NEGO-Mem-Aid - beda.doc

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San Beda College of Law6

MEMORYAIDIN COMMERCIAL LAW

I. GENERAL CONCEPTS

NEGOTIABLE INSTRUMENT (NI) A written contract for the payment ofmoney which complies with therequirements of Sec. 1 of the NIL, whichby its form and on its face, is intendedas a substitute for money and passesfrom hand to hand as money, so as togive the holder in due course (HDC) theright to hold the instrument free fromdefenses available to prior parties.(Reviewer on Commercial Law,Professors Sundiang and Aquino)

Functions: (Bar Review Materials in

Commercial Law, Jorge Miravite, 2002ed.)

1. To supplement the currency ofthe government.

2. To substitute for money andincrease the purchasing medium.

Legal tender That kind ofmoney which the law compels a creditorto accept in payment of his debt whentendered by the debtor in the rightamount.Note: A NI although intended to be asubstitute for money, is not legal tender.However, a check that has been clearedand credited to the account of thecreditor shall be equivalent to deliveryto the creditor of cash. (Sec. 60, NCBA)

Features: (Reviewer on CommercialLaw, Professors Sundiang and Aquino)

1. Negotiability That attribute orproperty whereby a bill or noteor check may pass from hand tohand similar to money, so as togive the holder in due course theright to hold the instrument and

to collect the sum payable forhimself free from defenses.

The essence of negotiability whichcharacterizes a negotiablepaper as a credit instrumentlies in its freedom tocirculate freely as asubstitute for money.(Firestone Tire vs. CA, 353SCRA 601)

2. Accumulation of SecondaryContracts Secondary contracts

are picked up and carried along

with NI as they are negotiatedfrom one person to another; or

in the course of negotiation ofnegotiable instruments, a seriesof juridical ties between theparties thereto arise either bylaw or by privity.

Applicability:

General Rule: The provisions of theNIL are not applicable if the instrumentinvolved is not negotiable.

Exception: In the case of Borromeovs. Amancio Sun, 317 SCRA 176, the SCapplied Section 14 of the NIL by analogy

in a case involving a Deed of Assignmentof shares which was signed in blank tofacilitate future assignment of the sameshares. The SC observed that thesituation is similar to Section 14 wherethe blanks in an instrument may be filledup by the holder, the signing in blankbeing with the assumed authority to doso.

The NIL was enacted for the purposeof facilitating, not hindering orhampering transactions in commercialpaper. Thus, the statute should not betampered with haphazardly or lightly.Nor should it be brushed aside in orderto meet the necessities in a single case.(Michael Osmea vs. Citibank, G.R. No.141278, March 23, 2004 Callejo J.)

Kinds of NI1. PROMISSORY NOTE (PN)

An unconditional promise in writing byone person to another signed by themaker engaging to pay on demand or ata fixed or determinable future time, a

sum certain in money to order or tobearer. (Sec. 184)

2. BILL OF EXCHANGE (BE)

An unconditional order in writingaddressed by one person to another,signed by the person giving it, requiringthe person to whom it is addressed topay on demand or at a fixed ordeterminable future time a sum certainin money to order or to bearer. (Sec.126)

COMMERCIAL LAW COMMITTEECHAIRPERSON: Garny Luisa Alegre ASST. CHAIRPERSON:Jayson OS Ramos EDP: Beatrix I. Ramos SUBJECT HEADS:Marichelle De Vera (Negotiable Instruments Law); Jose Fernando Llave (Insurance); Aldrich Del Rosario(Transportation Laws);Shirley Mae Tabangcura, Bon Vincent Agustin (Corporation Law); Karl Steven Co (Special Laws); John LemuelGatdula (Banking Laws); Robespierre CU (Law on Intellectual Property)

NEGOTIABLE INSTRUMENTS LAW (NIL)(Act No. 2031, effective June 2, 1911)


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CHECK- A bill of exchange drawn ona bank payable on demand. (Sec. 185). Itis the most common form of bill of

exchange.

OTHER FORMS OF NI1. Certificate of deposit issued by

banks, payable to the depositor orhis order, or to bearer

2. Trade acceptance3. Bonds, which are in the nature of

promissory notes4. Drafts, which are bills of exchange

drawn by one bank upon another5. Debenture

All of these must comply with Sec. 1,

NIL.Note: Letters of credit are notnegotiable because they are issued to aspecified person.

Instances when a BE may be treated asa PN

a. The drawer and the drawee arethe same person; or

b. Drawee is a fictitious person; orc. Drawee does not have the

capacity to contract. (Sec. 130)d. Where the bill is drawn on a

person who is legally absent;e. Where the bill is ambiguous (Sec.17[e])

Parties to a NI1. Promissory Note

a. Maker one who makespromise and signs the instrumentb. Payee party to whom thepromise is made or theinstrument is payable.

2. Bill of Exchangea. Drawer one who givesthe order to pay money to athird partyb. Drawee person towhom the bill is addressed andwho is ordered to pay. Hebecomes an acceptor when heindicates his willingness to paythe billc. Payee party in whosefavor the bill is drawn or ispayable.

DISTINCTIONS

PROMISSORYNOTE

BILL OFEXCHANGE

Unconditional

promise

Unconditional

orderInvolves 2 parties Involves 3 parties

Maker is primarilyliable

Drawer is onlysecondarily liable

Only onepresentment: forpayment

Two presentments:for acceptance andfor payment

NEGOTIABLEINSTRUMENTS

NON-NEGOTIABLEINSTRUMENTS

Only NI aregoverned by theNIL.

Application of theNIL is only byanalogy.

Transferable bynegotiation or byassignment.

Transferable only byassignment

A transferee can bea HDC if all therequirements arecomplied with

A transferee remainsto be an assigneeand can never be aHDC

A holder in duecourse takes the NIfree from personaldefenses

All defensesavailable to priorparties may beraised against thelast transferee

Requires cleantitle, one that isfree from anyinfirmities in theinstrument anddefects of title ofprior transferors.(Notes and Cases onBanks, NegotiableInstruments andother CommercialDocuments,Timoteo B. Aquino)

Transferee acquiresa derivative titleonly. (Notes andCases on Banks,NegotiableInstruments andother CommercialDocuments, TimoteoB. Aquino)

Solvency of debtor isin the senseguaranteed by theindorsers because

they engage that theinstrument will beaccepted, paid orboth and that theywill pay if theinstrument isdishonored. (Notesand Cases on Banks,NegotiableInstruments andother CommercialDocuments, TimoteoB. Aquino)

Solvency of debtor isnot guaranteed underArt. 1628 of the NCCunless expressly

stipulated. (Notesand Cases on Banks,NegotiableInstruments andother CommercialDocuments, TimoteoB. Aquino)



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BILLOF EXCHANGE CHECK Not necessarilydrawn on a deposit.The drawee need not

be a bank

It is necessary thata check be drawnon a bank deposit.

Otherwise, therewould be fraud.

Death of a drawer ofa BOE, with theknowledge of thebank, does notrevoke the authorityof the drawee topay.

Death of thedrawer of a check,with theknowledge of thebank, revokes theauthority of thebanker to pay.

May be presented forpayment withinreasonable timeafter its last

negotiation.

Must be presentedfor payment withina reasonable timeafter its issue.

May be payable ondemand or at a fixedor determinablefuture time

Always payable ondemand

NEGOTIABLEINSTRUMENT

NEGOTIABLEWAREHOUSE

RECEIPTIf originally payableto bearer, it willalways remain sopayable regardless of

If payable tobearer, it will beconverted into areceipt deliverable

manner of indorsement.

to order, if indorsed specially.

A holder in duecourse may obtaintitle better than thatof the one whonegotiated theinstrument to him.

The indorsee, evenif holder in duecourse, obtainsonly such title asthe person whocaused the deposithad over the goods.

ASSIGNMENT NEGOTIATIONPertains to contractsin general

Pertains to NI

Holder takes theinstrument subjectto the defensesobtaining among theoriginal parties

Holder in duecourse takes it freefrom personaldefenses availableamong the parties

Governed by theCivil Code

Governed by theNIL

II. NEGOTIABILITY

Form of NI: (Sec. 1) Key: WUPOA1. Must be in Writing and signed by the

maker or drawer;2. Must contain an Unconditional

promise or order to pay a sumcertain in money;

3. Must be Payable on demand, or at afixed or determinable future time;

4. Must be payable to Order or to

bearer; and5. When the instrument is addressed to

a drawee, he must be named orotherwise indicated therein withreasonable certainty.

