treat the bill as dishonored by
non-acceptance. Where a qualified acceptance is taken, the drawer
and indorsers are discharged from liability on the bill unless they
have expressly or impliedly authorized the holder to take a
qualified acceptance, or subsequently assent thereto. When the
drawer or an indorser receives notice of a qualified acceptance, he
must, within a reasonable time, express his dissent to the holder or
he will be deemed to have assented thereto.
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• holder has the right to require the drawee to accept the bill
without qualification
• if drawee refuses – holder can treat the bill as dishonored by non-
acceptance; must give notice of dishonor
• where the holder takes a qualified acceptance – drawer and
indorsers are discharged
o reason: drawer and indorsers warrant that the bill would
be paid as drawn, or as indorsed by them, and a qualified
acceptance would vary their contract without their
consent
• if the drawer and indorsers expressly or impliedly give their
consent to a qualified acceptance – not discharged
• drawer or an indorser will be considered to have consented if,
after receiving notice of the qualified acceptance, he does not
express his dissent thereto within a reasonable time
XI. PRESENTMENT FOR ACCEPTANCE
Sec. 143. When presentment for acceptance must be made. -
Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any other case,
where presentment for acceptance is necessary in order to fix the
maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be presented for
acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence
or place of business of the drawee.
In no other case is presentment for acceptance necessary in order
to render any party to the bill liable.
Sec. 144. When failure to present releases drawer and indorser. -
Except as herein otherwise provided, the holder of a bill which is
required by the next preceding section to be presented for
acceptance must either present it for acceptance or negotiate it
within a reasonable time. If he fails to do so, the drawer and all
indorsers are discharged.
Presentment – production of a bill of exchange to the drawee for his
acceptance
General rule as to presentment for acceptance: presentment for
acceptance is not necessary to render any party to the bill liable except in
3 cases enumerated in Sec. 143
• in those cases, to charge persons secondarily liable, it is
necessary:
1. to make presentment for acceptance or
42
2. to negotiate the bill within reasonable time
• even when no presentment for acceptance is made – if the bill is
negotiated within a reasonable time, the persons secondarily liable
thereon are not discharged
e.g. where the bill is payable after sight – date of maturity will not be fixed
is the bill is not presented
where there is express stipulation – such a bill must be presented for
acceptance
where bill is drawn elsewhere than at the residence of drawee – bill
must be presented for acceptance in order to inform the drawee of the
existence of the bill so that he can make arrangements for its payment
Prudential Bank v. CA
• There is no need for a acceptance for an “at sight” letter of credit.
Philippine Bank of Commerce v. Aruego
• As long as commercial paper conforms with the definition of a bill
of exchange, that paper is considered a bill of exchange. The
nature of acceptance is important only in determination of
whether a commercial paper is a bill of exchange or not. Thus,
Aruego’s contentions that the drafts signed by him were not really
bills of exchange but mere pieces of evidence of indebtedness
because payments were made before acceptance is not
meritorious.
PNB v. Seeto
• Sections 143 and 144 are not applicable since they are provisions
having to do with the presentation of a bill of exchange for
acceptance, and are not applicable to a check, as to which
presentment for acceptance is not required.
Sec. 145. Presentment; how made. - Presentment for acceptance
must be made by or on behalf of the holder at a reasonable hour,
on a business day and before the bill is overdue, to the drawee or
some person authorized to accept or refuse acceptance on his
behalf; and
(a) Where a bill is addressed to two or more drawees who are not
partners, presentment must be made to them all unless one has
authority to accept or refuse acceptance for all, in which case
presentment may be made to him only;
(b) Where the drawee is dead, presentment may be made to his
personal representative;
(c) Where the drawee has been adjudged a bankrupt or an
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insolvent or has made an assignment for the benefit of creditors,
presentment may be made to him or to his trustee or assignee.
Time for making presentment
1. before the bill is overdue
2. within reasonable time after acquisition thereof
To whom presentment made
• generally:
1. drawee or
2. some person authorized to accept or refuse acceptance on his
behalf
• where there are 2 or more drawees, presentment must be made
to both of them unless:
1. one is duly authorized to accept or refuse acceptance
2. they are partners, subject to limitations set forth in partnership
law
• Sec. 141 (e): acceptance by 1 drawee where there are 2 or more
is qualified acceptance
• Sec. 145 (b): seems to be merely permissive since by Sec. 148(a)
presentment is excused where the drawee is dead
• par. c: word “may” indicates merely a permission to adopt either
one of 2 alternative methods of presentment stated, not
permission to omit presentment altogether
Sec. 146. On what days presentment may be made. - A bill may be
presented for acceptance on any day on which negotiable
instruments may be presented for payment under the provisions of
Sections seventy-two and eighty-five of this Act. When Saturday is
not otherwise a holiday, presentment for acceptance may be made
before twelve o'clock noon on that day.
Sec. 72. What constitutes a sufficient presentment. - Presentment for
payment, to be sufficient, must be made:
(a) By the holder, or by some person authorized to receive payment on his
behalf;
(b) At a reasonable hour on a business day;
(c) At a proper place as herein defined;
(d) To the person primarily liable on the instrument, or if he is absent or
inaccessible, to any person found at the place where the presentment is
made.
Sec. 85. Time of maturity. - Every negotiable instrument is payable at the
time fixed therein without grace. When the day of maturity falls upon
Sunday or a holiday, the instruments falling due or becoming payable on
Saturday are to be presented for payment on the next succeeding business
43
day except that instruments payable on demand may, at the option of the
holder, be presented for payment before twelve o'clock noon on Saturday
when that entire day is not a holiday.
• only difference between Sections 72 and 85: under Sec. 146, no
distinction between instruments payable at a fixed or
determinable future time and instruments payable on demand
• where presentment is for acceptance: may be made for all kinds
of bills before 12:00 noon on Saturday
o provided: not holiday
Sec. 147. Presentment where time is insufficient. - Where the
holder of a bill drawn payable elsewhere than at the place of
business or the residence of the drawee has no time, with the
exercise of reasonable diligence, to present the bill for acceptance
before presenting it for payment on the day that it falls due, the
delay caused by presenting the bill for acceptance before
presenting it for payment is excused and does not discharge the
drawers and indorsers.
e.g.
Manila, P. I.
Jan. 2, 1950
Pay to B or order at the PNB Manila
P1,000.00 on Jan. 5, 1950.
(Sgd.) A
To X, Washington, D. C.
• under Sec. 143(c): B must present the bill for acceptance to X,
drawee, in Washington
• under Sec. 71: B must also present the bill for payment at the
PNB on Jan. 5, 1950
• B has to sent the bill for acceptance to X, B would not be able to
make presentment for payment on Jan. 5, 1950
o will therefore be delayed in making his presentment for
payment - excused
Sec. 148. Where presentment is excused. - Presentment for
acceptance is excused and a bill may be treated as dishonored by
non-acceptance in either of the following cases:
(a) Where the drawee is dead, or has absconded, or is a
fictitious person or a person not having capacity to
contract by bill.
(b) Where, after the exercise of reasonable diligence,
presentment can not be made.
(c) Where, although presentment has been irregular,
acceptance has been refused on some other ground.
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• presentment to be made to the representative of the deceased
drawee is merely optional
• presentment is excused in case drawee has absconded or fictitious
or person not having capacity to contract because it would then be
futile
• presentment in which acceptance is refused on some other ground
e.g. where presentment is made on Sunday = irregular but
acceptance is refused on ground that the drawer has no funds in
the hands of the payee
Sec. 149. When dishonored by nonacceptance. - A bill is dishonored
by non-acceptance:
(a) When it is duly presented for acceptance and such an
acceptance as is prescribed by this Act is refused or can not be
obtained; or
(b) When presentment for acceptance is excused and the bill is not
accepted.
• e.g. par. (a) where drawee refuses to accept on the bill itself or
refuses to give a general acceptance
Sec. 147. Presentment where time is insufficient. - Where the holder of a
bill drawn payable elsewhere than at the place of business or the residence
of the drawee has no time, with the exercise of reasonable diligence, to
present the bill for acceptance before presenting it for payment on the day
that it falls due, the delay caused by presenting the bill for acceptance
before presenting it for payment is excused and does not discharge the
drawers and indorsers.
Sec. 148. Where presentment is excused. - Presentment for acceptance is
excused and a bill may be treated as dishonored by non-acceptance in
either of the following cases:
(a) Where the drawee is dead, or has absconded, or is a fictitious
person or a person not having capacity to contract by bill.
(b) Where, after the exercise of reasonable diligence, presentment
can not be made.
(c) Where, although presentment has been irregular, acceptance
has been refused on some other ground.
Sec. 150. Duty of holder where bill not accepted. - Where a bill is
duly presented for acceptance and is not accepted within the
prescribed time, the person presenting it must treat the bill as
dishonored by nonacceptance or he loses the right of recourse
against the drawer and indorsers.
• duty of holder where bill dishonored by non-acceptance: must
give notice of dishonor and protest, when required
44
o otherwise, drawer and indorsers will be discharged
Sec. 151. Rights of holder where bill not accepted. - When a bill is
dishonored by nonacceptance, an immediate right of recourse
against the drawer and indorsers accrues to the holder and no
presentment for payment is necessary.
Rights of holder where bill dishonored by non-acceptance
• when a bill is dishonored by non-acceptance: no necessity of
making presentment of bill for payment
• if after previous non-acceptance, bill is subsequently accepted:
presentment for payment is necessary
• when bill has been accepted for honor, to charge the acceptance
for honor: presentment for payment is necessary
• holder, after giving notice of dishonor, and protesting when
required, can immediately file an action against the parties
secondarily liable on the bill
• true even when the bill is payable at a fixed or determinable
future time and the date of maturity has not yet arrived
XII. PROTEST
Sec. 152. In what cases protest necessary. - Where a foreign bill
appearing on its face to be such is dishonored by nonacceptance, it
must be duly protested for nonacceptance, by nonacceptance 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.
• omission of protest, where protest is required, will discharge the
drawer and the indorsers
• protest is required:
1. where the foreign bill is dishonored by non-acceptance
2. where the foreign bill is dishonored by non-payment - it not
having previously dishonored by non-acceptance
3. where the bill has been accepted for honor – it must be presented
for payment before it is presented for payment to the acceptor for
honor
4. where the bill contains a referee in case of need – must be
protested for non-payment before it is presented for payment to
the referee in case of need
Protest – a formal statement in writing made by a notary under his seal of
office at the request of a holder of a bill or note, in which it is declared that
the same was on a certain day presented for payment/ acceptance and
such payment/acceptance was refused, whereupon the notary protests
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against all parties to such instrument and declares that they will be held
responsible for all loss or damage arising from its dishonor
- all the steps or acts accompanying the dishonor of a bill or note
necessary to charge an indorser
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.
Procedure for protest
• instrument may be taken to a notary public to the party and the
party may state that he refuses to pay it
• notary makes a statement to that effect and attaches his seal that
it has been dishonored, and that he has protested it for non-
payment
• notary keeps this or he may send his sworn statement, one copy
to one person and one to the other – this is the protest
Certificate of protest as evidence
• when one comes to prove his case as the holder of an instrument:
he must prove
o that there has been a protest of the instrument
o that it has been presented for payment or acceptance to
a person liable and that it has been refused
• at trial, this statement of the protest by the notary is part of the
case
o same as deposition - can go in as evidence anywhere and
will prove the case
• generally accepted as evidence of the facts set forth in its terms,
and its production obviates the necessity of proof of these facts by
witnesses in open court
• main purpose of protest: to furnish to the holder legal testimony
of presentment, demand and notice of dishonor, to be used in an
action against the drawer and indorsers
• collateral facts noted by the certificate must be proved by other
evidence
Notice of protest
• after notary protest the instrument, he sends notice to all parties
on the instrument
• might send it to the person who sent the paper in for collection
45
• notary public would:
o send his notice of protest for other parties on the
instrument,
o to the last person on the instrument and
o he would say, “Notices enclosed herewith to be sent to
the other parties.”
• If holder has sent notice to all parties he is entitled to come in and
recover because he has performed his contract
Reasons for requiring protest
1. for uniformity in international transactions because most countries
require it
2. in order to furnish authentic and satisfactory evidence of the
dishonor to the drawer, who, from his residence abroad, may
experience difficulty in verifying the matter and may be forced to
rely on the representations of the holder
Measure of damages
• under law merchant:
1. face value of the bill
2. interest thereon
3. protest fees
4. re-exchange, being the additional expense of procuring a new bill
for the same amount payable in the same place on the day of
dishonor
Sec. 154. Protest, by whom made. - Protest may be made by:
(a) A notary public; or
(b) By any respectable resident of the place where the bill is
dishonored, in the presence of two or more credible witnesses.
Sec. 155. Protest; when to be made. - When a bill is protested, such
protest must be made on the day of its dishonor unless delay is
excused as herein provided. When a bill has been duly noted, the
protest may be subsequently extended as of the date of the noting.
Sec. 159. When protest dispensed with. - Protest is dispensed with by any
circumstances which would dispense with notice of dishonor. 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.
• “duly noted” – notary public jots down a note on the bill, or a
paper attached thereto, or in his registry book, consisting of his
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initials or signature and those matters required to be stated in
Sec. 153
o noting must be made on the day of dishonor but may be
extended into a formal protest afterwards
o protest may even be made during trial
Sec. 156. Protest; where made. - 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.
• generally: place where the instrument is dishonored
o exception: where the bill is payable at a place other than
the residence of the drawee
• e.g. held that where the domicile and place of
payment are different, it may be protested at
either place
Sec. 157. Protest both for non-acceptance and non-payment. - A
bill which has been protested for non-acceptance may be
subsequently protested for non-payment.
• where a bill has already been protested for non-acceptance:
protest for non-payment is merely optional
• Sec. 151: after a bill has been dishonored by non-acceptance,
presentment for payment is not necessary
Sec. 158. Protest before maturity where acceptor insolvent. -
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.
Protest for better security – made by the holder against the drawer and the
indorsers where the acceptor has been adjudged a bankrupt or an
insolvent or has made an assignment for the benefit of the creditors before
the bill matures
• not necessary to charge drawer and indorser
• optional on the part of the holder
When protest for better security made
1. after acceptance
2. but before date of maturity
3. when the acceptor has been adjudged bankrupt or insolvent or
has made an assignment for the benefit of creditors
46
Purpose of protest for better security: to give notice to the drawer and the
indorsers of this face in order to enable them to make the necessary
arrangements so that they will not be held liable thereon and prevent loss
of exchange
Sec. 159. When protest dispensed with. - Protest is dispensed with
by any circumstances which would dispense with notice of
dishonor. 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.
Illustrative cases
e.g. if drawer has no funds with the drawee bank to pay the check
where the drawee was a non-existent bank
drawer has countermanded payment
Sec. 160. 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.
• loss or destruction of the bill does not excuse the making of
protest
XIII. ACCEPTANCE FOR HONOR
Sec. 161. When bill may be accepted for honor. - When a bill of
exchange has been protested for dishonor by non-acceptance or
protested for better security and is not overdue, any person not
being a party already liable thereon may, with the consent of the
holder, intervene and accept the bill supra protest for the honor of
any party liable thereon or for the honor of the person for whose
account the bill is drawn. The acceptance for honor may be for part
only of the sum for which the bill is drawn; and where there has
been an acceptance for honor for one party, there may be a further
acceptance by a different person for the honor of another party.
Acceptance for honor
• acceptance “supra protest” – acceptance of a bill made by a
stranger to it before maturity, where the drawee of the bill has
refused to accept it, and the bill has been protested for non-
acceptance, or where the bill has been protested for better
security
o most frequently happens when the original drawee
refuses to accept the bill, in which a stranger may accept
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the bill for the honor or some one of the parties thereto,
which acceptance will insure to the benefit of all parties
subsequent to him for whose honor it was accepted
• purpose: to save the credit of the parties to the instrument or
some party to it, as the drawer, drawee, or indorser, or somebody
else
• by writing the word “accepted” on the bill
• consideration is presumed
• presumption is that he does have funds or money of the party for
whose honor he accepts
Requisites for acceptance for honor:
1. bill must have been previously protested
a. for non-acceptance or
b. better security
2. bill is not overdue at the time of the acceptance for honor
3. acceptor for honor must be stranger to the bill
• if he is a party: acceptance for honor would not give any
additional security to the holder
4. holder must give his consent
Sec. 162. Acceptance for honor; how made. - An acceptance for
honor supra protest must be in writing and indicate that it is an
acceptance for honor and must be signed by the acceptor for honor.
How acceptance for honor made
1. in writing and indicate that it is an acceptance for honor
2. signed by the person making the acceptance
e.g. “Accepted for the honor of B. (Sgd.) Y”
Acceptance for honor must appear before notary
• essential that the acceptor for honor appear before a notary public
and declare that he accepts the protested bill in honor of the
drawer or indorser and that he will pay it at the appointed time
• properly made by the acceptor appearing before a notary public
and declaring his intention to accept for the honor of some one or
more of the parties and subscribing to some such expression of
his intention as “accepted for the honor of A”
Sec. 163. When deemed to be an acceptance for honor of the
drawer. - Where an acceptance for honor does not expressly state
for whose honor it is made, it is deemed to be an acceptance for
the honor of the drawer.
e.g. “Accepted for honor. (Sgd.) Y.”
47
• deemed to have been made for the drawer, as it does not specify
for whose honor the acceptance is made
Sec. 164. Liability of the acceptor for honor. - The acceptor for
honor is liable to the holder and to all parties to the bill subsequent
to the party for whose honor he has accepted.
Sec. 165. 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.
Sec. 166. Maturity of bill payable after sight; accepted for honor. -
Where a bill payable after sight is accepted for honor, its maturity
is calculated from the date of the noting for non-acceptance and
not from the date of the acceptance for honor.
Sec. 167. 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 presented for payment to the acceptor for
honor or referee in case of need.
Sec. 168. Presentment for payment to acceptor for honor, how
made. - Presentment for payment to the acceptor for honor must
be made as follows:
(a) If it is to be presented in the place where the protest for non-
payment was made, it must be presented not later than the day
following its maturity.
(b) If it is to be presented in some other place than the place
where it was protested, then it must be forwarded within the time
specified in Section one hundred and four.
Sec. 104. Where parties reside in different places. - Where the person
giving and the person to receive notice reside in different places, the notice
must be given within the following times:
(a) If sent by mail, it must be deposited in the post office in time to go by
mail the day following the day of dishonor, or if there be no mail at a
convenient hour on last day, by the next mail thereafter.
(b) If given otherwise than through the post office, then within the time
that notice would have been received in due course of mail, if it had been
deposited in the post office within the time specified in the last subdivision.
Sec. 169. When delay in making presentment is excused. - The
provisions of Section eighty-one apply where there is delay in
making presentment to the acceptor for honor or referee in case of
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2C 2004-2005
need.
Sec. 81. When delay in making presentment is excused. - Delay in making
presentment for payment is excused when the 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, presentment must be made with reasonable diligence.
Sec. 170. Dishonor of bill by acceptor for honor. - When the bill is
dishonored by the acceptor for honor, it must be protested for non-
payment by him.
• necessity of protest: to fix the liabilities of the indorsers
XIV. PAYMENT FOR HONOR
Sec. 171. Who may make payment for honor. - Where a bill has
been protested for non-payment, any person may intervene and
pay it supra protest for the honor of any person liable thereon or
for the honor of the person for whose account it was drawn.
Sec. 172. Payment for honor; how made. - The payment for honor
supra protest, in order to operate as such and not as a mere
voluntary payment, must be attested by a notarial act of honor
which may be appended to the protest or form an extension to it.
Sec. 173. Declaration before payment for honor. - The notarial act
of honor must be founded on a declaration made by the payer for
honor or by his agent in that behalf declaring his intention to pay
the bill for honor and for whose honor he pays.
Requisites for payment for honor
1. bill has been protested for non-payment
2. any person, even a party thereto, may pay supra protest
distinguished from acceptance for honor in which acceptor must be a
stranger to the bill
Form for payment for honor
1. payment must be attested by notarial act appended to the
protest, or form an extension to it
2. notarial act must be based on a declaration by the payer for honor
Procedure for payment for honor
1. payer or his agent goes to a notary public and declares his
intention to pay the bill and for whose honor he pays
48
2. notary then records the declaration in the protest or in a separate
paper attached to it
3. payor then notifies the person for whose honor he pays within
reasonable time
• if: formalities are not followed:
o payment will operate merely as a mere voluntary
payment and
o payor acquires only his rights stated in Articles 1236-
1237 CC and not those stated in Sec. 175
• purposes of payment for honor
o when the holder does not want to indorse the bill and
thereby incur the liabilities of an indorser or of one
negotiating by mere delivery
Sec. 174. Preference of parties offering to pay for honor. - Where
two or more persons offer to pay a bill for the honor of different
parties, the person whose payment will discharge most parties to
the bill is to be given the preference.
Sec. 175. Effect on subsequent parties where bill is paid for honor.
- Where a bill has been paid for honor, all parties subsequent to the
party for whose honor it is paid are discharged but the payer for
honor is subrogated for, and succeeds to, both the rights and duties
of the holder as regards the party for whose honor he pays and all
parties liable to the latter.
Sec. 176. Where holder refuses to receive payment supra protest. -
Where the holder of a bill refuses to receive payment supra protest,
he loses his right of recourse against any party who would have
been discharged by such payment.
Sec. 177. Rights of payer for honor. - The payer for honor, on
paying to the holder the amount of the bill and the notarial
expenses incidental to its dishonor, is entitled to receive both the
bill itself and the protest.
Rights of payer for honor
1. he acquires the rights of the holder under Sec. 175
2. the payer for honor has also the right to receive both the bill and
protest
a. to enable him to enforce his rights against those who are
liable to him under Sec. 175
XV. BILLS IN SET
Sec. 178. Bills in set constitute one bill. - Where a bill is drawn in a
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2C 2004-2005

