San Beda NIL

8/13/2019 San Beda NIL

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S an eda College of L aw 6MEMORY AID IN COMMERCIAL LAW

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 Lemuel Gatdula (Banking Laws);RobespierreCU (Law on Intellectual Property)

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 inCommercial Law, Jorge Miravite, 2002ed.)

1. To supplement the currency ofthe government.2. To substitute for money and

increase the purchasing medium. Legal tender That kind of

money 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 delivery

to 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 andto collect the sum payable forhimself free from defenses. The essence ofnegotiability whichcharacterizes a negotiable

paper as a credit instrumentlies in its freedom tocirculate freely as asubstitute for money.(Firestone Tire vs. CA, 353SCRA 601)

2. Accumulation of SecondaryContracts Secondary contractsare picked up and carried along

with NI as they are negotiatedfrom one person to another; orin the course of negotiation of

negotiable 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 Borromeo vs.Amancio Sun, 317 SCRA 176, the SCapplied Section 14 of the NIL by analogyin a case involving a Deed of Assignmentof shares which was signed in blank to

facilitate 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, asum certain in money to order or tobearer. (Sec. 184)

2. BILL OF EXCHANGE (BE) An unconditional order in writing

addressed 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)

NEGOTIABLE INSTRUMENTS LAW (NIL)(Act No. 2031, effect ive 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 ofexchange.

OTHER FORMS OF NI1. Certificate of deposit issued bybanks, 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 a

specified 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 Notea. 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. He

becomes an acceptor when heindicates his willingness to paythe billc. Payee party in whosefavor the bill is drawn or ispayable.

DISTINCTIONS

PROMISSORYNOTE

BILL OFEXCHANGE

Unconditionalpromise

Unconditionalorder

Involves 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 becausethey 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 expresslystipulated. (Notesand Cases on Banks,NegotiableInstruments andother CommercialDocuments, TimoteoB. Aquino)


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

It is necessary thata check be drawnon a bank deposit.Otherwise, therewould be fraud.

Death of a drawer of

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

Death of the

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

May be presented forpayment withinreasonable timeafter its lastnegotiation.

Must be presentedfor payment withina reasonable timeafter its issue.

May be payable ondemand or at a fixedor determinable

future 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 ofindorsement.

to order, ifindorsed specially.

A holder in duecourse may obtaintitle better than thatof the one who

negotiated theinstrument to him.

The indorsee, evenif holder in duecourse, obtainsonly such title as

the person whocaused the deposithad over thegoods.

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. NEGOTIABILITYForm 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 tobearer; and

5. When the instrument is addressed toa 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)

NEGOTIABLEINSTRUMENT

NEGOTIABLEDOCUMENT OFTITLE

Subject is money Subject is goods

Is itself theproperty with

value

The document is amere evidence of

title 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 theparty 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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The acceptance of a bill of exchangeis not important in the determination ofits negotiability. The nature ofacceptance is important only on thedetermination of the kind of liabilities of

the parties involved (PBCOM vs. Aruego,102 SCRA 530)

REQUISITES OF NEGOTIABILITYa. It must be writing and signed by themaker or drawerAny 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 madeto depend 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 be

debited with the amount; orb) 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 the

fund is sufficient.

Particular fundindicated is NOT thedirect source ofpayment but only the

source ofreimbursement.

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, 194

SCRA 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; orb. By stated installments; orc. By stated installments with an

acceleration 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 faceof the instrument and is not affected bythe fact that the exact amount is arrivedat only after a mathematical

computation. (Notes and Cases on Banks,Negotiable Instruments and otherCommercial Documents, Timoteo B.Aquino)

ACCELERATIONCLAUSE

INSECURITYCLAUSE

EXTENSIONCLAUSE

A clause thatrenders whole

Provisions inthe contract

Clauses inthe face of


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debt due anddemandableupon failure ofobligor tocomply withcertain

conditions.

whichallows theholder toacceleratepayment ifhe deems

himselfinsecure.

theinstrumentthat extendthematuritydates;

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 theinstrument

Parties are boundbecause they took theinstrument knowingthat there is anextension clause

Binds the personsecondarily liable (andtherefore cannot bedischarged fromliabilities 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 ONDEMAND

