NEGO - Catapusan Notes

Catapusan, Kevin C. | NEGOTIN | 1st Sem.
SY 2015-2016
TABLE OF CONTENTS Sec. 22 Effect of indorsement by infant or corporation ............... 25

Sec. 23 Forged signature; effect ................................................... 26
I. Form and Interpretation .................................................................. 1 II. Consideration............................................................................... 31
Sec. 1 Form of negotiable instruments ........................................... 1 Sec. 24 Presumption of consideration .......................................... 31
Sec. 2 Certainty as to sum; what constitutes .................................. 2 Sec. 25 Value; what constitutes .................................................... 31
Sec. 3 When promise is unconditional ........................................... 4 Sec. 26 What constitutes a holder for value ................................. 32
Sec. 4 Determinable future time; what constitutes ......................... 6 Sec. 27 When a lien on instrument constitute holder for value .... 33
Sec. 5 Additional provisions not affecting negotiability ................ 8 Sec. 28 Effect of want of consideration........................................ 34
Sec. 6 Omissions; seal; particular money ....................................... 9 Sec. 29 Liability of accommodation party ................................... 35
Sec. 7 When payable on demand.................................................. 11 III. Negotiation ................................................................................. 37
Sec. 8 When payable to order ....................................................... 12 Sec. 30 What constitutes negotiation............................................ 37
Sec. 9 When payable to bearer ..................................................... 14 Sec. 31 Indorsement; how made ................................................... 41
Sec. 10 Terms, when sufficient .................................................... 16 Sec. 32 Indorsement must be of entire instrument ....................... 43
Sec. 11 Date, presumption as to ................................................... 16 Sec. 33 Kinds of indorsement ....................................................... 44
Sec. 12 Ante-dated and post-dated ............................................... 17 Sec. 34 Special indorsement; indorsement in blank ..................... 44
Sec. 13 When date may be inserted .............................................. 18 Sec. 35 Blank indorsement; how changed to special indorsement45
Sec. 14 Blanks, when may be filled (Incomplete instrument that Sec. 36 When indorsement restrictive .......................................... 46
was delivered) .............................................................................. 19
Sec. 37 Effect of restrictive indorsement; rights of indorsee........ 47
Sec. 15 Incomplete instrument not delivered (Incomplete
instrument that is undelivered) ..................................................... 20 Sec. 38 Qualified indorsement ..................................................... 48
Sec. 16 Delivery; when effectual; when presumed (Complete Sec. 39 Conditional indorsement .................................................. 49
instrument that is undelivered) ..................................................... 21 Sec. 40 Indorsement of instrument payable to bearer .................. 50
Sec. 17 Construction where instrument is ambiguous.................. 23 Sec. 41 Indorsement where payable to two or more persons ....... 50
Sec. 18 Liability of person signing in trade or assumed name ..... 24 Sec. 42 Effect of instrument drawn or indorsed to a person as
Sec. 19 Signature by agent; authority; has shown ........................ 24 cashier........................................................................................... 51
Sec. 20 Liability of person signing as agent, etc. ......................... 25 Sec. 43 Indorsement where name is misspelled. .......................... 52
Sec. 21 Signature by procuration; effect of .................................. 25 Sec. 44 Indorsement in representative capacity............................ 52
Sec. 45 Time of indorsement; presumption .................................. 53
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Catapusan, Kevin C. | NEGOTIN | 1st Sem. SY 2015-2016
Sec.45 Place of indorsement; presumption .................................. 53 VI. Presentment for payment ........................................................... 81
Sec. 47 Continuation of negotiable character ............................... 53 Sec. 70 Effect of want of demand on principal debtor ................. 81
Sec. 48 Striking out indorsements ................................................ 54 Sec. 71 Presentment where instrument is not payable on demand;
Sec. 49 Transfer without indorsement; effect of .......................... 54 and where payable on demand ..................................................... 83
Sec. 50 When prior party may negotiate instrument .................... 55 Sec. 72 What constitutes sufficient presentment .......................... 83
IV. Rights of the Holder................................................................... 56 Sec. 73 Place of presentment ........................................................ 84
Sec. 51 Right of holder to sue; payment ...................................... 56 Sec. 74 Instrument must be exhibited........................................... 85
Sec. 52 What constitutes a holder in due course .......................... 57 Sec. 75 Presentment where instrument payable at bank ............... 86
Sec. 53 When person not deemed holder in due course ............... 62 Sec. 76 Presentment where principal debtor is dead .................... 86
Sec. 54 Notice before full amount paid ........................................ 62 Sec. 77 Presentment to persons liable as partners ........................ 87
Sec. 55 When title is defective ..................................................... 63 Sec. 78 Presentment to joint debtors ............................................ 87
Sec. 56 What constitutes notice of defect ..................................... 64 Sec. 79 When presentment not required in order to charge the
drawer ........................................................................................... 87
Sec. 57 Rights of holder in due course ......................................... 65
Sec. 80 When presentment not required to charge indorser ......... 88
Sec. 58 When subject to original defenses ................................... 66
Sec. 81 When delay in making presentment is excused ............... 88
Sec. 59 Who is deemed holder in due course ............................... 68
Sec. 82 When presentment may be dispensed with ...................... 89
V. Liabilities of Parties .................................................................... 69
Sec. 83 When instrument dishonored by non-payment ................ 90
Sec. 60 Liability of maker ............................................................ 69
Sec. 84 Liability of a person secondarily liable when instrument
Sec. 61 Liability of the drawer ..................................................... 70 dishonored .................................................................................... 91
Sec. 62 Liability of acceptor......................................................... 71 Sec. 85 Time of maturity .............................................................. 91
Sec. 63 When person deemed indorser......................................... 74 Sec. 86 Time; How computed ...................................................... 92
Sec. 64 Liability of irregular indorser .......................................... 75 Sec. 87 Rule where instrument payable at bank ........................... 93
Sec. 65 Warranty; where negotiation by delivery, and so forth ... 76 Sec. 88 What constitutes payment in due course.......................... 93
Sec. 66 Liability of general indorser ............................................ 78 VII. Notice of dishonor .................................................................... 94
Sec. 67 Liability of indorser where paper negotiable by delivery 79 Sec. 89 To whom notice of dishonor must be given .................... 94
Sec. 68 Order in which indorsers are liable .................................. 80 Sec. 90 By whom given ................................................................ 96
Sec. 69 Liability of agent or broker .............................................. 81 Sec. 91 Notice given by agent ...................................................... 97
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Sec. 92 Effect of notice on behalf of holder ................................. 97 Sec. 118 When protest need not be made; when must be made . 109
Sec. 93 Effect where notice is given by party entitled thereto ..... 97 VIII. Discharge of negotiable instrument....................................... 110
Sec. 94 When agent may give notice............................................ 98 Sec. 119 Instrument, how discharged ......................................... 110
Sec. 95 When notice sufficient ..................................................... 98 Sec. 120 When persons secondarily liable on the instruments are
Sec. 96 Form of notice ................................................................. 99 discharged................................................................................... 112
Sec. 97 To whom notice may be given ...................................... 100 Sec. 121 Right of party who discharges the instrument ............. 114
Sec. 98 Notice where party is dead ............................................ 100 Sec. 122 Renunciation by the holder .......................................... 115
Sec. 99 Notice to partners........................................................... 101 Sec. 123 Cancellation; unintentional; burden of proof ............... 116
Sec. 100 Notice to persons jointly liable .................................... 101 Sec. 124 Alteration of instrument; effect of ............................... 116
Sec. 101 Notice to bankrupt ....................................................... 101 Sec. 125 What constitutes a material alteration.......................... 118
Sec. 102 Time within which notice must be given ..................... 102 IX. BOE Form and interpretation .................................................. 119
Sec. 103 Where parties reside in the same place ........................ 102 Sec. 126 Bill of Exchange defined ............................................. 119
Sec. 104 Where parties reside in different places....................... 103 Sec. 127 Bill not an assignment of fund in hands of drawee...... 121
Sec. 105 When sender deemed to have given due notice ........... 103 Sec. 128 Bill addressed to more than one drawee ...................... 121
Sec. 106 Deposit in post-office; what constitutes ...................... 104 Sec. 129 Inland and foreign bills of exchange............................ 122
Sec. 107 Notice to subsequent party; time of ............................. 104 Sec. 130 When bill may be treated as promissory note .............. 123
Sec. 108 Where notice must be sent ........................................... 104 Sec. 131 Referee in case of need ................................................ 123
Sec. 109 Waiver of notice .......................................................... 105 Letter of credit................................................................................ 123
Sec. 110 Whom affected by waiver............................................ 105 Art. 567....................................................................................... 124
Sec. 111 Waiver of protest ......................................................... 106 Art. 568....................................................................................... 124
Sec. 112 When notice is dispensed with .................................... 107 Art. 569....................................................................................... 124
Sec. 113 Delay in giving notice; how excused ........................... 107 Art. 570....................................................................................... 125
Sec. 114 When notice need not be given to drawer ................... 107 Art. 571....................................................................................... 125
Sec. 115 When notice need not be given to indorser ................. 108 Art. 572....................................................................................... 125
Sec. 116 Notice of non-payment where acceptance is refused... 108 Trust receipts law (PD 115) ........................................................... 130
Sec. 117 Effect of omission to give notice of non-acceptance ... 109 Sec. 1 Short title ......................................................................... 131
Sec. 2 Declaration of policy ....................................................... 131
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Sec. 3 Definition of terms........................................................... 131 Sec. 144 When failure to present releases drawer and indorser . 147
Sec. 4 What constitutes a trust receipt transaction ..................... 132 Sec. 145 Presentment; how made ............................................... 147
Sec. 5 Form of trust receipts; contents ....................................... 135 Sec. 146 On what days presentment may be made..................... 148
Sec. 6 Currency in which a TRA may be denominated ............. 135 Sec. 147 Presentment where time is insufficient ........................ 149
Sec. 7 Rights of entruster ........................................................... 135 Sec. 148 Where presentment is excused..................................... 149
Sec. 8 Entruster not responsible on sale by entrustee ................. 136 Sec. 149 When dishonored by non-acceptance .......................... 150
Sec. 9 Obligations of entrustee ................................................... 137 Sec. 150 Duty of holder where bill not accepted ........................ 150
Sec. 10 Liability of entrustee for loss ......................................... 137 Sec. 151 Rights of holder where bill not accepted ..................... 151
Sec. 11 Rigths of purchaser for value and in GF ........................ 137 XII. Protest ..................................................................................... 151
Sec. 12 Validity of entrsuter’s security interest.......................... 137 Sec. 152 In what cases protest necessary ................................... 151
Sec. 13 Penalty clause ................................................................ 138 Sec. 153 Protest; how made........................................................ 152
Sec. 14 Cases no covered by decree ........................................... 139 Sec. 154 Protest; by whom made ............................................... 153
X. Acceptance ................................................................................ 139 Sec. 155 Protest; when to be made ............................................. 154
Sec. 132 Acceptance; how made, etc. ........................................ 139 Sec. 156 Protest; where made..................................................... 154
Sec. 133 Holder entitled to acceptance on face of bill ............... 141 Sec. 157 Protest both for non-acceptance and non-payment ...... 155
Sec. 134 Acceptance by separate instrument ............................. 142 Sec. 158 Protest before maturity where acceptor insolvent ........ 155
Sec. 135 Promise to accept; when equivalent to acceptance ...... 142 Sec. 159 When protest dispensed with ....................................... 155
Sec. 136 Time allowed for drawee to accept .............................. 143 Sec. 160 Protest where bill is lost, etc. ....................................... 156
Sec. 137 Liability of drawee retaining or destroying bill ........... 143 XIII. Acceptance and honor ........................................................... 156
Sec. 138 Acceptance of incomplete bill ..................................... 144 Sec. 161 When bill may be accepted for honor .......................... 156
Sec. 139 Kinds of acceptance ..................................................... 144 Sec. 162 Acceptance for honor; how made ................................ 157
Sec. 140 What constitutes a general acceptance ........................ 145 Sec. 163 When deemed to be an acceptance for honor of the
Sec. 141 Qualified acceptance.................................................... 145 drawer ......................................................................................... 158
Sec. 142 Rights of parties as to qualified acceptance ................. 146 Sec. 164 Liability of the acceptor for honor ............................... 158
XI. Presentiment for acceptance .................................................... 146 Sec. 165 Agreement of acceptor for honor ................................. 159
Sec. 143 When presentment for acceptance must be made ........ 146 Sec. 166 Maturity of bill payable after sight, accepted for honor
.................................................................................................... 159
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Sec. 167 Protest of bill accepted for honor, etc. ......................... 160 Sec. 187 Certification of check; effect of ................................... 178
Sec. 168 Presentment for payment to acceptor for honor; how Sec. 188 Effect where the holder of heck procures it to be certified
made ........................................................................................... 160 .................................................................................................... 179
Sec. 169 When delay in making presentment is excused ........... 161 Sec. 189 When check operates as an assignment ....................... 179
Sec. 170 Dishonor of bill by acceptor for honor ........................ 161
XIV. Payment for honor ................................................................ 162 Abbreviations:
 BF – Bad faith
Sec. 171 Who may make payment for honor ............................. 162  CC – Civil Code
Sec. 172 Payment for honor; how made..................................... 162  GF – Good faith
Sec. 173 Declaration before payment for honor ......................... 163  GR – General rule
 HDC – Holder in due course
Sec. 174 Preference of parties offering to pay for honor ........... 163  HFV – Holder for value
Sec. 175 Effect on subsequent parties where bill is paid for honor  IPV – Innocent purchaser for value
.................................................................................................... 164  EGR – Exception to general rule
Sec. 176 Where holder refuses to receive payment supra protest  LC – Letter of credit
.................................................................................................... 164  NIL – Negotiable Instruments Law
 TRA – Trust receipts agreement
Sec. 177 Rights of prayer for honor ........................................... 165
XV. Bills in set ............................................................................... 166
Sec. 178 Bills in set constitute one bill....................................... 166
Sec. 179 Rights of holders where different parts are negotiated 166
Sec. 180 Liability of holder who indorses two or more parts of a
set to different persons ............................................................... 167
Sec. 181 Acceptance of bill drawn in sets .................................. 167
Sec. 182 Payment by acceptor of bills drawn in sets ................. 167
Sec. 183 Effect of discharging one of a set ................................ 167
XVI. Promissory notes and check .................................................. 168
Sec. 184 Promissory note, defined ............................................. 168
Sec. 185 Check defined .............................................................. 170
Sec. 186 Within what time a check must be presented .............. 174
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I. FORM AND INTERPRETATION
SEC. 1 FORM OF NEGOTIABLE INSTRUMENTS
To be negotiable
a. Must be in writing and signed by maker or drawer
b. Unconditional promise or order to pay a sum certain in money
c. Payable on demand, or at a fixed or determinable future time
d. To order or bearer
e. When addressed to drawee
 Named
 Otherwise indicated with reasonable certainty
Promissory note Bill of exchange (BOE)

Must be in writing and signed by the maker Must be in writing and signed by the drawer
Contain an unconditional promise to pay a sum Contain an unconditional order to pay a sum certain
certain in money in money
Payable on demand or determinable future date Payable on demand or determinable future date
Payable to bearer or order Payable to bearer or order
Drawee must be named or indicated with reasonable
certainty
*This does not cover negotiable documents.
There is no such thing as oral negotiable instrument.
The signature is presumed valid. The party against whom the instrument operates must provide an evidence
for its invalidity.
Money is legal tender thus gold, silver and bank notes are not money.
Non-negotiable instruments (e.g. pay to Pedro) may be transferred or assigned. They can only pass the
rights that they had.
A promissory note may be a demand instrument but is usually a time instrument.
The word order or bearer are usually referred to as words of negotiability.
“To the order of” and “or order” indicate a promise to pay as ordered or commanded by the payee.
When no time for payment is expressed, an instrument is payable on demand.
The payee may not be specified if the promise is made to bearer.
Check is a BOE that is drawn on a bank and payable on demand.
1 | I. Form and Interpretation | Sec. 1 Form of negotiable instruments

BOE parties:
a. Drawer- issue and draws the order
b. Drawee- ordered and expected to pay
c. Payee- to whom the BOE is originally issued
There can be drawer-drawee or drawer-payee.
If the drawee accepts the BOE, he becomes an acceptor. The drawer becomes a surety.
SEC. 2 CERTAINTY AS TO SUM; WHAT CONSTITUTES
Sum certain although

a. With interest
b. Stated in installments
c. Stated installments or interests, provision that become due upon default
d. Exchange (fixed or current)
e. Costs of collection or attorney’s fee in case not paid at maturity
Payment must be fixed amount of money. It must not need to refer to outside source.
Determine from instrument itself.
Otherwise, not negotiable because no longer substitute for money.
Permissible clauses or stipulations:

a. Interest at a fixed rate
b. Interest at increased (if not paid at maturity) or reduced rate (if paid before maturity)
c. Stated installments
 must state the interest of each installment
 the due date of each installment
d. Stated installments with acceleration clause dependent on maker (non-negotiable when acceleration
at option of holder)
e. Sum to be paid with exchange (may be a fixed rate or the current rate)
f. Sum to be paid with costs of collection or an attorney’s fees after maturity
Example dependent on extrinsic:

 Pay 100 or what may be due
 100 and also other sum which may be due
 1000 and value of four days labor
2 | I. Form and Interpretation | Sec. 2 Certainty as to sum; what constitutes

Basic test?
Whether the amount payable can be ascertained.
Interest is mere incident. Does not make it unascertainable.
If accrual or rate is not specified, then it shall be computed form date of instrument. If not dated, from
issuance. The rate to be used, if not stipulated, is the legal interest.
Usurious interest still be negotiable. Contract remains.
I will pay you P1000 in two installments. Negotiable?

No. Installment date not fixed.
Still negotiable:
 Acceleration dependent on maker
 Extension dependent on holder – effectively on demand
Can be on make but extension must be specified time
Extension dependent on holder for “no longer than reasonable time?”

Not negotiable.
Exchange is the charge for expenses in providing funds at place where the instrument is payable which is
issued at another place.
 Payment in foreign currency does not impair negotiability
 Exchange is applicable only to foreign bills
 Not applicable to inland or domestic bill (disregarded stipulation)
Can get cost of collection and attorney’s fees?

Yes. Immaterial whether the code only says “or.”
Increases amount at maturity?

Still allowed. Increase only upon maturity. In that case, ceases to be negotiable in the full commercial sense.
Any stipulation which renders the sum payable uncertain after it has ceased to be negotiable will not impair
the previous negotiability.
3 | I. Form and Interpretation | Sec. 2 Certainty as to sum; what constitutes

“Costs of collection if not paid?”

Negotiable.
“Charges and expenses including attorney’s fee?”

No. Cannot be ascertained how much money it represents. Use of the word “including.”
Attorney’s fees be reduced by courts?

Yes. If unconscionable. It is not an interest.
If attorney’s fee is not specified?

Reasonable sum.
SEC. 3 WHEN PROMISE IS UNCONDITIONAL
Unconditional
a. Indication of particular fund for reimbursement or a particular account be debited
b. Statement of transaction which gives rise to the instrument
Order or promise to pay out of particular fund ≠ negotiable
Not essential that word “promise” or “order” be used as long as intent is present.
Bare acknowledgement of indebtedness is not allowed (e.g. IOU, due P1,000, due P or bearer, IOU P1,000
to be paid on September 30).
Acknowledgement is only an evidence of an old obligation.
A PN imports a new obligation.
Equivalent to “promise”
 Payable
 To be paid
 I agree to pay
 I guaranty to pay
 Obliges himself to pay
 Good for
4 | I. Form and Interpretation | Sec. 3 When promise is unconditional

 Due on demand
An order should be imperative.

The following does not constitute an order:
 “I wish you would pay”
 “I hope you will pay”
 “I authorize you to pay”
Use of word please?

Polite word only. Not affect negotiability.
Not convert to request.
What if drawer does not pay?

Immaterial whether he complies or not. Negotiability not affected.
Unconditional when payable absolutely, not based on contingency.

Ex. not negotiable
 If X marries
 If property is sold
 After two years if still alaive
 Out of rent
Even if events is very likely to occur, still not negotiable. Simple contract only.
Indication of a particular fund out of which reimbursement is to be made is valid.

This occurs after payment to payee.
Drawee is not limited to the fund specified. Fund indicated is not the direct source of payment. Only
reimbursement.
Indication of a particular fund out of which payment is to be made is non-negotiable.

The fund may be insufficient.
Not negotiable even if later found sufficient.
Ex.
 Out of shares
 Share in profit
However, although non-negotiable, not made uncollectible.
5 | I. Form and Interpretation | Sec. 3 When promise is unconditional

The intention to limit to particular funds must be clear.

If vague?
Negotiable.
To debit a particular account?

No. Also means reimburse.
Statement of transaction which gives rise to instrument does not make it conditional. Ex. recital of
consideration.
It has no adverse legal effect on the negotiation of the instrument.
Additional terms (e.g., collateral securing it, per contract, per memo) will not automatically make it non-
negotiable.
If the instrument is subject to terms and conditions contained in another paper (“subject to or governed by
the terms and conditions of our contract executed by us on ____”), it is non-negotiable regardless of the
term stated.
Now requires examination of said contract.
The instrument must be determinable from the face alone.
SEC. 4 DETERMINABLE FUTURE TIME; WHAT CONSTITUTES
Determinable future time

a. Fixed period after date or sight
b. On or before a fixed or determinable future time
c. On or at a fixed period after occurrence of specified event which is certain to happen, though
timing is uncertain
Payable upon contingency ≠ negotiable

Happening of the event does not cure defect.
An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure
the defect.
6 | I. Form and Interpretation | Sec. 4 Determinable future time; what constitutes

It should be:
a. Payable at a fixed time
b. Payable at a fixed period after date
c. Payable at a fixed period after sight (after the instrument is seen by the drawee upon presentment
for acceptance or accepted by the drawee)
d. Payable on or before a fixed time
e. Payable on or before a determinable future time (ex. next school semester)
f. Payable on the occurrence of a specified event (ex. death)
Those payable upon a contingency are not considered to be negotiable.
“Renewed at maturity?”
Not unconditional.
Time must be certain

 Demand instrument – pay at anytime
 Term or time instrument – upon arrival of time
Benefit of time
 Holder will now when to enforce
 Person liable know when to pay
 For second parties (e.g., drawer, indorser, accommodation party) – when obligation is to arise
Sec. 4 v. Sec 7
Sec. 4 is on a future time
Sec. 7 is on demand
“At the earliest possible time after date”

Not negotiable.
“On or before date” option of maker?

Negotiable. Payee demand only at fixed, not before.
Maker has the option to pay in advance.
Necessary that the year of maturity be stated. Otherwise, not determinable.
Payable on or before date?
7 | I. Form and Interpretation | Sec. 4 Determinable future time; what constitutes

Valid.
On demand or at end of year?

No. Payee has power to declare mature at any time.
Uncertain.
However, believed to be negotiable and on demand instead.
Collect on date but extend to another date if unpaid?

Negotiable.
Other negotiable:
 Start of school year
 Death of father
 30 days after death
Payable five days before death?

No. uncertain.
Upon reaching age of majority?

No. can die.
Not negotiable:
 If die within five years
 If able
SEC. 5 ADDITIONAL PROVISIONS NOT AFFECTING NEGOTIABILITY
Promise to do any act in addition to payment ≠ negotiable
Negotiability not affected:

a. Sale of collateral securities if not paid at maturity
b. Confession of judgment if not paid at maturity
c. Waives benefit or protection of the obligor
d. Holder’s election to require something be done in lieu of payment
Nothing shall validate any provision or stipulation that is illegal.
8 | I. Form and Interpretation | Sec. 5 Additional provisions not affecting negotiability

An instrument which contains an order or promise to do an act (e.g., one is to be assigned) in addition to the
payment of money is not negotiable.
Not negotiable:
 I promise to pay and/or deliver
 And pay tax assessed
 And keep free from encumbrance
 And a promise to insure property pledged
Allowed by law:
a. Sale of collateral securities in case of non-payment at maturity date
Only after maturity. No longer negotiable.
Thus, may also cover other liabilities, not just the instrument itself.
b. Confession of judgment after the obligation becomes due

This is obtaining judgment without delay. Eliminates trial.
This is not allowed in our law.
Note that last portion of this section says that it will not validate illegal stipulation.
Different from:
 Cognavit actiomen – has confessed action after action is filed
 Relicta verificationem – pleading being abandoned or withdrawal of defense
c. Waiver of benefit granted by law after maturity date

Ex. notice of dishonor, waiver of protest, presentment for payment, demand, exemption from
attachment
d. Election of holder to requires some other act(“I promise to pay P or order P15,000 or an air
conditioner at the option of the holder”)
If the option is with the promissor, it is non-negotiable because cannot compel to pay money.
A recital to deliver on demand additional security to the ratification of a holder

 Not affect negotiability
SEC. 6 OMISSIONS; SEAL; PARTICULAR MONEY
9 | I. Form and Interpretation | Sec. 6 Omissions; seal; particular money

Not affect negotiability

a. Not dated
b. Place drawn or place payable not shown
c. Bears seal
d. Designates particular kind of current money for payment
Nothing to alter or repeal statute requiring nature of consideration to be stated.
If there is no date, the instrument will be considered to be dated as of the time it was issued.
If not yet issued, there is no inception.
Date is necessary
 Payable after date
 Interest to run from date
 Date of last negotiation (for PN) or date of issue (for BOE) as regards negotiability
Instruments may be postdated or antedated.
If there is a date but there is no such date in the calendar, it is resolved that the nearest date of the month is
intended (September 31 means September 30).
Note is not dated. Can holder insert the true date?

Yes. Sec. 13 applies.
However, insertion of wrong date will not avoid innocent third party.
Omission of the value received is considered to be negotiable.

It is not necessary to put the “value received.”
However, this would not alter or repeal any statute requiring in certain cases the nature of the consideration
to be stated in the instrument.
No law in the Philippines requiring such.
If the place of payment is not specified, it is presumed to be payable at the place of residence or business of
the maker or drawer.
10 | I. Form and Interpretation | Sec. 6 Omissions; seal; particular money

Presentment for payment when place not specified:

1. Presumed where dated
2. Payable at the place of residence of maker
3. Maker’s or drawer’s place of business or his home
If it bears a seal, it does not affect the negotiability of the instrument.
Advisable, compulsory, that BOE or PN appear in public instrument.

Purpose is to be included among the preferred credits with respect to property of debtor.
Designating a particular kind of current money payable does not affect the negotiability of the instrument.
Money is not limited to legal tender
 Kind of current money or foreign money (e.g., pay in fifty peso bills)
 “Currency” “in current funds” “current bank note” constitute commercial paper
Foreign money not current in Philippines. Negotiable?

Yes.
SEC. 7 WHEN PAYABLE ON DEMAND
Payable on demand:
a. So expressed (on demand, at sight, on presentation)
b. No time of payment
Issued, accepted or indorsed when overdue AI I (Ai Ai Delas alas)

 On demand as regards person
o Issuing
o Accepting
o Indorsing
On demand is present debt due at once.
First paragraph is good to immediate and subsequent parties.

Second paragraph is good to immediate only. As to them, no difference between an HDC and not HDC.
11 | I. Form and Interpretation | Sec. 7 When payable on demand

“On demand” is usually used for PM while “at sight” is usually for BOE.
The following are payable on demand:

a. Where it is expressed to be payable on demand, or at sight, or at presentation
b. No time for payment is expressed
c. Overdue instrument (considered a demand paper)
Pay from my estate or demand?