Determination of negotiability:a. Whole instrumentb. What appears on the face of theinstrumentc. Requisites enumerated in Sec.1 of theNILd. Should contain words or terms ofnegotiability. (Gopenco, CommercialLaw Bar Reviewer, cited in Aquino, p.23)

In determining the negotiability of aninstrument, the instrument in itsentirety and by what appears on its facemust be considered. It must complywith the requirements of Sec. 1 of theNIL. (Caltex Phils. v. CA, 212 SCRA 448)

The acceptance of a bill of exchange

is not important in the determination ofCOMMERCIAL LAW COMMITTEECHAIRPERSON: Garny Luisa Alegre ASST. CHAIRPERSON:Jayson OS Ramos EDP: Beatrix I. Ramos SUBJECT HEADS:Marichelle De Vera (Negotiable Instruments Law); Jose Fernando Llave (Insurance); Aldrich Del Rosario(Transportation Laws);Shirley Mae Tabangcura, Bon Vincent Agustin (Corporation Law); Karl Steven Co (Special Laws); John LemuelGatdula (Banking Laws); Robespierre CU (Law on Intellectual Property)

NEGOTIABLEINSTRUMENT

NEGOTIABLEDOCUMENT OFTITLE

Subject is money Subject is goods

Is itself theproperty withvalue

The document is amere evidence oftitle the things ofvalue being thegoods mentioned inthe document

Has all therequisites of Sec. 1of NIL

Does not have theserequisites

A holder of NI mayrun after thesecondary partiesfor payment ifdishonored by the

party primarilyliable.

Intermediate partiesare not secondarilyliable if thedocument isdishonored.

A holder, if aholder in duecourse, mayacquire rights overthe instrumentbetter than hispredecessors.

A holder can neveracquire rights to thedocument betterthan hispredecessors.


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its negotiability. The nature ofacceptance is important only on thedetermination of the kind of liabilities ofthe parties involved (PBCOM vs. Aruego,

102 SCRA 530)

REQUISITES OF NEGOTIABILITYa. It must be writing and signed by themaker or drawer

Any kind of material that substitutespaper is sufficient.

With respect to the signature, it isenough that what the maker or draweraffixed shows his intent to authenticatethe writing. (Notes and Cases on Banks,Negotiable Instruments and otherCommercial Documents, Timoteo B.

Aquino)b. Unconditional Promise or Order topay a sum certain in moneyUnconditional promise or order

Where the promise or order is made todepend on a contingent event, it isconditional, and the instrument involvedis non-negotiable. The happening of theevent does not cure the defect.

The unconditional nature of thepromise or order is not affected by:a) An indication of a particular fund out

of which reimbursement is to bemade, or a particular account to bedebited with the amount; or

b) A statement of the transaction whichgives rise to the instrument

Where the promise or order is subjectto the terms and conditions of thetransaction stated, the instrument isrendered non-negotiable. The NI must beburdened with the terms and conditionsof that agreement to destroy itsnegotiability. (Cesar Villanueva,Commercial Law Review, 2004 ed.)

But an order or promise to pay out ofa particular fund is NOT unconditional.(Sec. 3)

FUND FORREIMBURSEMENT

PARTICULAR FUNDFOR PAYMENT

Drawee pays thepayee from his ownfunds; afterwards,the drawee payshimself from theparticular fundindicated.

There is only oneact- the drawee paysdirectly from theparticular fundindicated. Paymentis subject to thecondition that thefund is sufficient.

Particular fundindicated is NOT thedirect source ofpayment but only thesource of

reimbursement.

Particular fundindicated is thedirect source ofpayment.

Postal money orders are not negotiableinstruments. Some of the restrictionsimposed by postal laws and regulationsare inconsistent with the character ofnegotiable instruments. (Phil. EducationCo. vs. Soriano, 39 SCRA 587)

Treasury warrants are non-negotiablebecause there is an indication of thefund as the source of payment of thedisbursement. (Metrobank vs. CA, 194SCRA 169)

Payable in sum certain in money

An instrument is still negotiablealthough the amount to be paid isexpressed in currency that is not legaltender so long as it is expressed inmoney. (PNB vs. Zulueta, 101 Phil 1071,Sec.6 (e)).

The certainty is however not affectedalthough to be paid:

a. With interest; or

b. By stated installments; orc. By stated installments with anacceleration clause;

d. With exchange; ore. With cost of collection or

attorneys fees.(Sec. 2)

The dates of each installment must befixed or at least determinable and theamount to be paid for each installment.

A sum is certain if the amount to beunconditionally paid by the maker ordrawee can be determined on the face

of the instrument and is not affected bythe fact that the exact amount is arrivedat only after a mathematicalcomputation. (Notes and Cases onBanks, Negotiable Instruments and otherCommercial Documents, Timoteo B.

Aquino)

ACCELERATIONCLAUSE

INSECURITYCLAUSE

EXTENSIONCLAUSE

A clause thatrenders wholedebt due and

demandable

Provisions inthe contractwhich

allows the

Clauses inthe face ofthe

instrumentCOMMERCIAL LAW COMMITTEECHAIRPERSON: Garny Luisa Alegre ASST. CHAIRPERSON:Jayson OS Ramos EDP: Beatrix I. Ramos SUBJECT HEADS:Marichelle De Vera (Negotiable Instruments Law); Jose Fernando Llave (Insurance); Aldrich Del Rosario(Transportation Laws);Shirley Mae Tabangcura, Bon Vincent Agustin (Corporation Law); Karl Steven Co (Special Laws); John LemuelGatdula (Banking Laws); Robespierre CU (Law on Intellectual Property)


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upon failure ofobligor tocomply withcertainconditions.

holder toacceleratepayment ifhe deemshimselfinsecure.

that extendthe maturitydates;a. At theoption ofthe holder;b. Extensionto a furtherdefinitetime at theoption ofthe makeror acceptorc. Automa tically uponor after aspecifiedact orevent.

Instrument isstill negotiable

Instrumentis renderednon-negotiablebecause theholderswhim andcapriceprevailwithout thefault andcontrol ofthe maker

Instrumentis stillnegotiable(Notes andCases onBanks,NegotiableInstrumentsand otherCommercialDocuments,Timoteo B.

Aquino)

EXTENSIONCLAUSE

EXTENSION UNDERSEC. 120(f)

Stated on the face ofthe instrument

Agreement binding theholder;a. To extend the timeof payment orb. Postpone theholders right toenforce the instrument

Parties are boundbecause they took theinstrument knowingthat there is an

extension clause

Binds the personsecondarily liable (andtherefore cannot bedischarged from

liabilities if:a. He consents orb. Right of recourse isexpressly reserved.(Notes and Cases onBanks, NegotiableInstruments and otherCommercialDocuments, TimoteoB. Aquino)

c. Payable on Demand or at fixed ordeterminable future time

PAYABLE ON

DEMAND

PAYABLE AT A

FIXED OR

DETERMINABLEFUTURE TIME

a. Where expressedto be payable on

demand, at sight oron presentation;b. Where no periodof payment is stated;c. Where issued,accepted, orindorsed aftermaturity (only asbetween immediateparties). (Sec. 7)

a. At a fixed periodafter date or sight;

b. On or before afixed ordeterminable futuretime specifiedtherein; orc. On or at a fixedperiod after theoccurrence of aspecified event,which is certain tohappen, though thetime of happening isuncertain. (Sec. 4)

If the day and the month, but not theyear of payment is given, it is notnegotiable due to its uncertainty.(Pandect of Commercial Law and

Jurisprudence, Justice Jose Vitug, 1997ed.)

d. Payable to Order or to BearerPayable to Order

The instrument is payable to orderwhere it is drawn payable to the order ofa specified person, or to him or hisorder. (Sec. 8)

The payee must be named or otherwiseindicated therein with reasonablecertainty.

The instrument may be made payableto the order of:

a. A payee who is not the maker,drawer or drawee

b. The drawer or makerc. The draweed. 2 or more payees jointlye. One or some of several payeesf. The holder of an office for a

time beingPayable to Bearer

The instrument is payable to bearer:a. When it is expressed to be so

payable; orb. When it is payable to a person

named therein or to bearer; orc. When it is payable to the order of a

fictitious or non-existing person, andsuch fact was known to the personmaking it so payable; or

d. When the name of the payee doesnot purport to be the name of any

person; orCOMMERCIAL LAW COMMITTEECHAIRPERSON: Garny Luisa Alegre ASST. CHAIRPERSON:Jayson OS Ramos EDP: Beatrix I. Ramos SUBJECT HEADS:Marichelle De Vera (Negotiable Instruments Law); Jose Fernando Llave (Insurance); Aldrich Del Rosario(Transportation Laws);Shirley Mae Tabangcura, Bon Vincent Agustin (Corporation Law); Karl Steven Co (Special Laws); John LemuelGatdula (Banking Laws); Robespierre CU (Law on Intellectual Property)


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e. When the only or last indorsement isan indorsement in blank. (Sec. 9)

Note: An instrument originally payable

to bearer can be negotiated by meredelivery even if it is indorsed especially.If it is originally a BEARER instrument,it will always be a BEARER instrument.