PAYABLE AT AFIXED OR

DETERMINABLE

FUTURE TIMEa. Where expressedto be payable ondemand, 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 fixedperiod after date orsight;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 is

uncertain. (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 andJurisprudence, 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 his

order. (Sec. 8) The payee must be named orotherwise indicated therein withreasonable certainty. 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 being

Payable 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, and


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such fact was known to the personmaking it so payable; or

d. When the name of the payee doesnot purport to be the name of anyperson; or

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

Note: An instrument originally payableto bearer can be negotiated by meredelivery even if it is indorsed especially.If it is originally a BEARER instrument, itwill 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 order ofcash is payable to bearer. Reason: The

name of the payee does not purport tobe 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 existing buthe is till fictitious or non-existent under

Sec. 9(c) of the NIL if the person makingit so payable does not intend to pay thespecified 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

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

value has beengiven;c. It does notspecify the placewhere it is drawn orwhere it is payable;

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

payment of money,the instrument isnot negotiable.(Sec. 5)EXCEPTIONS:a. Authorizes the

sale ofcollateralsecurities ondefault;

b. Authorizesconfession ofjudgment ondefault;

c. Waives thebenefit of lawintended toprotect thedebtor; or

d. Allows thecreditor theoption torequiresomething inlieu of money.

III. INTERPRETATION OF NEGOTIABLEINSTRUMENTS (Sec. 17)

a. Discrepancy between the amountin figures and that in words thewords prevail, but if the wordsare ambiguous, reference will bemade to the figures to fix theamount.

b. Payment for interest is providedfor 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 soambiguous that there is doubtwhether it is a bill or note, theholder may treat it as either athis 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


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

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. Dishonor by non-acceptancei. Presentment for paymentj. Dishonor by non-paymentk. Notice of dishonorl. Discharge

MODES OF TRANSFERa. Negotiation the transfer of theinstrument 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 the

requirements of Section 1;and2. The delivery of the

complete instrument by themaker or drawer to thepayee or holder with theintention of giving effect toit. (The Law on NegotiableInstruments with Documents

of 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 may

be negotiated byindorsement 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 orderinstrumentWhere the holder of an instrumentpayable to his order transfers it for value

without indorsing it, the transfer vests inthe transferee such title as thetransferor had therein and he alsoacquires 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 instrument orb. Upon a paper (allonge) attached

thereto with or withoutadditional words specifying theperson 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:


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

2. May be converted to specialindorsement by writing over the

signature of indorser in blankany contract consistent withcharacter 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 of

the instrument; orb. 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 indorser

a 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 to

indorse in a representative capacity, hemay 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 whoseindorsement 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 tohave been issued for a valuableconsideration. Every person whose

signature appears thereon is presumedto have become a party thereto forvalue. (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 bearer

thereof. (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 the


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negotiable instrument is subject todefenses as if it were non-negotiable.(Chan Wan vs. Tan Kim, 109 Phil. 706)

Holder In Due Course (HDC)

A holder who has taken theinstrument under the followingconditions: KEY: C O V 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 ownname;

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 a

reasonable man to investigate, it cannotbe stated that the payee acquired thecheck 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 sueunder 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 througha holder 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 anothercalled 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)


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Note: without receiving valuetherefor, means without receivingvalue by virtue of the instrument.(Clark vs. Sellner, 42 Phil. 384)

Effects: The person to whom the

instrument thus executed issubsequently 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 toa holder 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 virtue

of 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 and

debtor 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, a

consideration moving to the principalalone 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 barredfrom asserting a

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

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

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

MAKER ACCEPTOR ORDRAWEE

A. Engages to pay

according to thetenor of theinstrument; andB. Admits theexistence of thepayee and hiscapacity to indorse.

A. Engages to pay

according 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 operateas an assignment offunds in the handsof the draweeavailable for thepayment thereof


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and the drawee isnot 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. Engagesthat theinstrument

will beaccepted orpaid by thepartyprimarilyliable; andC. Engagesthat if theinstrumentisdishonoredand properproceedingsare brought,he will pay

to the partyentitled tobe paid.

A. WarrantsallsubsequentHDC -a. That theinstrument isgenuine andin all respectwhat itpurports to

beb. He hasgood title toit;c. All priorparties hadcapacity tocontractd. Theinstrumentis, at thetime ofendorse-ment, validandsubsisting.B. Engages

that theinstrumentwill beaccepted orpaid, orboth, as thecase may be,

according toits tenor; andC. If theinstrument isdishonoredandnecessaryproceedingson dishonor

be dulytaken, hewill pay tothe partyentitled tobe paid.