set, each part of the set being numbered and containing a

reference to the other parts, the whole of the parts constitutes one Sec. 180. Liability of holder who indorses two or more parts of a set
bill. to different persons. - Where the holder of a set indorses two or
more parts to different persons he is liable on every such part, and
Bill in set – one composed of various parts, each part being numbered, and every indorser subsequent to him is liable on the part he has
containing a reference to the other parts, all of which parts constitute but himself indorsed, as if such parts were separate bills.
one bill
Sec. 181. Acceptance of bill drawn in sets. - The acceptance may be
written on any part and it must be written on one part only. If the
e.g. drawee accepts more than one part and such accepted parts
First Part negotiated to different holders in due course, he is liable on every
Exchange for P2,000 such part as if it were a separate bill.
First

Manila, Philippines Drawee must accept only one part

Jan. 2, 1950 • drawee must accept only one part
30 days after sight of this First of • if he accepts both parts and they are negotiated to holders in due
Exchange (Second part unpaid), pay to the order of course: liable on every such part as if it were a separate bill
B, P2,000.00. o can ask for reimbursement from drawer only on one part
(Sgd.) A because the order of the drawer to him is to pay only one
To X
part not both parts
48 Exchange Place
New York City
Sec. 182. Payment by acceptor of bills drawn in sets. - When the
acceptor of a bill drawn in a set pays it without requiring the part
bearing his acceptance to be delivered up to him, and the part at
maturity is outstanding in the hands of a holder in due course, he is
Second Part liable to the holder thereon.
Exchange for P2,000
Second Sec. 183. Effect of discharging one of a set. - Except as herein
otherwise provided, where any one part of a bill drawn in a set is
Manila, Philippines
discharged by payment or otherwise, the whole bill is discharged.
Jan. 2, 1950
30 days after sight of this First of
Exchange (First part unpaid), pay to the order of B, • subject to the exceptions 180, 181 and 182, if one part is
P2,000.00. discharged: whole bill is discharged
(Sgd.) A o reason: bill constitutes only one bill
To X
48 Exchange Place XVI. PROMISSORY NOTES AND CHECKS
New York City

Sec. 184. Promissory note, defined. - A negotiable promissory note

• purpose of the bill in set: increasing the probability of the bill
reaching its destination
Sec. 179. Right of holders where different parts are negotiated. -
Where two or more parts of a set are negotiated to different
holders in due course, the holder whose title first accrues is, as
between such holders, the true owner of the bill. But nothing in
this section affects the right of a person who, in due course,
accepts or pays the parts first presented to him.
within the meaning of this Act is an unconditional promise in
writing made by one person to another, signed by the maker,
engaging to pay on demand, or at a fixed or determinable future
time, a sum certain in money to order or to bearer. Where a note is
drawn to the maker's own order, it is not complete until indorsed
by him.
e.g.
I promise to pay to the order of myself P1,000.

(Sgd.) A
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• no obligation arises and the bill is incomplete until the drawer
indorses and delivers it to some other person
o should not apply after the drawee accepts since an
obligation has then arisen
Is maker liable as indorser?
• one case: held that maker who indorses a note payable to himself,
is liable both as indorser and as maker
• another case: defendant induced by fraud to indorse a note
payable to himself was held not to be liable as an indorser to a
remote transferee, so that he did not warrant under Sec. 66 that
the instrument was valid and subsisting
o usual burden of proof therefore on the plaintiff to show
that he was holder in due course
Special types of promissory notes
1. certificate of deposit
2. bonds
3. bank notes
4. due bills
Certificate of deposit – written acknowledgment by a bank of the receipt of
money on deposit which the bank promises to pay to the depositor, the
bearer, or to some other person or order
• not ipso facto a negotiable instrument
• must conform to Sec. 1 NIL
Bonds – promise, under seal, to pay money
• series of instruments representing units of indebtedness regarded
as parts of 1 entire debt
• certifies that the issuing company is indebted to the bondholder
for the amount specified on the face of the bond
• contains an agreement of the company to pay the sum at a
specified time in the future and meanwhile, to pay a specified
interest on the principal amount at regular intervals, generally 6
months apart
• negotiable if they conform to Sec. 1 NIL
• as distinguished from ordinary promissory notes:
1. more formal in character
2. runs for a longer period of time
3. issued under different legal circumstances
Classes of bonds
50
• most important: according to security of the bond
o some important classes based on bond security:
1. mortgage bonds
2. equipment bonds
3. collateral trust bonds
4. guaranteed bonds
5. debentures
6. income bonds
7. convertible
8. redeemable
9. registered
10. coupon
Mortgage bonds – secured by a mortgage constituted on corporate physical
property; property is conveyed to a trustee for the benefit of the
bondholders in case the interest or principal is defaulted
Equipment bonds – secured by a mortgage or pledge or corporate movable
equipment e.g. rolling stock in case of railroads – form of special lien bonds
employed for the most part by railroads in order to obtain money at low
rates by pledging their movable equipment
Collateral trust bonds – not secured by a lien on physical property of the
corporation but by a lien on securities deposited with a trustee as collateral
• may consist of:
o shares or bonds issued by the subsidiaries of the
corporation issuing the collateral trust bonds
o bonds of small operating company which the issuing
holding corporation controls
o shares or bonds of any corporation issuing the collateral
trust bonds
Guaranteed bonds – secured by the guaranty of a corporation other than
the one issuing it; implies a double obligation --- that of issuing corporation
and of guaranteeing corporation
Debentures – not secured by any specific mortgage, lien or pledge on
specific corporate property but by the general credit of the corporation and
restrictive agreement
• usually issued under at rust indenture, and for a shorter term than
mortgage bonds
• frequently, protected by “negative pledge” clauses which are
agreements against new mortgages on the corporate assets or
those of subsidiary companies which do not equally secure the
debenture
Income bonds – principal of which may or may not be secured by a;
mortgage but the interest is payable only out of net profit
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• interest on income bonds which is payable out of earnings only,
may be cumulative or non-cumulative
• position of the holder of an income bond resembles that of the
holder of preferred shares, and that income bonds are the
weakest of all obligations resting on general credit
Convertible bonds – confers on the holder the option of exchanging it for
more speculative class of security, such as for preferred shares or common
shares
• convertible securities – issued in a more secure and less
speculative form, a form of security with a fixed or limited income
return
o convertible at the owner’s request and under clearly
specified conditions into some less secure, more
speculative form of security
Redeemable bonds – give the privilege to the issuing corporation to pay off
the bonds even before the date of maturity
• without provision for redemption: debtor corporation would have
no right to pay off the bonds and get rid of restrictions of the
mortgage or indenture before bonds fell due
Registered bonds – issued to a specified person made therein and the fact
of issuance to him is registered in the books of the issuing corporation
• payable only to the person whose name is thus registered and
transferred only on presentation at the obligor’s office with a
written assignment duly executed by the registered owner
• generally not negotiable
Coupon bonds – attached to a sheet of dated, numbered and similarly
printed coupons which the bondholder may cut off when due or thereafter
• may be served and deposited in a bank, negotiated before the
maturity of the interest they represent, and transferred just like
any commercial paper
• conform to requirements of NIL
Bank notes – promissory notes of the issuing bank payable to bearer on
demand and intended to circulate as money
• regarded as cash and pass from hand to hand without any
evidence of title in the holder than that which arises from
possession
Due bill – instrument whereby one person acknowledges his indebtedness
to another
e.g. “Due B, P200.00, payable to his order. (Sgd.) A.”
• conforms with Sec. 1 NIL
51
Clearing house due bill – device of clearing house associations to save
inconvenience and labor incident to the settling of balances between the
members of the association
• certificates or due bills are issued, instead of actual payment of
money, by one member of the association to another
• negotiable
• aka clearing house certificate
Sec. 185. Check, defined. - A check is a bill of exchange drawn on a
bank payable on demand. Except as herein otherwise provided, the
provisions of this Act applicable to a bill of exchange payable on
demand apply to a check.
• acceptance is not required
• unlike a PN, not a mere undertaking to pay the amount of money
• order addressed to a bank; 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
• there is element of certainty or assurance that the instrument will
be paid upon presentation
• although not legal tender, checks have come to be perceived as
convenient substitutes for currency in commercial and financial
transactions
o basis for perception: confidence
o any practice tending to destroy that confidence should be
deterred, for the proliferation of worthless checks can
only create havoc in trade circles and the banking
community
Issuing checks without funds constitutes estafa
• issuing a check w/o sufficient funds in the drawee bank
constitutes estafa if it is done as a means of obtaining money and
merchandise but not if the check was given for a pre-existing debt
• held that issuance of a check with knowledge on the part of the
drawer that he has no funds to cover its amount and w/o
informing the payee of such circumstance does not constitute the
crime of estafa if the check was intended as payment of pre-
existing obligation
o reason: deceit, to constitute estafa, should be the
efficient cause of the defraudation and should either be
prior to or simultaneous with the act of fraud
• under BP 22, knowingly issuing a check w/o sufficient funds is
punishable, even if for a preexisting debt
Batas Pambansa Bilang 22
• 2 acts punished under Sec. 1:
1. issuing a check
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2C 2004-2005
a. with knowledge of insufficiency of funds to pay for the
check
b. check is subsequently dishonored by the drawer bank for
insufficiency of funds or would have been dishonored for
the same reason had not the drawer, w/o any valid
reason, ordered the bank to stop payment
2. issuing a check w/ sufficient funds or credit to pay for the same,
but w/ failure to keep sufficient funds or maintain credit to cover
the full amount of the check if presented w/in 90 days from the
date appearing thereon, for w/c reason the check is dishonored
Elements of the offense of issuing bouncing checks
1. making, drawing and issuance of any check to apply to account or
for value
2. maker, drawer or issuer knows at the time of issue that he does
not have sufficient funds in or credit with the drawee bank for the
payment of such check in full upon its presentment
3. check is subsequently dishonored by the drawee bank for
insufficiency of funds or credit or would have been dishonored for
the same reason had not the drawer, w/o valid reason, ordered
the bank to stop payment
Issuance of bum checks
• give rise to prima facie presumption
o Sec. 2: presence of 1st and 3rd elements = prima facie
evidence that the 2nd element exists
o maker’s knowledge of the insufficiency of his funds is legally
presumed from the dishonor of his check for insufficiency of
funds
• malum prohibitum
o proscribed by legislature for being deemed pernicious and
inimical to public welfare
o violation of BP 22 is a crime involving moral turpitude
• the law penalizes the act of making or drawing and issuance of a
bouncing check and not only the fact of its dishonor
• where bouncing check was issued before effectivity of BP 22, but
dishonored after such effectivity, the accused who issued the
bouncing check did not commit a violation thereof as there was no
law to be violated
• filing of action to annul deed of sale on which bouncing check was
issued is not a prejudicial question
• issuance of check to guarantee or secure payment of obligation
not a defense
o Ministry of Justice Circular No. 12 dated August 8, 1984 –
amended Memorandum Circular No. 4, dated December
52
15, 1981, in effect reversing the previous ruling on the
subject matter
o “in all cases involving violation of BP 22 wherein the
check in question was issued after this date, the claim
that the check is issued as a guarantee or part of an
agreement to secure an obligation or to facilitate
collection will not longer be considered as a valid
defense”
• foreign checks are covered by Bouncing Checks Law
• knowledge of insufficiency of funds as an essential ingredient of
the offense charged and as defined in the statute is by itself a
continuing eventuality, whether the accused be within one
territory or another
• violation of Bouncing Checks Law is transitory or continuing crime
and its venue as is any of places where in part committed
o as is estafa by issuing a bouncing check
o determinative factor in determining venue is the place of
the issuance of the check
• issuance of a check for preexisting debt appears not to be a
defense under BP Blg. 22
o Sec. 1: in making the drawing or issuance of a check
under the circumstances stated in the law a crime uses
the words “to apply on account or for value”
o account = claim or demand growing out of the sale of
goods, performance of services and the like; equivalent
to “claim” or “demand” when referring to an
indebtedness arising out of contract or some fiduciary
relation
• when postdating check not estafa
o RPC: where postdating a check or issuing it in payment of
an obligation, the offender knowing that at the time he
had no funds in the bank, or the funds deposited by him
in the bank were not sufficient to cover the amount of
the check, and w/o informing the payee of such
circumstances
o BP 22: such issuance of a check would be a crime where
subsequently, the check is dishonored for insufficiency of
fund or credit, or would have been dishonored for the
same reason had not the drawer, w/o any valid reason,
ordered the bank to stop payment
o where a person issued a post dated check w/o funds to
cover it and informs the payee of that fact, he is not
guilty of estafa because there is no deceit
o where the check was dishonored as the drawer’s account
had earlier been closed, notified by the payee of the
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dishonor and failed to make it good w/in 3 days = deceit primary obligation of the bank does not operate as an assignment
is therefore presumed which issues it and constitutes its of funds in the hands of the drawee
• if fails to rebut presumption of deceit, guilty of written promise to pay upon who is not liable on the instrument
estafa demand until he accepts it