Negotiable. May rely on “on demand.”
Other equivalent words:

 At such times the payee may require
 At holder’s convenience
 At maker’s convenience (Smithers v. Junker, 41 Fed. 101)
An instrument payable on demand cannot be contradicted by parol proof.
Trade acceptance omitted the year?

No.
Payable thirty days after date. Date given was already overdue. On demand?
Yes.
Payable on July 2013. Accepted on August. On demand?

Yes.
Thirty days after July 1, 2013. Indorsed on Augsut 1. On demand?

Yes.
SEC. 8 WHEN PAYABLE TO ORDER
When payable to order of specified person or to him or his order.

Or order of: Payee ER EE joint several office
a. Payee ≠ maker, drawer, drawee
b. Drawer or maker
c. Drawee
12 | I. Form and Interpretation | Sec. 8 When payable to order

d. Two or more payees jointly

e. One or some of several payees
f. Holder of an office
If an order instrument
 Payee named; or
 Payee indicated with reasonable certainty
Words of negotiability are indispensable because the maker or drawer assumes greater risk than that if it
was not negotiable.
Any words may be used.
Pay to P?
Not negotiable. Limited to paying one person.
Subsequent purchaser will only be assignee.
To P and assigns?
Negotiable. (Putnan v. Cyrmes, 1 McNull 9, 36 Am. Dec. 250).
It may be drawn to order of:

a. A payee who is not maker, drawer, or drawee
b. The drawer or maker
A note payable to order of maker is not negotiable until indorsed by him.
c. The drawee
d. Two or more payees jointly
e. One or more of several payees
Indorsement by any one of them is sufficient to pass title.
f. The holder of an office for the time being (e.g., BIR commissioner, administrator of estate)
The payee must be named or indicated therein.

Otherwise, no one can indorse. Not negotiable.
Payable to order without blank for name of a person?

Not negotiable. Person not named or indicated.
Not automatically make it a bearer instrument.
13 | I. Form and Interpretation | Sec. 8 When payable to order

SEC. 9 WHEN PAYABLE TO BEARER
Payable to bearer: EPFPB (think of answering an abstract exam: E, F, B then Ps in between)

a. Expressed
b. Person named or bearer
c. Order of a fictitious or non-existing person
 Fact was known to person making
d. Not purport to name of any person
e. Only or last indorsement in blank
Bearer means person in possession of a bill or note.
If “payable to order” only  not negotiable.

If “payable to bearer” only  negotiable.
Why the difference?
Order instruments need to be indorsed.
Bearer instrument are

 negotiated without indorsement
 payment to any person in possession
 must be in GF and without notice that title is defective
For added security, may demand that it be indorsed.
The following are bearer instruments:

a. Expressed to be payable to bearer – on its face, bearer
Other words:
 To holder
 To any one whom he delivers
Payable to the order of bearer?

Payable to order, not bearer.
Criticized because the purchaser would not know whether he was the original recipient.
Pay bearer or if registered to Filriters, to the registered owner. Bearer?
14 | I. Form and Interpretation | Sec. 9 When payable to bearer

No.
b. Payable to person named therein or bearer – on its face, bearer

Other words:
 Holder or order
 Order of P or bearer
Under the Uniform Commerce Code, an instrument is an order unless bearer words are handwritten
or typewritten.
c. Payable to order of a fictitious person – on its face, order

Fictitious when it is feigned or pretended.
Fictitious person is one who has no right to the instrument, although there is a person with that
name.
A person should be the intended recipient.
In a fictitious-payee situation, the drawee bank is absolved from liability.
“Person making it so payable” refers to the maker or drawer.

If not known to maker that the person be fictitious, still an order.
Reason?
Fictitious person cannot indorse.
d. Payable to order of a non-existing person – on its face, order
e. Name of payee is not name of person – on its face, order

Ex.
 Cash
 Cash or order
 Money
 Sundries
 Payroll
To the order of P’s estate?

Bearer.
15 | I. Form and Interpretation | Sec. 9 When payable to bearer

Criticized because an estate is always represented by a person.
f. Only endorsement in blank – on its face, order
g. Last endorsement in blank – on its face, order
Blank indorsements cannot make non-negotiable to be negotiable.
SEC. 10 TERMS, WHEN SUFFICIENT
Instrument
 Need not follow the language of the Act
 Indicate intention to conform with the Act
The instrument need not follow the language of NIL.

Any terms are sufficient which clearly indicate an intention to conform to the requirements.
Negotiable instrument may be written in foreign language.
Clear intention of the parties should be present—substance over form.
Mere defect in language or grammatical error does not render the instrument non-negotiable. Ex. “himself
order”
SEC. 11 DATE, PRESUMPTION AS TO
Instrument or acceptance or indorsement is dated

 Prima facie the true date if making, drawing, accepting or indorsing
He who claims that some other date is the true date has the burden to establish such claim.
Different date be shown only as between original parties, not against HDC.
A date is necessary when:
16 | I. Form and Interpretation | Sec. 10 Terms, when sufficient

a. Where instrument is payable at a fixed period after date

Ex. 30 days after date
b. Where instrument is payable at a fixed period after sight or presentment
Ex. 30 days after sight/presentment
c. Sec. 71 – When it is on demand, payment is
 If PM, reasonable time after its issue
 If BOE, reasonable time after the last negotiation
What is reasonable time is a question of fact.
SEC. 12 ANTE-DATED AND POST-DATED
Not invalid if
 Ante dated
 Post dated
EGR: for illegal or fraudulent purpose
Person whom instrument is delivered

 Acquires title on the date of delivery
Ante-dated  contains an earlier date than the true date of issuance.

Ex. Issued on July 30 but dated July 15.
Post-dated  contains a date later than the true date of its issuance.
Ex. Issued on July 15 but dated on July 30.
It may be negotiated before or after the date given

 As long as it has not reached its maturity.
Ex. of ante dating for illegal purpose

 Conceal usurious interest
Ex. of post dating for illegal purpose
 Hide insufficiency of funds
If payee was informed that check has no funds, drawer liable for estafa?
No. No deceit. Liable under BP 22.
17 | I. Form and Interpretation | Sec. 12 Ante-dated and post-dated

There is a prima facie evidence of knowledge of insufficiency of funds after 90 days of presentment of check
to the bank or after receiving a notice from a bank within five days.
Person acquires title or ownership to the instrument

 On the date of delivery
 Not the date it bears
SEC. 13 WHEN DATE MAY BE INSERTED
The true date may be inserted by any holder (date of issue or date of acceptance)
 Payable at a fixed period after date is issued undated
 Payable at fixed period after sight is acceptance undated
In the hands of a holder in due course

 Date inserted, even if wrong, is to be regarded as the true date.
This section does not apply

 Instruments on demand
 BOE date of issuance if payable after sight (not necessary to date issuance, only acceptance)
Payable to P. It was not dated. Negotiated. Subsequent holder may date?

Yes.
Insertion of wrong date by one who knows the true date

 Avoid the instrument as to him and those claiming under him
 Not avoid as to subsequent HDC
o Regarded as true date by HDC
Why?
One who signs and furnishes is estopped.
30 days after date. Date should be on May 20 to be payable on June 19. P wrote May 15 and negotiated it.
When can a subsequent HDC collect?
Enforce on June 14.
Avoid the instrument as P is concerned.
18 | I. Form and Interpretation | Sec. 13 When date may be inserted

SEC. 14 BLANKS, WHEN MAY BE FILLED (INCOMPLE TE INSTRUMEN T THAT WAS DE LIVERED )
Instrument is wanting in material particular

 Prima facie authority of possessor to complete by filling up blanks
Signature on blank paper delivered by the one who signed to convert it to negotiable instrument
 Prima facie authority to fill it up for any amount
To be enforced against any person who became a party before the completion of the instrument
 Filled up in strict accordance with
o Authority given
o Within reasonable time
If completed instrument is negotiated to HDC

 Valid and effectual
 May enforce as if filled up strictly
Two steps in issuing a negotiable instrument:

 Mechanical act of writing the instrument completely and in accordance with Sec. 1 and
 Delivery of the complete instrument by the maker/drawer
Cases covered by Art. 14

1. Obvious blanks
Person who signs or indorses is liable to bona fide holders on the doctrine of implied authority
2. Apparently complete, containing blanks because the written matter does not so fully occupy the
written paper
Person who signs or indorses is liable to bona fide holders on the doctrine of negligence
Material particular refers to every complete feature of an instrument (date, due date, payee, amount,
drawer or rate of interest).
However, not limited to those essential requisites (ex. place of payment, amount of attorney’s fees).
Authority to complete ≠ authority to alter

Ex. Cannot insert words “or order” or “or bearer” after the name of payee
19 | I. Form and Interpretation | Sec. 14 Blanks, when may be filled (Incomplete instrument that was delivered)
If a blank paper is signed by the maker, the payee has the burden to prove the purpose of the maker. It can
be filled up for any amount.
M delivered a blank paper with signature. Given to P. P can make it negotiable?

No. No shown purpose. Could be for comparison purposes only.
The holder has the prima facie authority to fill up the blanks within a reasonable time.
Person who signed his name has the burden to rebut presumption of agency or that authority granted was
exceeded.
When is “reasonable time counted?”

From the time of original issuance, not successive negotiation.
M authorized to write 10k. P only wrote 2k. Given to C who is not HDC. Can claim?
No. Collect nothing.
C is HDC?
Can claim.
Why allowed by law?
Loss must fall upon the one who first reposed confidence and made it possible for the loss to occur.
In the hands of a holder in due course, the defense that the instrument had not been filled up in accordance
with the authority given and within a reasonable time is not available.
 This is only a personal defense.
SEC. 15 INCOMPLETE INSTRUMENT NOT DELIVERED ( INCOMPLE TE INSTRUMEN T THAT IS

UNDE LIVERED )
Incomplete instrument which is not delivered, if completed and negotiated without authority
 Not be a valid contract
o Against person whose signature was placed before delivery
There is a real defense.

Even against a holder in due course, it will not be a valid contract.
20 | I. Form and Interpretation | Sec. 15 Incomplete instrument not delivered (Incomplete instrument that is undelivered)
The prima facie presumption of delivery must be rebutted by the maker by proof of the contrary.
The defense is only available to parties prior to the delivery.

Hence, after stealing, it was negotiated, those who negotiated will be liable. Only the maker has defense.
P stole M’s check. Then A, B, C, D negotiated. Can D claim?

Yes. Only to P, A, B, C. Not to M who has real defense.
SEC. 16 DELIVERY; WHEN EFFECTUAL; WHEN PRESUMED (COMPLE TE INSTRUMENT

THAT IS UNDE LIVERED )
Until delivery
 Incomplete
 Irrevocable
Between immediate parties and remote parties other than HDC

 Delivery to be effectual
o Made by or under the authority of person
 Making
 Drawing
 Accepting
 Indorsing
o May be shown to be
 Conditional
 Special purpose
 Not for transferring the property in the instrument
When instrument is with HDC

 Valid delivery by all parties prior is conclusively presumed
When instrument no longer the with the party whose signature appears
 Valid and intentional delivery is presumed
EGR: Unless contrary is proved
21 | I. Form and Interpretation | Sec. 16 Delivery; when effectual; when presumed (Complete instrument that is undelivered)
Delivery means transfer of possession, actual or constructive, from one person to another.
 May be through
o Authorized agent
o Mail
Found PN in the effects of the deceased. Negotiable?

No. No delivery.
Receipt of checks by collector of payee. Negotiable already?

No. This is not issuance and delivery.
He is not a holder. He is not an agent. Only a collector.
Issue is defined as the first delivery of the instrument, complete in form, to a person who takes it as a
holder.
Holder means the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof.
Kept a PN in his drawer. Liability?

None.
A valid and intentional delivery by the maker is presumed until the contrary is proved. There is a prima
facie presumption of delivery but subject to rebuttal.
Immediate parties are those having or being held to know of the conditions or limitations placed upon
the delivery of the instrument. It contemplates privity not proximity.
An HDC an immediate party?

No. Sec. 52 – HDC has no notice of infirmity.
Remote parties are those not in direct contractual relation with each other.
Not immediate.
P steal note. D knows. P and D immediate?

Yes. As against P and D, M may prove that no delivery was made.
But D can recover from P, A, B, C who are indorsers.
22 | I. Form and Interpretation | Sec. 16 Delivery; when effectual; when presumed (Complete instrument that is undelivered)
M delivers note to X, agent, to give to P for safekeeping. X not inform P that safekeeping only. P can
enforce note?
Yes. He is HDC, not immediate party.
Instruments that are shown to be conditional (i.e. for safe-keeping only) is not enforceable to the maker.
This is only a personal defense.
If in the hands of HDC

 Valid prior delivery is conclusively presumed
P steals the note. D enforces against M but M not able to prove that it was stolen. Still conclusively
presumed?
Yes.
However, not apply to instrument which is incomplete.
Not apply to M who is victim of theft or robbery.
SEC. 17 CONSTRUCTION WHERE INSTRUMENT IS AMBIGUOUS
The following applies when the instrument is ambiguous: SI DP IS 2

a. Sums expressed in words and in figures are different. Use the one in words.
EGR: When words are ambiguous or uncertain, refer to figure
b. Payment of Interest without specifying the date from when to run
 Interest runs from the date of the instrument or
 Date of issue (if undated)
c. An instrument that is unDated
 Considered dated as of the date of issue.
d. Written and Printed words are in conflict
 Written words prevail.
e. Whether Instrument bill or note is in doubt
 Holder may treat either at his election
f. Capacity in which the person who Signed is in doubt
 Deemed that of an indorser
g. The instrument is signed by TWO or more persons “I promise to pay”
 Solidary liability
23 | I. Form and Interpretation | Sec. 17 Construction where instrument is ambiguous

“We promise to pay” is a joint liability.
Words outweigh figures. But sometime, when words are ambiguous, refer to the figures.
Note: If a printed check was filled up in such a way that it reads “pay to order of P only” wherein P only
was handwritten, it shall be deemed non-negotiable.
SEC. 18 LIABILITY OF PERSON SIGNING IN TRADE OR ASSUMED NAME
No person is liable on the instrument whose signature does not appear.

EGR: Expressly provided.
One who signs in a trade or assumed name

 Liable to same extent as he signed his own
Generally, only persons whose signatures appear on an instrument are liable thereon.
The following are the exceptions:

a. Where the person signs in trade or assumed name
b. The principal is liable if a duly authorized agent signs on his own behalf
c. In forgery, the forger is liable even if his signature does not appear
d. Where an acceptor makes his acceptance in a separate paper
e. Where a person makes a written promise to accept a bill before it is drawn
SEC. 19 SIGNATURE BY AGENT; AUTHORITY; HAS SHOWN
Signature of any party

 May be done by authorized agent
No particular form of appointment.
Authority may be established as in the case of agency.
The authority of the agent may be shown orally or in writing. There is no particular form.
24 | I. Form and Interpretation | Sec. 18 Liability of person signing in trade or assumed name
SEC. 20 LIABILITY OF PERSON SIGNING AS AGENT, ETC.
Person adds to his signature words indicating signs for or on behalf of a principal or representative
capacity
 Not liable if authorized
Mere addition of words describing him as agent

 Not exempt from personal liability if principal is not disclosed
Requisites of an agent to be not liable:

a. Duly authorized
b. He adds words to his signature indicating that he signs as an agent
c. Discloses the principal
If it fails any of these requisites, the agent will be personally liable but may introduce evidence that he
signed only in a representative capacity.
SEC. 21 SIGNATURE BY PROCURATION; EFFECT OF
Procuration
 Notice that agent has limited authority
 That principal is bound only if agent is within scope
Procuration is the act by which a principal gives power to another to act in his place as he himself. This
has a special and technical meaning which gives a warning that the agent has but a limited authority so that
the duty of the person dealing with him to inquire to the extent of that authority.
If the agent exceeded his authority, the principal is not bound.
SEC. 22 EFFECT OF INDORSEMENT BY INFANT OR CORPORATION
Indorsement or assignment of
 Corporation
25 | I. Form and Interpretation | Sec. 20 Liability of person signing as agent, etc.

 Infant
 Passes property, notwithstanding want of capacity
 But corporation or infant may incur no liability
A minor is not incapacitated to transfer certain rights though he is not bound by his indorsement for lack of
capacity. Minority is not even a personal defense but a real defense available to the minor.
A minor may be held bound by his signature if he is guilty of actual fraud (i.e. saying that he is of age
when in fact he is not).
For corporations, this applies to ultra vires acts which the corporation is without capacity to make the
contract in fulfillment of which they were executed.
SEC. 23 FORGED SIGNATURE; EFFECT
Signature forged or made without the authority

 Wholly inoperative
o No right to retain the instrument
o Or to give discharged thereof
o Or to enforce payment thereof against any party thereto
Can be acquired through or under such signature
EGR: Party against whom it is sought to enforce such right is precluded from setting up
 Forgery or
 Want of authority
Forgery is the fraudulent alteration of writing. Intent to defraud. Ex. signing of another’s name or alteration
of instrument.
Two cases under Sec. 23

1. Made by one who does not claim to be an agent and who has no authority
2. Made by agent but has no authority
In both cases, wholly inoperative.
Burden of proof lies on the party alleging forgery.
Forgery is real or absolute defense even against HDC.
26 | I. Form and Interpretation | Sec. 23 Forged signature; effect

P makes PN payable to his own forging M signature. Effect?

M not liable. Not an agent and not authority.
X signs M indicating that he signs on behalf of M. effect?

M not liable. No authority to bind.
Cases of forgery:
a. Indorsement of a note
b. Maker’s signature
c. Indorsement of a bill
d. Drawer’s signature either
 Without acceptance by the drawee
 With acceptance by drawee
GR: It is only the forged or unauthorized signature that is declared to be inoperative.

Rights may exist between and among parties subsequent to the forged signature.
It is still enforceable even if it is forged if:

a. The party is precluded from setting up the forgery or want of authority
b. Forged signature is not necessary to the holder’s title
X obtains possession of fraudulent note. Indorses to B by forging A. B to C. Effects?

C cannot enforce against M and P.
C cannot enforce against A (wholly inoperative signature).
C may go against B (genuine signature).
B or C has a right of recourse against X (X was forger).
A can recover from M and P (rights were not cut off).
Precluded is the same as estopped.
Persons precluded from setting up forgery:

a. Those who by their acts, silence, or negligence is estopped from setting up the defense of forgery
b. Those who warrant or admit the genuineness of the signatures in question:
i. Indorsers
ii. Acceptors

iii. Persons negotiating by delivery

A party precluded by reason of negligence may still recover damages. (Gempesaw v. CA).
P makes PN forging M. P indorses to A. A asks M if genuine. Affirmed. Can raise forgery?

No.
M, forged by husband, had a loan. M was silent. Raise forgery?

No. He who is silent when his conscience requires him to speak shall be debarred.
Ex. of precluded defense

 Drawer negligently failed to examine the checks returned to him
 W bank cleared P6000 despite being authorized to clear only P5000 (Republic v. Equitable)
 Indorsers after the forgery are liable to the holder
 W bank accepts a forged signature of R but not liable to forger or immediate parties
 Drawer was negligent in providing security measures in issuing checks (MWSS v. PNB)
 W bank returned the check 27 days later when central bank only provides 24 hours to return the
check if defective
 R who accorded his secretary unusual degree of trust is precluded from raising defense
especially when bank was not negligent
 W delayed in the return of the checks and even transferred money to the collecting bank
 W bank who accepted a check despite differences in signatures of the check and specimen
 W bank who cleared the check despite want of response from the clearing house saying that the
y were “exasperated”
Presented a check payable to cash to FEBTC. Checked the balance of Samsung. It was sufficient. Bank
teller 1 and 2 were satisfied with the signature. Asked the assistant accountant of Samsung, who happened
to be in the bank, if the checks were good. Replied that it was for purchase of equipment. Calle Samsung
but was not able to reach. FEBTC encashed. FEBT bears loss?
Yes.
GR: The fact that forgery is a clever one is immaterial.
EGR: When negligence can be traced to the drawer.
W required to verify indorsements?

No. W bank is in a position to verify the drawer’s signature by comparison with one in his hands, but has
ordinarily no opportunity to verify indorsements.

Can drawee bank recover from HDC if paid out of a forged check?
No. Betewen equally innocent persons, cannot recover.
Bank followed banking practice and was cleared by clearing house. Forgery will be sustained?
No. Not negligent.
Who bears the cost when both the collecting and drawee bank are negligent?
Allocated.
Right of drawee to recover

1. From enchaser or last indorser
2. Form drawer or depositor when negligent
Where note payable to order

 The party whose indorsement is forged is not liable to any holder even a holder in due course.
It is inoperative. Other parties prior to the party whose signature is forged are also not liable to
any holder.
P indorses note to A. X finds it and indorses to B by forging A. effects?

A is not liable to B.
M and P are not liable to B.
Where note payable to bearer

 If complete, the party whose indorsement is forged is liable to a holder in due course. In this
case, the forgery may be disregarded because it is a bearer instrument.
Why?
Can be negotiated by mere delivery.
What defense can be raised?

Want of delivery under Sec. 16. But not against HDC.
Where bill payable to order

 The party whose indorsement is forged is not liable even to a holder in due course. It is wholly
inoperative.

 If the drawee pays under the forged instrument, drawer is not liable in the bill and the drawee
may not debit the drawer’s account.
Drawee may pass liability back to the collection chain against the parties who took the forged
instrument and against forger himself.
 Where checks are received merely for collection and deposit, the bank cannot be expected to
know the genuineness of prior indorsements.
 Stamping “all prior endorsements and/or lack of endorsements are guaranteed” makes an
assurance that it has ascertained the genuineness of al prior indorsements
 Collecting bank is bound by its warranties and cannot set-up forgery against W bank
 Last indorser generally suffers the loss because it has the duty to ascertain he genuineness of
prior indorsements
 W bank can recover from collecting bank if W bank discovers that the signature of payee is
forged. Collecting bank has privity with its depositors. Even if collecting bank was not
negligent.
Drawer delivers the check to wrong payee believeing that he was the correct one. Effect?
Cannot set-up forgery. Drawer is liable.
X fraudulently obtained possession of check and forged P’s signature. Collecting bank indorsed
it to W bank. W debited the account of R. Effects?
W is liable to the R.
Collecting bank is liable to W bank under warranties as indorser.
W bank has remedy against X, civil and criminal.
P is not liable on the check.
R is not liable on the check.
R issued 10 checks. X, sales agent, indorsed all to A which deposited the same to collecting
bank. Collecting bank temporarily credited then debited when found out it was forged. Effects?
A, as indorser, warrants that signatures are genuine.
Collecting bank cannot be expected to know geniuses of all prior indorsements.
Back pay check was issued by BoT to P. From P to A then B then C who encashed to W.
Indorsement of P was forged. Effects?
Negotiation from P to A has no effect. From A to C, valid.
W can recover from C. C warrants that previous indorsements are genuine.

Where bill payable to bearer

 The drawee may debit the drawer’s account in spite of the forged indorsement.
The remedy of R is against the forger.
II. CONSIDERATION
SEC. 24 PRESUMPTION OF CONSIDERATION
Negotiable instrument prima facie

 Issued for valuable consideration
 Every person whose signature appears have become a party for value
Consideration is an inducement to a contract (e.g., cause, price, and impelling influence) which induces a
party to enter into the contract.
Consideration ≠ motive (personal or private reason)
Presumption of consideration
1. Need not be stated
2. Need not be alleged and proved
But can be rebutted.

Through convincing evidence.
M issued not to P or order for real estate at its negotiation stage. Before perfection, M withdrew. Days after,
P accepted. Check was with P already. Was there consideration?
No. Payee must prove. He claimed that never signed the acceptance until after the date of withdrawal.
SEC. 25 VALUE; WHAT CONSTITUTES
Value
 Any consideration sufficient to support simple contract
Antecedent or pre-existing debt
31 | II. Consideration | Sec. 24 Presumption of consideration

 Can constitute value

 Deemed whether instrument is payable on demand or future time
A consideration need not be adequate.

It is sufficient if it is a valuable one.
Antecedent or preexisting debt constitutes a value.

 Debt of a third person
 Security of pre-existing debt
No defense that no consideration beneficial to him personally.

Can be benefit to third person.
Enough that obligee foregoes some right or privilege or suffers some detriment.
Check issued to a person who was not authorized to collect. Effect?

No valuable consideration.
Considered issued for non-existing account.
Not sufficient consideration

 Love
 Affection
 Gratitude
SEC. 26 WHAT CONSTITUTES A HOLDER FOR VALUE
HFV
 Holder who has given value for the instrument
 Becomes HFV in respect to all parties prior to him
Holder for value is one who has given a value in exchange of the negotiable instrument and become such
with respect to the person given the value and all other prior parties.
A holder is presumed to be HFV unless contrary is proved.
32 | II. Consideration | Sec. 26 What constitutes a holder for value

If a holder is not in due course, the absence of a consideration can be set up.
M issued note to P without consideration. P to A without consideration. A to B with consideration. Effect?

B is HFV as regards A, P and M. May enforce full payment
What if B not HDC?
M can set-up the defense of lack of consideration.
If B negotiates by way of gift to C. Effect?
C is HFV against A, P, and M because of the value given by B.
Note that B does not see C as HFV.
P drawn by R against E bank. P deposits to W bank. Is W bank HFV?