A person,nototherwise aparty to aninstrument,places hissignaturethereon inblankbefore

delivery.(Sec. 64)A. Ifinstrumentpayable tothe orderof a 3rd

person, heis liable tothe payeeandsubsequentparties.B. Ifinstrument

payable toorder ofmaker ordrawer orto bearer,he is liableto allpartiessubsequentto themaker ordrawer.C. If hesigns foraccommo-dation of

the payee,he is liableto allpartiessubsequentto thepayee.

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

QUALIFIED

INDORSER

PERSON

NEGOTIATING BYDELIVERYEvery 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 parties

had capacity tocontract;D. He has noknowledge of anyfact which wouldimpair the validityof the instrument orrender it valueless.

A. Warranties sameas those ofqualified indorsers;andB. Warrantiesextend toimmediatetransferee only.

PERSONNEGOTIATING BY

MERE DELIVERYOR BY QUALIFIEDINDORSEMENT

GENERALINDORSER

No secondaryliability; but isliable for breach ofwarranty

There is secondaryliability, andwarranties

Warrants that hehas no knowledge ofany fact whichwould impair thevalidity of theinstrument orrender it valueless

Warrants that theinstrument is, atthe time of hisindorsement, validand subsisting

ORDER OF LIABILITY There is no order of liability amongthe indorsers 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 other


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Commercial Documents, Timoteo B.Aquino) As respect one another, indorsers areliable prima facie in the order in whichthey indorse unless the contrary is

proven (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 againstall holders,whether in duecourse or not, butonly by the parties

entitled to raisethem. (a.k.aabsolute defenses)

Those which areavailable only againsta person not a holderin due course or asubsequent holderwho stands in privitywith him. (a.k.a.equitable defenses)

1. MaterialAlteration;2. Want ofdelivery ofincompleteinstrument;3. Duressamounting 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 thecourt;

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 anillegal consideration;

8. Ultra vires actsof a corporation9. Want ofauthority of agent;10. Execution ofinstrument

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

EFFECTS OF CERTAIN DEFENSESA. MINORITY Negotiation by a minor passes title tothe instrument. (Sec.22). But the minor

is 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 bya 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 up

strictly 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 theinstrument.

2. As to HDC, it is conclusively

presumed that there was validdelivery; and3. As against an immediate party and

remote party who is not a HDC,presumption of a valid andintentional delivery is rebuttable.

F. FRAUD

FRAUD IN FACTUMOR FRAUD ININDUCEMENT

FRAUD INESSES

CONTRACTUSOR FRAUD INEXECUTION

The person who signs

the instrumentintends to sign thesame as a NI but wasinduced by fraud

The person is

induced 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 personnot HDC.

H. PRESCRIPTION Refers to extinctive prescription andmay be raised even against a HDC. Under

the 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 theparties in any way.

Effects:1. Alteration by a party Avoids the

instrument except as against theparty who made, authorized, orassented to the alteration and

subsequent 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 ofthe 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 whichpayment is to be made;

f. That which adds a place ofpayment 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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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 Lemuel Gatdula (Banking Laws); Robespierre CU (Law on Intellectual Property)

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 materia lparticular

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 to

the completion2. If not a HDC, he can enforce the instrument ascompleted only against parties subsequent to thecompletion but not against those prior thereto.

None in the hands of any holder.However, the invalidity of the

instrument is only with reference toparties whose signatures appear onthe instrument after delivery, theinstrument is valid.

Can enforce the instrument.Note: Where the instrument is in thehands of a HDC, a valid delivery

thereof by all parties prior to him soas to make them liable to him isconclusively presumed. Where theinstrument 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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Drawee cannotrecover fromthe collectingbank becausethere is noprivity

between 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 toforgery areliable. (such as

collectingbank)c. Party whomade theforgery isliable

a. Drawer isliableb. Drawee isliablec. Payee is notliabled. Collectingbank is liable

because ofwarrantye. Party whomade theforgery is liable

Indorsers

signatureforged

a. Drawer,

payee andindorser whosesignature wasforged notliable.b. Drawee isliable if it paid.c. Indorserssubsequent to

forgery areliable. (such ascollecting bank)d. Party whomade theforgery isliable.

a. Drawer is

liable.(indorsementnot necessary totitle)b. Drawee isliable.c. Indorserwhose signaturewas forged is

liable 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 attachesthe 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 should

be 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 expressly

stipulates 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


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a. Notice of dishonor to personssecondarily liable.