• drawing a check with insufficient fund is not falsification in effect a bill of exchange drawn by
o amount written on a check is not a narration of facts a bank on itself and accepted in
made by the drawer representing that he has money in advance by the act of its issuance
the bank but rather a check is an order in writing
addressed to the drawee bank to pay the holder of the • cashier’s check - mere issuance of check is considered acceptance
check the amount written thereon o holder has option of treating it as a PN or bill of exchange
o untruthful statement must refer to a narration of facts o commonly used by banks in meeting their expenses or in
narration of facts = recital of things payment of collections made for persons who are not
accomplished, of deeds, occurrence or customers
happening
• when postdating check a crime Manager’s check – drawn by the manager of a bank in the name of a bank
o payee or person receiving the check must be defrauded against the bank itself payable to a third person; similar to cashier’s check
by the act of the offender as to effect and use
o to defraud = to deprive of some right, interest or
property by a deceitful device Memorandum check – check on which is written the word “memorandum,”
o false pretenses or fraudulent acts must be exercised prior “memo” and “mem,” signifying that the drawer engages to pay upon
to or simultaneous w/ the commission of fraud presentment and non-payment
- check given by a borrower to a lender for the amount of a short
• distinction between estafa consisting of issuing checks w/o funds loan with the understanding that it is not to be presented at the
and violation of Bouncing Checks Law bank but will be redeemed by the maker himself when the loan
o estafa by postdating or issuing a bad check – deceit and falls due and which understanding is evidenced by writing the
damage are essential elements word “memorandum,” “memo,” or “mem” on the check
o violation of Bouncing Checks Law – elements of deceit
and damage are not essential; essential element of that Memorandum Check Ordinary
offense is knowledge on the part of the maker or drawer given by the drawer to the payee
of the check of the insufficiency of his funds more in the nature of a
• makes a mere act of issuing a worthless check a memorandum of indebtedness than
special offense punishable thereunder as payment
• malice and intent are immaterial --- malum drawer may be sued upon same as demand for payment and a refusal
prohibitum PN on the part of the bank are
necessary steps before the holder
Special types of checks can maintain action against the
1. cashier’s checks drawer
2. manager’s checks may be valid agreement as between
3. memorandum checks parties
4. certified checks
5. crossed checks if passed to a third person, check
will be valid in his hands like any
Cashier’s check – drawn by the cashier of a bank in the name of the bank other check
against the bank itself payable to a third person or order one view: contract whereby maker
engages to pay the bona fide holder
Cashier’s Check Demand Draft absolutely w/o any condition