No. parted nothing.
A bank to whom a check is deposited to is not a holder for value unless the same fund is exhausted by the
depositor.
Rules where funds represented by check are withdrawn

 If checked out, FIFO applies
 Another view is that as long as the balance of depositor is equal to or exceeds the amount of check
paid, W is not HFV
Second view is better. As if simple loan.
SEC. 27 WHEN A LIEN ON INSTRUMENT CONSTITUTE HOLDER FOR VALUE
When holder has lien on instrument arising from

 Contract or
 Implication of law
 Deemed HFV to extent of lien
One who has taken the instrument as collateral for debt has lien.
He would be a pledgee.
CC on pledge applies.
Different instances of being a holder for value with regard lien on an instrument (as pledgee):
33 | II. Consideration | Sec. 27 When a lien on instrument constitute holder for value
a. If the amount of the instrument is more than the debt secured by such instrument, the pledgee
becomes a holder for value to the extent of his lien
b. If there are existing defenses between the maker and the pledgor, the pledgee can collect on the
instrument only to the extent of his lien
c. If the amount of the instrument is less than the debt secured by such instrument, the pledgee
becomes a holder for value of the entire instrument
d. If there are real defenses, the pledgee can recover nothing
PN for P1,000 to order of P who pledges it to A to secure P’s debt of P800. Effect?
A is HFV up to P800.
If at maturity date of the PN, the debt of P is not yet due, A can collect in full and hold the surplus.
M has defense such that no consideration given by P. Effect?
A can collect only P800 even if HDC.
As to M, it is void. But A is allowed to recover because he is HFV.
If M’s signature is forgery?
A can collect nothing. Real defense.
SEC. 28 EFFECT OF WANT OF CONSIDERATION
Absence or failure of consideration

 Matter of defense as against any person not HDC
Partial failure of consideration

 Defense pro tanto, whether failure is ascertained and liquidated or otherwise
Absence of consideration means a total lack of any valid consideration for the contract, in consequence of
which the alleged contract must fail.
This is only a personal defense.
Hence, if subsequently indorsed to HFV, HFV can claim from M.
Partial failure in consideration is a defense pro tanto.
34 | II. Consideration | Sec. 28 Effect of want of consideration

PN given for parcel of land. P failed to deliver because sold it to X. Only 2/3 was delivered. Effect?
PN is effective only as to 2/3.
Matter of defense to any person not HDC.
R issued check in name of P to be given to X for textile payment. P indorsed and cashed the check and
turned over the proceeds to X. X failed to deliver. Carried in R’s books as P’s indebtedness. Can P claim
that he signed the check only as witness?
No. R can claim from P.
SEC. 29 LIABILITY OF ACCOMMODATION PARTY
Accommodation party
 Signed as
o Maker
o Drawer
o Acceptor
o Indorser
 Did not receive value thereof
 Purpose of lending his name to some other person
 Liable to HFV
o Even if HFV knows that only an accommodation party
Accommodation bill/note is one which the accommodation party has put his name.
No legal efficacy or obligation until delivered or negotiated to HFV.
Accommodation party is one who signed the instrument as maker, drawer, acceptor, indorser, without
receiving value therefor and for the purpose of lending his name to another party.
He is classified according to the accommodated party’s status.
Becomes surety of accommodated party.
 Permitted to show parol evidence.
o Absent concrete evidence, cannot be assumed to be accommodation party.
Accommodated party is one in whose favor a person without receiving value therefor, signs an instrument
for the purpose of lending his credit and enabling said party to raise money upon it.
 Impliedly agrees to
35 | II. Consideration | Sec. 29 Liability of accommodation party

o take up instrument at maturity

o indemnify the accommodation party
P needs P300k form PNB but would not allow because of poor credit rating. Now M signs as
accommodation party to P then P indorsed to PNB. P paid PNB. Can M go after P?
No. No value was given by M to P.
“Liable on the instrument to a holder for value notwithstanding such holder at the time of taking the
instrument knew him to be only an accommodation party.”
Without receiving value therefor means no value has been received for the negotiable instrument. It does
not mean that the accommodation party did not receive anything for lending his name.
Kinds of accommodation parties:

a. Accommodation maker
b. Accommodation drawer
c. Accommodation acceptor
d. Accommodation indorser
Liability of accommodation party:

1. Absence of consideration is not a defense
2. Rule not applicable to corporation (ultra vires)
o Signatories become personally liable
3. In effect, a surety
o Bound equally as the accommodated party
o Even if the accommodated party receives extension without consent of accommodation
party, still liable. He is a solidary co-debtor.
4. Right of accommodation party to notice of default or delinquency
o While not exonerating his solidary liability, bank should apprise (Gonzales v Phil.
Commercial)
After signing PN, M (accommodation party) kept it in drawer. Stolen by P then indorses to PNB.
PNB, knowing lack of deliver, can cash?
No. Not HDC.
Can an HFV, not HDC, collect from accommodation party?
No. Sec. 16, 55 and 58 has defenses.
36 | II. Consideration | Sec. 29 Liability of accommodation party

There can be no recovery by payee against accommodation party on an instrument vitiated by an illegality
of cause.
Debtor bough TV and mortgaged it to seller. Sold the TV without consent of mortgagee. Mortgagor and
accommodation party executed PN. Proper?
No. Illegality of cause on estafa.
Liability of solidary accommodation makers is joint and severally.
Rights of accommodation party:

1. Right to revoke
Has right to revoke accommodation?

Yes.
Notice to those interested at any time before the instrument has been negotiated for value.
Once negotiated to HFV, accommodation party is liable according to face of instrument.
2. Right to reimbursement
Article mentions that the accommodation party has “not received value therefor.”
Does not mean that nothing was given by the accommodated party to the accommodation party.
Rather, refers to proceeds of the instrument.
Accommodation party Regular party

Without receiving value therefor Signs the instrument for value
Signs for purpose of lending his name Does not sign on that purpose
May show parol evidence that he is only such Cannot disclaim or limit his personal liability
Cannot avail of absence/failure of consideration Can avail of absence/failure of consideration
May sue the accommodated party for May not sue any subsequent party for
reimbursement reimbursement
III. NEGOTIATION
SEC. 30 WHAT CONSTITUTES NEGOTIATION
37 | III. Negotiation | Sec. 30 What constitutes negotiation

Negotiated  transferred from one person to another

Transferee  is the holder
If payable to bearer
 Negotiated by delivery
If payable to order
 Negotiated by indorsement and completed by delivery
Transfer  property is delivered by one person to another
Negotiation is the transfer of negotiable instrument from one person to another made in such manner as to
constitute the transferee the holder thereof.
Methods of transfer of negotiable instrument:

a. Issue
 First delivery of the instrument
 Complete in form
 To a person who takes it as a holder
This is the start of the legal life.
b. Negotiation is to make the transferee a holder of the negotiable instrument.

 Transferee may acquire a better right than that of transferor
c. Assignment is the transfer of the title to an instrument.

 Assignee generally taking only such title or rights as his assignor has
 Subject to all defenses available against his assignor.
It is the transfer of rights under a contract.
Both negotiation and assignment require delivery to effect the transfer.
The transfer of a non-negotiable instrument always constitutes an assignment.
Transfer of negotiable instrument but transferee not become holder. Negotiation?

No.

If order instrument, to negotiate

 Indorsement
 Delivery
If bearer instrument, to negotiate
 Delivery
Holder  payee or indorsee who is in possession or bearer of the instrument
Methods of negotiation:
a. Instruments payable to order are indorsed then delivered
b. Instruments payable to bearer can be negotiated by mere delivery
Delivery means transfer of possession from one person to another. Can be

 Actual or
 Constructive (ex. without knowledge of A, indorsed by P to A)
M makes bearer instrument. Stolen by T and delivered to P. P can enforce?

Yes. Sec. 16 applies.
A thief or finder cannot acquire title.
But he can transfer title to innocent purchaser.
The payment of instrument by drawee bank is not a negotiation.

The bank is neither the payee nor the endorsee.
The writing of the name at the back of the check only serves as a receipt for money, not an indorsement.
Check becomes a voucher.
Can the bank pay only the amount based on the funds of the drawer?
No. Partial payment cannot be had because the check (i.e., voucher) is to be surrendered.
Commercial convenience.
A delivery of an order instrument without an indorsement operates as an ordinary assignment where the
assignee has the right to acquire the indorsement of the assignor.
In an ordinary assignment, the assignee is merely placed in the position of the assignor.

The former acquiring the instrument subject to all defenses, real and personal, available against the latter.
A bill or note, negotiable or not, may be assigned.

However, a non-negotiable may not be negotiated.
Transfer of negotiable order instrument without indorsement. Effect?

Assignment only.
Not delivered to A but was not indorsed by P. P died. Can A sue M on the noted?
Yes. But he is not a holder. He is an assignee.
LIT DSLR (law, instrument, transferee, defenses, solvency, liability, rights)

Negotiation Assignment
Only to negotiable instruments Generally to an ordinary contract
The transferee is the holder The transferee is the assignee
A holder in due course is subject to real defense An assignee in due course is subject to real and
personal defense
A holder in due course may acquire a better title or An assignee merely steps into the shoes of the
greater rights that possessed by the transferor assignor
A general indorser warrants the solvency of prior An assignor does not warrant the solvency of prior
parties parties unless expressly stipulated or the insolvency
is known to him
An indorser becomes liable once there is a An assignor is liable even without notice of
presentment and notice of dishonor dishonor
Governed by Negotiable Instruments Law Governed by the Civil Code
When is the distinction not material?

When only the maker is sought to be held liable.
GR: Payment by means of instrument is conditional payment only, subject to encashment.

EGR: In insurance, instruments (ex. checks) are immediately operative as payment.
Negotiation to a payee:
a. The first delivery of instrument to a payee is not negotiation but issuance
b. The first delivery of the instrument to other than payee (i.e., agent of the maker/draw) is a
negotiation

c. The delivery of instrument by the payee by the last holder is a negotiation
Delivery is essential to negotiation.

Delivery is presumed.
May be overcome by proof that it is stolen, except HDC.
When delivery is conditional

 Condition precedent
o Parol evidence is admissible
M delivers to P stating orally that delivery takes effect only upon the receipt of DOS.
Not stipulated. Allowed to be parol evidence?
Yes.
 Condition subsequent
o Parol not admissible
M sued P for not given by M for P’s tuition. M testified that P orally promised to
release M if P discontinues school. P subsequently discontinues. Parol admissible?
No. Violate parol evidence rule.
SEC. 31 INDORSEMENT; HOW MADE
Indorsement
 Written on
o Instrument or
o Paper attached thereto
Signature of indorser without additional words

 Sufficient indorsement
Indorsement is the writing of the name of the payee on the instrument with the intent either
 to transfer the title to the same, or
 strengthen the security of the holder by assuming a contingent liability for its payment, or
 both
41 | III. Negotiation | Sec. 31 Indorsement; how made

It is not only a mode of transfer.
Indorsement without delivery creates not holder, conveys no title.
Indorsement warrants:
1. Identity of the indorser (payee or true owner)
2. Genuineness of his signature
Duty of the person who cashes or pays to ascertain both.
Acceptor does not admit the genuineness of the indorser’s signature.
Assignment is broader. It includes indorsement.
Indorsement is necessary when:

a. Execution of order instrument payable to the maker or drawer
b. Negotiation of an order instrument
c. Not necessary in an assignment
d. Estoppel may take place in place of indorsement (ex. precluded from setting up forgery or want of
authority)
Forms of indorsement:
a. In writing (e.g., handwritten, stamp, printed)
b. The use of the word assign does not make the negotiation merely an assignment
Ex. I assign all my rights and interests in this note.
c. A signature of the indorser without any additional words becomes a blank indorsement
Ex. Blank indorsement.
d. Where the name of the indorsee is specified, it is a special indorsement
Notation at the back by P “I guarantee payment.” Now sued. Raises that he is only a guarantor. Valid?
Two conflicting authority
 First: Guaranty based on what was written and no other implication.
 Second: Majority suggests that it was an indorsement. Operates as an indorsement with
enlarged liability.
The place of the indorsement is not essential as long as the intent is present.
Allonge is the slip of paper physically attached to the instrument so as to become part of it.
42 | III. Negotiation | Sec. 31 Indorsement; how made

Place to indorse:
1. On the instrument
2. Paper attached
Leaving a blank space would facilitate fraud?

No. Discourages from inserting name because of the liability that would attach as an indorser.
SEC. 32 INDORSEMENT MUST BE OF ENTIRE INSTRUMENT
Indorsement
 Must be of the entire instrument
Not operates as negotiation

 Part only
 Two or more indorsees severally
If the instrument has been paid in part

 Can indorse the residue
Reason for prohibition?

Avoid multiplicity of suits.
Note amounting to P5k. Indorsed to A only P3k. Effect?

A is only an assignee.
Makes the note non-negotiable.
Partial indorsement makes the indorsee a mere assignee.
The negotiation is valid where indorsees are joint (combined or joined together; A and B).
Indorsement of all parties is necessary for further negotiation.
Alternative payees is allowed.

Either may negotiate.
Ex. Pay to A or B.
43 | III. Negotiation | Sec. 32 Indorsement must be of entire instrument

Partial indorsement is allowed

 Only when there was a partial payment already. The unpaid balance may be indorsed.
SEC. 33 KINDS OF INDORSEMENT
Kinds: SB RC Q (Starbucks, RC Qola)

 Special
 Blank
 Restrictive
 Qualified
 Conditional
Methods of negotiation:
a. Special
b. Blank
Kind of title transferred:
a. Restrictive
b. Non-restrictive
Scope of liability of indorser:
a. Qualified
b. Unqualified or general
Presence or absence of limitations:
a. Conditional
b. Unconditional
Other kinds:
a. Joint
b. Successive
c. Irregular or anomalous
d. Facultative
Once an instrument satisfies Sec. 1, no indorsement can negate its negotiability.
SEC. 34 SPECIAL INDORSEMENT; INDORSEMENT IN BLANK
44 | III. Negotiation | Sec. 33 Kinds of indorsement

Special indorsement
 Specifies the person
o To whom or
o To whose order
Further negotiation of specially indorsed instrument

 Needs the indorsement of the indorsee
Indorsement in blank
 Specifies no indorsee
 Becomes payable to bearer
o Negotiated by delivery
Special indorsement is one where the name of the payee is specified.

It is also known as the specific indorsement or indorsement in full.
Two forms:
a. “Pay to A”
b. “Pay to A or order” or “Pay to order of A”
In either case, must be signed by the indorser.
Not necessary to use words of negotiability.
Words of negotiability are not necessary to effectuate the indrosement.
A specially indorsed bearer instrument makes the special indorser liable to holders that make title through
his indorsement.
Blank indorsement does not specify the indorsee.

It then becomes a bearer instrument.
May be negotiated by delivery, whether bearer or order.
Bearer instrument where P signs. Did not indicate name of A but delivered to A. A is indorsee?
No. Only a bearer.
SEC. 35 BLANK INDORSEMENT; HOW CHANGED TO SPECIAL INDORSEMENT
45 | III. Negotiation | Sec. 35 Blank indorsement; how changed to special indorsement

Convert blank indorsement to special indorsement

 Writing over the signature of the indorser in blank
 Consistent with the character of the indorsement
Bearer always remain bearer.

But order can become a bearer if last indorsement is in blank.
Blank indorsement of A to B of an order instrument. Specially indorsed by B to C. Can C indorse by

delivery?
No. Needs to be indorsed.
The person who becomes a holder under a blank indorsement can write over the blank indorsement.
But it must be consistent with the character of the indorsement.
If without authority, not allowed when adding,

 Protest waived
 Demand and notice waived
 Without recourse
Constitutes material alteration. Will avoid the indorsement.
SEC. 36 WHEN INDORSEMENT RESTRICT IVE
Restrictive indorsement:
a. Prohibits further negotiation
b. Constitutes indorsee agent of indorser
c. Vests title in indorsee in trust for or the use of some other person
Mere absence of words implying power to negotiate

 Not make the indormsent restrictive
Restrictive indorsement
 Prohibits the further negotiation of the instrument, or
46 | III. Negotiation | Sec. 36 When indorsement restrictive

“Pay to A only”
“Pay to A and to no other person”
Banking rules prohibit more than one indorsement.

But not invalidate the negotiability of the instrument.
EGR: Bank may not legally refuse negotiable bill or check drawn against it with more than one
indorsement if nothing is irregular.
Prohibition must be written in express words.
 Constitutes agent of indorser
“Pay to A for collection”

“Pay to A for collection and remittance”
“Pay to A for deposit”
 Vests title for benefit of indorser or third person
“Pay to A in trust for B”

“Pay to A as agent of P”
This limits rights of indorsee and destroys negotiability of instrument.
A restrictive indorsee ≠ HDC

All subsequent indorsees are also not HDC.
Lack of words of negotiability is not necessarily restrictive indorsement.
SEC. 37 EFFECT OF RESTRICTIVE INDORSEMENT; RIGHTS OF INDORSEE
Right indorsee under restrictive indorsement

a. Receive payment on the instrument
b. Sue thereon on his name
c. Negotiate the instrument except when prohibited
All subsequent indorsees after the first indorsee under the restrictive indorsement
47 | III. Negotiation | Sec. 37 Effect of restrictive indorsement; rights of indorsee

 Acquire only the title of the first
“Pay to A for collection (sgd P).” A negotiates to B. Rights of B?

Acquires title as that of A. Only to collect.
If P already been paid?
A and B cannot enforce the instrument.
SEC. 38 QUALIFIED INDORSEMENT
Qualified indorsement
 Indorser is merely an assignor
 Expressed through adding the words
o without recourse
o similar import
 Does not impair the negotiability of the instrument
Other words similar:

 sans recourse
 at indorsee’s own risk
 or indorser not holder
Recourse means a resort to a person who is secondarily liable after the default of the person who is
primarily liable.
Effects of qualified indorsement:

a. Indorser is a mere assignor which means that the indorsement is to transfer title without
guaranteeing payment
b. To limit liability, not eliminate—warranty liability is still present (unless specifically excluded)
Still liable for ex.:
 Forgery
 Lack of good title to instrument indorsed
 Lack of capacity to contract on part of prior parties
 Instrument is valueless or not valid at time of indorsement and this was known to him
48 | III. Negotiation | Sec. 38 Qualified indorsement

c. Negotiability of the instrument is not affected

Only shows unwillingness to answer for solvency of prior parties.
Practical when the note has a long time to mature.
“I hereby transfer and assign my right, title and interest.” Qualified indorsement?
Two views
 Negotiation, not as an assignor
 Assignment only as qualified indorsement
P indorses to A without recourse. If M’s signature is forged, effect?

A can go after P. Warrants that instrument is genuine.
M cannot pay because of insolvency?
A cannot make P pay.
SEC. 39 CONDITIONAL INDORSEMENT
If there is conditional indorsement

 Party required to pay may disregard the condition whether fulfilled or not
Holder subsequent to the indorsee under conditional indorsement

 Hold the instrument or the proceeds subject to the rights of the person indorsing conditionally
Absolute indorsement is one by which the indorser binds himself to pay.

No other condition than the failure of prior parties to do so, and of due notice to him of such failure.
Conditional indorsement is one which the indorser imposes some other condition to his liability, or on the
indorsee’s right to collect the proceeds of the instrument.
A conditional indorsement does not prohibit the further negotiation of the instrument.
However, a condition on the face of the instrument makes it non-negotiable.
P indorsed to A subject to condition that his house be completed. At due date, house was not completed.
Can compel M to pay?
M has a choice to pay or not. If M pays, A will hold the proceeds.
49 | III. Negotiation | Sec. 39 Conditional indorsement

Different combinations of indorsements:

 Special and restrictive
 Special and qualified
 Special and conditional
 Blank and restrictive
 Blank and qualified
 Blank and conditional
 Special, unrestrictive, unqualified
 Etc.
SEC. 40 INDORSEMENT OF INSTRUMENT PAYABLE TO BEARER
If payable to bearer and indorsed specially

 May be negotiated by delivery
The person indorsing specially

 Liable as indorser to only such holders as make title through his indorsement
Does not transform the bearer instrument into an order instrument if indorsed specially.
SEC. 41 INDORSEMENT WHERE PAYABLE TO TWO OR MORE PERSONS
If payable to two or more payees or indorsees who are not partners

 All must indorse
EGR: One is authorized to indorse for the other
Sec. 41 does not apply to instruments payable to two or more payees severally.
If the instrument is payable to two or more payees or indorsees, all must indorse for the transaction to
operate as negotiation.
If only one, contrary to Sec. 32 (entire instrument). No right of action.
50 | III. Negotiation | Sec. 40 Indorsement of instrument payable to bearer

The payment of instrument with a missing indorsement is the same as payment on forged instrument to
unauthorized indorsement.
Indorsement by co-payee to the other payee transfers full title.
Exceptions:
a. Where the payees or indorsees are partners
b. Where the payee or indorsee has authority to indorse for the others
PN payable to “P and A,” Effects?

Indorsement of one is not enough.
If partners, allowed.
SEC. 42 EFFECT OF INSTRUMENT DRAWN OR INDORSED TO A PERSON AS

CASHIER
If drawn or indorsed to a
 Cashier
 Other fiscal officer of bank or corporation
 Prima facie payable to bank or corporation
May be negotiated by indorsement of

 Bank or corporation
 The officer
If it is payable to the cashier of an organization, it is deemed prima facie to be payable to the organization
and may be negotiated by the university through the indorsement of any of its duly authorized officers.
If it is intended to be payable to the cashier personally, sufficient evidence may be established.
The word “corporation” is not to include cities and towns.

Ex. Town treasurer is not to impose upon his town liability.
EGR: May be disproved.
51 | III. Negotiation | Sec. 42 Effect of instrument drawn or indorsed to a person as cashier

SEC. 43 INDORSEMENT WHERE NAME IS MISSPELLED.
If name of payee or indorsee is misspelled

 Indorse it as therein described add
 May add proper signature
Indorsement if misspelled:
a. By the same name but adding his proper signature
b. Sign in both names
The holder paying or giving value for the instrument may require the payee or indorsee to sign in both
names.
Surname was Villamayor in ON but should be Villamor. How to indorse?

1. (Sgd) Villamayor
2. (Sgd) Villamayor
(Sgd) Villamor
Only correct spelling error if intention of maker or drawer should be payable to the person making the
correction.
Any variance between the payee on face and the indorsee at the back should be ignored if they are the same
person.
SEC. 44 INDORSEMENT IN REPRESENTATIVE CAPACITY
Where person is to indorse in a representative capacity

 May indorse in such terms as to negative personal liability
An instrument may be indorsed by a person either personally or through and agent.
Authority need not be in writing.
52 | III. Negotiation | Sec. 43 Indorsement where name is misspelled.

SEC. 45 TIME OF INDORSEMENT; PRESUMPTION
Prima facie that every negotiation is made before the instrument is due.
EGR: Indorsement bears date after the maturity.
If the indorsement is without a date, the presumption is that it was negotiated before the maturity.
Indorsement appears to have been made in much fresher ink than the face?
No. Not enough to rebut presumption.
SEC.45 PLACE OF INDORSEMENT; PRESUMPTION
Prima facie that indorsement was made at the place where the instrument is dated.
EGR: Contrary appears.
Indorsement is governed by the law of the state where it is made although the instrument be executed in
different state. (Heidelberger v. Heidelberger)
SEC. 47 CONTINUATION OF NEGOTIABLE CHARACTER
A negotiable instrument continues to be negotiable.

EGR:
 Restrictively indorsed
 Discharged by
o Payment
o Otherwise
As a general rule, a negotiable instrument is always negotiable even after it has become overdue.
However, the holder who acquires the instrument can no longer be a holder in due course.
Overdue instruments are payable on demand.
Exceptions:
53 | III. Negotiation | Sec. 45 Time of indorsement; presumption

a. Restrictively indorsed
b. Discharged by payment or otherwise
“Otherwise” refer to ways enumerated in Sec. 119 PACAP
o Payment in due course by or on behalf of the principal debtor
o Payment in due course by the party accommodated, where the instrument is made or
accepted for accommodation
o By the intentional cancellation of the holder
o Any act that discharged a simple contract for the payment of money
o When the principal debtor becomes the holder of the instrument at or after maturity in
his own right (not in representative capacity)
SEC. 48 STRIKING OUT INDORSEMENTS

Holder may strike out indorsement:
 Not necessary to his title
Indorser struck out and all indorsers subsequent him

 Relieved from liability
Holder may strike out indorsement:

a. When the instrument is bearer instrument—the liability of indorsers are discharged
b. An instrument originally payable to order—all those indorsements after the blank indorsement
Should not strike out the payee’s indorsement because it cannot be validly negotiated without his
indorsement.
SEC. 49 TRANSFER WITHOUT INDORSEMENT; EFFECT OF
Holder transfers the order instrument for value without indorsing

 Vests in the transferee title as the transferor had
 Right to have indorsement
For purposes of determining if the transferee is HDC

 Takes effect at time of actual indorsement
54 | III. Negotiation | Sec. 48 Striking out indorsements

Article only applicable to order instrument.
A transferee may ask for the indorsement of the transferor if the latter failed to do such.
This operates as an equitable assignment.
Before indorsement, transferee is not holder or indorsee.

Not enjoy presumption of ownership.
Art. 49 speaks “for value.”

Hence, if gratuitous, no right to compel the donor-transferor to indorse.
Although, as legal owner, has right to sue thereon.
Negotiation happens if the transferor subsequently makes his actual indorsement.
SEC. 50 WHEN PRIOR PARTY MAY NEGOTIATE INSTRUMENT
An instrument when negotiated back to a prior party

 May reissue
 Not entitled to enforce payment to any intervening party whom he was personally liable
If a prior party reacquires an instrument before maturity, he may negotiate the same further.
But after paying the holder, he may not claim payment from any of the intervening parties.
This is to avoid multiplicity of suits.
EGR: Passed through reacquirer without indorsement or without recourse. Then, intervening parties are not
relieved. (Moore v. Cross)
Limitations of renegotiation:
a. Payable to the order of a third person and has been paid by the drawer
b. Made or accepted for accommodation and has been paid by the party accommodated
c. Instrument is discharged when acquired by a prior party
55 | III. Negotiation | Sec. 50 When prior party may negotiate instrument

IV. RIGHTS OF THE HOLDER
SEC. 51 RIGHT OF HOLDER TO SUE; PAYMENT
Holder of negotiable instrument

 May sue in his own name
 Payment to him
o Discharges the instrument
Holder (Sec. 191)

 Payee – to whom originally issued
 Indorsee – to whom negotiated
Classes of holders: (in ascending order)

a. Holders simply (Sec. 51)
b. Holders for value (Sec. 26)
c. Holders in due course (Sec. 52, 57)
Any person who is a holder but does not qualify as holder in due course is called ordinary holder or mere
holder.
A holder is not necessarily the owner of the instrument (i.e. thief).
In the hands of any holder other than a holder in due course, the negotiable instrument is subject to any and
every defense or defect in the instrument, whether real or personal, as if it were non-negotiable but the
instrument is still a negotiable instrument.
Ex. Sec. 58 and 59 – holder is not HDC but derives title from HDC is given the rights of HDC.
Rights of holder (in general):

a. Sue – in his own name
b. Receive payment – when it was paid in due course, the instrument is discharged
Paid in due course when

a. Paid at or after maturity
b. To holder
56 | IV. Rights of the Holder | Sec. 51 Right of holder to sue; payment

c. GF without notice that title is defective
Pledgee is considered a “holder.” Therefore, he may sue one his name.
A transferee of an unindorsed instrument is not a holder.

He can become such once the transfer vests title and the transferor had legal title.
Believed that he may still sue.
SEC. 52 WHAT CONSTITUTES A HOLDER IN DUE COURSE
HDC CROD GV T (CRod, good vibes, title)

 Complete and Regular upon its face
 Instrument not yet Overdue or was not Dishonored
 Took in GF or for Value
 No notice that Title has defect at time negotiated to him
HDC aka
 Bona fide holder
 Bona fide holder for value without notice
Only negotiation can operate as valid transfer.
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
b. That he became a 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 on the instrument or
defect in the title of the person negotiating it
Every holder is deemed prima facie to be a holder in due course.
Mere assignee is not a holder in due course.
Law does not provide that a holder who is not HDC cannot recover in any case.
57 | IV. Rights of the Holder | Sec. 52 What constitutes a holder in due course
Only disadvantage is that it is subject to defenses as if it were non-negotiable.
M gave PN to P. P negotiated to A. P violated the consideration to be given to M. A can still collect?

Yes.
What if P only assigned?
No. Cannot claim. The rights of A would be the rights of P.
Is payee and HDC?

 Yes. Since a holder includes “payee” in its definition.
 No. Because it has not acquired the instrument through negotiation.
A holder in due course takes the instrument free of many defenses that exist between the original parties.
A holder not in due course has all the rights of the latter except that the instrument is subject to every
available defense as if it were non-negotiable.
A drawee, upon payment, does not become a holder in due course.

It becomes a mere voucher.
Instrument is not complete and regular:

a. Wanting in any material particular – if the omission is not material, still complete and regular
“On or before (blank) after date.” complete?

No.
August 19, 2015 to be paid on December 31 (without year). Complete?

No.
Ex. of incomplete
 Blank as to payee or acceptor
 Absence or required revenue stamps
 Printed name of payee was stricken out and another was inserted
EGR: If common practice by the holder bank, complete and regular
Ex. of complete
 Figures on the upper right hand corner
 Omission of “we” “I” in “promise to pay”
b. Alteration apparent on face – tampering, alteration, erasure
An instrument is overdue after the date of maturity.