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: withinreasonable 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 isspecified;

3. Usual place of business or residenceof the person to make payment, in

case no place is specified and noaddress is given;4. In any other case, wherever the

person 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 oraccepted for his accommodation and

he 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 issufficient. (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 ACCEPTANCEWhen 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 has

absconded, or is a fictitious person

or a person not having capacity tocontract by bill;2. After exercise of reasonable

diligence, presentment cannot bemade;

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

If bill is duly presented for acceptanceand it is not accepted within theprescribed time, the person presenting itmust treat the bill as dishonored by non-acceptance or he loses the right of

recourse against the drawer andindorsers. (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 exchangedirected to him. Form: Must be in writing and signedby the drawee and must not express thatthe drawee will perform his promise byany other means than the payment of

money. (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 termsvaries the effect of the bill as

drawn.a. Conditional - makes payment bythe 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 theholder;

2. At a reasonable hour on a businessday;

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 when

he 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 by

law (Sec. 102); and4. Given at the proper place (Secs. 103

and 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); and3. When after due diligence, it cannot

be 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 expected topay it.

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

secondarily liable, namely, thedrawer and indorsers as the case

may 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 of

reimbursement 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 of

dishonor 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 recourseagainst the drawer and indorsers accrues

to 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 previousinstallment will discharge thepersons secondarily liable as to the

succeeding 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 theholder 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 theparty 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 personssecondarily liable thereon; or

2. Give notice to his principal. Insuch 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 duly

addressed, and2. Deposited in the post-office,

even when there is miscarriageof mail. (Sec. 105)


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the acceptor has been adjudged abankrupt or an insolvent, or has made anassignment for the benefit of thecreditors. (Sec. 158) Protest is necessary only in case of

foreign 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 isdrawn which acceptance inures also tothe benefit of all parties subsequent tothe person for whose honor it is

accepted, 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 anacceptance 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 beenprotested for non-payment, for thebenefit of any party liable thereon or for

the 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 aparty thereto;

4. The payment is attested by anotarial act of honor which must be

appended to the protest or form anextension of it;5. The notarial act must be based on

the 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 asa 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 rightto 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.If each part is sent by different means ofconveyances, the chance that at least


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one 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 everysuch part;

2. Every indorser subsequent to him isliable on the part he has himselfindorsed, as if such parts were

separate bills. (Sec. 180)

IX. DISCHARGE

DISCHARGE OF NI A release of all parties, whetherprimary or secondary, from theobligations arising thereunder. Itrenders the instrument without forceand 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 onbehalf 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 aftermaturity.2. Payment must be made to the

holder.3. Payment must be made in good faith

and without notice that the holderstitle is defective. (Sec. 88)

By whom made:a. By maker or acceptor; orb. Surety if a primary party; orc. By an agent on behalf of the

principal

RENUNCIATION (Sec. 122) The act of surrendering a right orclaim without 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 party

and all parties subsequent to him butthe 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 whichthe intention to cancel the instrumentmay be evident.

DISCHARGE OF PERSONS SECONDARILYLIABLE1. By any act which discharges the

instrument;

2. By the intentional cancellation of hissignature 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 ofrecourse against the party


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secondarily liable is expresslyreserved;

6. By any agreement binding upon theholder to extend the time ofpayment or to postpone the holders

right to enforce the instrument.(Sec. 120) In the following cases, theagreement to extend the time ofpayment does not discharge aparty secondarily liable:

a) where the extension of time isconsented to by such party;

b) where the holder expresslyreserves his right of recourseagainst such party.

Payment at or after maturity by aparty secondarily liable does notdischarge the instrument. It only

cancels 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 personssecondarily 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 instrument

b. 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 discharged

from 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 be

presented 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 to

crossed 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 notconverted 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)Note: The holder must be a holder indue course before the stop paymentorder may not be successfully invoked


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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 Lemuel Gatdula (Banking Laws);

against him. (Mesina vs. IAC, 146 SCRA497, 505)

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

a. Cashiers Check One drawn by the cashier of a bank,in the 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 and

use.

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 be

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

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