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concerning the presentment
second view: making of a check in
this manner is merely for the
purpose of indicating that it is not to
be presented immediately for
payment
Certified check – check on which the drawee bank has written an
agreement whereby it undertakes to pay the check at any future time
when presented for payment, such as, by stamping on the check “certified”
and underneath is written the signature of the cashier
- depositor’s check recognized and accepted by bank officers as
valid appropriation of the amount specified and as drawn against
funds held by a bank
Crossed checks – there is stamped across the face of the check the name
of a certain banker through whom it must be presented for payment, and if
presented by any one else, it will not be honored
• Bills of Exchange Act of England and of Canada expressly regulate
what constitutes a “crossing” and the effect thereof
• Philippines – authorized by Art. 541 of the Code of Commerce
• usually done by drawing 2 parallel lines transversally on the face
of the check
o specially – when the name of a particular banker or a
company is written between the parallel lines drawn
transversally on the face of the check;
drawee bank should pay the check only with the
intervention of that particular banker/company
if it does not – that particular banker/company
can be made to pay again by the rightful owner
should the first payment prove to be erroneous
(par. 2 Art. 531)
o generally – when only words “and company” are written
between the parallel lines, or when nothing is written at
all between the parallel lines
payment must be made through the intervention
of any company which is duly authorized
otherwise, payment will not be valid
actual practice – holder of the crossed check
merely deposits it for collection w/ the bank
indicated between the parallel lines or with any
bank where he keeps an account in the case of a
check crossed generally; depositary then takes
charge of the collection
54
• under crossed check, payee has duty to ascertain holder’s title to
checks (SIHI v. IAC)
o a check with 2 parallel lines in the upper left hand corner
means that it could only be deposited and may not be
converted into cash
• drawee should not encash a crossed check but merely accept the
same for deposit
• where other than payee of crossed checks presented it for
payment, there is no proper presentment and drawer is not liable
thereon
• advantages of crossing a check – good precaution when it is to be
forwarded by mail or when it is entrusted to an agent and the
drawer wants to be sure that it will be paid to the rightful owner
Moran v. CA
• A bank is not liable for is refusal to pay a check on account of
insufficient funds, notwithstanding the fact that a deposit may be
made later that day. The depositor must show that he had a
deposit of a sufficient funds to meet his demand in order to file a
suit to recover a sufficient amount from the bank. The bank is not
under any obligation to make part payment on a check, up to the
amount of the drawer’s funds.
Firestone Tire v. Ines Chaves
• Where a person issues a post dated check without funds to cover
it and informs the payee of the fact, he cannot be guilty of bad
faith.
Bataan Cigar v. CA
• BCCFI’s defense in stopping payment is as good to SIHI as it is to
George King. The checks were issued with the intention that
George King would supply BCCFI with the bales of tobacco leaf.
There being failure of consideration, SIHI is not a holder in due
course and BCCFI cannot be obliged to pay the checks.
Republic v. PNB
• A demand draft is very different from a cashier’s or manager’s
check for it has been held that the latter is a primary obligation of
the bank which issues it and constitutes its written promise to pay
upon demand. Primary obligation of the bank which issues it and
constitutes its written promise to pay upon. A demand draft is not
in the same category as a cashier’s check.
Mesina v. IAC
• A bank may refuse to pay a stolen check.
Section 186. Within what time a check must be presented.
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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.
• although under Sec. 185, a check is a bill of exchange payable on
demand, it is intended for immediate use and not to circulate as
PN
• therefore, the transfer of a check to successive holders, where it is
drawn and delivered in the place where the drawee bank is
located, does not extend the time for presentment
• if check is delivered 1 day and is not presented before the close of
banking hours the next business day – drawer is discharged to the
extent of any loss suffered from failure to present
• test of reasonable time: Did the payee employ such diligence as a
prudent man exercises his own affairs
• held that the payee’s failure to present a check to the drawee
bank and who did not present the check for 1 week after its
receipt is unreasonable time as a matter of law
Failure to present on time does not totally wipe out all liability
• Where a party draws a check and delivers it to another, the legal
situation is nothing less than an acknowledgment on his part of
his liability to the second in the sum stated in the check. It is an
original instrument of indebtedness, only that payment is ordered
to be made through drawer’s bank. If the check remains unpaid,
whether because dishonored or not presented at all, the original
obligation to pay certainly cannot be erased, for it is a written
promise to pay. It is a written acknowledgment of an obligation
to pay, so that for it to lapse, there must have to pass the
ordinary prescriptive period governing written obligations.
(Verhomal v. Estacio)
When delay is excused
• Sec. 81 provides that delay in making presentment is excused
when the delay is caused circumstances beyond the control of the
holder and not imputable to his default, misconduct or negligence
• e.g. drawer would be discharged if the bank tendered bills of
small denominations which the payee declined to receive
Stale check – one which is not presented for payment w/in reasonable time
after its issue
Effect of delay on liability of drawer
• when a check is not presented for payment within a reasonable
time after its issue, the drawer is discharged but only to the
extent of the loss caused by the delay
o hence, if no loss or injury is shown, the drawer is not
discharged
55
o only injury would be caused by the failure to the bank
subsequent to the delivery and prior to the presentment
of the check
• Justice Story: “If a bank or banker still remains in good credit and
is able to pay the check, the drawer will still remain liable to pay
the same, notwithstanding many months have elapsed since the
date of the check and before presentment for payment and notice
of dishonor
e.g. suppose the bank fails and as a result of such failure the drawer loses
¾ of his deposit in that bank
• drawer is discharged to the extent of the loss
Effect of failure to give notice to drawer
• where the check is dishonored by non-payment, and the drawer is
not given notice of dishonor, the drawer is totally discharged from
liability on the instrument
• drawer may be held liable by the payee on the basis of the
original consideration between him and said payee
Holders of stale checks
• learned writer writes: maturity of the check for the purpose of
presentment for payment and of dishonor in order to bind parties
to is, it not identical with the maturity which will charge
subsequent holders with notice of defect of title or infirmities in
the instrument
Effect of delay as to indorsers
• held that an unreasonable delay in the presentment of payment of
a check for payment will discharge the indorsers thereon, WON he
is injured by the delay as the law presumes that he is prejudiced
• bases of decision are Secs 184 and 186
• held that Secs 143 and 144 NIL are not applicable to checks
because these provisions have to do with the presentment for
acceptance of ordinary bills of exchange
Effect of payment by check where it becomes stale, or it is dishonored by
non-payment
• if indeed the check in question had been dishonored - there can
be no doubt that petitioner’s redemption was null and void
• if it had only become stale – 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, if, after all, the value of the check has
otherwise been received or realized by the party concerned
(Crystal v. CA)
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PNB v. Seeto
• A delay of 27 days from the date of indorsement to that of the
presentation of the check for payment at the drawee bank is
unreasonable, and consequently, discharges completely the
indorser from liability.
Crystal v. CA
• The Supreme Court remanded the case for further proceedings to
determine whether the check was dishonored or became stale, in
order to determine if there was a valid redemption. If the check
had been dishonored, then there can be no doubt that Crystal’s
redemption was null and void. If the check had 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 Crystal, then it would be unfair to deprive him of the rights
he had acquired as redemptioner, particularly, if the value of the
check has otherwise been received or realized by the party
concerned.
Montinola v. PNB
• At the time of the transfer of the check to Montinola about the last
days of December 1944, or the first days of January 1945, the
check, which being a negotiable instrument, was payable on
demand, was long overdue by about 2 1/2 years. It may
therefore be considered even then, a stale check. As such,
Motinola was not a holder in due course and therefore subject to
the defense that the check could not be paid to him because it
was issued to Ramos in his official capacity as disbursing officer of
the USAFFE.
Pacheco v. CA
• The checks were treated as proof of obligation and not for
payment. However, even if the checks were issued for payment,
they are stale already, having been issued more than 3 years prior
to presentment. A check becomes stale after more than 6 months
since its issuance.
The International Corporate Bank v. Spouses Gueco
• A stale check is one which has not been presented for payment
within a reasonable time after its issue. It is valueless and should
not be paid. If a check becomes stale, it is imperative that the
circumstances that caused its non-presentment be determined.
ICB held on the check and refused to encash the same because of
the controversy surrounding the signing of the joint motion to
dismiss. There was no bad faith or negligence on its part.
• Failure to present for payment within a reasonable time will result
to the discharge of the drawer only to the extent of the loss
56
caused by the delay. Failure to present on time, thus, does not
totally wipe out all liability. Spouses Gueco have not alleged,
much less shown, that they or the bank which issued the
manager’s checks has suffered damage or loss caused by the
delay or non-presentment. Definitely, the original obligation to
pay has not been erased.
Wong v. CA
• That the check must be deposited within 90 days is simply a
condition for prima facie presumption of knowledge of lack of
funds to arise. In this case, the checks issued were not yet stale,
since they were deposited 157 days after the date of the check.
Although LPI failed to avail of the prima facie presumption with
the 90-day condition, it can still prove lack of knowledge through
other means.
Great Asian Sales v. CA
• The rule under Section 186, in relation to Section 196, applies to
delay in notice of dishonor. Thus, delay in notice of dishonor,
where such notice is required, discharges the drawer only to the
extent of the loss caused by the delay.
Nagrampa v. People
• By current banking practice, a check becomes stale after more
than 6 months or 180 days. These checks were presented before
6 months or 180 days. Here checks were presented before 6
months lapsed. Thus Nagrampa is guilty for 2 counts of BP 22.
Sec. 187. Certification of check; effect of. - Where a check is
certified by the bank on which it is drawn, the certification is
equivalent to an acceptance.
Certification – agreement whereby the bank against whom a check is
drawn, undertakes to pay it at any future time when presented for
payment
• a bank is not obligated to the depositor to certify checks
• drawee is not liable to the holder for refusal of the bank to certify
a check
• refusal of a bank does not dispense with the requirement of
presentment for payment
• no particular form required
• usual method:
o by stamping on the check the word “certified” and
underneath it the signature of the cashier, or
o by writing upon the word “good” with the date of
certification and signature of the officer of the bank
having the express or implied authority to certify checks
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• letters “O. K.” with initials of cashier of bank do not constitute a
sufficient certification under modern banking practice
• effects of certification:
1. equivalent to acceptance and is the operative act that makes the
drawee bank liable
2. operates as an assignment of the funds of the drawer in the hands
of the drawee bank
3. if obtained by the holder, it discharges persons secondarily liable
thereon
• certification is equivalent to acceptance in that drawee bank is
bound on the instrument upon certification
o thus: certifying bank has all liabilities stated in Sec. 62
• implication of certification of a check:
o check is drawn upon sufficient funds in the hands of the
drawee
o that they have been set apart for its satisfaction and
o that they shall be so applied whenever the check is
presented for payment
o that check is good, then, and shall continue good, and
this agreement is as binding on the bank as its notes on
circulation, a certificate of deposit payable to the order of
the depositor, or any other obligation it can assume
• object of certifying a check: to enable the holder to use it as
money
• a bank incurs no greater risk in certifying a check and in giving a
certificate of deposit
• in well-regulated banks: practice is at once to charge the check to
the account of the drawer, to credit it in a certified check account,
and, when the check is paid, to debit the account with the amount
• function of certified checks – means in constant and extensive use
in the business of banking and its effects and consequences are
regulated by the law merchant
o checks drawn upon banks or bankers, thus marked and
certified, enter largely into commercial and financial
transactions of the country, pass from hand to hand, in
the payment of the debts, the purchase of property, and
in the transfer of balances from 1 house and 1 bank to
another
• purpose of procuring checks to be certified – to impart strength
and credit to the paper by obtaining an acknowledgment from the
certifying bank that the drawer has funds therein sufficient to
cover the check and securing the engagement of the bank that the
check will be paid upon presentation
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o when a check is certified, it ceases to possess the
distinctive character as a species of commercial paper
and performs important functions, or to perform the