 If payable on demand, determined by date of presentment.
o Presentment made within reasonable time after issue
 If PN – after issuance
 If BOE – after last negotiation
Date of maturity is on June 11. When is it overdue?

The following day, June 12.
If dependent upon happening of event?
Overdue the following day after the event happened.
A negotiable instrument in circulation past its maturity date has a strong indication
 Previously dishonored
An overdue instrument is still negotiable subject

 Subject to defenses existing at the time of transfer
P negotiated to A an overdue note. Then, M paid P. A can collect?

Yes. Payment was done after the negotiation.
But if M has paid before the negotiation to A?
No. M can raise the defense that it has already been discharged.
WHERE INSTRUMENT IN PART OVERDUE AND IN PART NOT

- Acquisition when not all installments are due on the face, HDC?
1. INSTALLMENTS DUE BEFORE TRANSFER

- When over due already before transfer, such holder is not HDC
 Regardless if there’s notice or not
- As to installments that are overdue, cannot be HDC
2. TRANSFEREE WITHOUT NOTICE OF NON-PAYMENT

- If no notice of non-payment, he is a HDC for those installment still yet to mature
- Absent any Acceleration Clause, the maturity of one installment does not affect the others
 It can still be in circulation until the maturity of the last installment; presumption
that paid on maturity date before
 Unless the Maturity of each installment is regarded as the maturity of the
Instrument, then maturity is on the first maturity of the installment
 Holding the instrument with some mature, some not is not an indication of
Dishonor; presumption of collecting balance
 Non-payment of one installment is presumed to be dishonor of the who instrument;
but if no notice of non-payment then no notice of dishonor too
- If the holder has not notice of non-payment of prior installment, he is HDC to future installments
- A PN with installment is designed to circulate until the maturity date of last installment
- One or more installment overdue does not signify dishonor
- No notice of dishonor unless he has notice of non-payment
3. TRANSFEREE WITH NOTICE OF NON-PAYMENT

- When with knowledge that at least one installment was not paid before acquiring the
instrument, such person is not HDC
- No basis but dissent says:
1. Non-payment of at least one installment is not dishonor of the whole instrument
- If with notice of non-payment of prior installments, can no longer be HDC
a. Dissenting: Failure to pay may have arisen from unexpected circumstances
Ways and time of dishonor:

a. Non-acceptance of a bill
o May occur before the maturity
o It is not necessary that this fact appears on the bill; to inform the holder is sufficient
b. Non-payment occurs
o at the time of maturity
HOLDER WITHOUT NOTICE OF DISHONOR
1. WAYS AND TIME OF DISHONOR

- Dishonored either thru:
 Non-acceptance – for bills of exchange only
 can be dishonored even before Maturity Date
 bec the Drawee can simply not accept it without any marks on the
instrument
MPA
If P presents it before maturity date and not accepted, and negotiated it to A who knew
about it, A is not HDC
 Non-payment – only after maturity date
2. NEGOTIATION AFTER MATURITY OR DISHONOR

- When acquired overdue – not HDC at all
- When acquired Dishonored – can be HDC if no notice
 If stamped with “account closed” it is a notice of non-payment
A dishonored instrument may be negotiated and the holder may still be a holder in due
course if he had no notice of the fact.
3. NON-PAYMENT OF INTERST DUE

- When interest not paid but principal NOT YET DUE, instrument is still not dishonored
 What if interest was unpaid but principal is not yet due, PN dishonored?
 No.
An overdue instrument may still be negotiated but the holder cannot be a holder in due course.
But as to holder without notice, he can be HDC.
GF is honesty in fact in the transaction concerned.
Proof of bad faith can be knowledge that tends to show that there was something wrong with the
transaction.
Effects of crossing a check:

a. May not be encashed – only deposited
b. Negotiated only once – to one who has account with the bank
c. Warning that it is issued for specific purpose
An instrument that has been dishonored or any defense against the instrument after the instrument has been
acquired does not prevent a holder from qualifying as a holder in due course.
HFV
 Adequacy of consideration
o Love and affection does not constitute value
 Taking the instrument for value
o Agreed consideration has been performed or acquires security interest or lien
o Antecedent claim
o Commitment to third person
There should be actual performance by holder, not just commitment or promise.
The bad faith of an agent will render the principal not a holder in due course.
SEC. 53 WHEN PERSON NOT DEEMED HOLDER IN DUE COURSE
Not HDC
 Instrument payable on demand is negotiated
o Unreasonable length of time after its issue
An overdue instrument payable on demand may qualify the holder as a holder in due course if it is within
a reasonable time (had to be the nature of the instrument or usage of the trade or business).
SEC. 54 NOTICE BEFORE FULL AMOUNT PAID
Transferee receives notice of any

 Infirmity in the instrument or
 Defect in title of person negotiating
Before he has paid the full amount agreed
 Deemed HDC to the extent amount paid prior to notice
If there is a notice of infirmity before the amount has been paid, the holder is relieved from the obligation to
pay.
62 | IV. Rights of the Holder | Sec. 53 When person not deemed holder in due course
But if he does so, he does not become a holder in due course.
If there is a notice of infirmity after a partial payment, the holder becomes a holder in due course on the
paid amount only.
“Paid” is not limited to money but includes performance in any other manner. Art. 1232 CC
PN for P20k. P indorsed to A where A paid P12k. Before payment of balance, had notice of defect of title.
A HDC?
Yes. Up to P12k.
PN for P10k. Discounted to A for P9k. Paid P5k only and received notice of defect. A HDC?
Yes. Up to P5k.
What if paid the P9k already?
HDC up to P10k.
SEC. 55 WHEN TITLE IS DEFECT IVE
Title of transferor defective when he obtained the instrument, or any signature

 Fraud
 Duress
 Force
 Fear
 Other unlawful means
 Illegal consideration
 Negotiates in breach of faith
 Other circumstances amounting to fraud
Defects can be
 Defects of title – those in Sec. 55
 Infirmities – wrong in the instrument itself
o Sec. 13 – when date may be inserted
o Sec. 14 – blanks, when may be filled
o Sec. 15 – incomplete instrument not delivered
o Sec. 16 – delivery, when effectual, when presumed
63 | IV. Rights of the Holder | Sec. 55 When title is defective

o Sec. 21 – signature by procuration

o Sec. 23 – forged signature
o Sec. 124 – alteration, effect of
o Sec. 125 – what constitutes material alteration
Title of person is defective in two ways:

a. Acquisition—
o Fraud
 Brokers represented that they are the current owners of the stocks sold
o Duress, force and fear
 Violence and intimidation used to force P to indorse
o Other unlawful means
 Stolen instrument
o For illegal consideration
 Stifle a criminal prosecution
b. Negotiation—breach of faith, circumstances amounting to fraud
 Negotiated the instrument even after discharge
 Not negotiated after being told that maker will not pay
SEC. 56 WHAT CONSTITUTES NOT ICE OF DEFECT
To constitute notice of
 Infirmity on instrument
 Defect in title of person negotiating
 Must have
o Actual knowledge of the infirmity or defect or
o Knowledge of such facts that his action amounts to BF
Notice of defect may be of actual knowledge or chargeable knowledge.
Mere negligence to make inquiries is not sufficient to constitute notice.
Inadequacy of payment for the consideration is not BF.

EGR: Sold for a very large discount.
64 | IV. Rights of the Holder | Sec. 56 What constitutes notice of defect

If notice of defect is present at the time of taking the instrument

 It opens the holder to all defenses
EGR: If obtained it from HDC, acquires the rights of HDC.
Notice to agent is notice to principal.

Notice to partner is notice to partnership.
When B was asked as to how he had gotten the instrument, just said “certain transactions” without
elucidating. HDC?
No.
Doctrine of constructive notice

 Not applicable to commercial paper
Ex. Registration in mortgage.
Hence, even if A was registered as the mortgagee but the PN was indorsed to B in GF, B has better right.
Facts that are not notice of defense:

 Antedated or postdated
 Accompanied by a separate agreement
 Signed for accommodation party
 Incomplete instrument that has been completed
 Person negotiation is fiduciary
 Default in payment of interest
SEC. 57 RIGHTS OF HOLDER IN DUE COURSE
HDC
 Holds the instrument free from defenses available to prior parties among themselves
 May enforce payment for full amount against all parties liable
Rights of a holder in due course: FFRES

a. May sue on the instrument in his own name
b. Receive payment and if it was paid in due course, the instrument is discharged upon payment
c. Holds the instrument free from any defect of title of prior parties
d. Holds the instrument free from defenses available to prior parties among themselves
65 | IV. Rights of the Holder | Sec. 57 Rights of holder in due course

e. Enforce payment for the full amount against all parties liable thereon
Real defenses are available against HDC.
SEC. 58 WHEN SUBJECT TO ORIGINAL DEFENSES
In the hands of holder not HDC

 Negotiable instrument as if it were non-negotiable
EGR: If not HDC derives title from HDC and who is not party to any fraud or illegality, has the rights of
HDC.
Defenses are grounds or reasons showing why plaintiff will not be given the relief he seeks.
Real defense challenges the validity of the instrument itself.

 Available against all parties, immediate or remote, HDC or not HDC.
 Attach to the res (the instrument)
 Does not imply that the instrument is valueless (ex., real defense of minor cannot be used by other
holders)
Examples of real defenses: ADDFFFIIIIP

a. Incapacity
b. Illegality of contract when declared by law
c. Want of delivery of incomplete instrument
d. Forgery
e. Want of authority, apparent and real
f. Duress that is overwhelming
g. Fraud in factum or fraud in esse contractus (Sec. 14)
Fraud in execution or fraud in factum is where the person who has signed was deceived as to the
character of the instrument. This is a real defense.
Signed the document but had the opportunity to read it. Real or personal defense?
Personal only. Failed to exercise reasonable diligence.
66 | IV. Rights of the Holder | Sec. 58 When subject to original defenses

Fraud in inducement or simple fraud implies that the signer knew what he was signing. This is a
personal defense.
Mere carelessness or negligence, in the absence of any fraud, is neither a real or personal defense.
h. Fraudulent alteration (Sec. 124 and 125)

i. Prescription
j. Infirmities appearing on the face (Sec. 52)
k. Discharge at or after maturity (Sec. 88, 118, 121, 122)
Personal defense can be used only between original parties or immediate parties or against one who is not a
holder in due course.
 It challenges the validity of the agreement.
Examples of personal defenses: ABCCDDSSW

a. Filling of the wrong date
b. Filling up of blanks not in accordance with the authority given and within reasonable time
c. Want of delivery of complete instrument
d. Absence or failure of consideration
e. Simple fraud or fraud inducement
f. Acquisition of instrument (not signature) by duress, or force and fear
g. Acquisition of instrument by unlawful means
h. Illegal consideration
i. Breach of faith
j. Circumstances amounting to fraud
k. Innocent alteration or spoliation
l. Set-off between immediate parties
m. Discharge by payment or renunciation or release before maturity
n. Discharge of party secondarily liable by discharge of prior party
o. Usury – contract itself is not void, only the interest
p. Want of authority of agent who has apparent authority
Defenses are subject to estoppel.

Ex. those who are estopped from raising forgery or illegality.
Rights of holder not in due course: SERR
67 | IV. Rights of the Holder | Sec. 58 When subject to original defenses

a. Sue on the instrument in his own name

b. Receive payment (instrument is discharged upon payment if in due course)
c. Entitled to the instrument but holds it subject to defenses as if it were non-negotiable
d. Has all the rights of the holder in due course from whom he derives his title in respect of all parties
prior to such holder provided that he himself is not a party to any fraud or illegality affecting the
instrument
Holder becomes a holder through a holder in due course when:

a. Derives the title through a holder in due course
b. Holder is not a party to any fraud or illegality affecting the instrument
A payee or indorsee whose title is defective cannot better it by selling to a holder in due course and buying
it again.
P used simple fraud to procure the note from M. A had notice. B is HDC. C knows the note was obtained
though fraud but he is not a party of the fraud. Effects?
C is not HDC. But has rights of HDC as derived from B. C is HDC with respect to M, P and A.
What if indorsed to P instead of C?
P cannot recover because he was a party to the fraud.
Indorsed by C to D who also had notice but not a party. Effect?
D is not HDC. However, will not have the rights of an HDC because C is not HDC.
If C renegotiated it to A?
A remitted to former position of being HDC.
SEC. 59 WHO IS DEEMED HOLDER IN DUE COURSE
Every holder
 Prima facie deemed HDC
EGR: If shown that transferor had defective title, burden is on holder to prove that he or the transferor is
HDC.
EEGR: Not apply in favor of party bound by the instrument prior to the acquisition of such defective title.
A holder does not have to prove that he satisfies the requirements of a holder in due course.
However, when it is shown that the title of any person who has negotiated the instrument was defective
 The burden of proof shifts to the holder.
68 | IV. Rights of the Holder | Sec. 59 Who is deemed holder in due course
The holder has no burden of proving that he is a holder in due course in favor of a party who became bound
on the instrument prior to the acquisition of such defective title.
P obtained not from M through simple fraud. A, B, C, D became parties. Effects?

D need not prove that he is HDC.
EGR: When M proves the fraud.
What if A was the one who committed the fraud?
D is HDC to M no matter what. The fraud occurred after he negotiated it.
M was already bound before A’s acquisition of defective title.
V. LIABILITIES OF PARTIES
SEC. 60 LIABILITY OF MAKER
Maker, by making it, engages that

 Will pay it accordingly
o To its tenor
 Admits existence of payee
o Capacity to endorse
Liability
 Obligation of party
Primary liable (unconditionally bound):

a. Maker of a promissory note
b. Acceptor of a BOE
c. Certifier of a check
Secondary liable (conditionally bound):

a. Drawer of a BOE
b. Indorser of a note or BOE
Not liable:
69 | V. Liabilities of Parties | Sec. 60 Liability of maker

a. Drawee until he accepts the BOE
Generally, no person is liable unless his signature appears on the bill. Sec. 18-21
Primarily liable Secondarily liable

Absolutely required to pay Only after certain conditions
 Presentment for payment or acceptance (70)
 Dishonor (184 and 151)
 Proceedings required (89 and 118)
Unconditionally bound Conditionally bound
Liability ends when primary party pays in full
Liable in reverse order
Liability of the maker:

1. Unconditional liability
o Due presentment for payment and due notice of dishonor is not necessary to charge the
maker for with liability
o Pay not only payee but subsequent legal holder
 Even if no demand from holder
o Fully liable despite presented late
 EGR: Prescription sets in
o Admits existence of payee and capacity to indorse
2. Presumption arising from signature – prima facie maker
M issued P500 to P. P indorses to A. Effects?

M cannot say only P300.
Neither P is non-existent.
Precluded from raising defense that P is minor, insane, or ultra vires of corporation.
SEC. 61 LIABILITY OF THE DRAWER
Drawer, by drawing, admits

 Existence of payee
o Capacity to endorse
 On due presentment
70 | V. Liabilities of Parties | Sec. 61 Liability of the drawer

oInstrument be accepted or paid, or both

 According to tenor
 If dishonored and necessary proceedings on dishonor is taken
o Will pay the amount
 To any holder or
 Any subsequent indorser
 Who may be compelled to pay it
The drawer may insert stipulation negativing or limiting his liability.
Liability of the drawer:

1. Liability conditional
o Necessary proceedings
 Notice of dishonor (89)
EGR: Exceptions (114)
 If foreign bills, protest followed by notice of protest (152)
2. General indorser
o The phrase “to any subsequent indorser” refers to any indorsers between drawer and holder
 Also called intervening indorsers
3. Drawer of check
o Impliedly represents that credit is available in drawee bank
o Drawer can be made liable under separate contract distinct from the instrument
There is slight difference between liability of drawer of a check and that drawer of other BOE
(186).
The drawer does not promise to pay absolutely.
Maker Drawer
Promissory note BOE
Primarily liable Secondarily liable
Cannot limit his liability Can limit his liability
SEC. 62 LIABILITY OF ACCEPTOR
71 | V. Liabilities of Parties | Sec. 62 Liability of acceptor

Acceptor, by accepting
 Pay according to tenor of acceptance
a. Existence of drawer
o Geniuses of signature
o Capacity to draw
o Authority to draw
b. Existence of payee
o Capacity to indorse
Liability of acceptor:
1. Drawee before acceptance
o Not liable before acceptance
o Refusal of drawee constitutes dishonor
 Triggers liability of secondary parties
EGR: Indorsing qualifiedly
o Unless drawee accepts, only obligation is to drawer
2. Drawee after acceptance

o Same as maker of note
3. Retraction of acceptance
o BOE implies representation that drawee has already received the funds
o Cannot retract acceptance
4. Payment despite stop-payment order

o Cannot refuse to pay holder
o Cannot recover what has been paid
o Cannot debit drawer’s account
5. Similarity to liability of maker or drawer

o Same liability with respect to existence of payee and then capacity to indorse
o Presentment for payment or notice of dishonor is necessary
EGR: Acceptor for honor (165)

Stranger or volunteer is not bound by acceptance.

EGR: When bill is accepted for honor supra protest (158 and 161).
Maker Drawee
Pay according to tenor of instrument Pay according to tenor of acceptance
Acceptance may be qualified.
Is the altered tenor of bill the tenor of acceptance?

First view: Tenor of acceptance.
Second view: Original tenor of the bill.
It is argued that acceptor has “assented to the alteration.”
De Leon: Difficult to see the assent since he had no knowledge of the alteration.
The acceptor is precluded to raise the defense that the

 drawer is fictitious or non-existent
 forged signature
 no funds
 no capacity or authority to draw the bill
The holder is stranger between the drawer and drawee.
The acceptor does not admit the genuineness of the indorsers’ signatures.
Acceptance is the promise to perform an act.

Acceptance is not required for checks. On demand.
Payment is the actual performance.

More than acceptance.
Payment of checks include its acceptance.
W requested Bureau of Posts photocopy of check which copies it duly received and A to present the check
to the provincial treasurer. Was there implied acceptance by W?
Yes. In requesting photocopies.
Would be an empty gesture if W did not mean to assume obligation.

But Justice Padilla dissents.

Sumacad v. Province of Samar
SEC. 63 WHEN PERSON DEEMED INDORSER
Deemed indorser
 Person placing signature other than
o Maker
o Drawer
o Acceptor
EGR: Clearly indicates by appropriate words his intention to be bound in some other capacity.
Person signing on the back, nothing else appearing, is a general indorser.

 Parole evidence is inadmissible
o E.g., cannot show that he is merely an agent. Law has requirement to show.
Why?
Commercial necessity.
Guarantor
 Liable only subsidiarily after the assets of the principal debtor have been exhausted
 A party is liable only as a guarantor and not as an indorser if his indorsement is made for
identification only
 Under Uniform Commercial Code
o If signs “payment guaranteed,” and not paid when due
 Pay it according to tenor even if holder has not attempted to collect it
o If signs “collection guaranteed,” and not paid when due
 Pay according to tenor only after holder collects
Surety
 Primarily and absolutely liable without the benefit of exhaustion of the properties
 Without the necessity of presentment or notice of dishonor
Agent bank for collection

 Not bound to know genuineness of prior indorsements
74 | V. Liabilities of Parties | Sec. 63 When person deemed indorser

Status of stamping “all prior indorsements are guaranteed?”

Not as general indorser.
Merely as agent guaranteeing prior indorsements, not the genuineness of the check itself.
 Estopped form raising non-negotiability when it stamps

 Collecting bank which allowed crossed check payable to co-payees is liable when it allowed the
deposit even if the signature of the other co-payee is missing
SEC. 64 LIABILITY OF IRREGULAR INDORSER
Liable as indorser
 Person, not a party
 Places signature in blank before delivery
a. If payable to order of a third person

o Liable to payee
o Liable to subsequent parties
b. If payable to order of maker or drawer, or payable to bearer
o Liable to all parties subsequent to maker or drawer
c. If signs for accommodation of payee
o Liable to all parties subsequent to payee
Irregular indorser
a. Not a party
b. Signature in blank
c. Before delivery
Rights and liabilities of irregular indorsers among themselves is not covered under this article.
Covered under Sec. 68.
Sec. 64 does not apply when signature is places after delivery to payee.
Usually, an irregular indorser is an accommodation indorser.
P not have faith in M. Willing to take only if X “is back of it.” X signs then delivered to P. P to A. Effects?
75 | V. Liabilities of Parties | Sec. 64 Liability of irregular indorser

X is liable to P and A.
Not to M.
Suppose payable to M (same maker and payee). X then signs and M indorses and delivers to A. Effects?
X is liable to A. Also to subsequent parties of M.
Not to M.
M is first indorser.
X is second indorser.
P discounts the note to bank but bank asks the signature of X. X, without receiving consideration, signs.
Effects?
X is liable to subsequent parties to P.
P is the first indorser.
X is the second indorser.
Irregular indorser has same warranties as regular indorser in Sec. 66.

His indorsement in blank is without qualification.
SEC. 65 WARRANTY; WHERE NEGOTIATION BY DELIVERY, AND SO FORTH
Every person negotiating by delivery or by qualified indorsement: GeTiCaKn

a. The instrument is Genuine and in all respects what it purports to be
b. That he has 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
If by delivery
 Warranty extends to immediate transferee
Subdivision (c) not apply to person negotiating public or corporation securities other than bills or notes.
Warranty liability is unconditional.
If a negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate
transferee.
76 | V. Liabilities of Parties | Sec. 65 Warranty; where negotiation by delivery, and so forth

A qualified indorser is liable to all subsequent holders for any breach of his warranties.
Blank indorsement. What Sec. to apply?

Sec. 66. Not Sec. 65.
Person negotiating bearer instrument by delivery and one who negotiates by qualified indorsement
 Not assume to pay
EGR: Dishonor is based on the four implied warranties.
 Merely assigning credit.
By delivery if bearer instrument By qualified indorsement

Warranty extends to immediate transferee only Warranty to all subsequent holders
P to A by delivery or qualified indorsement. Effects?

If dishonored, A cannot recover from P. P does not warrant solvency of M.
However, liable if
a. Instrument is forged – warrants genuine
b. P had stolen the note – warrants good title
c. M is minor – warrants capacity of prior parties
d. P knew instrument to be invalid – warrants no knowledge that would impair or render it useless
Suppose by delivery only? P to A to B.
Warranties of P only extend to A, not B.
Liability of indorsing/issuing bank

1. Guarantees even if previous indorsing forged
o Last indorser will be liable for the amount indicated in the instrument
o Collecting bank guarantees all prior indorsement
EGR: Check was issued with negligence.
2. Assumes warranty of an indorser

o In indorsing to drawee bank, collecting bank stamps
o Without the warranty, drawee bank will not pay
Brokers negotiating public or corporation securities

 Do not warrant capacity of prior parties
77 | V. Liabilities of Parties | Sec. 65 Warranty; where negotiation by delivery, and so forth

X bought shares from City. Sold to A. Later, SC said the shares were void. X liable to A?
No. No warranty attaches.
SEC. 66 LIABILITY OF GENERAL INDORSER
Indorser who warrants without qualification: GeTiCaVa

a. Warrants to subsequent HDCThe instrument is Genuine and in all respects what it purports to be
c. That he has good Title to it
d. That all prior parties had Capacity to contract
e. That the instrument, at the time of his indorsement, is Valid and subsisting
 On due presentment
o Instrument be accepted or paid, or both
 According to tenor
 If dishonored and necessary proceedings on dishonor is taken
o Will pay the amount
 To any holder or
 Any subsequent indorser
 Who may be compelled to pay it
Knowledge of the indorser is immaterial as to the validity and subsistence of the instrument.
A subsequent party which caused a defect cannot hold prior indorsers liable on the instrument.
After dishonor, indorsers cease to become secondarily liable.

They become principal.
Warranties are available only to HDC.
Warranty of collecting bank is an indorser.
Does that mean not HDC cannot raise Sec. 66?

No. Not literal interpretation.
In that case, not HDC in Sec. 65 would have better rights that not HDC in Sec. 66.
78 | V. Liabilities of Parties | Sec. 66 Liability of general indorser

Hence, should be allowed.
To enforce liability of indorser

1. Due presentment for payment or acceptance
2. Dishonor
3. Necessary proceedings
EGR: Can be waived.
GR: Indorsements are unqualified.

EGR: If qualified under Sec. 38.
As warrantor, liability is unconditional. No additional steps necessary to enforce the warranty.

Different from liability to pay which follows the procedure to enforce liability.
R made note to P for P3000. Forged by P to P8000. P to A to B. Effects?

B recover form R P3000.
Recover from A P5000.
A breached warranty of genuineness even if he had no knowledge.
Indorser Drawer
Note or BOE BOE
Does not make admission on the existence of a Admits the existence of a payee
payee
Has warranties Has no warranties but engages to pay secondarily
*Both have conditional liabilities.
General indorser Irregular indorser

Blank or special indorsement Always a blank indorsement
Indorses after the delivery to payee Indorses before delivery to the payee
Liable to the parties subsequent to him Liable to the payee and subsequent parties
SEC. 67 LIABILITY OF INDORSER WHERE PAPER NEGOTIABLE BY DELIVERY
Person places indorsement on instrument negotiable y delivery

 Incurs all liability of an indorser
79 | V. Liabilities of Parties | Sec. 67 Liability of indorser where paper negotiable by delivery

Bearer instrument need not be indorsed.

Nothing to stop holder form indorsing.
Liability be governed by Sec. 65 or 66.
 If indorsees specially, liable to holders who can make title through his indorsement
 If indorses without qualification, incurs liability of general idnorser
SEC. 68 ORDER IN WHICH INDORSERS ARE LIABLE
GR: Indorsers are liable in order they indorse.

EGR: Evidence admissible shown that as between or among themselves, they agreed otherwise.
Joint payees or indorsees

 Deemed to indorsee jointly and severally
GR: There is a disputable presumption that every indorser is liable to all indorsers subsequent him.
EGR: Rebutted if it be shown that as between themselves, they have agreed otherwise.
As to the holder
 Indorsers are liable in any order
 EGR:
o Qualified indorser
o Instrument negotiated by delivery
Joint payees and indorsees who indorsed

 Deemed to indorse jointly and severally
If maker use the word “we promise to pay”

 Liable jointly, not severally
Sec. 68 does not determine the liability of joint indorsers among themselves.
A, B and C signed jointly as indorsers. Can C go after B?
No. Sec. 68 not apply.
80 | V. Liabilities of Parties | Sec. 68 Order in which indorsers are liable

SEC. 69 LIABILITY OF AGENT OR BROKER
Broker or other agent who negotiates without indorsement

 Incurs liabilities under Sec. 65
EGR:
o Discloses name of principal
o Fact that acting only as agent
The agent will have a personal liability once he does not disclose his authority as a mere agent.
If he fails to observe such, he will be governed by Sec. 65 (if qualified indorsement) and 66 (if general
indorsement).
To exempt from liability

 Disclose principal
 Fact that he is acting as agent
Parol evidence is not admissible.
VI. PRESENTMENT FOR PAYMENT
SEC. 70 EFFECT OF WANT OF DEMAND ON PRINCIPAL DEBTOR
Presentment for payment not necessary

 To charge person primarily liable
Instrument is payable at a special place and person primarily liable is able and willing to pay it there at
maturity
 Equivalent to tender of payment
Presentment of payment is necessary

 To charge drawer and indorser
Presentment for payment

 Presentation of the instrument to the person primarily liable
81 | VI. Presentment for payment | Sec. 69 Liability of agent or broker

 For the purpose of demanding and receiving payment
Person primary liable

 Presentment and demand for payment is not necessary to charge
 Their liability is absolute on the date for payment
 Holder can sue, although no demand has been made, as soon as date for payment has passed
without instrument being paid
If instrument is payable at a special place

 Equivalent to tender or offer of payment if there is ability and willingness to pay
 Hence, he cannot be considered in delay
o Not liable for costs and interests subsequently accruing if the holder fails to meet the
requirements
 However, not relieved from making payment
What if the terms of instrument require presentment?