As opposed to an original orderinstrument becoming payable to bearer,if the same is indorsed specially, it canNO LONGER be negotiated further bymere delivery, it has to be indorsed.

A check that is payable to the orderof cash is payable to bearer. Reason: Thename of the payee does not purport to

be the name of any person. (Ang TekLian vs. CA, 87 Phil. 383)FICTITIOUS PAYEE RULE

It is not necessary that the personreferred to in the instrument is reallynon-existent or fictitious to make theinstrument payable to bearer. Theperson to whose order the instrument ismade payable may in fact be existingbut he is till fictitious or non-existentunder Sec. 9(c) of the NIL if the personmaking it so payable does not intend to

pay the specified persons. (Reviewer onCommercial Law, Professors Sundiangand Aquino)

e. Identification of Drawee

Applicable only to a bill of exchange

A bill may be addressed to 2 or moredrawees jointly whether they arepartners or not but not to 2 or moredrawees in the alternative or insuccession. (Sec. 128)

OMISSIONS &PROVISIONS THATDO NOT AFFECT

NEGOTIABILITY

ADDITONALPROVISONS NOTAFFECTING

NEGOTIABILITY

a. It is not dated;b. It does notspecify the valuegiven or that any

value has beengiven;c. It does notspecify the place

where it is drawn or

GENERAL RULE: Ifsome other act isrequired other thanor in addition to

payment of money,the instrument isnot negotiable.(Sec. 5)

EXCEPTIONS:

where it is payable;d. It bears a seal;e. It designates aparticular kind ofcurrent money inwhich payment is tobe made. (Sec. 6)

a. Authorizes thesale ofcollateralsecurities ondefault;

b. Authorizesconfession ofjudgment ondefault;

c. Waives thebenefit of lawintended toprotect thedebtor; or

d. Allows thecreditor theoption torequiresomething in

lieu of money.

III. INTERPRETATION OF NEGOTIABLEINSTRUMENTS (Sec. 17)

a. Discrepancy between theamount in figures and that inwords the words prevail, but ifthe words are ambiguous,reference will be made to thefigures to fix the amount.

b. Payment for interest is provided

for interest runs from the dateof the instrument, if undated,from issue thereof.

c. Instrument undated considerdate of issue.

d. Conflict between written andprinted provisions writtenprovisions prevail.

e. When the instrument is so ambiguousthat there is doubt whether it isa bill or note, the holder maytreat it as either at his election;

f. If one signs without indicating inwhat capacity he has affixed hissignature, he is considered anindorser.

g. If two or more persons sign Wepromise to pay, their liability isjoint (each liable for his part)but if they sign I promise to

pay, the liability is solidary(each can be compelled tocomply with the entireobligation). (Sec. 17)



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IV. TRANSFER AND NEGOTIATION

INCIDENTS IN THE LIFE OF A NI (1Agbayani, 1992 ed.)

a. Issueb. Negotiationc. Presentment for acceptance, incertain kinds of Bills of Exchanged. Acceptanceh. D ishonor by non-acceptancei. P resentment for paymentj. D ishonor by non-paymentk. N otice of dishonorl. D ischarge

MODES OF TRANSFERa. Negotiation the transfer of the

instrument from one person to anotherso as to constitute the transferee asholder thereof. (Sec.30)b. Assignment The transferee does notbecome a holder and he merely stepsinto the shoes of the transferor. Anydefense available against the transferoris available against the transferee.(Notes and Cases on Banks, NegotiableInstruments and other CommercialDocuments, Timoteo B. Aquino)

Assignment may be effected whetherthe instrument is negotiable or non-

negotiable. (Sesbreo vs. CA, 222 SCRA466)

HOW NEGOTIATION TAKES PLACEa. Issuance first delivery of theinstrument complete in form to a personwho takes it as a holder. (Sec. 191)

Steps:1. Mechanical act of writing

the instrument completelyand in accordance with therequirements of Section 1;and

2. The delivery of thecomplete instrument by themaker or drawer to thepayee or holder with theintention of giving effect toit. (The Law on NegotiableInstruments with Documentsof Title, Hector de Leon,2000 ed.)

b. Subsequent Negotiation1. If payable to bearer, a

negotiable instrument may

be negotiated by meredelivery.

2. If payable to order, a NI maybe negotiated by

indorsement completed bydelivery

Note: In both cases, delivery must beintended to give effect to the transfer ofinstrument. (Development Bank vs. SimaWei, 219 SCRA 736)c. Incomplete negotiation of orderinstrument

Where the holder of an instrumentpayable to his order transfers it for valuewithout indorsing it, the transfer vests inthe transferee such title as thetransferor had therein and he also

acquires the right to have theindorsement of the transferor. But forthe purpose of determining whether thetransferee is a holder in due course, thenegotiation takes effect as of the timewhen the indorsement is made. (Sec. 49)d. Indorsement

Legal transaction effected by theaffixing one's signature at the:

a. Back of the instrumentorb. Upon a paper (allonge) attached

thereto with or withoutadditional words specifying the

person to whom or to whoseorder the instrument is to bepayable whereby one not onlytransfers legal title to thepaper transferred but likewiseenters into an implied guarantythat the instrument will be dulypaid (Sec. 31)

GENERAL RULE: Indorsement mustbe of the entire instrument.

EXCEPTION: Where instrument hasbeen paid in part, it may be indorsed

as to the residue. (Sec. 32)

Kinds of Indorsement:A. SPECIAL Specifies the person towhom or to whose order, the instrumentis to be payable (Sec. 34)B. BLANK Specifies no indorsee:

1. Instrument becomes payable tobearer and may be negotiated bydelivery (Sec. 34)

2. May be converted to specialindorsement by writing over thesignature of indorser in blank

any contract consistent withCOMMERCIAL LAW COMMITTEECHAIRPERSON: Garny Luisa Alegre ASST. CHAIRPERSON:Jayson OS Ramos EDP: Beatrix I. Ramos SUBJECT HEADS:Marichelle De Vera (Negotiable Instruments Law); Jose Fernando Llave (Insurance); Aldrich Del Rosario(Transportation Laws);Shirley Mae Tabangcura, Bon Vincent Agustin (Corporation Law); Karl Steven Co (Special Laws); John LemuelGatdula (Banking Laws); Robespierre CU (Law on Intellectual Property)


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character of indorsement (Sec.35)

C. ABSOLUTE One by which indorserbinds himself to pay:

1. Upon no other condition thanfailure of prior parties to do so;

2. Upon due notice to him of suchfailure.

D. CONDITIONAL Right of the indorseeis made to depend on the happening of acontingent event. Party required to paymay disregard the conditions. (Sec. 39)E. RESTRICTIVE An indorsement isrestrictive, when it either:

a. Prohibits further negotiation ofthe instrument; or

b. Constitutes the indorsee the

agent of the indorser; orc. Vests the title in the indorsee in

trust for or to the use of someother persons. But mere absenceof words implying power tonegotiate does not make anindorsement restrictive. (Sec.36)

F. QUALIFIED Constitutes the indorsera mere assignor of the title to theinstrument. (Sec. 38)

It is made by adding to the indoser'ssignature words like "sans recourse,

without recourse", "indorser notholder", "at the indorser's own risk", etc.G. JOINT Indorsement payable to 2 ormore persons (Sec. 41)H. IRREGULAR A person who, nototherwise a party to an instrument,places thereon his signature in blankbefore delivery (Sec. 64)

Other rules on indorsement;1. Negotiation is deemed prima facie tohave been effected before theinstrument is overdue except if theindorsement bears a date after thematurity of the instrument. (Sec. 45)2. Presumed to have been made at theplace where the instrument is datedexcept when the place is specified. (Sec.46)3. Where an instrument is payable to theorder of 2 or more payees who are notpartners, all must indorse unlessauthority is given to one. (Sec. 41)4. Where a person is under obligation toindorse in a representative capacity, he

may indorse in such terms as to negativepersonal liability. (Sec. 44)

RENEGOTIATION TO PRIOR PARTIES

(Sec. 50) Where an instrument is negotiatedback to a prior party, such party mayreissue and further negotiate the same.But he is not entitled to enforcepayment thereof against any interveningparty to whom he was personally liable.Reason: To avoid circuitousness of suits.