functions, of a check and represents so much money on
deposit, payable to the holder on demand
o mode of passing money from hand to hand and answers
the purposes of money
• payment neither includes nor implies acceptance
o payment – final act which extinguishes a bill
o acceptance – promise to pay in the future and continues
the life of the bill
o payment of a check on a forged or unauthorized
indorsement of a payee’s name, and charging the same
to the drawer’s account, do not amount to an acceptance
so as to make the bank liable to the payee – supported
by all of recent cases in which question is considered
• right of holder to sue drawer where check not certified
o drawer of a check contracts that it will be paid on
presentment but not that it will be certified
o certification differs from acceptance in that refusal of the
drawee bank to certify does not amount to a dishonor of
a check
therefore, no necessity of notice of dishonor by
non-acceptance or non-certification, and it is still
necessary to make presentment for payment
w/c is not necessary in the case of non-
acceptance
case is adversely criticized
Panlilio v. David
• Panlilio’s check had on its face “O.K. – S. M.” The letters “O. K.”
with the initials of the cashier of a bank written upon the face of a
check drawn on that bank is not under modern banking practice a
sufficient certification of the check.
New Pacific Timber v. Seneris
• Where a check is certified by a 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.”
• 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 of the creditors.” Hence, the exception to the
rule under Sec. 63 of the Central Bank Act to the effect that “a
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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 to his account” shall
apply.
Araneta v. Paz Tuazon
• The stipulation that the defendant or seller “shall not hold the
vendee responsible for any loss of these checks” was
unconscionable, void and unenforceable insofar as the liability for
these checks beyond 90 days.
PNB v. National City Bank of NY
• Since PNB was not negligent and did not accept/certify the check,
it is not precluded from setting up the forgery defense.
• Rule: A drawee of a check, who is deceived by a forgery of the
drawer’s signature may recover the payment back.
Sec. 188. Effect where the holder of check procures it to be
certified. - Where the holder of a check procures it to be accepted
or certified, the drawer and all indorsers are discharged from
liability thereon.
Effect where holder obtains certification
• drawer and indosers are discharged
• in the Philippines – practice is to certify only at the request of the
drawer
• reason: the moment the check is certified, the funds cease to be
under the control of the original depositors and pass under the
control of the person who procures the certification of the check
drawn in his favor
• effect where certification obtained by others – they are not
discharged
o e.g. where certification is obtained by the drawer,
even when drawer procures the certification at the
instance of the payee
where the certification is obtained by a person
who is neither holder nor drawer
Sec. 189. When check operates as an assignment. - A check of itself
does not operate as an assignment of any part of the funds to the
credit of the drawer with the bank, and the bank is not liable to the
holder unless and until it accepts or certifies the check.
• certification operates as assignment of funds
• duration of transfer of fund
o where the certification states the check is to be “void if
not presented for payment within 90 days from date of
acceptance,” the transfer of the corresponding funds
58
from the credit of the depositor to that of the payee is
co-extensive with the life of the check, which in this case
is 90 days
o if check is not presented within that period – invalid and
funds are automatically restored to the credit of the
drawer though not as a current deposit but as a special
deposit
• uncertified check not assignment of funds
o a check of itself is not assignment of the funds of the
drawer in the bank
o held that a general deposit in a bank is so much money
to the depositor’s credit; it is a debt by him by the bank,
payable on demand to his order not property capable of
identification and specific appropriation
o check drawn upon the bank in the usual form, not
accepted or certified by its cashier to be good, does not
constitute a transfer of any money to the credit of the
holder; simply an order which may be countermanded
and payment forbidden by the drawer at any time before
it is actually cashed
• drawee bank not liable to holder on check unless accepted or
certified
o before acceptance or certification – the bank is not liable
and the holder has no right to sue the drawee bank on
the check
o w/o acceptance or certification, as provided by the
statute – no privity of contract between drawee bank and
payee, or holder of the check; neither is there
assignment pro tanto of the funds where the check is not
drawn on a particular fund, or does not show on its face
that it is an assignment of a particular fund
• relation between depositor and bank – contract of deposit
o separate contract from that stated in the check that may
be drawn by the depositor against the depositary bank
o relation of creditor and debtor
o implied contract between them being that the bank shall
discharge the indebtedness by honoring such checks as
the latter may draw upon it and cannot debit the
depositor’s account with payment not made by his order
or direction
• duties owed by the bank to the depositor – banker agrees to pay
checks drawn by the depositor provided that the said depositor
has money in the hands of the bank
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o as to depositor who has funds sufficient to meet payment
of a check drawn by him in favor of a third party – he has
right of action against the bank for its refusal to pay a
check in the absence of notice to him that the bank has
applied the funds so deposited in extinguishment of past
due claims held against him
o depository may maintain action against the bank not only
for a breach of contract but also for a tort;
tort – entitled to recover damages for injury to
his credit or any other injury that he might
have suffered
• when drawer of dishonored check entitled only to temperate
damages and attorney’s fees but not to moral damages
o on the basis of the contractual relation between him as
drawee (depositary) and the drawer (depositor) – drawee
is obligated to pay the persons designated by the drawer
to be paid by the drawee
o if drawee dishonors the check issued by the drawer w/o
justifiable cause – drawee is liable to drawer for damages
o where a drawer issues a check that is dishonored by the
drawee bank upon a mistake but rectifies the mistake
w/in 4 hours and the payee is paid in full – drawer is not
entitled to moral damages
• banks not obliged to make part payment
o bank is under no obligation to make part payment to the
amount of the funds on deposit, a check drawn by the
depositor for an amount in excess of such funds, nor has
the payee of such check any right to the actual balance
on deposit to the credit of the drawer
o in practice – holder of a check sometimes deposits
sufficient amount of his funds to the drawer’s account in
order to have sufficient on deposit in the drawer’s name
so that the latters’ check will be honored by the bank
Summary of rights and liabilities of parties – where drawee banks refuses
to certify, or accept or pay a check:
1. holder has no action against it – check is not assignment of the
funds of the drawee in the hands of the drawee bank
2. neither has the holder of a right of action against the drawer but
he has a right of action against the drawer where the drawee bank
refuses to pay
3. while holder has no right of action against the drawee bank which
refuses to pay, accept or certify a check – drawer has a right of
action against the drawee bank so refusing; not based on the
check drawn but on the original contract of deposit between them
59
• duty of depositor to bank – where a drawer of a check has
prepared his check so negligently that it can be easily altered
without giving the instrument a suspicious appearance and
alterations are afterwards made, he can blame no one but himself
and in such case he cannot hold the bank liable for the
consequences of his own negligence in that respect
• negligence of the depositor in drawing a check will not excuse the
paying bank
o unless:
misled by such negligent act and
if drawer of a check is first in fault and
if his negligence contributes directly to its
wrongful and fraudulent appropriation
- he is not entitled to recovery
• duty of depositor where passbook returned to him – to examine
such checks within a reasonable time, and if they disclose
forgeries or alterations, to report them to the bank, and failing in
which he cannot, if his failure results in detriment to the bank,
dispute the correctness of payments thereafter made by it on
similar checks
o assumes the bank itself has not been guilty of negligence
in making the payment for when, by the exercise of
proper care, it could have discovered the alteration or
forgery, it must bear the loss notwithstanding that the
depositor failed in his duty to examine the accounts
• drawer may countermand payment before its acceptance or
certification
o order to stop payment must be communicated to the
bank before the check to which it refers has been paid;
and in the absence of a rule of the bank that stop orders
must be in writing, a verbal notice is sufficient
• when stopping payment constitutes estafa – where the accused
issues a check and receives money, not goods, for them from the
offended party, and where, at the time the accused received the
money for the check offended party, he has the intention of
stopping payment on it
Tan v. CA
• An ordinary check is not a mere undertaking to pay an amount of
money. There is certainty or assurance that it will be paid that is
why it is a convenient substitute for currency in commercial and
financial transactions.
• A cashier’s check is a primary obligation of the issuing bank and
accepted in advance by its mere issuance. It is a bank’s order to
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pay drawn upon itself committing in effect its total resources,
integrity and honor behind the check.
XVII. GENERAL PROVISIONS
Sec. 190. Short title. - This Act shall be known as the Negotiable
Instruments Law.
Sec. 191. Definition and meaning of terms. - In this Act, unless the
contract otherwise requires:
"Acceptance" means an acceptance completed by delivery or
notification;
"Action" includes counterclaim and set-off;
"Bank" includes any person or association of persons carrying on
the business of banking, whether incorporated or not;
"Bearer" means the person in possession of a bill or note which is
payable to bearer;
"Bill" means bill of exchange, and "note" means negotiable
promissory note;
"Delivery" means transfer of possession, actual or constructive,
from one person to another;
"Holder" means the payee or indorsee of a bill or note who is in
possession of it, or the bearer thereof;
"Indorsement" means an indorsement completed by delivery;
"Instrument" means negotiable instrument;
"Issue" means the first delivery of the instrument, complete in
form, to a person who takes it as a holder;
"Person" includes a body of persons, whether incorporated or not;
"Value" means valuable consideration;
"Written" includes printed, and "writing" includes print.
Sec. 192. Persons primarily liable on instrument. - The person
"primarily" liable on an instrument is the person who, by the terms
of the instrument, is absolutely required to pay the same. All other
parties are "secondarily" liable.
Sec. 193. Reasonable time, what constitutes. - In 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.
Sec. 194. Time, how computed; when last day falls on holiday. -
Where the day, or the last day for doing any act herein required or
permitted to be done falls on a Sunday or on a holiday, the act may
be done on the next succeeding secular or business day.
60
Sec. 195. Application of Act. - The provisions of this Act do not
apply to negotiable instruments made and delivered prior to the
taking effect hereof.
Sec. 196. Cases not provided for in Act. - Any case not provided for
in this Act shall be governed by the provisions of existing
legislation or in default thereof, by the rules of the law merchant.
Sec. 197. Repeals. - All acts and laws and parts thereof inconsistent
with this Act are hereby repealed.
Sec. 198. Time when Act takes effect. - This Act shall take effect
ninety days after its publication in the Official Gazette of the
Philippine Islands shall have been completed.
NOTE: Please refer to Table of Some Important Provisions.
LETTERS OF CREDIT
NOTE: Please refer to your copies of the pertinent laws.
Uniform Commercial Code
Article 5 Letters of Credit
Letter of credit - financial device developed by merchants as a convenient
and relatively safe mode of dealing with sales of goods to satisfy the
seemingly irreconcilable interest of a seller, who refuses to part with his
goods before he is paid, and a buyer, who wants to have control of the
goods before paying
Buyer Seller
Issuing Bank Corresponding Bank
• Confirming
• Accepting
• Notifying
• Paying/Negotiating
• buyer may be required to contact a bank to issue a letter of credit
in favor of the seller so that, by virtue of the letter of credit the
issuing bank can authorize the seller to draw drafts and engage to
pay them upon their presentment simultaneously with the tender
of documents required by the letter of credit
• buyer and seller agree on what documents are to be presented for
payment, but ordinarily they are documents of title evidencing or
attesting to the shipment of the goods to the buyer
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• seller ships goods to the buyer and secures the required shipping
documents or documents of title
• to get paid, the seller executes a draft and presents it together
with the required documents to the issuing bank
• the issuing bank redeems the draft and pays cash to the seller if it
finds that the documents submitted by the seller conform with
what the letter of credit requires
• bank then obtains possession of the documents upon paying the
seller
• buyer reimburses the issuing bank and acquires the documents
entitling him to the goods
• seller gets paid only if he delivers the documents of title over the
goods, while the buyer acquires the said documents and control
over the goods only after reimbursing the bank
• letters of credit – distinguished from other accessory contracts
i.e., engagement of the issuing bank to pay the seller once the
draft and the required shipping documents are presented to it
o assures the seller of prompt payment, independent of
any breach of the main sales contract = independence
principle
Laws governing a letter of credit transaction
• Code of Commerce Articles 567 to 572
• Uniform Customs and Practice for Documentary Credits or UCP –
issued by the International Chamber of Commerce