No.
Presentment for payment is not necessary even if it is required according to the terms of the instrument.
Will not put the holder in default.
P failed to present at maturity. Release M?

No.
But M not liable for interest.
P sues M on note. Who bears cost?
P will pay. M entitled to court costs.
There must be evidence on ability and willingness on part of M to pay.
This rule is also applicable to notes on demand.
Risk assumed by holder in case presentment not made.

 E.g., the person primarily liable might become insolvent
For the benefit of those who are secondarily liable

 Demand for payment must be made to those who are primarily liable
o Done through presentment for payment
Effect if no presentment?
82 | VI. Presentment for payment | Sec. 70 Effect of want of demand on principal debtor
Secondary parties released from liability.

Dishonor activates secondary liability.
EGR: Presentment is excused (Sec. 79) or waived (Sec. 82 and 151).
SEC. 71 PRESENTMENT WHERE INSTRUMENT IS NOT PAYABLE ON DEMAND; AND

WHERE PAYABLE ON DEMAND
Instrument not payable on demand

 Presentment made on day it falls due
Instrument payable on demand

 Presentment made within reasonable time
o If note  after issue
o If bill  after last negotiation
If it is payable at a fixed or determinable future time

 Presentment must be made on the date it falls due
 Otherwise, indorsers or makers are discharged from liability
If it is payable on demand
 Presented within the reasonable time
o After the issue of the note or
o Within a reasonable time after last negotiation of bill
 Means last transfer for value
Burden is on holder to prove due and timely payment.
Can present before maturity?

No. Premature.
Not effective.
Reminded the primary party of when the due date is. Proper presentment?
No.
SEC. 72 WHAT CONSTITUTES SUFFICIENT PRESENTMENT
83 | VI. Presentment for payment | Sec. 71 Presentment where instrument is not payable on demand; and where payable on demand
Presentment to be sufficient HHPP

a. By the holder, or some person authorized to receive payment on his behalf
b. Reasonable hour on a business day
c. Place defined
d. To person primarily liable, if inaccessible, any person found at the place where presentment is
made
All requirements should be met.

Otherwise there is no presentment made.
Then, secondary parties released.
Crossed check deposited by person not named therein. Proper?

No.
No right of recourse against drawer. Not the intended party.
Does term “holder” include transferee in (a)?

Yes.
What constitutes reasonable hour on business day?

Depends on general custom.
 If bank, banking hours
 If place of business, business hours
 If residence, usual hours between rising and retiring
To whom to present BOE or check payable on demand?

To drawee although he not liable on the bill.
If the primary party is not available and presented it to a person in the place of payment, need to have
personal demand on maker?
No. Sufficient presentment already.
SEC. 73 PLACE OF PRESENTMENT
The following should be exhausted in the following order:
84 | VI. Presentment for payment | Sec. 73 Place of presentment

a. Place specified in the instrument

b. If no (a), given address of the person to make payment
c. If no (b), at the usual place of business or residence
d. Wherever he can be found or at his last known place of business or residence
Payable at designated branch but presented in the parent company. Proper?

No.
Presentment can be made in clearinghouse.

It is an association of banks and financial institutions.
SEC. 74 INSTRUMENT MUST BE EXHIBITED
Must be exhibited to the person from whom payment is demanded .
When paid, delivered up to the party paying.
Valid presentment requires a face to face demand at the proper place.

The debtor is entitled to
 See the instrument
o To check if
 Genuine instrument
 Proper indorsement
 If holder is entitled
 Demand its surrender
o As to an acceptor, it becomes his voucher to charge the drawer
Demand by telephone, proper?

No. Not sufficient.
Exhibition is not possible.
What if only informal demand without presentment. Can charge indorser?

No.
85 | VI. Presentment for payment | Sec. 74 Instrument must be exhibited

Is there an instance where exhibition to maker allowed?

Yes. Can be waived by maker.
SEC. 75 PRESENTMENT WHERE INSTRUMENT PAYABLE AT BANK
Instrument payable at bank

 Presented during banking hours is allowed if there is a sufficient fund within the bank
 Presented at any time during the day before bank is closed is allowed if there is no fund
If the person to make payment deposits money hours before the closing of the bank
 Not considered dishonored if the holder of the instrument presented the instrument earlier in the day
 First presentment is considered premature
Discharge the maker if presentment not made on due date?

No.
EGR: Prescribed.
Discharge indorser?
Yes.
What if there was no presentment made but the bank who is to pay became insolvent. Maker still liable?
Maker can discharge liability by assigning his rights from the bank.
If bank does not pay, loss on holder.
SEC. 76 PRESENTMENT WHERE PRINCIPAL DEBTOR IS DEAD
Person primarily liable is dead and no place of payment is specified

 Presentment made to personal represented
o If such there be and
o Can be found with reasonable diligence
Provided there is no place specified

 Presentment should be made to his personal representative
86 | VI. Presentment for payment | Sec. 75 Presentment where instrument payable at bank
Presentment dispensed with

 No personal representative found upon due diligence
If no personal representative found, still give notice of dishonor to indorsers?

Yes. To make them liable.
SEC. 77 PRESENTMENT TO PERSONS LIABLE AS PARTNERS
Persons primarily liable are partners and no place of payment is specified

 Presentment may be made to any one
 Even though there was dissolution
Provided there is not place specified, presentment may be made to any one of them.
SEC. 78 PRESENTMENT TO JOINT DEBTORS
Several persons, not partners, are primarily liable and no place of payment is specified
 Presentment must be made to all of them
Provided there is no place specified, presentment must be made to all.

 There are as many debts as there are debtors.
SEC. 79 WHEN PRESENTMENT NOT REQUIRED IN ORDER TO CHARGE THE

DRAWER
Presentment for payment not required in order to charge drawer

 No right to expect or require that the drawee or acceptor will pay
Applies to drawer only.

An EGR to the rule that secondary parties are liable only after dishonor and notice.
Presentment is not required for a drawer who:
87 | VI. Presentment for payment | Sec. 77 Presentment to persons liable as partners

a. Has no funds to the drawee

b. Drawer has stopped the payment of check
c. Drawer has withdrawn funds from the drawee leaving nothing with which to pay the check
d. Drawer and drawee are the same
SEC. 80 WHEN PRESENTMENT NOT REQUIRED TO CHARGE INDORSER
Presentment not required in order to charge indorser

 Made or accepted for accommodation of indorser and
 No reason to expect that instrument be paid if presented
Refers only to indorser for whose accommodation the instrument was made or accepted.
Presentment for payment is not required for an accommodated payee-indorser.

Why?
Accommodated payee-indorser is the real debtor.
Not discharged even if no presentment for payment is made.
SEC. 81 WHEN DELAY IN MAKING PRESENTMENT IS EXCUSED
Delay in presentment for payment excused

 When caused by circumstances beyond control of holder
 Not imputable to holder’s
o Default
o Misconduct
o Negligence
If cause of delay ceases
 Presentiment be made with reasonable diligence
What is excused is delay in making presentiment.

Not the presentment itself. EGR: Sec. 79, 80 and 82.
Circumstances beyond control
88 | VI. Presentment for payment | Sec. 80 When presentment not required to charge indorser
 Could not be foreseen which though foreseen are inevitable (e.g., weather conditions)
SEC. 82 WHEN PRESENTMENT MAY BE DISPENSED WITH
Presentment for payment is excused

a. Presentment cannot be made after reasonable diligence
b. Drawee is fictitious person
c. Waiver of presentment
o Express
o Implied
Facts excusing must be specially pleaded.
When is there reasonable diligence?

Active search.
What if bank was closed by government?

Dispenses presentment.
What if maker is insolvent?

No. Not excuse for presentment.
Why dispensed when fictitious drawee?

No one to present it to.
Waiver of presentment
 Express
o “Presentment waived”
o “Waiving demand and protest”
 Implied
o Conduct
Waiver of presentment by the maker also a waiver by indorser?

No.
89 | VI. Presentment for payment | Sec. 82 When presentment may be dispensed with
Summary of rules as to presentment for payment

1. Not necessary for persons primarily liable.
Necessary for secondary liable.
2. Not necessary to charge secondary liable persons
a. As to drawer, Sec. 79
b. As to indorser, Sec. 80
c. Presentment is dispensed with, Sec. 82
d. Bill dishonored by nonacceptance, Sec. 151
SEC. 83 WHEN INSTRUMENT DISHONORED BY NON-PAYMENT
Dishonored by nonpayment when:

a. Duly presented for payment
o Payment is refused
o Payment cannot be obtained
b. Presentment is excused
o Instrument is
 Overdue and
 Unpaid
Two requisites:
1. Duly presented to primarily liable party
2. Payment is refused or cannot be obtained
The primary party promises to pay five days after, after presentment?
There is already non-payment.
Nonpayment without presentation

1. Excused (Sec. 79, 80, 82)
2. Overdue (Sec. 85, 86, 194)
3. Unpaid
Although presentment is excused

 Indorser is still entitled to notice of dishonor
90 | VI. Presentment for payment | Sec. 83 When instrument dishonored by non-payment

SEC. 84 LIABILITY OF A PERSON SECONDARILY LIABLE WHEN INSTRUMENT

DISHONORED
If dishonored by nonpayment
 Immediate right of recourse to all secondarily liable parties accrues
Right of recourse against secondary parties

 Accrues only after giving notice of dishonor
Application of this section to an indorser of check dishonored by nonpayment

 Subject to provision in Sec. 186
o Check must be presented for payment within reasonable time after its issue
Right is immediate.
Secondary parties cannot interpose that suit be brought first against the maker or acceptor.
To hold secondary party:

1. Presentment properly made
2. Primary party dishonored
3. Notice of dishonor given
SEC. 85 TIME OF MATURITY
Every negotiable instrument is payable at time fixed therein

 Without grace
When maturity is on a Sunday or Holiday

 Payable on the next succeeding business day
When maturity is on a Saturday

 Presented for payment on the next succeeding business day.
EGR: If on demand
 Holder may present it before 12 noon on Saturday when days is not a holiday
91 | VI. Presentment for payment | Sec. 84 Liability of a person secondarily liable when instrument dishonored
If with grace period, when is the maturity date?

On the last day of date of grace.
Rules on a Saturday
 For the benefit of the debtor
 Law does not want to deprive the debtor of half a day
Why different rule if it is on demand?

Law presumes that primary party has money ready at any time.
What if falls due on Friday which is a holiday?

Presentment be made on Saturday.
However, it would be made on the next succeeding business day.
SEC. 86 TIME; HOW COMPUTED
When payable at
 Fixed period after date
 After sight
 After happening of specified event
 Exclude the day from which time is to begin to run
 Include the date of payment
Count starts from the day following the date from which the time is to run (even if the said date is a
holiday), and include the last day of the period.
Dated November 8, 2013. Payable 12 months. When due?

November 9, 2014. Not November 9.
Dated January 31. Payable one month. When due?

February 28 or 29.
Dated October 11. Payable ten days. When due?

October 21.
92 | VI. Presentment for payment | Sec. 86 Time; How computed

SEC. 87 RULE WHERE INSTRUMENT PAYABLE AT BANK
Where the instrument is payable at a bank

 Equivalent to an order to the bank to pay the for the account of the principal debtor thereon
Bank may charge out of the deposit of the maker or drawer.

 No need for addition authority.
o Instrument itself is authority.
However, bill itself does not operate as assignment of funds.

 Drawee is not liable until it accepts.
Sec. 87 only applies where payable at a particular named bank.
Not payable at “any bank in Manila.” Can the holder go to bank where the depositor has deposit in Manila?
No. Bank will not be authorized to pay the note.
SEC. 88 WHAT CONSTITUTES PAYMENT IN DUE COURSE
Payment is made in due course when:

a. Made at or after the date of maturity
b. Made to the holder
c. In good faith
d. Without notice that the holder’s title is defective
What if payment was made before maturity?

Constitutes re-negotiation to primary party.
Not payment in due course.
Payment must be made to the holder.
Who must be “in good faith?” The holder or the payor?
93 | VI. Presentment for payment | Sec. 87 Rule where instrument payable at bank
The payor.
M made not to P or order. P to A. Obtained though fraud by B who presented to M. M no notice of fraud.
Discharge?
Yes.
VII. NOTICE OF DISHONOR
SEC. 89 TO WHOM NOTICE OF DISHONOR MUST BE GIVEN
Negotiable instrument dishonored by nonacceptance or nonpayment

 Notice of dishonor be given to
o Drawer
o Each indorser
Drawer or indorser whom such notice is not given
 Discharged
Instrument is dishonored when:

a. Not accepted when presented for acceptance
b. Not paid when presented for payment
c. Presentment is excused or waived and the instrument is past due and unpaid
Notice of dishonor
 Can either be verbally or by writing
o The party notified is expected to pay the instrument
Protest
 If such notice is done through a notary public
Object of notice of dishonor:

a. Inform the secondarily liable parties
o Maker or acceptor has failed to meet his engagement
b. Advise such parties that they will be required to make payment
94 | VII. Notice of dishonor | Sec. 89 To whom notice of dishonor must be given

Notice preserves the right to recover and enforce liability.
Any secondarily liable person to whom such notice is not given is discharged.
EGR: Liable for warranties under Sec. 65 or 66.
Though the law says “each indorser,” the holder may select to notify only one or some of the parties.
Maker and acceptor need not be notified.
Burden on holder to prove that notice has been given.
Will loss of note excuse compliance with giving notice of dishonor?

No.
P presented to W. W dishonors. No notice given to R. P negotiated to A. No knowledge of prior dishonor. A

presents to W who dishonors. Is R discharged by non-notification of P?
No.
GR: Party holding the bill is bound to communicate to drawer the dishonor.
In absence of notice, drawer is discharged.
EGR: Not against innocent indorsee who has no knowledge.
Notice is essential.
Mere knowledge of indorser of non-payment is not sufficient.
To what kind of indorser should the notice be given?

To all kinds. Even if accommodation indorser or irregular.
EGR: Qualified indorser.
 Has no effect
 Does not undertake to pay
Sec. 89 not applicable in

 Sec. 109 – waiver of notice
 Sec. 111 – waiver of protest
 Sec. 112 – when notice is dispensed with
 Sec. 114 – notice need not be given to drawer
 Sec. 115 – notice need not be given to indorser
95 | VII. Notice of dishonor | Sec. 89 To whom notice of dishonor must be given

 Sec. 116 – notice of nonpayment where acceptance is refused

 Sec. 117 – effect of omission to give notice of nonacceptance
Need to give notice of dishonor to joint maker who is only a surety?

No. Not an indorser. Primarily liable.
Even an accommodation maker is not entitled to notice.
X issued postdated check to R. Indorsed in favor of E. E issued check payable to R. indorsed in favor of X.
X made use to the negotiated check. Deed of assignment made where surety agreement whereby F
unconditionally guarantee the payment of R to E. However, dishonored. R and F failed to settle. R argues
he is discharged since E failed to give notice to him. Is assignor liable to assignee for dishonored notes?
Yes. Assignment of credit is done onerously and has an effect similar to sale.
Breach of warranties under Art. 1628 applies.
Check is merely incidental matter.
SEC. 90 BY WHOM GIVEN
Notice may be given by:

a. Holder
b. In behalf of the holder
c. Party who is compelled to pay to the holder and would have the right to reimbursement
d. Person in behalf of (c)
GR: Notice by mere stranger is ineffectual.

EGR: Acting as an agent.
What if drawee who refused was the one who gave notice of dishonor?
As if given by stranger.
Drawee who refuses to accept is not a party.
Why notice to come from holder?

To fix or waive the liability of secondary parties.
D gives notice only to B. Effect?

Discharge C. B would no longer have right against C.
96 | VII. Notice of dishonor | Sec. 90 By whom given

C becomes total stranger.
SEC. 91 NOTICE GIVEN BY AGENT
Notice by agent may be in

 His own name
 Name of party entitled to give notice
o Whether he be his principal or not
The agent need not be authorized by the principal to give notice.
The notice may be given in the name of the agent or the party entitled to give the notice.
SEC. 92 EFFECT OF NOTICE ON BEHALF OF HOLDER
Notice given by or on behalf of holder

 Inures to the benefit of:
o All subsequent holders
o All parties prior parties who have right of recourse to whom the notice has been given
Reason?
A party entitled to a notice of dishonor need to be notified only once.
SEC. 93 EFFECT WHERE NOTICE IS GIVEN BY PARTY ENTITLED THERETO
When notice given by or on behalf of party entitled to give notice

 Inures to benefit of
o Holder
o All parties subsequent to party whom notice is given
Parties who are given the notice of dishonor

 Entitled to give notice of dishonor to those who must receive it.
97 | VII. Notice of dishonor | Sec. 91 Notice given by agent

 It inures to the benefit of the holder and all parties subsequent to the party to whom notice is given
including parties subsequent to the holder who gave notice.
D notifies C only. C notified P, A and B. Effect?

Benefits D.
C’s notice to A inures to B, D and E.
SEC. 94 WHEN AGENT MAY GIVE NOTICE
Instrument is dishonored in hands of agent

 Agent may give notice to parties liable by himself
 Agent may give notice to principal
o Agent may do so as if he were the holder
o Principal will have the same time for giving notice as if the agent were an independent
holder
The agent may give notice to his principal or directly to the parties secondarily liable.
The agent must notify the parties as if he were a holder.
The principal, upon receiving notice from the agent, must give notice to those who are secondarily liable as
if the instrument was dishonored on the day he received it.
SEC. 95 WHEN NOTICE SUFFICIENT
Written notice
 Need not be signed
Insufficient written notice

 May be supplemented and validated by verbal communication
Misdescription of the notice

 Does not vitiate it
EGR: Party whom notice was given was misled
98 | VII. Notice of dishonor | Sec. 94 When agent may give notice

Can notice be by phone?

Yes.
Mere statement that instrument is due and payable is enough?

No.
SEC. 96 FORM OF NOTICE
Notice may be
 Writing or
 Oral
In any terms which
 Sufficiently identify the instrument
 Indicate that it was dishonored
o Nonacceptance or
o Nonpayment
It may be given
 Personally or
 Mail
Thus, it can be through telephone call or telegraph.
A mere statement that the instrument is due and payable is insufficient notice.
Insufficient written notice may be supplemented and validated by verbal communication.
Contents of notice
1. Identity of instrument
2. Fact that it was dishonored
3. Statement that party giving notice intends to look to party addressed for payment
But not need stated expressly if it could be inferred from notice.
99 | VII. Notice of dishonor | Sec. 96 Form of notice

SEC. 97 TO WHOM NOTICE MAY BE GIVEN
Notice may be given to

 Party himself or
 Agent in his behalf
Agent must be authorized to receive

 Because this creates a liability
Unlike in Sec. 91 where it benefits the principal.
SEC. 98 NOTICE WHERE PARTY IS DEAD
When party is dead and death is known to party giving notice

 Notice must be given to the personal representative
o If there can be one and
o If can be found with reasonable diligence
 If there be no personal representative
o Notice sent to last
 Residence or
 Place of business
Executor named in will but not yet approved by court. Principal representative?
Yes.
Where there are several personal representatives, can notice be given to just one?
Yes.
Instances where notice need not be given to personal representative:

1. Death is not known
2. Decedent has no personal representative
3. With reasonable diligence, personal representative cannot be found
If none, notice may be sent to the last residence or last place of business of the deceased.
100 | VII. Notice of dishonor | Sec. 97 To whom notice may be given

SEC. 99 NOTICE TO PARTNERS
Notice to any partner is

 Notice to the partnership
Even if there has been dissolution.
A partner who fraudulently suppresses the notice of dishonor

 Still considered a notice to the partnership
Sec. 99 has no application to personal undertakings of each partner.
SEC. 100 NOTICE TO PERSONS JOINTLY LIABLE
Notice to joint persons who are not partners

 Given to each of them
EGR: One of them has authority to receive such notice for others.
Not refer to joint payees or joint indorsees in Sec. 68.
Since joint accommodation indorsers are neither payees nor indorsees

 They are not secondarily liable under Sec. 68 but may be governed by Sec. 100
o Thus, notice be given to each
SEC. 101 NOTICE TO BANKRUPT
Party to whom notice must be given has been

 Declared a bankrupt or
 Insolvent or
 Has made an assignment for the benefit of creditors
 Notice may be given to
o Party himself or
o Trustee or
101 | VII. Notice of dishonor | Sec. 99 Notice to partners

o Assignee
Necessary for holder to

 File his claims in insolvency proceedings
 To prove giving of due notice
SEC. 102 TIME WITHIN WHICH NOTICE MUST BE GIVEN
Notice may be given as soon as the instrument is dishonored.
Be given within time provided by this act.

EGR: Unless delay is excused.
After dishonor, notice may be given earlier than is required by law.

Why allowed?
Avoid court action.
SEC. 103 WHERE PARTIES RESIDE IN THE SAME PLACE
The person giving and receiving reside in the same place:

a. If given at the place of business of the person to receive the notice
o Must be given before the close of business hours on the day following
b. If given at his residence
o Must be given before the usual hours of rest on the day following
c. If sent by mail
o Must be deposited in the post office in time to reach him in usual course on the day
following
Definition of reasonable time in Sec. 103

 No application in this section
Where the time for giving notice falls on Sunday or a holiday
102 | VII. Notice of dishonor | Sec. 102 Time within which notice must be given
 Act may be done on the next succeeding business day (Sec. 194)
At residence
 Given while members of family are attending to their ordinary affairs
SEC. 104 WHERE PARTIES RESIDE IN DIFFERENT PLACES
The person giving and the person receiving reside in different places:
a. If by mail
o Must be deposited in the post office in time to go by mail the day following the day of
dishonor
 If there be no mail at a convenient hour on that day, by the next mail thereafter
b. If other than through post office
o Within the time that notice would have been received in due course of mail,
o If it has been deposited in the post office within the time specified in (a)
When is convenient time?

9:00 and 11:00 in the morning.
Burden is on holder to prove that notice was mailed within the time prescribed.
No mail on Oct. 11 or if there is but leaves at 4:00 a.m. Next mail is on Oct. 12 in 5 p.m. When to be
mailed?
Oct. 12 at 5 p.m.
SEC. 105 WHEN SENDER DEEMED TO HAVE GIVEN DUE NOT ICE
Sender has given due notice if:

 Notice of dishonor is duly addressed
 Deposited in the post office
Notwithstanding miscarriage in mails.
As long as the sender did everything required by law
103 | VII. Notice of dishonor | Sec. 104 Where parties reside in different places
 It would still be considered on time despite any miscarriage in the mails
Plaintiff to show compliance.
SEC. 106 DEPOSIT IN POST-OFFICE; WHAT CONSTITUTES
Notice may be deposited in post office when deposited in

 Any branch post-office
 Any letter box under the control of the post-office
SEC. 107 NOTICE TO SUBSEQUENT PARTY; TIME OF
Where party receives notice of dishonor

 After receipt, he has same time for giving notice to antecedent parties that the holder as after the
dishonor
An instrument is considered dishonored in the hands of a party who receives a notice of dishonor from the
holder on the date he receives such notice and not on the date the note is dishonored in the hands of the
holder.
SEC. 108 WHERE NOTICE MUST BE SENT
If the signature has an address

 Sent to that address
If no address, notice sent to

a. Post office nearest to his place of residence or
Post office where he is accustomed to receive his letters
b. If he lives in one place, and has his place of business in another, notice may be sent to either place
c. If he is sojourning in another place, notice may be sent to the place where he is so sojourning
But if notice is actually received by the party within the time specified
104 | VII. Notice of dishonor | Sec. 106 Deposit in post-office; what constitutes
 Sufficient even if it was not sent as specified above
It must be sent to the address where the party added an address to his signature.
This is still true even if the address is incorrect.
“Residence” is not used in strict sense.

May be partial or even constructive residence.
Statue is mandatory.
Must be sent to the post office nearest the place of residence or where he is accustomed to receive letters.
Burden is on holder to discover the “place of residence.”
What if residence and place of business are in the same place?

Notice sent to residence.
Indorser is vacationing in Baguio. Can send in Baguio?

Yes.
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
It may be
 Express or
 Implied
The burden of proof to the waiver of notice lies on the holder.
Implied waiver usually takes place after omission to give notice.
SEC. 110 WHOM AFFECTED BY WAIVER
105 | VII. Notice of dishonor | Sec. 109 Waiver of notice

If the waiver is embodied in the instrument itself

 Binds all the parties
If the waiver is written above the signature of an indorser

 Binds only him
SEC. 111 WAIVER OF PROTEST
Protest can be
 Foreign BOE or
 Other negotiable instrument
When protest is waived

 Presentment and notice of dishonor is also deemed waived
Protest
 Formal instrument executed usually by a notary public
o Certifying that the legal steps necessary to fix the liability of the drawee and the indorsers
have been taken
Strictly speaking, applies only to foreign BOE.

But becomes universal to apply to inland bills and notes.
Where protest is waived, the following are also waived

 Presentment
 Notice of dishonor
Why?
Because “protest” means all steps accompanying dishonor.
But it is not a waiver of presentment.
Waiver of notice of dishonor is waived. Presentment also waived?

No.
106 | VII. Notice of dishonor | Sec. 111 Waiver of protest

Facultative indorsement
 When indorser waives presentment and notice of dishonor
SEC. 112 WHEN NOTICE IS DISPENSED WITH
Notice is dispensed with when

 After exercise of reasonable diligence
o It cannot be given to or does not reach the parties sought to be charged
Merely examining the directory for the address is not sufficient.
SEC. 113 DELAY IN GIVING NOTICE; HOW EXCUSED
Delay is excused
 Caused by circumstances beyond the control of the holder
 Not imputable to his
o Default
o Misconduct
o Negligence
If the delay ceases to operate
 Notice must be given with due diligence
Holder’s agent called defendant’s place. Defendant not around. Did not give notice. Dispensed?
No. Could have done it through mail.
SEC. 114 WHEN NOTICE NEED NOT BE GIVEN TO DRAWER
Notice to drawer is not required under the following: EFSPC (expect)

a. Drawer and drawee are the same (regarded as PN)
b. Drawee is a fictitious person or person not having capacity to contract (regarded as PN)
c. Drawer is the person to whom presentment for payment is made
d. Drawer has no right to expect or require that the drawee or acceptor will honor the instrument
107 | VII. Notice of dishonor | Sec. 112 When notice is dispensed with
e. Drawer has countermanded payment
Holder has option to treat bill as PN under (a) and (b).
Bill drawn by agent on his principal (drawee) with authority. Effect?