STRIKING OUT INDORSEMENT

The holder may at any time strike outany indorsement which is not necessaryto his title. The indorser whose

indorsement is struck out, and allindorsers subsequent to him, are therebyrelievedfrom liability on the instrument.(Sec. 48)

CONSIDERATION FOR THE ISSUANCEAND SUBSEQUENT TRANSFER

Every NI is deemed prima facie to havebeen issued for a valuable consideration.Every person whose signature appearsthereon is presumed to have become aparty thereto for value. (Sec. 24)

What constitutes value:a. An antecedent or pre-existing debtb. Value previously givenc. Lien arising from contract or byoperation of law. (Sec. 27)

V. HOLDERS

HOLDER

A payee or endorsee of a bill or notewho is in possession of it or the bearerthereof. (Sec. 191)

RIGHTS OF HOLDERS IN GENERAL(Sec. 51)a . May sue thereon in his own nameb. Payment to him in due coursedischarges the instrument

The only disadvantage of a holder whois not a holder in due course is that thenegotiable instrument is subject todefenses as if it were non-negotiable.(Chan Wan vs. Tan Kim, 109 Phil. 706)

Holder In Due Course (HDC)



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A holder who has taken the instrumentunder the following conditions: KEY: C OV I1. Instrument is complete and regular

upon its face;2. Became a holder before it was

overdue and without notice that ithad been previously dishonored;

3. For value and in good faith; and4. At the time he took it, he had no

notice of any infirmity in theinstrument or defect in the title ofthe person negotiating it. (Sec. 52)

Rights of a HDC:1. May sue on the instrument in his own

name;

2. May receive payment and if paymentis in due course, the instrument isdischarged;

3. Holds the instrument free from anydefect of title of prior parties andfree from defenses available toparties among themselves; and

4. May enforce payment of theinstrument for the full amountthereof against all parties liablethereon. (Secs. 51 and 57)

Every holder of a negotiableinstrument is deemed prima facie aholder in due course. However, thispresumption arises only in favor of aperson who is a holder as defined inSection 191 of the NIL. The weight ofauthority sustains the view that a payeemay be a holder in due course. Hence,the presumption that he is a prima facieholder in due course applies in his favor.(Cely Yang vs. Court of Appeals, G.R. No.138074, August 15, 2003)

Holder Not In Due Course One who became a holder of aninstrument without any, some or all ofthe requisites under Sec. 52 of the NIL.

With respect to demand instruments,if it is negotiated an unreasonable lengthof time after its issue, the holder isdeemed not a holder in due course.(Sec.53)

GENERAL RULE: Failure to makeinquiry is not evidence of bad faith.

EXCEPTIONS:

1. Where a holders title is defective orsuspicious that would compel areasonable man to investigate, it cannotbe stated that the payee acquired the

check without the knowledge of saiddefect in the holders title and for thisreason the presumption that it is aholder in due course or that it acquiredthe instrument in good faith does notexist. (De Ocampo vs. Gatchalian, 3SCRA 596)2. Holder to whom cashiers check is notindorsed in due course and negotiatedfor value is not a holder in due course.(Mesina v. IAC)

Rights of a holder not in due course:1. It can enforce the instrument and sue

under it in his own name.2. Prior parties can avail against him anydefense among these prior parties andprevent the said holder from collectingin whole or in part the amount stated inthe instrumentNote: If there are no defenses, thedistinction between a HDC and one whois not a HDC is immaterial. (Notes andCases on Banks, Negotiable Instrumentsand other Commercial Documents,Timoteo B. Aquino)

SHELTER RULE A holder who derives his title through aholder in due course, and who is nothimself a party to any fraud or illegalityaffecting the instrument, has all therights of such former holder in respect ofall prior parties to the latter. (Sec. 58)

ACCOMMODATION

A legal arrangement under which aperson called the accommodation party,lends his name and credit to another

called the accommodated party,without any consideration.Accommodation Party (AP)

Requisites:1. The accommodation party must sign

as maker, drawer, acceptor, orindorser;

2. He must not receive value therefor;and

3. The purpose is to lend his name orcredit. (Sec. 29)Note: without receiving valuetherefor, means without receiving



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value by virtue of the instrument.(Clark vs. Sellner, 42 Phil. 384)

Effects: The person to whom theinstrument thus executed is

subsequently negotiated has a right ofrecourse against the accommodationparty in spite of the formers knowledgethat no consideration passed betweenthe accommodation and accommodatedparties. (Sec. 29)

Rights & Legal Position:1. AP is generally regarded as a surety

for the party accommodated;2. When AP makes payment to holder

of the note, he has the right to suethe accommodated party forreimbursement. (Agro

Conglomerates, Inc. vs. CA, 348SCRA 450)

Liability: Liable on the instrument to aholder for value notwithstanding suchholder at the time of the taking of theinstrument knew him to be only anaccommodation party. Hence, Asregards, an AP, the 4th condition, i.e.,lack of notice of infirmity in theinstrument or defect in the title of thepersons negotiating it, has noapplication. (Stelco Marketing Corp. vs.Court of Appeals, 210 SCRA 51)

Rights of APs as against each other:May demand contribution from his co-accommodation party without firstdirecting his action against the principaldebtor provided:

a. He made the payment by virtueof judicial demand; or

b. The principal debtor is insolvent.

The relation between anaccommodation party is, in effect, oneof principal and surety theaccommodation party being the surety.

It is a settled rule that a surety is boundequally and absolutely with the principaland is deemed an original promissory anddebtor from the beginning. The liabilityis immediate and direct. (Romeo Garciavs. Dionisio Llamas, G.R. No. 154127,December 8, 2003)

Well-entrenched is the rule that theconsideration necessary to support asurety obligation need not pass directlyto the surety, a consideration need notpass directly to the surety, aconsideration moving to the principal

alone being sufficient. (Spouses EduardoEvangelista vs. Mercator Finance Corp,G.R. No. 148864, August 21, 2003)

VI. PARTIES WHO ARE LIABLEPRIMARY ANDSECONDARYLIABILITY OF

PARTIES

WARRANTIES OFPARTIES

Makes the partiesliable to pay thesum certain inmoney stated in theinstrument.

Impose no directobligation to pay inthe absence ofbreach thereof. Incase of breach, theperson whobreached the samemay either beliable or barred

from asserting aparticular defense.

Conditioned onpresentment andnotice of dishonor(Campos and Lopez-Campos, NegotiableInstruments Law,1994 ed.)

Does not requirepresentment andnotice of dishonor.(Campos and Lopez-Campos,NegotiableInstruments Law,1994 ed.)

1. Primarily Liable (Sec. 60 and 62,NIL)

MAKER ACCEPTOR OR DRAWEEA. Engages to payaccording to thetenor of theinstrument; andB. Admits theexistence of thepayee and hiscapacity to indorse.

A. Engages to payaccording to thetenor of hisacceptance;B. Admits theexistence of thedrawer, thegenuineness of hissignature and hiscapacity andauthority to drawthe instrument;

andC. Admits theexistence of thepayee and hiscapacity toindorse.

A bill of itselfdoes not operate asan assignment offunds in the handsof the draweeavailable for thepayment thereofand the drawee is



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not liable unlessand until heaccepts the same(Sec.127)

2. Secondarily Liable (Sec. 61, 64 and66, NIL)

DRAWER GENERALINDORSER

IRREGULARINDORSER

A. Admitstheexistence ofthe payeeand hiscapacity toindorse;B. Engages

that theinstrumentwill beaccepted orpaid by thepartyprimarilyliable; andC. Engagesthat if theinstrumentisdishonoredand proper

proceedingsare brought,he will payto the partyentitled tobe paid.

A. WarrantsallsubsequentHDC -a. That theinstrument isgenuine andin all respectwhat itpurports tobeb. He hasgood title toit;c. All priorparties hadcapacity tocontractd. Theinstrumentis, at thetime of endorse-ment, validandsubsisting.B. Engagesthat theinstrumentwill beaccepted orpaid, orboth, as thecase may be,according toits tenor; andC. If theinstrument isdishonoredandnecessaryproceedingson dishonorbe dulytaken, hewill pay tothe partyentitled tobe paid.

A person,nototherwise aparty to aninstrument,places hissignaturethereon in

blankbeforedelivery.(Sec. 64)A. If instrumentpayable tothe orderof a 3rd

person, heis liable tothe payeeandsubsequent

parties.B. If instrumentpayable toorder of maker ordrawer orto bearer,he is liableto allpartiessubsequentto themaker ordrawer.C. If hesigns foraccommo-dation ofthe payee,he is liableto allpartiessubsequentto thepayee.

3. Limited Liability (Sec. 65; MetropolFinancing v. Sambok, 120 SCRA864)

QUALIFIEDINDORSER

PERSONNEGOTIATING BY

DELIVERYEvery person

negotiatinginstrument bydelivery or by aqualifiedendorsementwarrants that:A. Instrument isgenuine and in allrespects what itpurports to be;

B. He has good titleto it;C. All prior partieshad capacity tocontract;D. He has noknowledge of anyfact which wouldimpair the validityof the instrument orrender it valueless.