Parties to a letter of credit transaction

Responsibilities
Buyer • procures the letter of credit
• obliges himself to reimburse the issuing bank upon receipt of the documents of title
• initiates the operation of the letter of credit transaction
• contract is with the bank
• represented by the Commercial Credit of Agreement form which he signs, supported by the
mutually made promises contained in the Agreement
Opening Bank or Issuing Bank • buyer’s bank which issues the letter of credit
• undertakes to pay the seller upon receipt of the draft and proper documents of titles and to
surrender the documents to the buyer upon reimbursement
• issues the instrument
• should be a strong bank, well known and well regarded in international trading circles
Seller • in compliance with the contract of sale ships the goods to the buyer and deliver the documents
of title and draft to the issuing bank to recover payment
• beneficiary of the credit instrument
• may recover from the bank the value of his shipment if made within the terms of the
instrument, even though he has not given the bank any direct consideration for the bank’s
promises contained in the instrument
Correspondent Bank – may be
• Advising Bank or Notifying - to convey to the seller the existence of the credit OR
• Confirming Bank – will lend credence to the letter of credit issued by a lesser known issuing
bank OR
• Paying Bank – undertakes to encash the drafts drawn by the exporter
Negotiating Bank • may be approached by the buyer to have the draft discounted instead of going to the place of
the issuing bank to claim payment

confirmed commercial credit and the bank notifying the

• if the beneficiary requires that the obligation of the issuing bank beneficiary is the Confirming Bank, which liability is primary
shall also be made the obligation of the bank to himself, there is a o Confirming Bank – primary liability to the seller as if it
had issued the letter of credit; receives a commission for

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its confirmation from the Issuing Bank which the Issuing
Bank, in turn, passes on to the buyer of the merchandise
• Paying Bank – on which the drafts are drawn; may be Issuing or
Advising Bank;
• If the draft is to be drawn on the Issuing Bank or on other
designated banks not in the city of the seller, any bank in the city
of the seller which buys or discounts the draft of the beneficiary
becomes a Negotiating Bank
• Rule: Whenever the facilities of an Advising or Notifying Bank are
used, the beneficiary is apt to offer his drafts to the Advising Bank
for negotiation, thus giving the Advising Bank the character of a
Negotiating Bank also
o Negotiating Bank becomes an endorser and bona fide
holder of the drafts and within the protection of the credit
instrument; protected by the drawer’s signature
• settled rule: Documents tendered must strictly conform to the
terms of the letter of credit; documents tendered by the
beneficiary must include all documents required by the letter; a
correspondent bank which departs from what has been stipulated
under the letter of credit, as when it accepts faulty tender, acts on
its own risk and may not thereafter be able to recover from the
money thus paid to the beneficiary