Equivalent to bill drawn by principal on himself.
Simple fact that drawer has no funds does not operate to excuse the holder to give notice to drawer.
Why?
Drawee may have advanced the amount for the drawer (e.g., loan).
SEC. 115 WHEN NOTICE NEED NOT BE GIVEN TO INDORSER
Notice to indorser is not required under the following:

a. Drawee is a fictitious person or a person not having capacity to contract
o Indorser was aware of the fact at the time he indorsed the instrument
b. Indorser is the person to whom presentment for payment is made
c. Instrument was made or accepted for his accommodation
Applies only to the indorser concerned.
Knowledge by indorser that maker is insolvent or that instrument been dishonored

 Not dispute dispense with notice
Under (c), indorser who is the accommodated party is in fact the principal debtor.
Not entitled to notice.
SEC. 116 NOTICE OF NON-PAYMENT WHERE ACCEPTANCE IS REFUSED
Where due notice of dishonor by non-acceptance has been given

 Notice of a subsequent dishonor by non-payment is not necessary
EGR: Unless in the meantime the instrument has been accepted.
108 | VII. Notice of dishonor | Sec. 115 When notice need not be given to indorser
C presents to W for acceptance but refused. Gives notice of dishonor of non-acceptance to R, P, A and B.
Effect?
No need to make presentment for payment.
SEC. 117 EFFECT OF OMISSION TO GIVE NOTICE OF NON-ACCEPTANCE
Omission to give notice of dishonor by non-acceptance

 cannot prejudice a holder in due course subsequent to the omission.
May still present the instrument to the drawee for acceptance and notify the drawer and indorsers if
acceptance is refused.
SEC. 118 WHEN PROTEST NEED NOT BE MADE; WHEN MUST BE MADE
Any negotiable instrument has been dishonored

 May be protected for nonacceptance and nonpayment
But protest is not required except in foreign BOE.
Protest is necessary only in the case of foreign bills and exchange.

Protest for other negotiable instrument is optional but is the most convenient way of record evidencing the
fact of dishonor.
Summary of rules as to notice:

1. Not necessary to charge primary parties.
Necessary to charge secondary parties.
2. Notice of dishonor not necessary
a. Notice is waived, Sec. 109
b. Protest is waived, Sec. 111
c. Notice is dispensed with, Sec. 112
d. As to drawer, Sec. 114
e. As to indorser, Sec. 115
f. Due notice of dishonor by non-acceptance has been given, Sec. 116
109 | VII. Notice of dishonor | Sec. 117 Effect of omission to give notice of non-acceptance
g. HDC, without notice of dishonor by non-acceptance, subsequent to omission to give notice,

Sec. 117
VIII. DISCHARGE OF NEGOTIABLE INSTRUMENT
SEC. 119 INSTRUMENT, HOW DISCHARGED
Negotiable instrument is discharged: PACAP

a. Payment in due course by or on behalf of the principal debtor
b. Payment in due course by the party accommodated
o Where the instrument is made or accepted for accommodation
c. By the intentional cancellation of the holder
d. Any act that discharged 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
Discharge of an instrument
 Release of all parties from obligations arising under the instrument
 Instrument no longer negotiable
Reference to both
 Instrument
 Parties
No express release on primary parties in NIL

 Because none necessary
 Unconditional liability
Sec. 119 is exclusive.
Payment by principal debtor to discharge:

1. By or on behalf of principal debtor
2. At or after maturity
3. To holder
4. In GF without notice of defect in holder’s title
110 | VIII. Discharge of negotiable instrument | Sec. 119 Instrument, how discharged
“Principal debtor” is to mean exactly what it says

Payment by guarantor or surety will discharge?
No. Not principal debtor.
Payment by accommodated party?
Yes. Payment by principal debtor.
Holder
 not bound to accept payment by check or other negotiable instrument
o does not meet the requirements of a legal tender
To discharge by cancellation
1. Intentional
2. By holder
Cancellation
 Writing
o Word cancelled or paid on the face of the instrument
 Tearing
 Burning
 Mutilating
It is presumed that the aforementioned grounds are intentional.
Any act which discharges a contract also discharges the instrument. CCCNPL
1. Payment by performance,
2. Loss of the thing due,
3. Condonation or remission of debt,
4. Confusion or merger of rights of creditor and debtor,
5. Compensation, and
6. Novation
Others:
 Annulment
 Rescission
 Fulfillment of resolutory condition
 Prescription
111 | VIII. Discharge of negotiable instrument | Sec. 119 Instrument, how discharged
Payment, condonation, etc. operate to discharge instrument between immediate parties

 Not discharge the instrument in the hands of HDC
Reacquisition by principal debtor in his own right

 Should not be in representative capacity
Requisites
1. By principal debtor
2. Own right
3. At or after maturity
Debtor reacquires as agent of another?

Not discharged. Not own right.
As pledge?
Not discharged. Not own right.
SEC. 120 WHEN PERSONS SECONDARILY LIABLE ON THE INSTRUMENTS ARE

DISCHARGED
The following discharges a secondarily liable person: ACDPPP

a. Any act that discharges the instrument (as enumerated in Sec. 119)
b. Intentional cancellation of his signature by the holder
c. By the discharge of a prior party
d. By a valid tender of payment made by a prior party
e. By a release of the principal debtor
EGR: Unless the holder’s right of recourse against the secondarily liable party 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
EGR:
o Unless made with the assent with the party secondarily liable
o Unless the right of recourse against such party is expressly reserved
Maker was a surety of another. Under this article?

No. Not secondary.
Accommodation co-maker?
112 | VIII. Discharge of negotiable instrument | Sec. 120 When persons secondarily liable on the instruments are discharged
No. Not secondary.

Accommodation acceptor?
No. Not secondary.
Discharge may be
 Partial  only secondary parties
 Total  all parties are discharged
A discharge of the instrument

 Discharge of the secondary party
But discharge of a secondary party
 Not a discharge of the instrument
Intentional cancellation
 No need for consideration to support discharge
However
 Right is subject to limitation that the indorsement is not necessary to holder’s title
Contrast from Sec. 119 on cancellation wherein this requisite is not necessary because the whole
instrument is discharged.
Why discharge subsequent parties when a prior party is discharges another party?
Because it deprives the subsequent party the right of recourse.
Who are “prior parties?”
Indorsers, drawers and principal debtors.
Subsection (c) on “discharge of prior party” applies only to discharge by holder.

Not by operation of law
 Bankruptcy
 Statute of limitations
 Discharge by failure of holder to give notice
Holder’s refusal without any justifiable reason to accept the valid tender of payment?
Discharges subsequent parties.
But does not operate as discharge of debt.
Only stops the running of interest.
Relieves from subsequent costs and attorney’s fees.
113 | VIII. Discharge of negotiable instrument | Sec. 120 When persons secondarily liable on the instruments are discharged
In subsection (d) on release of principal debtor, the release must be done by holder.
Not by operation of law.
C released M but expressly reserved right against P, A, B. Effect?

Secondary parties not discharged.
Understood that right of recourse of P, A and B are also reserved as against M.
The agreement in (f) on extension of payment, to be binding, must have valuable consideration and for a
definite period.
The agreement is between the holder and the principal debtor.
Consistent with the rule on guaranty.

 Extinguishes guaranty if extension made without consent of guarantor
Mere failure of holder to demand payment

 Not operate as extension
SEC. 121 RIGHT OF PARTY WHO DISCHARGES THE INSTRUMENT
Instrument is paid by party secondarily liable

 Instrument not discharged
Party so paying
 Remitted to his former rights
o As regard all prior parties
 May strike out his own and subsequent indorsements
 May again negotiate
EGR:
a. Payable to order of third person and has been by drawer
b. Made or accepted for accommodation and has been paid by the accommodated
A payment at or after maturity by a secondarily liable party

 Not discharge the instrument
 Only cancels his own liability and that of parties subsequent to him
114 | VIII. Discharge of negotiable instrument | Sec. 121 Right of party who discharges the instrument
 Reverts to his former rights as regards prior parties
If he was previously HDC but now has notice of defenses?

Still HDC.
Does the two exceptions (a and b) apply to negotiation only?

Yes.
Otherwise, the drawer cannot go after the acceptor.
SEC. 122 RENUNCIATION BY THE HOLDER
Holder may expressly renounce rights against any party

 Before
 At
 After
 Maturity
Absolute and unconditional discharge of instrument at or after maturity

 Discharges the instrument
HDC without notice

 Renunciation does not affect
GR: Renunciation must be in writing.

EGR: Instrument is delivered to the primary party.
Renunciation
 Surrendering right without recompense
What if with recompense or consideration?

Sec. 120 (e) applies.
How renunciation made

 Written
 Oral
115 | VIII. Discharge of negotiable instrument | Sec. 122 Renunciation by the holder
o Accompanied by delivery
Is mere expression of intention enough?

No.
Does not apply to oral novation under which the obligation is accepted in lieu of maker of the instrument.
Renunciation is only personal defense.

Not affect HDC.
SEC. 123 CANCELLATION; UNINTENTIONAL; BURDEN OF PROOF
Inoperative cancellation
 Unintentionally
 Under mistake
 Without authority of the holder
Burden of proof
 Lies on party who alleges that it is inoperative
Cancellation may be
 Writing
 Tearing erasure
 Obliteration
 Burning
SEC. 124 ALTERATION OF INSTRUMENT; EFFECT OF
Where instrument is materially altered without assent of parties

 Avoided
EGR:
 Party who made
 Authorized
 Assented
116 | VIII. Discharge of negotiable instrument | Sec. 123 Cancellation; unintentional; burden of proof
 Subsequent indorsers
But when materially altered instrument is in the hands of HDC who did not alter
 May enforce payment according to original tenor
Material alteration refers to any change in the instrument which affects the liability of the parties in any
way or changes the contract of the parties in any respect.
Sec. 124 is physical alterations.
Extension of time given by holder. Material alteration?

No. Not physical.
The effect of a material alteration by the holder is to discharge the instrument and all prior parties
thereto who did not give their consent to such alteration.
 No distinction is made whether It is a favorable or unfavorable alteration
 Material alteration includes innocent changes
 Exceptions is to be made to those who
o Made
o Assented
o Authorized
o Subsequent indorsers
 When apparent, holder has burden to prove that he had no part
 HDC has to prove that alteration is not apparent
 Drawee bank cannot reimburse from the drawer. Treated as if not paid according to tenor of
instrument.
M issued not to P for P3,000. P changed it to P8,000 and negotiated to B, C and D. If D is not HDC?
Not is discharged as against M.
D can go after P (for the alteration) and B and C (subsequent indorsers).
If D in due course?
Can go to M for P3,000 only.
Spoliation – material alteration made by stranger

Does not affect the instrument if original meaning can be ascertained.
117 | VIII. Discharge of negotiable instrument | Sec. 124 Alteration of instrument; effect of
It does not discharge:

a. Party who has made the alteration
b. Party who authorized or assented to the alteration
c. Indorsers who indorsed subsequent to the alteration
If an altered instrument is negotiated to a holder in due course, he may enforce payment thereof according
to its original tenor regardless of whether alteration was innocent or fraudulent.
SEC. 125 WHAT CONSTITUTES A MATERIAL ALTERATION
Material alterations: D $ T/P P P P

a. Date
b. Sum payable, either for principal or interest
c. Time or place of payment
d. Number of relations of the parties
e. Medium of currency in which payment is to be made;
f. Which adds a place of payment where no place of payment is specified, or any other change or
addition which alters the effect of the instrument in any respect, is a material alteration
Any other alteration which is immaterial will not discharge the instrument.
Ex. of immaterial changes

 Change in serial number
 Making marginal figures
 Change in date of indorsement unless the issue is WON indorsement was made before or after
maturity
 Filling of blanks as to date
 Adding “with interest” with authority
 Insertion of legal interest when interest is stipulated but not supplied
 Marginal notations to correct obvious mistakes
 Substitution of bank name (ex. when banks merged)
Ex. of material changes

 “Surety” is added after co-maker’s name
118 | VIII. Discharge of negotiable instrument | Sec. 125 What constitutes a material alteration
 “Trustee” inserted after payee

 Erasure of payee’s name
 Adding words “agent”
 Erasure of “or”
 Insertion of “current funds” as basis for payment
 Writing “protest waived”
 Writing “without recourse”
Why place of payment material?

Under Sec. 70, the maker or drawer may be at a disadvantage if the place is altered.
IX. BOE FORM AND INTERPRETATION
SEC. 126 BILL OF EXCHANGE DEFINED
BOE
 Unconditional order in writing
 Addressed by one person to another
 Signed by the person giving it
 Requiring the person to whom it is addressed
o To pay on
 Demand or
 At fixed or
 Determinable future time
o A sum certain in money
 To order or
 To bearer
Differences between BOE and PN: UPLIAD

BOE PN
Unconditional order addressed by one person to Unconditional promise made by one person to
another requiring the latter to pay another to pay it
Three parties Two parties
Secondarily liable Primarily liable
119 | IX. BOE Form and interpretation | Sec. 126 Bill of Exchange defined
Complete without indorsement Not complete until indorsed by him

Presented for acceptance No need for presentment for acceptance
If on demand, presented within a reasonable time If on demand, presented within a reasonable time
from its last negotiation from its issue
A promissory note becomes like a bill of exchange when the note is indorsed by the payee.
Maker is the acceptor.
Payee is the indorsee.
Indorser is the drawer.
A bill of exchange becomes like a promissory note when it has been accepted.
Drawer is the first indorsees.
Acceptor is the maker.
Certified check
 Practically PN with bank as maker
 Discharges drawer from liability thereon (Sec. 188)
Draft is a BOE payable on

 Demand (demand draft)
 At sight (demand draft)
 At a determinable future time (time draft)
If drawn by bank against its branch or another bank
 Demand draft
If drawn and payable in one country
 Domestic draft
If drawn in one country and payable in another
 International draft
Drawee bank acting as “payor” bank

 Solely liable for acts done not in accordance with instructions of drawer-bank
Check
 Always drawn on a bank
 Payable on demand
120 | IX. BOE Form and interpretation | Sec. 126 Bill of Exchange defined
Which is more acceptable, bank draft or private check?

Bank draft.
Superior credit resources.
Trade acceptance
 BOE drawn by a seller on the purchaser of goods accepted by the latter by sighing it as drawee
 It has a definite maturity date
If drawn against a bank
 Banker’s acceptance
Bank is not making a loan.
Merely lending credit to buyer.
Letters of credit are loan agreements made by a bank (or other person) at the request of its customer that
the bank (issuer) will pay or honor drafts drawn by the seller (creditor) on the buyer (debtor) up to a stated
amount on compliance with the conditions specified in the credit. Usually used for international commerce.
SEC. 127 BILL NOT AN ASSIGNMENT OF FUND IN HANDS OF DRAWEE
BOE
 Not assignment of funds
GR: Drawee is not liable.

EGR: Accepts the negotiable instrument.
A drawee is a mere stranger to the bill unless and until he accepts the same.
A drawee is not liable even to a HDC if in case he dishonored the bill.

Cannot even sue the drawee because no privity.
Is drawee bound to accept if drawer has sufficient funds?

No.
But would be liable to drawer.
SEC. 128 BILL ADDRESSED TO MORE THAN ONE DRAWEE
121 | IX. BOE Form and interpretation | Sec. 127 Bill not an assignment of fund in hands of drawee
Bill may be addressed to

 Two or more drawee jointly
o Partners or
o Not partners
Bill cannot be addressed to

 Two or more drawee in
o Alternative
o Succession
Why nor drawees in the alternative?

Because of the difficulty of determining the exact date of the dishonor.
Note that several payees is allowed (Sec. 8e)
SEC. 129 INLAND AND FOREIGN BILLS OF EXCHANGE
An inland bill (domestic bill)

 On its face
 Both drawn and payable in the Philippines
Foreign bill
 Not inland bill
GR: Holder may treat the negotiable instrument as inland bill.

EGR: Contrary appears on face.
Each state of US is deemed foreign to each other.
Why the distinction?

To know when to protest (GR: Only foreign).
Determine the applicable laws.
122 | IX. BOE Form and interpretation | Sec. 129 Inland and foreign bills of exchange
SEC. 130 WHEN BILL MAY BE TREATED AS PROMISSORY NOTE
Holder may treat a BOE at his option as BOE or PN:

a. Drawer and drawee are the same person
b. Drawee is a fictitious person
c. Drawee has no capacity to contract
Why (a)?
Practically ordering himself to pay.
Why (b) and (c)?
Nobody to accept.
Holder need not prove

 Presentment for payment
 Acceptance of drawee
 Notice of dishonor to charge drawee
SEC. 131 REFEREE IN CASE OF NEED
Referee in case of need

 Drawer and any indorser may insert name of a person whom the holder may resort in case of need
o In case bill
 Non-acceptance
 Non-payment
It is not obligatory for the holder to the referee in case of dishonor.
The referee is not bound to pay the holder.

But he may be liable to the party who named him.
LETTER OF CREDIT
123 | Letter of credit | Sec. 130 When bill may be treated as promissory note
ART. 567
LC
 Issued by one merchant to another
 Purpose of attending to commercial transaction
ART. 568
Essential conditions PA
1. Issued in favor of determined Person
2. Limited to a fixed and specified Amount or
One or more indeterminate amounts but within a maximum limit
If LC not satisfy condition

 Only letters of recommendation
ART. 569
One who issues LC

 Liable to person on whom it was issued
o For amount paid
 Within the maximum limit fixed
LC
 When not paid
o Not protested
o No right of action to the issuer for nonpayment
Payor
 Right to demand proof of identity of person LC was issued
124 | Letter of credit | Art. 567

ART. 570
Drawer of LC may annul

 Inform about the revocation
o Bearer
o Person to whom it is addressed
ART. 571
Holder of LC
 Pay the drawer amount received without delay
If not done
 Action including attachment brought
o Recover amount with legal interest
o Current exchange in place where payment was made on the place where it was repaid
ART. 572
If holder of LC not make use within period agreed with drawer

 Void
o In fact
o In law
If no period but six months lapsed since its date in any point of Philippines
 Void
o In fact
o In law

LC
 Letter from merchant, bank or banker in one place
 Addressed to another in another place
 Requesting addressee to pay money or deliver goods to a third party names
 Writer undertaking to provide for the goods or to repay him
Contract involved in LC
1. Contract of sale between buyer and seller
2. Contract of buyer with issuing bank
3. LC proper which bank promises to pay seller pursuant to conditions
A contract of transportation is usually involved apart from LC.

 When seller and buyer not in same locale
Bank cannot be expected to look beyond documents presented to it.

Cannot be expected to go beyond representation of shipper in the BOL.
Bank deals only with documents.
Has nothing to do with quality of merchandise.
Effect when correspondent bank accepts faulty tender?

Does so in its own risk.
Discrepancy in the amount of BOL and goods indicated in the invoice. Go against the bank?
No. Remedy is go against the seller.
Keng Hua Paper v. CA
Parties to LC:
1. Buyer
o Reimburses the issuing bank upon receipt of documents
o Initiates the LC
2. Bank issuing the LC (opening bank)
3. Seller (beneficiary)
o Ships goods to buyer
o Delivers documents of title
o Delivers draft to recover payment
4. Advising bank (notifying)

5. Confirming bank (lends credence to the LC)

o E.g., Confirmed commercial credit where the notifying bank assumes the obligation of
issuing bank
Nature of liability together with issuing bank?
Joint.
Beneficiary may proceed either or against both of them.
o Receives commission for confirmation
 Issuing bank passes this to the buyer
6. Paying bank (encashes the draft)
o May be the
 Issuing bank
 Advising bank
How to reimburse if the issuing bank has no account with the paying bank?
Paying bank draws BOE on the issuing bank.
In here, the beneficiary is out of the transaction.
7. Negotiating bank
o Usually any bank in the city of beneficiary
o Buys or discounts the draft of beneficiary
o Becomes indorser and bona fide holder
 Protected by the drawer’s signature
Nature of LC
 Nothing more than commitment
 Nature of guaranty partaking negotiable instrument in so far as it accepts bills or drafts
 Not strictly negotiable instrument
 Bearer not considered bound to receive money
o May use the letter as he pleases
 Purpose of insuring that seller is paid
o Absolute undertaking to pay
o Primary obligation
 Not accessory
 While security arrangement, not converted to contract of guaranty
 Definite undertaking to pay at sight once documents stipulated are presented
Purpose of LC
 Modern letters involving bank to bank transactions

Failure to open LC within the period agreed upon. Effect?

Prevent binding juridical tie.
To bind offeror, must comply with conditions.
Letter may be made conditional.

Protection of banking and mercantile community.
Conditions be strictly complied.
Complete agreement is unaffected by any breach of contract on part of seller or buyer.
Material variance between LC and COS. Effect?

Would excuse nonperformance of seller.
When is LC consummated?
Date of payment to creditor in his country by the correspondent bank.
Not the date of payment by debtor to the bank. Belman v. CB
Why not date of payment of debtor?
Because debtor can be granted extension.
Seller to claim the LC but was refused because lack of one certification. Proper to refuse?
Yes.
LC is governed by strict compliance.
Absence of a document justifies the refusal of correspondent bank.
Irrevocable credit Confirmed credit

Refers to duration. Kind of obligation assumed by correspondent bank.
Issuing bank may not revoke his undertaking. Gives absolute assurance to beneficiary that it will
EGR: Consented by the beneficiary and applicant. undertake the issuing bank’s obligation according
to terms and conditions of credit.
Correspondent bank may be

 Notifying bank – no liability except to notify or transmit to beneficiary the existence of LC
 Negotiating bank – buys or discounts a draft under the LC
o Before negotiation, it has no liability

o After negotiation, contractual relationship prevail between seller and negotiating bank
 Confirming bank – assumes direct obligation (primary)
Is there guaranty in LC?

No.
Irrevocable credit is independent of the
 Contract between the buyer and seller
 The credit agreement between the issuing bank and the buyer.
Guarantee theory destroys the independence principle.
Nature of contract between notifying bank and beneficiary?

Contract of service.
Nature of contract between notifying bank and issuing bank?
Agency.
Beneficiary was told that confirmation of LC not needed. LC turned out to be fraudulent. Negotiating bank,
who was also the notifying bank, runs after the beneficiary. Effects?
Can go after the beneficiary. Akin to discounting agreement.
Right of recourse is against the issuing bank. However, until reimbursement, the drawer of the draft
assumes contingent liability.
Letter of credit
 Financial device
 Convenient and relatively safe mode
 Seller refuses to part with his goods before payment and buyer wants to have control of goods
before paying
 Buyer and seller agree on what documents are to be presented (usu. title evidencing shipment)
How LC is done
1. Seller ships goods to buyer
2. Seller secures the required shipping documents
3. Seller executes draft
4. Seller presents the draft and required documents to issuing bank
5. Issuing bank redeems and obtains possession of the documents
6. Transaction is completed when buyer reimburses issuing bank and acquires the documents

Independence principle characterizes LC from other accessory contracts.

Independent of any breach of the main sales contract.
Parties to LC:
1. Buyer
2. Bank issuing the LC
3. Seller (beneficiary)
4. Advising bank (notifying)
5. Confirming bank (lends credence to the LC)
6. Paying bank (encashes the draft)
7. Negotiating bank (discounts the drafts)
Observance of Uniform Customs and Practice for Documentary Credits (UCP) is justified under Art. 2
of Code of Commerce (usages and customs generally observed).
 Suppletory application
Commercial credits Standby credits

Involve payment under COS Payable upon certification of party’s
nonperformance
Payable upon presentation of documents by the Documents tend to show the nonperformance of
beneficiary applicant
Beneficiary to demonstrate that he has performed Beneficiary show that obligor has not performed
his contract the contract
Who can invoke independence principle?

Either issuing bank or beneficiary.
For the benefit of both.
Standby credit Surety

Reasonably expects receipt of cash in the event of No duty to indemnify beneficiary until the fact is
nonperformance established that obligor has not performed
No need of litigation Needs litigation
TRUST RECEIPTS LAW (PD 115)
130 | Trust receipts law (PD 115) | Art. 572

SEC. 1 SHORT TITLE
Short title
 Trust receipts law
SEC. 2 DECLARATION OF POLICY
Declaration of policy
 Promote use of trust receipts
 Declare misuse and/or misappropriation as criminal offense
o Estafa under Art. 315 RPC
SEC. 3 DEFINITION OF TERMS
Document
 Written or printed evidence of title of goods
Entrustee
 Person taking possession of goods, documents, instruments under TRA in interest of entruster
Entruster
 Person holding title over goods, documents, instruments
Goods
 Include chattels and personal property
 Not
o Money
o Things in action
o Things affixed to land
Instrument
 Any negotiable instrument under NIL
 Not include a document in this decree
Purchase
 Sale, conditional sale, mortgage, pledge
o Legal
o Equitable
Purchaser
 Person taking by purchase
131 | Trust receipts law (PD 115) | Sec. 1 Short title

Security interest
 Property interest in goods, documents, instruments
o To secure performance
Person
 Individual, trustee, receiver, fiduciary, partnership, corporation, business trust, other association
Trust receipt
 Written or printed document
 Signed by entrustee
 In favor of entruster
 Containing terms to comply with PD 115
Value
 Any consideration to support simple contract
SEC. 4 WHAT CONSTITUTES A TRUST RECEIPT TRANSACTION
TRA
 Between entruster and entrustee
 Entruster holds
o Absolute title or
o Security interest
Over certain goods, documents, instruments
 Possession is with entrustee
 Entrustee executes and delivers to the entruster
o Signed document
 Called trust receipt
 Entrustee binds to hold the goods, documents, instruments
o In trust for the entruster
 To sell or dispose
 Obligation of entrustee
o To turn over proceeds
 Proceeds or
 Amount owing as it appears in TRA
o If unsold
 Return the goods, documents, instruments
1. Goods or documents
132 | Trust receipts law (PD 115) | Sec. 4 What constitutes a trust receipt transaction
a. Sell goods or procure their sale

b. Manufacture or process goods with purpose of ultimate sale
In case of goods delivered under purpose of manufacturing
o Entruster retain title
 Original form or
 Processed form
Until entrustee has fully complied with obligation
c. To load, ship, transship in manner preliminary to sale
2. Instrument
a. Sell or procure sale or exchange
b. Deliver to principal
c. Effect consummation of some transactions involving deliver to
 Depository or
 Register
d. Effect presentation, collection or renewal
Not trust receipt transaction:

 If sale by person who is in business of selling for profit
o Has general property rights to such goods, documents, instruments
 If sells goods, documents, instruments on credit
o Retaining title or other interest as security for payment of the purchase price
Trust Receipts Law

 Additional layer of security to the lending bank
TRA
 Security transaction
 Lender, having no prior title or possession
 Lends money to borrower on security of goods
 Goods to be sold by borrower
Importance of trust receipts

 Originally in importing transactions
 Convenience aid to commerce and trade
 Full title vested in entruster
 Title in entruster taken as security only

o Importer has never owned the goods
 Importer becomes abosolute owner as soon as payment of price
 Both loan and security features
o LC as the loan feature
o TRA as the security feature
 Financial assistance to traders
Violates constitutional prohibition against imprisonment on non-payment of debt?
No.
Law does not seek to enforce payment of the loan.
 Entruster remains lender and creditor
o Bank does not become real owner
 Remain the property to importer
 Risk to importer in case of loss
Why not consider the bank as true owner?
Would disregard the loan feature.
 LC and TRA agreement
o Entrustee’s non-sale does not affect the right of entruster to recover the advances
o Repossession of goods by the bank is not payment
 Payment only upon application of foreclosure
If lender knows that return of goods is not possible, TRA?