A. Warranties sameas those of qualified indorsers;andB. Warrantiesextend toimmediatetransferee only.

PERSONNEGOTIATING BYMERE DELIVERY

OR BY QUALIFIEDINDORSEMENT

GENERALINDORSER

No secondaryliability; but isliable for breach ofwarranty

There is secondaryliability, andwarranties

Warrants that hehas no knowledge ofany fact which

would impair thevalidity of theinstrument orrender it valueless

Warrants that theinstrument is, atthe time of his

indorsement, validand subsisting

ORDER OF LIABILITY

There is no order of liability among theindorsers as against the holder. He isfree to choose to recover from anyindorser in case of dishonor of theinstrument. (Notes and Cases on Banks,

Negotiable Instruments and otherCOMMERCIAL LAW COMMITTEECHAIRPERSON: Garny Luisa Alegre ASST. CHAIRPERSON:Jayson OS Ramos EDP: Beatrix I. Ramos SUBJECT HEADS:Marichelle De Vera (Negotiable Instruments Law); Jose Fernando Llave (Insurance); Aldrich Del Rosario(Transportation Laws);Shirley Mae Tabangcura, Bon Vincent Agustin (Corporation Law); Karl Steven Co (Special Laws); John LemuelGatdula (Banking Laws); Robespierre CU (Law on Intellectual Property)


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Commercial Documents, Timoteo B.Aquino)

As respect one another, indorsers areliable prima facie in the order in which

they indorse unless the contrary isproven (Sec.68)

GENERAL RULE: One whose signaturedoes not appear on the instrument shallnot be liable thereon.

EXCEPTIONS:1. The principal who signs through an

agent is liable;2. The forger is liable;3. One who indorses in a separate

instrument (allonge) or where anacceptance is written on a separatepaper is liable;

4. One who signs his assumed or tradename is liable; and

5. A person negotiating by delivery (as inthe case of a bearer instrument) isliable to his immediate indorsee.

VII. DEFENSES

REAL DEFENSES PERSONALDEFENSES

Those that attachto the instrumentitself and areavailable against

all holders,whether in duecourse or not, butonly by the partiesentitled to raisethem. (a.k.aabsolute defenses)

Those which areavailable only againsta person not a holderin due course or a

subsequent holder whostands in privity withhim. (a.k.a. equitabledefenses)

1. MaterialAlteration;2. Want of delivery of incompleteinstrument;3. Duress

amounting toforgery;4. Fraud infactum or fraud inesse contractus;5. Minority(available to theminor only);6. Marriage in thecase of a wife;7. Insanity wherethe insane personhas a guardianappointed by the

court;

1. Absence or failureof consideration,partial or total;2. Want of delivery ofcomplete instrument;3. Insertion of wrongdate in an instrument;

4. Filling up of blankcontrary to authoritygiven or not withinreasonable time;5. Fraud ininducement;6. Acquisition ofinstrument by force,duress, or fear;7. Acquisition of theinstrument byunlawful means;8. Acquisition of theinstrument for an

illegal consideration;

8. Ultra vires actsof a corporation9. Want of authority of agent;10. Execution ofinstrumentbetween publicenemies;11. Illegality ifdeclared void forany purpose12. Forgery.

9. Negotiation inbreach of faith;10. Negotiation undercircumstances thatamount to fraud;11. Mistake;12. Intoxication(according to betterauthority);13. Ultra vires acts ofcorporations wherethe corporation hasthe power to issuenegotiable paper butthe issuance was notauthorized for theparticular purpose forwhich it was issued;14. Want of authority

of agent where he hasapparent authority;15. Insanity wherethere is no notice ofinsanity on the part ofthe one contractingwith the insaneperson; and16. Illegality of contract where theform or considerationis illegal.

EFFECTS OF CERTAIN DEFENSES

A. MINORITY Negotiation by a minor passes title tothe instrument. (Sec.22). But the minoris not liable and the defense is personalto him

B. ULTRA VIRES ACTS

A real defense but the negotiationpasses title to the instrument. (Sec. 22)Note: A corporation cannot act as anaccommodation party. The issuance orindorsement of negotiable instrument by

a corporation without consideration andfor the accommodation of another isultra vires. (Crisologo-Jose v. CA, 117SCRA 594)

C. INCOMPLETE AND UNDELIVERED NI(Sec. 15)

If completed and negotiated withoutauthority, not a valid contract against aperson who has signed before delivery ofthe contract even in the hands of HDCbut subsequent indorsers are liable. Thisis a real defense.



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D. INCOMPLETE BUT DELIVERED NI(Sec. 14)1. Holder has prima facie authority to

fill up the instrument.

2. The instrument must be filled upstrictly in accordance with theauthority given and withinreasonable time

3. HDC may enforce the instrument asif filled up according to no. 2.

E. COMPLETE BUT UNDELIVERED NI(Sec. 16)1. Between immediate parties and

those who are similarly situated,delivery must be coupled with theintention of transferring title to the

instrument.2. As to HDC, it is conclusively

presumed that there was validdelivery; and

3. As against an immediate party andremote party who is not a HDC,presumption of a valid andintentional delivery is rebuttable.

F. FRAUD

FRAUD IN FACTUMOR FRAUD ININDUCEMENT

FRAUD INESSES

CONTRACTUS

OR FRAUD INEXECUTION

The person who signsthe instrumentintends to sign thesame as a NI but wasinduced by fraud

The person isinduced to sign aninstrument notknowing itscharacter as a billor note

G. ABSENCE OR FAILURE OFCONSIDERATION (Sec. 28)

Personal defense to the prejudicedparty and available against any person

not HDC.

H. PRESCRIPTION

Refers to extinctive prescription andmay be raised even against a HDC. Underthe Civil Code, the prescriptive period ofan action based on a written contract is10 years from accrual of cause of action.

I. MATERIAL ALTERATION

Any change in the instrument whichaffects or changes the liability of the

parties in any way.

Effects:1. Alteration by a party Avoids the

instrument except as against theparty who made, authorized, or

assented to the alteration andsubsequent indorsers.

However, if an altered instrumentis negotiated to a HDC, he mayenforce payment thereof accordingto its original tenor regardless ofwhether the alteration was innocentor fraudulent.

Note: Since no distinction is made, itdoes not matter whether it isfavorable or unfavorable to the partymaking the alteration. The intent of

the law is to preserve the integrityof the negotiable instruments.

2. Alteration by a stranger (spoliation)-the effect is the same as where thealteration is made by a party which aHDC can recover on the originaltenor of the instrument. (Sec. 124)

Changes in the following constitutematerial alterations:

a. Date;b. Sum payable, either for principal

or interest;c. Time or place of payment;d. Number or relations of the

parties;e. Medium or currency in which

payment is to be made;f. That which adds a place of

payment where no place ofpayment is specified; and

g. Any other change or additionwhich alters the effect of theinstrument in any respect. (Sec.

125)

A serial number is an item whichis not an essential requisite fornegotiability under Sec. 1, NIL, andwhich does not affect the rights ofthe parties, hence its alteration isnot material. (PNB vs. CA, 256 SCRA491)



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Comparison of sections 14, 15 and 16 of the negotiable instruments law

Section 14 Section 15 Section 16

Delivery Delivered UndeliveredUndeliveredNote: Delivery may be made for aconditional or for a special purposeonly and not for the purpose oftransferring the property in theinstrument

Completeness 1. Wanting in any materialparticular

1. Blank paper withsignature

Mechanically incomplete Mechanically complete

Authority of personin possession

1. Prima facie authority tocomplete it by filling upthe blanks therein

1.Signature operates as aprima facie authority tofill it up as such for anyamount

No authority to complete and/ornegotiate instrument

May negotiate if delivered to him byor under the authority of the partymaking, indorsing, drawing oraccepting, as the case may be.

When enforceable If filled up strictly in accordance with authority givenand within a reasonable time

Not enforceable When delivery is made by or underauthority of the party making,indorsing, drawing or accepting, asthe case may be.

Kind of defense Personal Real Personal

Rights of holder 1. If HDC, he can enforce the instrument ascompleted against parties prior or subsequent tothe completion

2. If not a HDC, he can enforce the instrument ascompleted only against parties subsequent to the

completion but not against those prior thereto.

None in the hands of any holder.However, the invalidity of theinstrument is only with reference toparties whose signatures appear onthe instrument after delivery, the

instrument is valid.