Standby Letters of Credit or Guarantees Principal types of demand guarantee

Demand guarantee – an undertaking given for payment of a stated or tender or bid guarantee to safeguard the beneficiary against
maximum sum of money on presentation to the party giving the the breach of an undertaking;
undertaking of a demand for payment and such other documents as may guarantor to pay a specified sum
be specified in the guarantee within the period and in conformity with the designed to compensate him for the
other conditions of the guarantee trouble and expense he suffered in
• difference between letter of credit and demand guarantee – a reawarding the contract, as well as
letter of credit is for the benefit of the seller while the demand any additional cost of that contract
guarantee is for the benefit of the buyer
• typical uses: to safeguard the other party (employer or buyer) performance guarantee to cover a single guarantee covering
against non-performance or late or defective performance by the all phases; guarantee of the central
supplier or contractor performance of the contract from
commencement to completion
Direct guarantees – minimum of 3 parties: advance payment or repayment entitle the principal to payment of
1. account party – party to the underlying contract whose performance is guarantee stated sums in advance of
required to be covered by the guarantee and who gives instructions for its performance; to secure the
issuer beneficiary’s right to repayment of
2. guarantor – bank or other party issuing the guarantee on behalf o fits the advance if the performance of
customer the principal which it relates is not furnished
3. beneficiary – other party to the underlying contract in whose favor the retention guarantee secures repayment of the released
guarantee is issued retention moneys if defects are later
found or if the contractor fails to
• 3 distinct contracts: complete the contract
1. underlying contract between principal and beneficiary maintenance or warranty guarantee to cover the cost of any defects or
2. counter-indemnity between principal and guarantor bank malfunction which become manifest
3. contract established by the guarantee issued by guarantor bank in favor during that period
of principal
Why is a demand guarantee somewhere between a letter of credit and a
Indirect guarantees – 4 distinct contracts surety?
1. underlying contract between principal and beneficiary It is secondary in the intent but primary in form. Performance is due in the
2. counter-indemnity between principal and instructing party bank first instance from the principal, and the guarantee is intended to be
3. counter-guarantee issued by instructing party bank to guarantor bank resorted only if the principal has failed to perform; indeed, for the
4. guarantee issued by guarantor to beneficiary

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beneficiary to call on the guarantee knowing that the principal was not in
default to be fraudulent.
Standby letter of credit – payment undertaking primary in form but
intended to be used only as a fall-back in the event of default by the
principal under the underlying contract
Grounds for refusal to pay
• it follows from the independence of the guarantee from the
underlying contract that in principle the guarantor must pay a
demand presented in accordance with the terms of the guarantee,
regardless of whether in fact the principal has committed a breach
of the underlying contract with the beneficiary
o exceptions:
1. fraud
2. illegality in the guarantee transaction
Petra International Banking Corporation v. First American Bank of Virginia
• Article 16 of the UCP states that if an issuing bank desires to
refuse documents, it must do so without delay by stating the
discrepancies it has found and holding the documents at the
disposal of, or returning them to the presentor. If the issuing
bank fails to perform these requirements, it shall be precluded
from claiming that the documents are not in accordance with the
terms and conditions of the credit.
• First American received the documents on or about October 25,
1988. Not only did it fail to note any discrepancies or to hold the
documents at PIBC’s disposal, it transferred the documents to its
account customer and formally notified PIBC on November 16,
1988 that “the transaction was accepted and, at maturity, we will
remit proceeds …” First American is therefore precluded by Art. 16
from asserting noncompliance.
• Dameron delayed informing First American of any discrepancies
for more than a reasonable period of time. It failed to return the
documents to First American and instead took control of the
goods. By these acts, Dameron waived its right to reject
nonconforming documents and bound itself to reimburse First
American for the amount of the drafts.
Union Export Company v. N.I.B. Intermarket, A.B.
• As a general rule, the issuer must honor the draft when the
documents presented comply with the terms of the letter of credit.
However, when a required document does not conform to the
necessary warranties, is forged, fraudulent, or there is fraud in the
transaction, an issuer acting in good faith is not required to, but
may honor a draft drawn under a letter of credit if the documents
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presented appear on their face to comply with the terms of the
letter of credit. A court may enjoin an issuer from honoring such
a draft if the issuer fails to do so on its own. Notwithstanding this
exception, if the person presenting the draft drawn on a letter of
credit is a holder in due course, the issuer must pay the draft,
whether or not it has notice of forgery or fraud.
Andina Coffee v. National Westminister Bank USA
• Unless the postdating was expressly allowed under the letters of
credit, and there is no indication that this is the situation, or the
parties’ prior course of conduct conclusively demonstrates
otherwise, the documents provided under the letters of credit did
not comply with the terms thereof, and BCCC may not compel
payment. The record of the present matter clearly presents
sufficient unresolved matters precluding summary judgment as to
whether BCCC participated in a scheme whereby the bills of lading
were altered simply to render them in conformity with the letters
of credit. Once it has been shown that a defense exists a person
claiming the rights of a holder in due course has the burden of
establishing that he or some person under whom he claims is in
all respects a holder in due course. BCCC must now prove that it
is a holder in due course, and consequently, summary judgment
in its favor is not warranted.
Bank of America, NT & SA v. CA
• As an advising or notifying bank, Bank of America did not incur
any obligation more than just notifying Inter-Resin of the letter of
credit issued in its favor, let alone to confirm the letter of credit.
The bare statement of the bank employee in responding to the
inquiry made by Atty. Tanay, Inter-Resin’s representative, on the
authenticity of the letter of credit certainly did not have the effect
of novating the letter of credit and Bank of America’s letter of
advise, nor can it justify the conclusion that the bank must now
assume total liability on the letter of credit.
• As an advising bank, Bank of America is bound only to check the
“apparent authenticity” of the letter of credit, which it did (Art. 8
of UCP).
• When Inter-Resin negotiated the corresponding draft of partial
availment and the required documents with Bank of America,
there existed a discounting arrangement. Bank of America acted
independently as a negotiating bank, thus saving Inter-Resin from
the hardship of presenting the documents directly to Bank of
Ayudhya to recover payment. Hence, it has a right of recourse
against the issuer bank and until reimbursement is obtained,
Inter-Resin, as the drawer of the draft, continues to assume a
contingent liability thereon.
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FEATI Bank v. CA
• An irrevocable credit refers to the duration of the letter of credit.
The issuing bank may not without the consent of the beneficiary
and the applicant revoke his undertaking under the letter. The
issuing bank does not reserve the right to revoke the credit. On
the other hand, a confirmed letter of credit pertains to the kind of
obligation assumed by the correspondent bank. The
correspondent bank gives an absolute assurance to the beneficiary
that it will undertake the issuing bank’s obligation as its own
according to the terms and conditions of the credits. Hence, the
mere fact that a letter of credit is irrevocable does not necessarily
imply that the corresponding bank in accepting the instructions of
the issuing bank has also confirmed the letter of credit.
Keng Hua Paper Products Co., Inc. v. CA
• A bill of lading serves two functions. First, it is a receipt for the
goods shipped. Second, it is a contract by which three parties,
namely, the shipper, the carrier, and the consignee undertake
specific responsibilities and assume stipulated obligations. The
acceptance of a bill of lading by the shipper and its contents, gives
rise to the presumption that the same was a perfected and
binding contract.
• In a letter of credit, there are three distinct and independent
contracts: (1) the contract of sale between the buyer and the
seller, (2) the contract of the buyer with the issuing bank, and (3)
the letter of credit proper in which the bank promises to pay the
seller pursuant to the terms and conditions stated therein. Hence,
the contract of carriage, as stipulated in the bill of lading in the
present case, must be treated independently of the contract of
sale between the seller and the buyer, and the contract for the
issuance of a letter of credit between the buyer and the issuing
bank. Any discrepancy between the amount of the goods
described in the commercial invoice in the contract of sale and the
amount allowed in the letter of credit will not affect the validity
and enforceability of the contract of carriage as embodied in the
bill of lading.
Insular Bank of Asia & America v. IAC
• Standby letters of credit are in effect an absolute undertaking to
pay the money advanced or the amount for which credit is given
on the faith of the instrument. They are primary obligations and
not accessory contracts. Being separate and independent
agreements, the payments made by the Mendozas cannot be
added in computing the IBAA’s liability under its own standby
letters of credit.
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• Letters of credit are strictly construed most strongly against the
writer, and so as to be reasonable and consistent with the honest
intention.
Edward Owen Engineering Ltd. V. Barclays Bank International Ltd. And
another
• A bank which gives a performance guarantee must honour that
guarantee according to its terms. It is not concerned in the least
with the question whether the supplier has performed his
contracted obligation or not; nor with the question whether the
supplier defaulted or not. The bank must pay according to its
guarantee, on demand, if so stipulated, without proof or
conditions. The only exception is when there is clear fraud of
which the bank has notice.
Ground Air Transfer, Inc. v. Westates Airlines, Inc. & Jesse Yohanan
• The courts may not normally issue an injunction because of an
important exception to the general “no injunction” rule. The
exception concerns “fraud” so serious as to make it obviously
pointless and unjust to permit the beneficiary to obtain the
money. Where the circumstances plainly show that the underlying
contract forbids the beneficiary to call a letter of credit; where
they show that the contract deprives the beneficiary of even a
“colorable” right to do so where the contract and circumstances
reveal that the beneficiary’s demand for payment has “absolutely
no basis in fact,”; where the beneficiary’s conduct has so vitiated
the entire transaction that the legitime purpose of the
independence of the issuer’s obligation would no longer be served,
the a court may enjoin payment.
TRUST RECEIPTS
Trust receipt – written or printed document signed by the entrustee in
favor of the entruster containing terms and conditions substantially
complying with the provisions of this Decree
• no further formality of execution or authentication shall be
necessary to the validity of a trust receipt
• merchant = entrustee
• entruster = person or institution in whose favor the receipt runs
PD No. 115:
Entrustee – person having or taking possession of goods, documents or
instruments under a trust receipt transaction, and any successor in interest
of such person for the purpose or purposes specified in the trust receipt
agreement
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Entruster – person holding title over the goods, documents, or instruments were rejected by the entruster – entrustee-importer is
subject of a trust receipt transaction, and any successor in interest of such still liable to the entrustee
person
• liability of entrustee to entruster is ex contractu not ex delictu –
Trust receipt WON he misappropriated, misapplied or converted the
• legal title to the matter entrusted remains in the entruster but merchandise covered by the transaction
entruster gives to the trustee a form of title which is good and • holder of trust receipt who does not pay to issuing bank proceeds
legal against everybody except the entruster of sale of goods is liable for estafa
• as between entruster and trustee – entruster is always the legal
owner of the matter involved Vintola v. Insular Bank of Asia and America
• as between trustee and rest of the world – trustee is the legal • A trust receipt is a security agreement, pursuant to which a bank
owner and whenever he sells the goods to a third party who has acquires a “security interest” in the goods. It secures an
no knowledge of the existence of the trust receipt, such third indebtedness and there can be no such thing as security interest
party is protected and the entruster loses his legal ownership of that secures no obligation. The Bank did not become the real
the goods owner of the goods as it was merely a holder of a security title for
• legal title to the matter entrusted remains in the entruster but the advances it had made to the petitioners.
entruster gives to the trustee a form of title which is good and
legal against everybody except the entruster Prudential Bank v. IAC
• under a letter of credit-trust receipt arrangement, a bank extends
a loan covered by the letter of credit, with the trust receipt as a
• In Prudential Bank, the Court ruled that the person signing the
security for the loan
trust receipt for the corporation is not solidarily liable with the
• transaction involves a loan feature represented by the letter of
entrustee-corporation for the civil liability arising from the criminal
credit, and a security feature which is in the covering trust receipt
offense. He may, however, be personally liable if he bound himself
• security agreement, pursuant to which a bank acquires a “security
to pay the debt of the corporation under a separate contract of
interest” in the goods
surety or guaranty.
• entrustee not entruster is real owner in trust receipt – entruster is
merely holder of a security title for the advances it has made
under the letter of credit of the entrustee, the importer
o goods purchased by the entrustee (importer) through the
financing of the entruster (bank) remain the property of
said entrustee (importer) and he holds the goods at his
own risk
o trust receipt arrangement does not covert the entruster
(bank) into an investor but remains as a lender and
creditor
o even where the entrustee (importer) fails to sell the
goods, offers them to entruster (bank), deposits them in
court, and is acquitted from the charge of estafa said
entrustee (importer) is liable to the entruster (bank) for
the advance made by the latter to the former
o where the importer fails to comply with the terms of the
trust receipt, particularly to pay his obligation to the
entruster, or to turn over to said entruster the goods
covered by the trust receipt if they were not sold, the
entrustee is guilty of estafa
o where the entrustee fails to sell the goods subject of the
trust receipt and fails to pay the entrustor its loan,
although entrustee deposits the goods in court which