No. Mere simple loan.
Debtor received goods subject to trust but TRA made only after delivery of goods. TRA?
No. There as already transfer of ownership to the debtor before the TRA was made.
Goods were not being held for sale but to be used for fabrication of steel communication tower. TRA?
No.
Should be to sell, not to build, to be under TRA.
TRA LC
May be executed as security on the LC
Entruster holds absolute title. Engagement where the issuer will honor upon
Goods released to entrustee. compliance.
Entrustee has obligation to return proceeds or goods. Bank merely substitutes its own promise to pay.
SEC. 5 FORM OF TRUST RECEIPTS; CONTENTS
TRA
 Need not be in any form
 May contain terms and conditions not contrary to OD 115
Must substantially contain:
a. Description of goods, documents, instruments
b. Total invoice value of goods and amount of draft to be paid
c. Undertaking or commitment of entrustee
d. Hold in trust for entruster
e. To dispose
f. To turn over proceeds or return
SEC. 6 CURRENCY IN WHICH A TRA MAY BE DENOMINATED
TRA
 May be in
o Philippine currency
o Foreign currency
 Acceptable and part of international reserves of the Philippines
If A be in foreign currency
 Payment made in equivalent Philippine currency
o Using prevailing exchange rate
 Date of turnover of the proceeds or
 Date stipulated
SEC. 7 RIGHTS OF ENTRUSTER
Entruster
 Entitled to proceeds
o Extent of amount
 Owed by entrustee or
135 | Trust receipts law (PD 115) | Sec. 5 Form of trust receipts; contents
 Shown in TRA
 If non-sale
o Return of goods, documents, instruments
 Enforce all other rights conferred in TRA
o No contrary to PD 115
Entruster
 May cancel trust and take possession
o Any time upon default or failure of entrustee to comply with conditions
 Entruster in possession
o Give notice to entrustee of intent to sell
 Notice of sale sufficient
 Writing
 Either
o Personally served
o Post-paid ordinary mail
o Cannot sell within 5 days from serving or sending notice
o Sell at
 Public or
 Entruster may be purchaser
 Private
Proceeds of sale by entruster be applied

a. Expenses of sale
b. Payment of expenses of re-taking, keeping, storing
c. Satisfaction of entrustee’s debt
Surplus
 To entrustee
Deficiency
 Entrustee liable
SEC. 8 ENTRUSTER NOT RESPONSIBLE ON SALE BY ENTRUSTEE
Entruster
 Not responsible as principal or vendor
o Sale or contract made by entrustee
136 | Trust receipts law (PD 115) | Sec. 8 Entruster not responsible on sale by entrustee
SEC. 9 OBLIGATIONS OF ENTRUSTEE
Entrustee
 Hold the goods, documents, instruments
o In trust
o In accordance with terms
 Receive proceeds of sale and turn over
o Extent owing ot
o Amount in TRA
 Insure goods for total value against
o Fire
o Theft
o Pilferage
o Other casualties
 Keep goods separate and capable of identification
 Return in case of non-sale
 Observe other conditions in TRA
SEC. 10 LIABILITY OF ENTRUSTEE FOR LOSS
Risk of loss
 Borne by entrustee
 Whether or not due to fault or negligence of entrustee
Loss
 Not extinguish the obligation to the entruster
SEC. 11 RIGTHS OF PURCHASER FOR VALUE AND IN GF
Purchaser for value and in GF

 Acquires the goods, documents, instruments
o Free from entruster’s security interest
SEC. 12 VALIDITY OF ENTRSUTER’S SECURITY INTEREST
137 | Trust receipts law (PD 115) | Sec. 9 Obligations of entrustee

Entruster’s security interest

 Valid as against all creditors of entrustee
o For duration of TRA
Nature of security interest of entruster

 Becomes lien
Right of entruster to cancel trust

 Optional Sec. 7 (2) PD 115
 The provision uses the word “may”
 Alternative action
o Separate civil action
Right of entruster to goods as against entrustee and third person

 Law warrants the validity of entruster’s security interest
EGR: Goods are in hands of IPV.
Is the entrustee still liable even after the entruster takes the goods?
Yes. Remain liable for the loan covered.
California to Manila drums of gasoline consigning to PNB. X requested PNB to pay and PNB acceded but
TRA be made. J filed an action against X and was awarded. Who has preference?
PNB. TRA partakes nature of conditional sale.
PNB enjoys preference.
J merely a judgment creditor.
X, importer, made TRA in favor PNB. Y, purchaser of X, strongly desired the goods. Signed in the TRA
also. X became insolvent. Can PNB go after Y?
Yes. Liable ex contractu. Assumed the same obligation as co-signer.
SEC. 13 PENALTY CLAUSE
Failure to turn over proceeds or return in case of non-sale

 Estafa
o Art. 315 1 (b) ROC
138 | Trust receipts law (PD 115) | Sec. 13 Penalty clause

If violation is committed by corporation, partnership, association or other juridical entities

 Penalty imposed upon
o Director
o Officer
o Employee
o Other official responsible
No prejudice to civil liabilities.
Law does not seek to enforce payment of the loan.

Rather, punishes the dishonesty and abuse of confidence.
Nonpayment of amount involved

 Punishable by estafa
 All transactions are covered
 Malum prohibitum
o Offense against public order
o But still, although malum prohibitum, still need to establish the misuse or misappropriation
Constitutive of the criminal offense

 Proceeds not turned over
 Non-return of the goods, if unsold
Presumption of intent to defraud.
SEC. 14 CASES NO COVERED BY DECREE
Cases not covered

 Governed by existing laws
X. ACCEPTANCE
SEC. 132 ACCEPTANCE; HOW MADE, ETC.
Acceptance of a bill
139 | X. Acceptance | Sec. 14 Cases no covered by decree

 Signification of a drawee
o Assent to the order of the drawer
Formal requisites of acceptance:

a. In writing
b. Signed by the drawee
c. Not express that promise be performed other than payment of money
Drawee consents to comply.

No acceptance unless  completed by delivery or notification (Sec. 191)
Acceptance only applies to BOE, not to PN.
GR: No need to accept a check.

EGR: Relating to certification of checks which declares that it is an acceptance or equivalent thereto.
Chapter XVI Sec. 187-191
Object of acceptance
 To bind drawee
By acceptance
 Drawee admits everything essential to BOE’s validity
o Want or failure of consideration cannot be later shown
Is rule unjust for the drawee?
No. He has the duty to know whether he is obliged to know that he is indebted to the drawer.
Upon acceptance
 the bill in effect becomes a note
Acceptance is important to determine the liabilities.

Not important to determine negotiability.
Formal requisites of acceptance

1. In writing
o Not apply to
 Constructive acceptance
140 | X. Acceptance | Sec. 132 Acceptance; how made, etc.

 Foreign bill payable to another state

EGR: Law of state requires written acceptance
Acceptance was made thru telephone. Proper?

No. Not in writing.
2. Signed by drawee
3. Express a promise to pay money
Accepted to be payable in goods. Proper?

No. Should be money.
4. Delivered to holder
o Before delivery or notification to holder
 Drawee may still revoke or cancel
Usually, acceptance is made by writing across the face of the BOE the word “accepted.”
There are no particular words required.
What is important is an intention to accept the instrument.
SEC. 133 HOLDER ENTITLED TO ACCEPTANCE ON FACE OF BILL
Holder of BOE
 Right to require that the acceptance be made on the bill itself
If the drawee refuses
 Holder has the option to treat it as dishonored
Acceptance on separate paper

 Sec. 134 – existing bill
 Sec. 135 – non-existing bill
No actual written acceptance

 Sec. 137 – constructive acceptance
Sec. 133 is applicable to all bills.
141 | X. Acceptance | Sec. 133 Holder entitled to acceptance on face of bill

Not only sight bills.
Can ask for acceptance even if payable at a fixed time?

Yes.
SEC. 134 ACCEPTANCE BY SEPARATE INSTRUMENT
GR: If acceptance is made other than on the bill itself

 Not bind accepter
EGR: In favor of person
 To whom it is shown
 Take the bill for value on faith of such acceptance
E.g., Acceptance by letter.
Acceptance made by telegram saying “good” or “good for sum named.” Proper?
No. Not acceptance.
If “good” is written on the BOE
 Acceptance
If “good” is written not on the BOE
 Not acceptance
Highly criticized decision.
In case the acceptance was made on a non-existing bill

 Believed that as long as the holder knows of the acceptance and relies upon it, the acceptor must
be held to his acceptance although it was not actually shown to the holder
SEC. 135 PROMISE TO ACCEPT; WHEN EQUIVALENT TO ACCEPTANCE
An unconditional promise
 In writing
 To accept a bill before it is drawn
o Deemed an actual acceptance
 In favor of every person
142 | X. Acceptance | Sec. 134 Acceptance by separate instrument

 Receives the bill for value upon the faith thereof
Promise to accept future non-existing bill

 Unconditional
 In writing
P writes letter to W to accept a future BOE. W replied “YES.” Negotiated to A who did not see the letter of
W. Effect?
W is liable to P as acceptor.
W is not liable to A.
SEC. 136 TIME ALLOWED FOR DRAWEE TO ACCEPT
Drawee
 24 hours to decide after presentment for acceptance
o Whether or not to accept the bill
Acceptance
 Dated as of the day of presentation
BOE payable 20 days after sight. Presented on Sept. 5 at 10:00 am. Accepted on Sept. 6. When will be the
due date?
On Sept. 25, not 26.
SEC. 137 LIABILITY OF DRAWEE RETAINING OR DESTROYING BILL
Deemed to have accepted the bill:

 Drawee destroys the instrument
 Drawee refuses within 24 hours or within period given to him
o To return the bill accepted or non-accepted
This is based on doctrine of estoppel.
143 | X. Acceptance | Sec. 136 Time allowed for drawee to accept

This should not be confused with implied acceptance.

Implied acceptance is inferred from the act or conduct of drawee.
An accidental destruction would not constitute acceptance.
Mere retention without refusal to return for more than 24 hours. Constructive acceptance?
Yes.
Note that the Sec. 137 talks about delivery for acceptance.
Not delivery for payment.
SEC. 138 ACCEPTANCE OF INCOMPLETE BILL
A bill may be accepted:

 Before the bill has been signed by the drawer
 While incomplete
 Overdue
 After it has been dishonored by non-acceptance or non-payment
If a previously dishonored instrument by non-acceptance was subsequently accepted by the drawee

 Holder is entitled to have the bill accepted as of the date of first presentment
EGR: Different agreement
SEC. 139 KINDS OF ACCEPTANCE
Acceptance
 General acceptance
o Assents without qualification to the order of the drawer
 Qualified acceptance
o In express term
 Varies the effect of the bill drawn
144 | X. Acceptance | Sec. 138 Acceptance of incomplete bill

SEC. 140 WHAT CONSTITUTES A GENERAL ACCEPTANCE
An acceptance to pay at a particular place

 General acceptance
EGR: Expressly states that the bill is to be paid there only and not elsewhere
SEC. 141 QUALIFIED ACCEPTANCE
Qualified acceptance: CPLTD (capulted)

a. Conditional
o Dependent on the fulfillment of a condition therein stated
b. Partial
o Pay part only of the amount for which the bill is drawn
c. Local
o 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
“Accepted” or “good” written on the instrument. Effect?

General acceptance.
Conditional
 As soon as proceeds of sale of hardware is available.
Partial
 Only 700 of the 1000 is accepted.
Local
 Accepted payable at PNB only.
Qualified
 BOE is 30 days from acceptance but was accepted to be 60 days from acceptance.
As to drawee
 ABC are drawees. Only A accepts.
145 | X. Acceptance | Sec. 140 What constitutes a general acceptance

SEC. 142 RIGHTS OF PARTIES AS TO QUALIFIED ACCEPTANCE
Holder may refuse qualified acceptance.

If not obtain an unqualified acceptance
 May treat it as dishonored by non-acceptance
If the holder agrees to a qualified acceptance

 GR: Drawer and indorser are discharged from liabilities
EGR:
o Authorized to take qualified acceptance
 Expressly or
 Impliedly
o They subsequently assent
If drawer or indorser receives notice of qualified acceptance
 Drawer or indorser must express his dissent
Otherwise
o Deemed assented
Reason is because the drawer and indorser engage that the BOE be paid as drawn or indorsed.
XI. PRESENTIMENT FOR ACCEPTANCE
SEC. 143 WHEN PRESENTMENT FOR ACCEPTANCE MUST BE MADE
Presentment for acceptance is be made: FEE

a. Where bill is payable after sight or when it is necessary to fix the maturity of the instrument
b. Where the bill expressly stipulates that it shall be presented for acceptance
c. Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee
In no other case is acceptance necessary.
146 | XI. Presentiment for acceptance | Sec. 142 Rights of parties as to qualified acceptance
Presentment for acceptance

 Production or exhibition of a BOE to the drawee for his acceptance or payment
 It includes “payment” also
When presentment necessary

a. Fix the maturity
b. Comply with stipulation
c. Inform drawee of existence of the BOE
So if not under the three instances, not allowed to present?

No. Interest of holder to have it accepted so that drawee be bound.
SEC. 144 WHEN FAILURE TO PRESENT RELEASES DRAWER AND INDORSER
As provided in Sec. 143, holder must either

 Present if for acceptance
 Negotiate it (even without presentment for acceptance)
 Within reasonable time
Otherwise
 Discharge
o Drawer
o Indorser
To charge the drawers and indorsers:

a. Present the bill for acceptance (Sec. 143)
b. Negotiate within a reasonable time
The reason is to shorten the time of payment for drawer and indorsers
 Put a limit to the period of their liability
 Enable to protect themselves
SEC. 145 PRESENTMENT; HOW MADE
Proper presentment:
147 | XI. Presentiment for acceptance | Sec. 144 When failure to present releases drawer and indorser
 Made by or on behalf of the holder

 Reasonable hour
 Business day
 Before the bill is overdue
 To the drawee or some other person authorized to accept or refuse on his behalf
a. If bill is addressed to two or more drawees

o Not partners
 Presentment be made to all
o One has authority to accept or refuse acceptance for all
 Presentment may be only to him
b. Drawee is dead
o Presentment may be to personal representative
c. Drawee adjudged
o Bankrupt
o Insolvent
o Assignment for benefit of creditors
Presentment may be made to
o Him or
o Trustee or assignee
Place for presentment

 Not material
o Drawee need only write his acceptance on the bill unlike that of presentment for payment
Contrast with Sec. 73.
Presentiment for payment if drawee is dead

 Only permissive
 Excused under Sec. 148
SEC. 146 ON WHAT DAYS PRESENTMENT MAY BE MADE
BOE
 Presented on any day
 Subject to Sec. 72* and 85**
148 | XI. Presentiment for acceptance | Sec. 146 On what days presentment may be made
If on a Saturday
 Presented for acceptance before 12 o’clock
EGR: Unless it is a holiday
* Presentment to be sufficient HHPP

a. By the holder, or some person authorized to receive payment on his behalf
b. Reasonable hour on a business day
c. Place defined
d. To person primarily liable, if inaccessible, any person found at the place where presentment is made
**Every negotiable instrument is payable at time fixed therein

 Without grace
When maturity is on a Sunday or Holiday
 Payable on the next succeeding business day
When maturity is on a Saturday
 Presented for payment on the next succeeding business day.
EGR: If on demand
 Holder may present it before 12 noon on Saturday when days is not a holiday
If on a Sunday or Holiday, it will have to be on the next succeeding business day.
SEC. 147 PRESENTMENT WHERE TIME IS INSUFFICIENT
Excuse in delay in making presentment for payment

 Drawn payable elsewhere than place of business or residence of drawee
 No time to present the bill for acceptance before presenting for payment
 Exercise of reasonable diligence
If such is the case
 Indorsers and drawers are not discharged
If presentment of acceptance be in Zamboanga and payment be in Manila the following day, effect?
Delay in presentment for payment in Manila is excused.
SEC. 148 WHERE PRESENTMENT IS EXCUSED
149 | XI. Presentiment for acceptance | Sec. 147 Presentment where time is insufficient
Presentment for acceptance may be excused: DRR

a. Drawee is dead or
Absconded or
Fictitious person or
Person not having capacity to contract by bill
b. After exercise of reasonable diligence, presentment cannot be made
c. Although presentment has been irregular
o Acceptance has been refused on some other ground
If such is the case
 Holder may treat it as dishonored by non-acceptance
SEC. 149 WHEN DISHONORED BY NON-ACCEPTANCE
Dishonored by nonacceptance if:

a. After presentment for acceptance
o Acceptance is refused or
o Cannot be obtained
b. Presentment for acceptance is excused and the bill is not accepted
Under (a) are

 Sec. 132 – acceptance, how made
 Sec. 133 – holder entitled to acceptance in face of bill
 Sec. 142 – rights of parties as to qualified acceptance
Under (b) is
 Sec. 148 – presentiment is excused (DRR)
SEC. 150 DUTY OF HOLDER WHERE BILL NOT ACCEPTED
If within prescribed time the BOE is not accepted

 Instrument must be treated as dishonored by nonacceptance
 Otherwise
o Loses right of recourse against
150 | XI. Presentiment for acceptance | Sec. 149 When dishonored by non-acceptance
 Drawer
 Indorser
Note that the BOE is not declared as dishonored.

Only treated as dishonored by the holder.
An HDC may still acquire it.
SEC. 151 RIGHTS OF HOLDER WHERE BILL NOT ACCEPTED
If the BOE is dishonored by non-acceptance

 Immediate right of recourse against drawer and indorser
 No presentment for payment necessary
After notice of dishonor and protest when required, the holder may now run after the drawer and indorsers
even before maturity.
In this case, presentment for payment is not necessary.
XII. PROTEST
SEC. 152 IN WHAT CASES PROTEST NECESSARY
Foreign bill appearing on its face

 If dishonored by nonacceptance
o Must be duly protested for nonacceptance
 If not previously dishonored by nonacceptance but dishonored by nonpayment
o Must be duly protested for nonpayment
If not protested
 Discharges
o Drawer
o Indorser
151 | XII. Protest | Sec. 151 Rights of holder where bill not accepted
If not foreign bill on its face

 Protest not necessary
Protest is a formal, notarized notice of dishonor (non-acceptance or non-payment).
Required only in foreign bills.

EGR:
 Sec. 158 – Protest before maturity where acceptor insolvent
 Sec. 161 – When bill may be accepted for honor
 Sec. 171 – Who may make payment for honor
Can protest in PN?

Yes. Not required. But not prohibited.
Protest is necessary:
 Foreign bill is dishonored by nonacceptance
 Bill which has not been previously dishonored by nonacceptance has been dishonored by non-
payment
 Before a bill can be accepted for honor
o Protested for dishonor by nonacceptance or for better security
 Before a bill can be presented for payment to the acceptor for honor or referee in case of need
o Protested for nonpayment by party liable
 Upon dishonor of the bill by the acceptor for honor
o Protested for nonpayment by acceptor for honor
 Before a bill can be paid for honor
o Protested for nonpayment by party liable
Reasons for protest:

a. Uniformity in international transactions
b. Furnishes authentic and satisfactory evidence of dishonor
SEC. 153 PROTEST; HOW MADE
Protest: AN TF RD
 Annexed to the bill or must contain a copy thereof
152 | XII. Protest | Sec. 153 Protest; how made

 Under the hand and seal of the notary making it

Must specify:
a. 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:

1. Takes the dishonored instrument to notary public
2. Notary public presents the instrument again to the party who previously dishonored it
o Demands acceptance or payment
3. If refused, notary public on the day of dishonor makes a minute
o On instrument or
o On his notarial register
Noting – minutes consists of
o Initials
o Year, month, date of dishonor
o Charges
4. On same day or afterwards, notary public extends the protest thus noted by embodying in certificate
the fact of protest and his acts in making presentment, demand and giving notice of dishonor
Affix seal on the notarial certificate.
5. Sends notice of dishonor to all parties of the instrument
Without the authentication of notary public?

No proof of drawee’s refusal to accept the bill.
Purpose of certificate of protest?

Do away with necessity of proving the dishonor.
Protest is only a prima facie evidence of the facts therein stated.
It may be disproved by competent evidence to the contrary.
SEC. 154 PROTEST; BY WHOM MADE
Protest may be made by:
153 | XII. Protest | Sec. 154 Protest; by whom made

a. Notary public (necessary for a foreign bill)

b. Any respectable resident
o Place where the bill is dishonored
 Presence of two or more credible witnesses
Respectable resident (witnesses)

 Not necessary if done through a notary public
SEC. 155 PROTEST; WHEN TO BE MADE
When a bill is protested

 Made on the day of its dishonor
EGR: Unless delay is excused
When bill has been duly noted

 Protest may be subsequently extended as of date of noting
The notary public need not make the formal certificate on the same day the instrument is dishonored.
But the noting of the matter is required.
Notice of dishonor be given within prescribed time. (102, 103, 104, 107)
SEC. 156 PROTEST; WHERE MADE
Protested
 At the place where it has been dishonored.
EGR: If bill drawn payable at place of business or residence of person other than drawee
o If dishonored by nonacceptance
 Protested for nonpayment at place where it is expected to be payable
 No further presentment for payment or demand is necessary
154 | XII. Protest | Sec. 155 Protest; when to be made

Drawee resides in Tokyo but payable in Manila. Bill presented for acceptance in Tokyo but was refused. On
maturity, presented for payment to Manila but was refused. Effect?
Protest for nonpayment in Manila.
No further presentment for payment or demand is needed to be made for the drawee.
SEC. 157 PROTEST BOTH FOR NON-ACCEPTANCE AND NON-PAYMENT
A bill protested for non-acceptance

 May be subsequently protested for non-payment
This is discretionary on the part of the holder.
SEC. 158 PROTEST BEFORE MATURITY WHERE ACCEPTOR INSOLVENT
Acceptor adjudged before maturity of the bill

 Bankrupt
 Insolvent
 Assignment for benefit of creditor
 Holder may cause protest for better security
o Against drawer and indorsers
This is optional and will not affect the holder’s remedy against the drawer and indorsers.
SEC. 159 WHEN PROTEST DISPENSED WITH
Protest dispensed with

 Any circumstance that would dispense notice of dishonor
Delay in noting or presenting is excused

 Delay is caused by circumstances
o Beyond the control of holder
o Not imputable to his
 Default
155 | XII. Protest | Sec. 157 Protest both for non-acceptance and non-payment
 Misconduct
 Negligence
When cause of delay ceases
 Bill must be noted or protested with reasonable diligence
*Notice of dishonor may be waived either

 Before the time of giving notice has arrived or
 After the omission to give due notice
It may be
 Express or
 Implied
Refer to Sec. 109-118.
SEC. 160 PROTEST WHERE BILL IS LOST, ETC.
Protest be made on copy or written particulars when

 Loss or destruction of bill
 Wrong detention of a bill
Protest Notice of dishonor

Required on a foreign bill On any negotiable instrument
Written Oral or written
Includes presentment, notice of dishonor and all the Limited to notice only
steps accompanying dishonor
Notary public or respectable resident in the presence A party or his agent
of two or more witnesses
Made at the place where bill is dishonored Not essential
Protest is made on the day of dishonor Giving of notice is made within the times prescribed
XIII. ACCEPTANCE AND HONOR
SEC. 161 WHEN BILL MAY BE ACCEPTED FOR HONOR
156 | XIII. Acceptance and honor | Sec. 160 Protest where bill is lost, etc.
Bill supra protest for the honor of any party liable or person whose account the bill is drawn POSC
 BOE Protested for
o Dishonor by nonacceptance or
o Better security
 Not Overdue
 Acceptor for honor is a Stranger
 Consent of holder
Acceptance for honor may be
 Whole
 Part
If there be acceptance for honor of one party
 There may be acceptance for honor of another party
Acceptance for honor or acceptance supra protest is an undertaking by a stranger to a bill after protest
for the benefit of an party liable thereon, or for the honor of r the person or for whose account the bill is
drawn which acceptance inures also to the benefit of all parties subsequent to the person for whose honor it
is accepted, and conditioned to pay the bill when it becomes due if the original drawee does not pay it.
Purpose
 Preserve the credit of the parties to the instrument or some party to it
Consideration is presumed once a bill is accepted for honor.

Requisites:
a. protested for non-acceptance or for better security
b. party for honor must be a person not a party already liable thereon (stranger)
o If not stranger, would not give additional security
c. bill must not be overdue
d. acceptance for honor must be with the consent of the holder of the instrument
o Because his right to is suspended until maturity
This is obsolete.
Rendered unnecessary by rapid communication.
SEC. 162 ACCEPTANCE FOR HONOR; HOW MADE
157 | XIII. Acceptance and honor | Sec. 162 Acceptance for honor; how made
Formal requisites:
 In writing
 Indicate that it is an acceptance for honor
 Signed by the acceptor for honor
Other requirements:
 Contain an express or implies promise to pay
 Accepted bill for honor must delivered to the holder
Acceptor for honor must appear before a notary public to delicate his intent to accept.
Gazzem v. Armstrong (US Case)
SEC. 163 WHEN DEEMED TO BE AN ACCEPTANCE FOR HONOR OF THE DRAWER
If BOE is accepted for honor without specifying for whose honor

 Deemed to be an acceptance for the honor of the drawer
Why?
Only drawer will become liable to the acceptor for honor.
SEC. 164 LIABILITY OF THE ACCEPTOR FOR HONOR
Acceptor for honor

 Liable to
o Holder
o All subsequent parties to the party for whose honor he accepted
Benefit to those who have a right of recourse against the person for whose honor he accepts.
Accepted by X for honor of B with consent of D, holder. Effect if X pays D?

X will have right against R, W, P, A and B. Not against C.
X’s right against W is dependent on the liability of W to R.
158 | XIII. Acceptance and honor | Sec. 163 When deemed to be an acceptance for honor of the drawer
SEC. 165 AGREEMENT OF ACCEPTOR FOR HONOR
Acceptor for honor

 Engages to pay bill according to terms of his acceptance PPPN
o Not have been Paid by drawee
o Duly Presented for payment
o Protested for nonpayment
o Notice of dishonor given to him
The acceptor for honor is only a collateral and conditional engagement to pay if the drawee does not.
He is only secondarily liable.
He pays according to the terms of his acceptance:

a. It shall have been duly presented for payment
o Note that presentment for payment needed despite prior dishonor
Contrast with Sec. 151 which dispenses presentment for payment when dishonored by
nonacceptance.
Why need to present?
Drawee, after first refusal, may have reached an understanding with the drawer for the
payment of the bill.
b. It shall not have been paid by the drawer
c. It shall have been protested for non-payment
d. Notice of dishonor is given to him supra protest
SEC. 166 MATURITY OF BILL PAYABLE AFTER SIGHT, ACCEPTED FOR HONOR
BOE payable after sight is accepted for honor

 Maturity is calculated from the date of noting for non-acceptance
Not the date of acceptance for honor.
Applies only to bill payable after sight.
159 | XIII. Acceptance and honor | Sec. 165 Agreement of acceptor for honor
SEC. 167 PROTEST OF BILL ACCEPTED FOR HONOR, ETC.
If dishonored bill is accepted for

 Honor supra protest or
 Contains a referee in case of need
 Must first be protested for non-payment
Except as to referee, repetition of Sec. 165.
SEC. 168 PRESENTMENT FOR PAYMENT TO ACCEPTOR FOR HONOR; HOW MADE
How made:
a. If presented in the place where the protest for non-payment is made
 Presented not later than the day following its maturity
b. If presented in some other place
 Forwarded within the time specified in Sec. 103* and Sec. 104**
*The person giving and receiving reside in the same place:

a. If given at the place of business of the person to receive the notice
 Must be given before the close of business hours on the day following
b. If given at his residence
 Must be given before the usual hours of rest on the day following
c. If sent by mail
 Must be deposited in the post office in time to reach him in usual course on the day following
** The person giving and the person receiving reside in different places:
a. If by mail
o Must be deposited in the post office in time to go by mail the day following the day of dishonor
 If there be no mail at a convenient hour on that day, by the next mail thereafter
b. If other than through post office
o Within the time that notice would have been received in due course of mail,
o If it has been deposited in the post office within the time specified in (a)
160 | XIII. Acceptance and honor | Sec. 167 Protest of bill accepted for honor, etc.
SEC. 169 WHEN DELAY IN MAKING PRESENTMENT IS EXCUSED
Delay in making presentment to

 Acceptor for honor or
 Referee in case of need
 Sec. 81*
*Delay in presentment for payment excused

 When caused by circumstances beyond control of holder
 Not imputable to holder’s
o Default
o Misconduct
o Negligence
If cause of delay ceases
 Presentiment be made with reasonable diligence
Delay is excused when it is caused by circumstances beyond the control of the holder.
After which, due diligence for presentment must be made by him.
SEC. 170 DISHONOR OF BILL BY ACCEPTOR FOR HONOR
If the acceptor for honor does not pay the bill

 Protest the bill for non-payment by the acceptor for honor
Three protests would be outstanding on the bill:

a. Protest for dishonor by non-acceptance or for better security
b. Protest for non-payment by the drawee in order to hold the acceptor for honor liable
c. Protest for non-payment by the acceptor for honor in order to hold the drawer and indorsers whose
liabilities have not yet become fixed because of the acceptance for honor
PACLAP
Acceptance for honor Ordinary acceptance
There must be previous protest Protest not required
Acceptor must be a stranger to the bill Acceptor is the drawee
161 | XIII. Acceptance and honor | Sec. 169 When delay in making presentment is excused
Consent of the holder is required Consent of the holder is not required

Acceptor is secondarily liable Acceptor is primarily liable
Several acceptors for honor for different parties in No alternative acceptors
the BOE
Bill is not discharge upon payment by acceptor for Bill is discharge upon payment by acceptor for
honor honor
XIV. PAYMENT FOR HONOR
SEC. 171 WHO MAY MAKE PAYMENT FOR HONOR
Where bill is protested for nonpayment

 Any person may intervene
o Pay it supra protest
 For honor of
 Any person liable or
 For the account of the person whose account it is drawn
Also called payment supra protest.