Can enforce the instrument.Note: Where the instrument is in thehands of a HDC, a valid deliverythereof by all parties prior to him soas to make them liable to him isconclusively presumed. Where the

instrument is no longer in thepossession of a party whose signatureappears thereon, a valid andintentional delivery to him ispresumed until the contrary isproved.


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J. FORGERY

Counterfeit making or fraudulentalteration of any writing, which mayconsist of:

1. Signing of anothers name withintent to defraud; or

2. Alteration of an instrument in thename, amount, name of payee, etc.with intent to defraud. (1 Agbayani,1992 ed.)

GENERAL RULE: When a signature isforged or made without the authority ofthe person, the signature (notinstrument itself and the genuinesignatures) is wholly inoperative

Legal Effects:1. No right to retain the instrument

2. To give a discharge therefore3. To enforce payment thereof

against any party thereto, canbe acquired through or undersuch signature

EXCEPTION: Unless the party againstwhom it is sought to enforce such right isprecluded from setting up the forgery orwant of authority. (Sec.23)

Persons precluded from setting updefense of forgery1. Those who warrant or admit the

genuineness of the signature inquestion. This includes indorsers,persons negotiating by delivery andacceptors.

2. Those who, by their acts, silence, ornegligence, are estopped fromsetting up the defense of forgery.

RULES ON FORGERYA. Promissory Notes

OrderInstrument

BearerInstrument

Makerssignatureforged

a. Maker is notliable becausehe neverbecame aparty to theinstrument.b. Indorserssubsequent toforgery areliable becauseof theirwarranties.c. Party whothe made theforgery is

a. Maker is notliable.b. Party whomade theforgery isliable.c. Indorsersmay be madeliable to thosepersons whoobtain titlethrough theirindorsements.

liable.

Payeessignatureforged

a. Maker andpayee notliable.b. Indorserssubsequent toforgery areliable.c. Party whomade theforgery isliable.

a. Maker isliable.(Indorsementis notnecessary totitle and themaker engagesto pay holder)b. Party whomade theforgery isliable

Indorsers

signatureforged

a. Maker,payee andindorser whosesignature wasforged is notliable.

b. Indorserssubsequent toforgery areliable.(Because oftheirwarranties)c. Party whomade theforgery isliable.

a. Maker isliable.(indorsementis notnecessary totitle and the

maker engagesto pay theholder)b. Indorserwhosesignature wasforged notliable to onewho is not aHDC providedthe instrumentismechanicallycomplete

before theforgery.c. Party whomade theforgery isliable.

B. Bills of Exchange

OrderInstrument

BearerInstrument

Drawerssignatureforged

a. Drawer isnot liablebecause hewas never aparty to theinstrument.b. Drawee isliable if it paid(no recourseto drawer)because headmitted thegenuiness ofthe drawerssignature.Drawee cannotrecover from

a. Drawer isnot liable.b. Drawee isliable if it paid.Drawee cannotrecover fromthe collectingbank.c. Party whomade theforgery isliable.


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the collectingbank becausethere is noprivitybetween thecollectingbank and thedrawer. Thelatter does notgive anywarrantyregarding thesignature ofthe drawer.(AssociatedBank vs. CA)c. Indorserssubsequent toforgery liable

(such ascollectingbank or lastendorser)d. Party whomade theforgery isliable

Payeessignatureforged

a. Drawer,drawee andpayee notliable.b. Indorserssubsequent to

forgery areliable. (such ascollectingbank)c. Party whomade theforgery isliable

a. Drawer isliableb. Drawee isliablec. Payee is notliable

d. Collectingbank is liablebecause of warrantye. Party whomade theforgery is liable

Indorsers

signatureforged

a. Drawer,payee andindorser whosesignature wasforged notliable.b. Drawee isliable if it paid.c. Indorserssubsequent toforgery areliable. (such ascollecting bank)d. Party whomade theforgery isliable.

a. Drawer isliable.(indorsementnot necessary totitle)b. Drawee isliable.c. Indorserwhose signaturewas forged isliable becauseindorsement isnot necessary totitle.d. Party whomade theforgery is liable.

VIII. ENFORCEMENT OF LIABILITY

A. STEPS TO CHARGE THE PARTIESLIABLEa. Primary Liability

The unconditional promise attaches the

moment the maker makes theinstrument while the acceptors assentto the unconditional order attaches themoment he accepts the instrument. Nofurther act is necessary in order for theliability to accrue. Presentment forpayment is all that is necessary. (Notesand Cases on Banks, NegotiableInstruments and other CommercialDocuments, Timoteo B. Aquino)b. Secondary Liability

1. Steps in promissory note(indorsers)

a. Presentment forpayment to the maker.

b. Notice of dishonor shouldbe given, if dishonoredby non-payment.

2. Steps in bill of exchangea. Presentment for acceptance inthe following instances:

a. Where the bill is payableafter sight, or when it isnecessary in order to fixthe maturity of theinstrument;

b. Where the bill expresslystipulates that it shall bepresented foracceptance;

c. Where the bill is drawnpayable elsewhere thanat the residence or placeof business of thedrawee. (Sec. 143)

Note: In all the above cases, the holdermust either present the bill foracceptance or negotiate it within areasonable time; otherwise, the drawerand all indorsers are discharged. (Sec.144)2. If dishonored by non-acceptance;

a. Notice of dishonor given todrawer and indorsers.

b. Protest in case of a foreign bill.3. If bill is accepted:

a. Presentment for payment to theacceptor.

4. If dishonored upon presentment forpayment

a. Notice of dishonor to persons

secondarily liable.


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b. Protest for dishonor by non-payment in case of foreign bill.

B. PRESENTMENT

The production of a BE to the draweefor his acceptance, or to the drawee oracceptor for payment or the productionof a PN to the party liable for thepayment of the same. (Sec. 70)

PRESENTMENT FOR PAYMENT

Consists of:1. Personal demand for payment at the

proper place; and2. Readiness to exhibit the instrument

if required, and to receive paymentand to surrender the instrument if

the debtor is willing to pay. Requisites:1. Made by the holder or any person

authorized to receive payment on hisbehalf;

2. At a reasonable hour on a businessday;

3. At a proper place;4. To the person primarily liable or if

he is absent or inaccessible, to anyperson found at the place where thepresentment is made. (Sec. 72)

When should be made:1. PN payable on demand: within

reasonable time after its issue;2. BE payable on demand: within

reasonable time after its lastnegotiation;

3. Instrument payable on a specifieddate: on the date it falls due. (Sec.71)

Proper place:1. Place specified;2. Address of the person to make

payment is given, in case no place is

specified;3. Usual place of business or residenceof the person to make payment, incase no place is specified and noaddress is given;

4. In any other case, wherever theperson to make payment can befound, or at his last known place ofbusiness or residence. (Sec. 73)

When not required:1. In order to charge the drawer where

he has no right to expect or require

that the drawee or acceptor will paythe instrument;(Sec. 79)

2. In order to charge an indorser whenthe instrument was made or

accepted for his accommodation andhe has no reason to expect that theinstrument will be paid if presented.(Sec. 80)

When delay in making presentment orof giving notice is excused:1. When caused by circumstancesbeyond the control of the holder; and2. Not imputable to his default,misconduct, or negligence.(Sec. 81)

When presentment for payment isexcused:1. After exercise of reasonable

diligence, it cannot be made;2. Drawee is a fictitious person;3. Express or implied waiver.(Sec. 82)

Exhibition

Purposes:1. To enable the debtor to determine

the genuineness of the instrumentand the right of the holder toreceive payment; and

2. To enable him to reclaim possessionupon payment.

When excused:1. When debtor does not demand to see

the instrument but refuses paymenton some other grounds, and

2. When the instrument is lost ordestroyed.

Special cases1. Instrument payable at a bank Mustbe made during banking hours unlessthere are no funds to meet it at any timeduring the day, presentment at any hourbefore the bank is closed on that day is

sufficient. (Sec. 75)2. Person liable is dead May be madeto his personal representative, if therebe one, and if he can be found. (Sec. 76)

C. PRESENTMENT FOR ACCEPTANCE

When required:a. Where the bill is payable aftersight, or when it is necessary in orderto fix the maturity of the instrument;b. Where the bill expressly stipulatesthat it shall be presented foracceptance;


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c. Where the bill is drawn payableelsewhere than at the residence orplace of business of the drawee. (Sec.143)

How made:a. Where a bill is addressed to 2 or moredrawees who are not partners,presentment must be made to allb. Where drawee is dead, presentmentmay be made to his personalrepresentativec. Where the drawee is adjudged abankrupt, insolvent or made anassignment to his creditors, presentmentmay be made to him or his trustee orassignee

When excused:

1. Where the drawee is dead, or hasabsconded, or is a fictitious personor a person not having capacity tocontract by bill;

2. After exercise of reasonablediligence, presentment cannot bemade;

3. Although presentment has beenirregular, acceptance has beenrefused on some other ground. (Sec.148)

If bill is duly presented foracceptance and it is not accepted withinthe prescribed time, the personpresenting it must treat the bill asdishonored by non-acceptance or heloses the right of recourse against thedrawer and indorsers. (Sec. 150)

D. ACCEPTANCE

The signification by the drawee of hisassent to the order of the drawer.