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Table of Some Important Provisions indorser's signature the words

"without recourse" or any words of
When payable to order or bearer similar import
to order payable to the order of a specified conditional - party required to pay the
person or to him or his order. It instrument may disregard the
may be drawn payable to the order condition and make payment to the
of: indorsee or his transferee whether
(a) payee who is not maker, the condition has been fulfilled or
drawer, or drawee; or not
(b) drawer or maker; or - any person to whom an
(c) drawee; or instrument so indorsed is
(d) 2 or more payees jointly; or negotiated will hold the same, or
(e) 1 or some of several payees; or the proceeds thereof, subject to the
(f) holder of an office for the time rights of the person indorsing
being conditionally
to bearer (a) it is expressed to be so payable;
or Rights of Holder and Holder in Due Course
(b) it is payable to a person named Holder 1. sue on the instrument
therein or bearer; or in his own name
(c) it is payable to the order of a 2. receive payment and if
fictitious or non-existing person, the payment is in due
and such fact was known to the course, the instrument
person making it so payable; or is discharged
(d) name of the payee does not Holder in Due Course 1. sue on the instrument
purport to be the name of any in his own name
person; or 2. receive payment and if
(e) the only or last indorsement is payment is in due
an indorsement in blank course, the instrument
is discharged
Kinds of Indorsements 3. holds the instrument
special specifies the person to whom, or to free from any defect or
whose order, the instrument is to be title of prior parties
payable and free from defenses
blank specifies no indorsee, and an available to prior
instrument so indorsed is payable to parties among
bearer themselves
restrictive (a) prohibits the further negotiation 4. enforce payment of
of the instrument; or the instrument for the
(b) constitutes the indorsee the full amount thereof
agent of the indorser; or against all parties
(c) vests the title in the indorsee in liable thereon
trust for or to the use of some other
persons Liabilities of Parties
qualified - constitutes the indorser a mere Parties Liabilities
assignor of the title to the Maker 1. engages that he will pay according to its
instrument tenor
- may be made by adding to the 2. admits the existence of the payee and his

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then capacity to indorse
Drawer 1. admits the existence of the payee and his
then capacity to indorse
2. engages that on due presentment, the
instrument will be accepted or paid, or
both, according to its tenor
3. engages that if it be 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
Acceptor 1. engages that he will pay it according to
the tenor of his acceptance
2. admits the existence of the drawer, the
genuineness of his signature, and his
capacity and authority to draw the
instrument;
3. admits the existence of the payee and his
then capacity to indorse
Irregular Indorser 1. if the instrument is payable to the order of
a third person - liable to the payee and to
all subsequent parties
2. if the instrument is payable to the order of
the maker or drawer, or is payable to
bearer - liable to all parties subsequent to
the maker or drawer
3. if he signs for the accommodation of the
payee - liable to all parties subsequent to
the payee
Person negotiating warrants:
an instrument by 1. that the instrument is genuine and in all
delivery or by respects what it purports to be
qualified 2. that he has a good title to it
indorsement 3. that all prior parties had capacity to
contract
4. that he has no knowledge of any fact
which would impair the validity of the
instrument or render it valueless
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General Indorser 1. warrants to all subsequent
holders in due course:
a) that the instrument is
genuine and in all respects
what it purports to be
b) that he has a good title to it
c) that all prior parties had
capacity to contract
d) that instrument is, at the
time of his indorsement, valid and
subsisting;
2. engages that that, on due
presentment, it shall be accepted or
paid, or both, as the case may be,
according to its tenor
3. engages that if it be 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
Place of Presentment for Payment
place of payment is specified in the it is there presented
instrument
no place of payment is specified but it is there presented
the address of the person to make
payment is given in the instrument
no place of payment is specified and instrument is presented at the usual
no address is given place of business or residence of the
person to make payment
in any other case if presented to the person to make
payment wherever he can be found,
or if presented at his last known
place of business or residence
When presentment not required to charge for payment
drawer where he has no right to expect or
require that the drawee or acceptor
will pay the instrument
indorser where the instrument was made or
accepted for his accommodation
and he has no reason to expect that
the instrument will be paid if
presented
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When delay is excused

Making presentment when the delay is caused by circumstances
for payment beyond the control of the holder and not
imputable to his default, misconduct, or
negligence To whom notice must be given
Giving notice of when the delay is caused by circumstances party is dead - personal representative, if there
dishonor beyond the control of the holder and not be one, and if with reasonable
imputable to his default, misconduct, or diligence, he can be found
negligence - if none, to the last residence or
Making presentment to when the delay is caused by circumstances last place of business of the
acceptor for honor or beyond the control of the holder and not deceased
referee in case of need imputable to his default, misconduct, or
negligence partners any partner
Noting or presenting when delay is caused by circumstances beyond persons jointly liable each of them unless one of them
the control of the holder and not imputable to his has authority to receive such notice
default, misconduct, or negligence for the others
bankrupt or insolvent or made an either to the party himself or to his
When presentment is excused assignment for the benefit of the trustee or assignee
for payment 1. where, after the exercise of creditors
reasonable diligence,
presentment, as required Where notice is given to parties residing in the same place
by this Act, cannot be given at place of business of the must be given before the close of
made person to receive notice business hours on the day following
2. where the drawee is a given at his residence must be given before the usual
fictitious person hours of rest on the day following
3. by waiver of presentment, if sent by mail must be deposited in the post office
express or implied in time to reach him in usual course
for acceptance 1. drawee is dead, or on the day following
has absconded, or
is a fictitious Where parties reside in different places
person or a if sent by mail must be deposited in the post office
person not having in time to go by mail the day
capacity to following the day of dishonor, or if
contract by bill there be no mail at a convenient
2. after the exercise hour on last day, by the next mail
of reasonable thereafter
diligence, given otherwise than through the within the time that notice would
presentment can post office have been received in due course of
not be made mail, if it had been deposited in the
3. although post office within the time specified
presentment has in the last subdivision
been irregular,
acceptance has When notice of dishonor is dispensed with
been refused on when after the exercise of
some other reasonable diligence, it cannot be
ground given to or does not reach the
parties sought to be charged

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drawer (a) drawer and drawee are the
same person;
(b) drawee is fictitious person or a
person not having capacity to
contract;
(c) drawer is the person to whom
the instrument is presented for
payment;
(d) drawer has no right to expect or
require that the drawee or acceptor
will honor the instrument;
(e) drawer has countermanded
payment
indorser (a) drawee is a fictitious person or
person not having capacity to
contract, and the indorser was
aware of that fact at the time he
indorsed the instrument;
(b) indorser is the person to whom
the instrument is presented for
payment;
(c) instrument was made or
accepted for his accommodation
How to discharge
Instrument (a) payment in due course by or on
behalf of the principal debtor;
(b) payment in due course by the
party accommodated, where the
instrument is made or accepted for
his accommodation;
(c) intentional cancellation thereof
by the holder;
(d) any other act which will
discharge a simple contract for the
payment of money;
(e) principal debtor becomes the
holder of the instrument at or after
maturity in his own right
Persons Secondarily Liable (a) any act which discharges the
instrument;
(b) intentional cancellation of his
signature by the holder;
(c) discharge of a prior party;
(d) a valid tender of payment made
by a prior party;
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(e) a release of the principal debtor
unless the holder's right of recourse
against the party secondarily liable
is expressly reserved;
(f) any agreement binding upon the
holder to extend the time of
payment or to postpone the holder's
right to enforce the instrument
unless made with the assent of the
party secondarily liable or unless
the right of recourse against such
party is expressly reserved
When bill may be treated as promissory note:
1. drawer and drawee are the same person
2. drawee is a fictitious person
3. drawee is a person not having capacity to contract
When protest dispensed with
when, after the exercise of
reasonable diligence, it cannot be
given to or does not reach the
parties sought to be charged
drawer (a) drawer and drawee are the
same person;
(b) drawee is fictitious person or a
person not having capacity to
contract;
(c) drawer is the person to whom
the instrument is presented for
payment;
(d) drawer has no right to expect or
require that the drawee or acceptor
will honor the instrument;
(e) drawer has countermanded
payment
indorser (a) drawee is a fictitious person or
person not having capacity to
contract, and the indorser was
aware of that fact at the time he
indorsed the instrument;
(b) indorser is the person to whom
the instrument is presented for
payment;
(c) instrument was made or
accepted for his accommodation
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