Not applicable to PN.
Not acquire any right of recourse against prior parties.
Since the provision states “any person”

 Includes a stranger or a party already liable therein
Purpose
 Availed by holder who does not want to indorse the bill yet it has already been dishonored for
nonpayment
SEC. 172 PAYMENT FOR HONOR; HOW MADE
Payment for honor supra protest

 In order not to operate as voluntary payment
o Attested by a notarial act
162 | XIV. Payment for honor | Sec. 171 Who may make payment for honor
 May be
 Appended to the protest or
 For an extension to it
SEC. 173 DECLARATION BEFORE PAYMENT FOR HONOR
Notarial act of honor

 Founded on a declaration made by
o Payer for honor or
o Agent
Declaring intention to pay the bill for honor
For whose honor he pays
Requisites of valid payment for honor:

1. Dishonored by nonpayment (Sec. 83)
2. Protested for nonpayment (Sec. 171)
3. Made by any person
4. Attested by notarial act of honor (Sec. 172)
o Appended to protest or for extension
5. Declaration made by payor or his agent of intent to pay for honor and for whose honor
Effect if requisites not followed?

No right of full reimbursement against the party whose honor he pays.
Procedure for payment for honor:

1. Goes to notary public and declares intent to pay for honor and for whose honor
2. Recorded by the notary public in the protest or in a separate paper
3. Payer for honor notifies within reasonable time the party for whose honor he pays
SEC. 174 PREFERENCE OF PARTIES OFFERING TO PAY FOR HONOR
Two or more persons offer to pay a bill for honor of different parties
163 | XIV. Payment for honor | Sec. 173 Declaration before payment for honor
 Preference
o Person whose payment will discharge the most parties
Note that under acceptance for honor (Sec. 161), the rule is different.
It will be deemed for the benefit of the drawee.
SEC. 175 EFFECT ON SUBSEQUENT PARTIES WHERE BILL IS PAID FOR HONOR
If bill has been paid for honor

 All parties subsequent to the party for whose honor it is paid
o Discharged
 Payer for honor
o Subrogated and succeed
 Holder
 Rights and
 Duties
o As regards
 Party for whose honor he pays and
 All parties liable to the latter
Effects of payment for honor:

 All parties subsequent to the party for whose honor it is paid
o Discharged
 Payer for honor
o Subrogated and succeeds the holder
SEC. 176 WHERE HOLDER REFUSES TO RECEIVE PAYMENT SUPRA PROTEST
Holder of a bill refuses to receive payment supra protest

 Loses right of recourse against any party
o Who would have been discharged
164 | XIV. Payment for honor | Sec. 175 Effect on subsequent parties where bill is paid for honor
Payment for honor Acceptance for honor

Cannot refuse Holder’s consent is necessary
SEC. 177 RIGHTS OF PAYER FOR HONOR
Payer for honor entitled to receive

 Both
o Bill itself and
o Protest
 If paid the
o Amount of bill and
o Notarial expenses
Payment for honor Acceptance for honor

Protest for nonpayment Protest for nonacceptance or for better security
Bill is overdue Bill not overdue
Consent of holder is not required nor can holder Holder’s consent is required
refuse
Acceptor is secondarily liable Acceptor is primarily liable
Notarial act of honor is necessary Notarial act not necessary
Only one payer for honor May be several acceptors for honor
Effects in Effects in
Sec. 175 Sec. 164
If bill has been paid for honor Acceptor for honor
 All parties subsequent to the party for whose honor it  Liable to
is paid o Holder
o Discharged o All subsequent parties to the party for
 Payer for honor whose honor he accepted
o Subrogated and succeed Sec. 165
 Holder Acceptor for honor
 Rights and  Engages to pay bill according to terms of his
 Duties acceptance PPPN
o As regards o Not have been Paid by drawee
 Party for whose honor he pays and o Duly Presented for payment
 All parties liable to the latter o Protested for nonpayment
Sec. 177 o Notice of dishonor given to him
Payer for honor entitled to receive
165 | XIV. Payment for honor | Sec. 177 Rights of payer for honor
 Both
o Bill itself and
o Protest
 If paid the
o Amount of bill and
o Notarial expenses
XV. BILLS IN SET
SEC. 178 BILLS IN SET CONSTITUTE ONE BILL
Bill is drawn in set

 Each part being numbered
 Containing a reference to the other parts
 Whole of the parts constitutes one bill
Bill in set
 Composed of several parts
 Each part numbered and containing reference to other parts
 But constitutes one bill
Purpose
 Availed of in case a bill is to be sent to a distant place through some conveyance
o Avoid miscarriage or loss
SEC. 179 RIGHTS OF HOLDERS WHERE DIFFERENT PARTS ARE NEGOTIATED
Where two or more parts are negotiated to different holders in due course
 As between holder
o Preferred as true owner
 Holder whose title first accrues
But nothing in this section affects the right of a person who, in due course
 Accepts or pays the parts first presented to him
166 | XV. Bills in set | Sec. 178 Bills in set constitute one bill
SEC. 180 LIABILITY OF HOLDER WHO INDORSES TWO OR MORE PARTS OF A SET
TO DIFFERENT PERSONS
Holder of set indorses two or more parts to different person

 Liable on every such part
 Every indorser subsequent him is liable on the part he himself has indorses
o As if each were separate bills
Drawee not liable for more than one part

 Order is to accept or pay only one part
SEC. 181 ACCEPTANCE OF BILL DRAWN IN SETS
Acceptance
 May be on any part
o Must be on one part only
If drawee accepts more than one part and subsequently negotiated to different HDC
 Liable on every part as
o As if each were separate bills
SEC. 182 PAYMENT BY ACCEPTOR OF BILLS DRAWN IN SETS
Acceptor of bill in set pays without requiring part bearing his acceptance to be delivered up
 Liable to
o Part at maturity outstanding in the hands of HDC
SEC. 183 EFFECT OF DISCHARGING ONE OF A SET
167 | XV. Bills in set | Sec. 180 Liability of holder who indorses two or more parts of a set to different persons
If one part of a bill in set is discharged

 Whole bill is discharged
EGR: Otherwise provided
“Except as herein provided”

 Sec. 180 – Liability of holder who indorses two or more parts of a set to different persons
 Sec. 181 – Acceptance of bill drawn in sets
 Sec. 182 – Payment by acceptor of bills drawn in sets
XVI. PROMISSORY NOTES AND CHECK
SEC. 184 PROMISSORY NOTE, DEFINED
Negotiable PN
 Unconditional promise
o in writing
 Made by one person to another
 Signed by the maker
 Engaging to pay
o On demand or
o At a fixed determinable future time
 Sum certain in money
 To
o Order or
o Bearer
If note is drawn to maker’s own order

 Not complete until indorsed by him
If drawn to maker’s own order and not indorsed, no effect at all?

No. Not prevent recovery on the debt for which it was given by the maker.
Same reasoning to BOE payable to drawer’s own order.
But not apply if already accepted by drawee/acceptor.
168 | XVI. Promissory notes and check | Sec. 184 Promissory note, defined
 Acceptance makes the bill complete
Special types of PN
1. Certificate of deposit
o Acknowledgement by bank of receipt of money received or on deposit
o Bank promises to pay
 Depositor or his order
 Some other person or his order
 Bearer
 Specified person or bearer
Either on
 Demand or
 Fixed date
o Often with interest
o Not to be confused with deposit slip
Is CD always negotiable?
No. Only if compliant with Sec. 1 of NIL.
Hence, if there absence of promise to pay, it is a mere receipt.
o No specific form
 A passbook may be a CD
2. Bond
o Evidence of indebtedness issued by
 Public corporation
 Private corporation
o Promise to pay a sum of money
o To be paid on a day certain in the future
 Runs for longer period in time than PN
o Usually large amounts
o Two types:
 Registered bond
 Not negotiable
 Transferrable only through registration
 Coupon bond
 Attached coupons
169 | XVI. Promissory notes and check | Sec. 184 Promissory note, defined
 Negotiated like PN
3. Bank note
o Money
4. Due bill
o PN where word “due” is usually used
5. Mortgage note
o Can either be
 Chattel mortgage
 REM
Foreclosed if the note is not paid
6. Title-retaining note
o Conditional sales contract
7. Collateral note
o Maker pledges securities to payee
 To secure payment of the amount of the note
8. Judgment note
o Enables payee to take judgment against maker
 Without formality of trial
9. Installment note
o Payable in specified installments
SEC. 185 CHECK DEFINED
Check
 BOE drawn on a bank
Provisions applicable to a BOE payable on demand

 Applicable to check
EGR: Otherwise provided.
Does a check need to explicitly state that it is payable on demand?

No.
Presentment for acceptance is unnecessary.
170 | XVI. Promissory notes and check | Sec. 185 Check defined
By issuing a check
 Represents that there are fund in the bank for payment
Checks are not mere contracts

 Representation of funds on deposit
R issued to P a check as security for pieces of jewelry. R failed to sell the jewelry, Returned it but
was told that the check was negotiated already. Withdraw the funds in the bank so that the check
would not be paid. Proper?
No.
Cannot unilaterally withdraw funds.
 Representation of credit stated in monetary value

 Substitute for cash
 Not legal tender
o Produces payment only when
 Encashed or
 Through the creditor, check has been impaired
Check Regular BOE

Drawn on bank or banker May not be drawn on a bank
On demand On demand or at a fixed determinable future time
Drawn against a previous deposit of funds Need not be drawn against a deposit
Intended for immediate payment Intended to be circulated as an instrument of credit
Death of drawer revoked authority of bank to pay Death of drawer does not revoke authority of payee
to pay
Need not be presented for acceptance Acceptance required in certain cases (Sec. 143 FEE)
Presented for payment within a reasonable time after Presented for payment within a reasonable time after
its issue its negotiation
If not presented within a reasonable time after its Drawer is totally discharged
issue, drawer is discharged to the extent of loss
caused by the delay
If check is accepted or certified, drawer and If BOE accepted, drawer and indorsers are
indorsers are discharged secondarily liable
Specifying date of payment

 Characteristic of ordinary BOE rather than a check
Bills payable in the future:

1. Bearing date of their issuance but payment to be on a specified date in the future
2. Postdated check or those bearing a date subsequent to delivery and specifying no time for payment
o Payable on demand on or at any time after the day of its date
 Effect is the same as if it had not been issued until the date stated
Special types of checks

1. Memorandum check
o Word “memorandum,” “memo,” or “mem” is written
o Drawer engages to pay bona fide holder absolutely
 Not upon a condition
o Drawer may be sued the same as a maker upon a PN
 Although maker is but a promise to pay
o Falls within BP 22
 BP 22 does not distinguish the kind of check
2. Cashier’s check
o BOE drawn by cashier of bank against the bank itself
o Not subject to countermand by payee after indorsement
o Same legal effect as CD and certified check
o Treated as PN with bank as maker
o Bank draft if drawn by a bank upon another bank which it has funds on deposit
3. Manager’s check
o Drawn by bank’s manager upon the bank itself
o Mere issuance not work as an automatic transfer of funds to the account of the payee
o Mere fact that manager’s check does not bear the payee’s signature at the back does not
negate the deposit in payee’s account
o Demand draft ≠ cashier’s check or manager’s check
4. Traveler’s check
o Holder’s signature must appear twice
 First – by the time it is issued
 Second – counter-signature
Otherwise, incomplete.
o Usually foreign BOE
o Most traveler’s checks are not checks but drafts because the drawee is not ordinarily a bank
5. Certified check
o Deemed accepted by the bank
6. Crossed check
o Two parallel lines diagonally, usually at the upper left
o Relates to the mode of presentment for payment
Crossing of check:
1. Crossed specially
o Name of a particular bank or company is written between the parallel lines
o Drawee bank to pay only upon presentment of the name indicated
 Absence of proper presentment
 Liability not attach to drawer
2. Crossed generally
o Only the words “and Co.” are written or none at all
o Drawee not encash but merely accept for deposit
Purposes of crossing a check:

 Payment to the rightful person
 Warning that it be deposited to the account of the payee
 Negotiated only once
 Not be encashed
Payee has cause of action against the bank

 For enchasing and paying a crossed check to another person
Stale check
 Not been presented within reasonable time after its issue
 Valueless, should not be paid
 GR: 6 months or 180 days
Check payable to bearer

 Indorsement of drawer is not necessary
 Identification of bearer is not required
 Satisfactory proof of identity may be required by the bank
Depositor has a duty

 Reconcile bank statement with his own records
 Diligence of depositor to depository bank
No duty of diligence by drawer to collecting bank.
 No privity
Duty of diligence of collecting bank
 Scrutinize checks deposited with it for the purpose of determining genuineness
SEC. 186 WITHIN WHAT TIME A CHECK MUST BE PRESENTED
Check
 Must be presented for payment
 After its issue
Otherwise
 Drawer be discharged from liability
 To the extent of the loss caused by the delay
Requisites that drawer of check may be discharged:

1. Check not presented within reasonable time after issuance
EGR: Discharged if not given notice of dishonor within prescribed time (89, 103, 104)
2. Drawer suffers loss
3. Loss suffered is attributable to the delay
If check not presented at all

 Drawer has no liability
But if after drawing and before presentiment for payment and dishonor
 Drawer withdraws his funds
o Liable
A sold to B land. B gave check. A never enchased it. Claims that the sale was never consummated. B said
receipt was already issued. Was the sale consummated?
Yes.
Presumption is that the check had been cashed.
174 | XVI. Promissory notes and check | Sec. 186 Within what time a check must be presented
Granting that petitioner never enchased, failure to do so more than 10 years undoubtedly resulted to the
impairment of the check though his unreasonable delay.
Risk of loss for drawee’s insolvency

 Chargeable to payee/holder
o If payee/holder is the one in delay
GR: Delivery produces effect of payment if encashed.
EGR: Drawer/debtor is prejudiced by the holder/payee’s unreasonable delay in presentment.
Drawer of check assumes the risk of drawee’s insolvency at all times?

No. Only up to reasonable period.
So, holder should obtain payment within that reasonable period.
If holder fails, nonpayment must fall on him.
Discharge in case of presentment is delayed

 If drawer
o Only to the extent of the loss
 If indorser
o Wholly discharged
Basis?
Sec. 186 is silent on the discharge of indorser.
Use Sec. 84, indorser being secondarily liable.
What is reasonable time?

Depends upon circumstances (Sec. 193).
Test is whether payee employed such diligence as a prudent person exercises his own affairs.
E.g., delay is excused
 Bank told payee to return and the bank failed before the check was again presented
 Fault of drawer (e.g., drawer did not have funds)
 Famer living eight miles from town
GR: Payee and drawee reside or are located in the same place
 Holder present the check not later than the day succeeding on which it was issued
Even a delay of two days is unreasonable.
National Plubmbing v. Stevenson (US Case)
Bouncing checks law
Penalizes the making, drawing, or issuing of bouncing or bum check

o Malum prohibitum
 Aim is to prohibit the making of worthless checks and putting them in circulation
 Offense against public order
If the check is drawn by a corporation/company

o Person liable is the one who actually signed
Transitory or continuing crime
Elements:
1. Making, drawing, issuance of check
 To apply on account for value
2. Knowledge of insufficiency or check not be fully paid upon presentment
3. Subsequent dishonor
There is prima facie presumption of the second element under the following:
1. Presented within 90 days from date of check
2. Drawer/maker receives notice
 Lack of written notice is fatal
 Not enough that it was sent, should have been received
3. Drawer/maker fails to pay in 5 working days from receipt of notice
Effect if not presented within 90 days?

Presumption is not present.
Drawer is not automatically discharged.
Not mean that check is stale/worthless.
Two distinct acts being penalized:

1. Making, drawing or issuing a check to apply on account or for value knowing that it is
insufficient funded at time of issue
2. Failing to keep sufficient funds for period of 90 day from date of check for which reason it
is dishonored by drawee
What types of checks are covered?

All kinds of checks.
Are foreign checks included?
Yes.
Drawn and issued in the Philippines though payable outside.
Does the agreement surrounding the issuance of the check relevant?

No.
Novation theory
o Not apply when offer to pay by debtor turned out to be empty promise
Effect if after criminal liability had already been attached or incurred and there was subsequent
payment?
Only affect civil liability. Not the criminal.
Need to properly describe the check?

Yes. To inform the accused of the nature and cause of accusation against him.
Otherwise, violate constitutional right.
BP 22 separate from estafa.

So two civil liabilities?
No.
Single act of issuing a bouncing check may give rise to two distinct criminal offenses.
But only one liability for the offended party.
Acquittal from the crime will extinguish civil liability?

No.
No penalty for imprisonment?

No.
GR: Instead of imprisonment, a fine of not less than but not more than double the amount of the
check dishonored be imposed.
EGR: Accused is not in GF.
Prescriptive period of BP 22
o Since it is a special law with imprisonment of 30 days to 1 year

 Four years
SEC. 187 CERTIFICATION OF CHECK; EFFECT OF
Check is certified by bank

 Certification = acceptance
Check
Effect of refusal to certify?
Not dishonor.
De Leon: Criticized. Inferentially indicates dishonor.
Form of certification
 In writing
o Usually stamping or writing “certified”
Is writing “OK” certification?

No.
What if bank orally agreed to wire-pay a check through telephone. Certification?

No.
Effects of certification:
 Equivalent to acceptance by bank
o Bank is primarily liable
 As primary debtor
 Discharges person secondarily liable if procured by holder
 Operates as assignment in the hands of the drawee-bank
o Drawer cannot draw out the funds
 May not issue stop payment order
 Payee becomes the depositor of the drawee-bank
Bank is estopped as against HDC:
178 | XVI. Promissory notes and check | Sec. 187 Certification of check; effect of
 Dispute genuineness of drawer’s signature

 Set up defense of drawer’s insufficient funds
 Drawer’s indebtedness to the bank for more than the amount of the check
Is a certifying bank liable for material alterations after certification?

No. Liable only up to the amount certified.
When can a check be certified?

 Cannot be certified before it is payable
 Made by officer of the bank
o President
o Cashier
o Tellers
o Designated by BOD
SEC. 188 EFFECT WHERE THE HOLDER OF HECK PROCURES IT TO BE CERTIFIED
Holder of check procures it to be accepted or certified

 Drawer and indorser are discharged from liability
Same effect as if holder had drawn the money, redeposited it and taken CD for it.
 Makes the bank his debtor and releases drawer
Apply to all indorsers?
No. Only to indorsers at time of certification.
Subsequent indorsers are not released.
Certification obtained not by holder but by other?

Secondary party not discharged (e.g., when obtained by drawer)
 Even at the request of the payee or
 Even though the drawer is also the payee
Why?
Holder has not yet received the payment.
SEC. 189 WHEN CHECK OPERATES AS AN ASSIGNMENT
179 | XVI. Promissory notes and check | Sec. 188 Effect where the holder of heck procures it to be certified
Check
 Not operate as assignment of any part of funds to the drawer
 Bank not liable to holder
EGR: The bank
 Accepts or
 Certifies
Before acceptance or certification

 Drawer may countermand
Holder cannot claim priority over
 General creditors of drawer or
 Creditors of the bank in case it becomes insolvent
Can acceptance be implied?

Yes. E.g., checks are impliedly accepted by banks.
Bank refuses to honor the drawer’s order. Who will the payee sue?
The drawer, not the bank.
No privity between payee and the bank.
But bank may be is liable to drawer.
Duty of diligence of the bank

 Scrutinize checks deposited with it
Taking of check by collecting bank on a forged or unauthorized indorsement. Effect?

Same as if it had taken the check and collected without indorsement at all.
Teller deposited cash using a wrong deposit slip which resulted to missending. Bank liable?
Yes.
Teller should not have accepted the local deposit slip when the cashier’s check clearly showed to be a
regional check.
Should have called the attention of the depositor.
Diligence of banks
180 | XVI. Promissory notes and check | Sec. 189 When check operates as an assignment
 More than a good father of a family
Bank treated the account of the depositor as closed because they could not find the ledger. Proper?
No.
Reckless act.
Can claim moral damages from bank even if bank’s negligence is without BF or malice?
Yes. If depositor suffered mental anguish, serious anxiety, embarrassment or humiliation.
Exemplary damages?
Only if there is malice, BF or gross negligence.
Attorney’s fees?
Only if exemplary damages are awarded or where depositor was compelled to litigate to protect his interest.
Can a bank freeze the account of depositor if it suspects that the funds are illegal?
No. Cannot be by mere suspicion.
Does check operate as assignment of funds?

GR: No.
EGR: When certified. Ceases to be under the control of drawer.
Acceptance ≠ payment
Payment ≠ acceptance
Acceptance contemplates further circulation.

Acceptance is the assent.
Payment is not only the assent but also compliance to the obligation.
Why need to distinguish acceptance and payment?

Because if not, drawee-bank may even be precluded from recovering from the forger himself on the ground
of estoppel or legal admission of genuineness of the instrument.
Cases where bank may refuse to pay:

 Bank is insolvent
 Drawer’s deposit is insufficient or has not account with the bank or has been closed or garnished
 Drawer is insolvent and notice was received by the bank
 Drawer dies and notice received by bank
 Drawer has countermanded

 Holder refuses to identify himself
 Bank has reason to believe that the check is forgery
 Check is stale or postdated
Bank has no obligation to make part payment if the funds are insufficient.
Why?
Bank would be without voucher.
Relation between depositor and bank:

 Fiduciary in nature
 Creditor and debtor
Notice in monthly statement issued by bank with stipulation that “it be final if no error reported in
10 days.” Proper?
No. Cannot be considered as waiver.
 Principal and agent

E.g., Checks are received by bank merely for collection and deposit (collecting bank).
o If indorsement is “for collection”
 Restrictive indorsement
o If indorsement is “for deposit”
 Courts differ if restrictive or not
Escheat proceedings in case of dormant accounts.

 State compels the surrender to it of unclaimed deposit
o Abandoned
o Forgotten
o Without owner

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Catapusan, Kevin C. | NEGOTIN | 1st Sem.

TABLE OF CONTENTS Sec. 22 Effect of indorsement by infant or corporation ............... 25

IV. Rights of the Holder................................................................... 56 Sec. 73 Place of presentment ........................................................ 84

Sec. 109 Waiver of notice .......................................................... 105 Letter of credit................................................................................ 123

Sec. 110 Whom affected by waiver............................................ 105 Art. 567....................................................................................... 124

Sec. 111 Waiver of protest ......................................................... 106 Art. 568....................................................................................... 124

I. FORM AND INTERPRETATION

SEC. 1 FORM OF NEGOTIABLE INSTRUMENTS

Promissory note Bill of exchange (BOE)

1 | I. Form and Interpretation | Sec. 1 Form of negotiable instruments

SEC. 2 CERTAINTY AS TO SUM; WHAT CONSTITUTES

Sum certain although

Permissible clauses or stipulations:

Example dependent on extrinsic:

2 | I. Form and Interpretation | Sec. 2 Certainty as to sum; what constitutes

Interest is mere incident. Does not make it unascertainable.

Usurious interest still be negotiable. Contract remains.

I will pay you P1000 in two installments. Negotiable?

Extension dependent on holder for “no longer than reasonable time?”

Can get cost of collection and attorney’s fees?

Increases amount at maturity?

3 | I. Form and Interpretation | Sec. 2 Certainty as to sum; what constitutes

“Costs of collection if not paid?”

“Charges and expenses including attorney’s fee?”

Attorney’s fees be reduced by courts?

If attorney’s fee is not specified?

SEC. 3 WHEN PROMISE IS UNCONDITIONAL

Order or promise to pay out of particular fund ≠ negotiable

4 | I. Form and Interpretation | Sec. 3 When promise is unconditional

An order should be imperative.

Use of word please?

What if drawer does not pay?

Unconditional when payable absolutely, not based on contingency.

Indication of a particular fund out of which reimbursement is to be made is valid.

Indication of a particular fund out of which payment is to be made is non-negotiable.

5 | I. Form and Interpretation | Sec. 3 When promise is unconditional

The intention to limit to particular funds must be clear.

To debit a particular account?

SEC. 4 DETERMINABLE FUTURE TIME; WHAT CONSTITUTES

Determinable future time

Payable upon contingency ≠ negotiable

6 | I. Form and Interpretation | Sec. 4 Determinable future time; what constitutes

Time must be certain

“At the earliest possible time after date”

“On or before date” option of maker?

Payable on or before date?

7 | I. Form and Interpretation | Sec. 4 Determinable future time; what constitutes

On demand or at end of year?

Collect on date but extend to another date if unpaid?

Payable five days before death?

Upon reaching age of majority?

SEC. 5 ADDITIONAL PROVISIONS NOT AFFECTING NEGOTIABILITY

Promise to do any act in addition to payment ≠ negotiable

Negotiability not affected:

Nothing shall validate any provision or stipulation that is illegal.

8 | I. Form and Interpretation | Sec. 5 Additional provisions not affecting negotiability

b. Confession of judgment after the obligation becomes due

c. Waiver of benefit granted by law after maturity date

A recital to deliver on demand additional security to the ratification of a holder

SEC. 6 OMISSIONS; SEAL; PARTICULAR MONEY

9 | I. Form and Interpretation | Sec. 6 Omissions; seal; particular money

Not affect negotiability

Nothing to alter or repeal statute requiring nature of consideration to be stated.

Instruments may be postdated or antedated.