It is the act by which the draweemanifests his consent to comply with therequest contained in the bill of exchange

directed to him.Form: Must be in writing and signed bythe drawee and must not express thatthe drawee will perform his promise byany other means than the payment ofmoney. (Sec. 132)

The holder of the bill presenting thesame for acceptance may require thatthe acceptance be written on the bill,and if such request is refused, may treatthe bill as dishonored. (Sec. 133)

Kinds:

1. GENERAL - assents withoutqualification to the order of thedrawer.

2. QUALIFIED - which in express terms

varies the effect of the bill asdrawn.a. Conditional - makes payment by

the acceptor dependent on thefulfillment of a condition thereinstated.

b. Partial - an acceptance to paypart only of the amount forwhich the bill is drawn.

a. Local - an acceptance to payonly at a particular place.

b. Qualified as to timec. The acceptance of some one or

more of the drawees but not ofall. (Sec. 141)

Form:1. Must be made by or on behalf of the

holder;2. At a reasonable hour on a business

day;3. Before the bill is overdue; and4. To the drawee or some person

authorized to accept or refuse toaccept on his behalf.

Implied Acceptance

If after 24 hours, the drawee fails toreturn the instrument. He is also deemedto have accepted the instrument whenhe destroys the same.

E. NOTICE OF DISHONOR

Notice given by holder or his agent toparty or parties secondarily liable thatthe instrument was dishonored by non-acceptance by the drawee of a bill or bynon-payment by the acceptor of a bill orby non-payment by the maker of a note.

(Sec. 89) Requisites:1. Given by holder or his agent, or by

any party who may be compelled bythe holder to pay (Sec. 90);

2. Given to secondary party or hisagent (Sec. 97);

3. Given within the periods provided bylaw (Sec. 102); and

4. Given at the proper place (Secs. 103and 104)

When dispensed with:


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1. When party to be notified knowsabout the dishonor, actually orconstructively (Secs. 114-117);

2. If waived (Sec. 109); and

3. When after due diligence, it cannotbe given (Sec. 112).

How given:1. By bringing verbally or2. By writing to the knowledge of the

person liable the fact that aspecified instrument, upon properproceedings taken, has not beenaccepted or has not been paid, andthat the party notified is expectedto pay it.

To whom given:1. Non-acceptance (bill) to persons

secondarily liable, namely, thedrawer and indorsers as the casemay be.

2. Non-payment (both bill and note) indorsers.Note: Notice must be given topersons secondarily liable.Otherwise, such parties aredischarged. Notice may be given tothe party himself or to his agent.

By whom given:1. The holder2. Another on behalf of the holder3. Any party to the instrument who may

be compelled to pay it to the holder,and who would have a right ofreimbursement from the party towhom notice is given. (Sec. 90)

DISHONOR BY NON-PAYMENT1. Payment is refused or cannot be

obtained after due presentment forpayment;

2. Presentment is excused and theinstrument is overdue and unpaid.

(Sec. 83)

Effect: There is an immediate right ofrecourse by the holder against personssecondarily liable. However, notice ofdishonor is generally required. (Sec. 84)

DISHONOR BY NON-ACCEPTANCE

Instances:1. When it is duly presented for

acceptance and such an acceptanceis refused or cannot be obtained; or

2. When presentment for acceptance isexcused, and the bill is notaccepted. (Sec. 149)

Effect: Immediate right of recourse

against the drawer and indorsers accruesto the holder and no presentment forpayment is necessary. (Sec. 151)

Effect of lack of notice of dishonor onNI which are payable in installments1. No acceleration clause failure to

give notice of dishonor on a previousinstallment does not dischargedrawers and indorsers as tosucceeding installments.

2. With acceleration clause failure togive notice of dishonor as to previous

installment will discharge thepersons secondarily liable as to thesucceeding installments.

To whose benefit does a notice ofdishonor inure1. When given by or on behalf of aholder:

a. All parties prior to the holder,who have a right of recourseagainst the party to whom thenotice is given; and

b. All holders subsequent to the

holder giving notice. (Sec. 92)2. When given by or on behalf of aparty entitled to give notice:

a. The holder; andb. All parties subsequent to the

party to whom notice is given.(Sec. 93)

Dishonor in the hands of an Agent

Agent can do either of the following:1. Directly give notice to persons

secondarily liable thereon; or2. Give notice to his principal. In

such case, he must give noticewithin the time allowed by lawas if he were a holder. (Sec. 94)

A party giving notice is deemed to havegiven due notice where:

1. The notice of dishonor is dulyaddressed, and

2. Deposited in the post-office,even when there is miscarriageof mail. (Sec. 105)


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Where a party receives notice ofdishonor, he has, after the receipt ofsuch notice, the same time for givingnotice to antecedent parties that the

holder has after the dishonor. (Sec. 107)

Waiver of Notice of Dishonor

Either before the time of giving notice,or after the omission to give due notice.Waiver may be expressed or implied.(Sec. 109)

As to who are affected by an expresswaiver depends on where the waiver iswritten:

1. If it appears in the body or onthe face of the instrument, it bindsall parties; but

2. If it is written above thesignature of an indorser, it bindshim only. (Sec. 110)

Notice of dishonor is not required to begiven to the drawer in any of the ff.cases:

1. Drawer and drawee are thesame;

2. Drawee is a fictitious person ornot having the capacity tocontract;

3. Drawer is the person to whomthe instrument is presented forpayment;

4. The drawer has no right toexpect or require that thedrawee or acceptor will honorthe instrument;

5. Where the drawer hascountermanded payment. (Sec.114)

Notice of dishonor is not required to begiven to an indorser in the ff. cases:

1. Drawee is a fictitious person ordoes not have the capacity tocontract, and indorser wasaware of that fact at the time heindorsed the instrument;

2. Indorser is the person to whomthe instrument is presented forpayment;

3. Instrument was made oraccepted for hisaccommodation. (Sec. 115)

If an instrument is not accepted by

the drawee, there is no sense presenting

it again for payment, and notice ofdishonor must at once be given. If therewas acceptance, presentment forpayment is still required and if payment

is refused, there is a need for notice ofdishonor. (Sec. 116)

An omission to give notice of dishonorby non-acceptance does not prejudicethe rights of a holder in due coursesubsequent to the omission. (Sec. 117)

F. FOREIGN BILL OF EXCHANGE1. Drawn in the Philippines but payable

outside the Philippines.2. Payable in the Philippines but drawn

outside the Philippines.

INLAND BE FOREIGN BEA bill which or on itsface purports to beboth drawn andpayable within thePhilippines.

One which is or onits face purports tobe drawn or payableoutside thePhilippines.

NOTICE OFDISHONOR

PROTEST

Required in inlandbill

Required in foreignbill

May be oral orwritten

Always written

May be made by aparty or agent

Made by a notarypublic or arespectable residentin the presence ofwitness

Made in residence ofparties

Made in the place ofdishonor

PROTEST

The formal instrument executedusually by a notary public certifying that

the legal steps necessary to fix theliability of the drawee and the indorsershave been taken.

Who makes:1. A notary public; or2. Any respectable resident of the

place where the bill is dishonored, inthe presence of 2 or more crediblewitnesses. (Sec. 154)

Protest for better security Onemade by the holder of a bill after it hasbeen accepted but before it matures,


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against the drawer and indorsers, wherethe acceptor has been adjudged abankrupt or an insolvent, or has made anassignment for the benefit of the

creditors. (Sec. 158) Protest is necessary only in case offoreign bills of exchange, which havebeen dishonored by non-acceptance ornon-payment, as the case may be. If itis not so protested, the drawer andindorsers are discharged. (Sec. 118)

ACCEPTANCE FOR HONOR

An undertaking by a stranger to a billafter protest for the benefit of any partyliable thereon or for the honor of theperson for whose account the bill is

drawn which acceptance inures also tothe benefit of all parties subsequent tothe person for whose honor it isaccepted, and conditioned to pay thebill when it becomes due if the originaldrawee does not pay it. (Secs. 161-170)

Requisites:1. The bill must have been protested

for dishonor by non-acceptance orfor better security;

2. The acceptor for honor must be astranger and not a party alreadyliable on the instrument;

3. Bill must not be overdue;4. Acceptance for honor must be with

the consent of the holder of theinstrument.

Formal requisites:1. Must be in writing;2. Must indicate that it is an

acceptance for honor;3. Signed by the acceptor for honor;4. Must contain an express or implied

promise to pay money;5. The accepted bill for honor must be

delivered to the holder.

ORDINARYACCEPTANCE

ACCEPTANCEFOR HONOR

No previous protestis required

Previous protest isrequired

Consent of holder isimplied

Consent of holderis required

Drawee is acceptor Acceptor must bestranger to the bill

Acceptor isprimarily liable

Acceptor issecondarily liable

PAYMENT FOR HONOR

Payment made by a person, whether aparty to the bill or not, after it has been

protested for non-payment, for thebenefit of any party liable thereon or forthe benefit of the person for whoseaccount it was drawn.(Secs. 171-177)

Requisites:1. The bill has been dishonored by non-

payment;2. It has been protested for non-

payment;3. Payment supra protest (another term

for payment for honor because priorprotest for non-payment is required)is made by any person, even by a

party thereto;4. The payment is attested by a

notarial act of honor which must beappended to the protest or form anextension of it;

5. The notarial act must be based onthe declaration made by the payorfor honor or his agent of hisintention to pay the bill for honorand for whose honor he pays.

Note: If the above formalities are notcomplied with, payment will operate as

a mere voluntary payment and the payorwill acquire no right to fullreimbursement against the party forwhose honor he pays.

In payment for honor, the payeecannot refuse payment. If he refuses,he cannot recover from the parties whowould have been discharged had heaccepted the same. In acceptance forhonor, the holders consent is necessary.

The payor for honor is given the right

to receive both the bill and the protestobviously to enable him to enforce hisrights against the parties who are liableto him.

BILLS IN SET

One composed of several parts, eachpart being numbered and containing areference to the other parts, the wholeof the parts constituting but one bill.

Purpose: It is usually availed of incases where a bill had to be sent to adistant place through some conveyance.


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If each part is sent by different means ofconveyances, the chance that at leastone part of the set would reach itsdestination would be greater.

Rights of holders where parts arenegotiated separately

1.If both are HDC, the holder whosetitle first accrues is considered thetrue owner of the bill.

2.But the person who accepts or paysin due course shall not beprejudiced. (Sec. 179)

Obligations of holder who indorses 2 ormore parts of the bill in set

1.The person shall be liable on every

such part;2.Every indorser subsequent to him is

liable on the part he has himselfindorsed, as if such parts wereseparate bills. (Sec. 180)

IX. DISCHARGE

DISCHARGE OF NI

A release of all parties, whetherprimary or secondary, from theobligations arising thereunder. Itrenders the instrument without force

and effect and, consequently, it can nolonger be negotiated. (The Law onNegotiable Instruments with Documentsof Title, Hector de Leon, 2000 ed.)

Instances:1. By payment in due course by or on

behalf of the principal debtor;2. Payment by accommodated party;3. Intentional cancellation by the

holder;4. By any act which will discharge a

simple contract for the payment ofmoney;(Sec. 119)

5. When the principal debtor becomesthe holder of the instrument at orafter maturity in his own right.

PAYMENT IN DUE COURSE

Requisites:1. Payment must be made at or after

maturity.2. Payment must be made to the

holder.3. Payment must be made in good faith

and without notice that the holders

title is defective. (Sec. 88)

By whom made:a. By maker or acceptor; or

b. Surety if a primary party; orc. By an agent on behalf of the

principal

RENUNCIATION (Sec. 122)

The act of surrendering a right or claimwithout recompense, but it can beapplied with equal propriety to therelinquishing of a demand upon anagreement supported by a consideration.(1 Agbayani 1992 ed.)

Effects:1. A renunciation in favor of a

secondary party may be made by theholder before, at or after maturityof the instrument. The effect is todischarge only such secondary partyand all parties subsequent to himbut the instrument itself remains inforce.

2. A renunciation in favor of theprincipal debtor may be effected ator after maturity. The effect is todischarge the instrument and allparties thereto provided therenunciation is made unconditionallyand absolutely.

Note: In either case, renunciation doesnot affect the rights of a holder in duecourse without notice.

CANCELLATION

It includes the act of tearing, erasing,obliterating, or burning. It is not limitedto writing of the word cancelled, orpaid, or drawing of criss-cross linesacross the instrument. (Sec. 123) It maybe made by any other means by which

the intention to cancel the instrumentmay be evident.

DISCHARGE OF PERSONS SECONDARILYLIABLE1. By any act which discharges the

instrument;2. By the intentional cancellation of his

signature by the holder;3. By the discharge of a prior party;4. By a valid tender of payment made

by a prior party;5. By the release of the principal

debtor, unless the holders right of


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recourse against the partysecondarily liable is expresslyreserved;

6. By any agreement binding upon the

holder to extend the time ofpayment or to postpone the holdersright to enforce the instrument.(Sec. 120)

In the following cases, theagreement to extend the timeof payment does not discharge a

party secondarily liable:a) where the extension of time is

consented to by such party;b) where the holder expressly

reserves his right of recourseagainst such party.

Payment at or after maturity by aparty secondarily liable does notdischarge the instrument. It onlycancels his own liability and that of theparties subsequent to him. (Sec. 121)

X. CHECKS

A bill of exchange drawn on a bankpayable on demand (Sec. 185)

CONCEPTS:1. Certification of Checks

An agreement whereby the bankagainst whom a check is drawn,undertakes to pay it at any future timewhen presented for payment.

Effects:a. Equivalent to acceptance (Sec.

187) and is the operative actthat makes banks liable

b. Assignment of the funds of thedrawer in the hands of thedrawee (Sec. 189)

c. If obtained by the holder,discharges the persons

secondarily liable thereon (Sec.188)2. A check of itself does not operate asan assignment of any part of the funds tothe credit of the drawer with the bank.The bank is not liable to the holder,unless and until it accepts or certifiesthe check. (Sec. 189)3. A check must be presented forpayment within reasonable time after itsissue or the drawer will be dischargedfrom liability thereon to the extent ofthe loss caused by the delay. (Sec. 186)

Reasonable time: (Sec. 193, NIL)a. Nature of the instrumentb. Usage of business or tradec. The facts of the particular case

4. Where the holder of a check procuresit to be accepted or certified, thedrawer and all indorsers are dischargedfrom liability thereon. (Sec. 186)5. Refusal of drawee bank to certify

The holder has no action against thebank but he has a right of action againstthe drawer. The drawer in turn has rightof action against the bank based on theoriginal contact of deposit betweenthem.

Crossed Check

A check which in addition to the usualcontents of an ordinary check containsalso the name of a certain banker orbusiness entity through whom it must bepresented for payment.

Effects:a) That the check may not be

encashed; it may only be depositedwith the bank;

b) That the check may be negotiatedonly once to a person who has anaccount with the bank; and

c) That it serves as a warning to theholder that the check has beenissued for a definite purpose.(Bataan Cigar vs. CA, 230 SCRA 643)

The NIL is silent with respect tocrossed checks, although the Code ofCommerce makes reference to suchinstrument. Nonetheless, this Court hastaken judicial cognizance of the practicethat a check with 2 parallel lines in theupper left hand corner means that itcould only be deposited and not

converted into cash. The effects ofcrossing a check thus, relates to themode of payment, meaning that thedrawer had intended the check fordeposit only by the rightful person, i.e.,the payee named therein. (Cely Yang vs.Court of Appeals, G.R. No. 138074,August 15, 2003)

IRON CLAD RULE

Prohibits the countermanding ofpayment of certified checks. (Republicof the Philippines vs. PNB)


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Note: The holder must be a holder indue course before the stop paymentorder may not be successfully invokedagainst him. (Mesina vs. IAC, 146 SCRA

497, 505)

TYPES OF CHECKS (Cesar Villanueva,Commercial Law Review, 2004 ed.)

a. Cashiers Check

One drawn by the cashier of a bank, inthe name of the bank against the bankitself payable to a third person. It is aprimary obligation of the issuing bankand accepted in advance upon issuance.(Tan vs. CA, 239 SCRA 310)

b. Managers Check A check drawn by the manager of abank in the name of the bank itselfpayable to a third person. It is similar tothe cashiers check as to the effect anduse.

c. Memorandum Check

A check given by a borrower to alender for the amount of a short loan,with the understanding that it is not tobe presented at the bank, but will beredeemed by the maker himself whenthe loan falls due and whichunderstanding is evidenced by writingthe word memorandum, memo ormem on the check.

d. Certified Check

An agreement whereby the bankagainst whom a check is drawn

undertakes to pay it at any future timewhen presented for payment. (Sec. 187)

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