MERCANTILE LAW

NEGOTIABLE
INSTRUMENTS LAW

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UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
I. Definition
A. DEFINITION AND PURPOSE
• Written contract for the payment of
money, by its form and on its face,
intended as substitute for money and
intended to pass from hand to hand to
give the holder in due course (HDC) the
right to hold the same and collect the
sum due.
• Instruments are negotiable when they
conform to all the requirements
prescribed by the Negotiable Instruments
Law (NIL; Act 2031, 03 February 1911).
• However, the fact that an instrument
does not meet the foregoing requisites
will not affect its validity, the only
consequence being that it will be
governed not by the NIL but by the
general law on contracts. (Campos)
Negotiable Instrum ents Not Legal
tender
Art. 1249, Civil Code. The payment of debts in
money shall be made in the currency
stipulated, and if it is not possible to deliver
such currency, then in the currency which is
legal tender in the Philippines.
The delivery of promissory notes payable to
order, or bills of exchange or other mercantile
documents shall produce the effect of
payment only when they have been cashed, or
when through the fault of the creditor they
have been impaired.
In the meantime, the action derived from the
original obligation shall be held in the
abeyance. (1170)
Sec. 52, New Central Bank Act. Legal Tender
Power. - All notes and coins issued by the
Bangko Sentral shall be fully guaranteed by
the Government of the Republic of the
Philippines and shall be legal tender in the
Philippines for all debts, both public and
private: Provided, however, That, unless
otherwise fixed by the Monetary Board, coins
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shall be legal tender in amounts not exceeding
Fifty pesos (P50.00) for denominations of
Twenty-five centavos and above, and in
amounts not exceeding Twenty pesos
(P20.00) for denominations of Ten centavos or
less.
• Although considered as medium for
payment of obligations, negotiable
instruments are not legal tender.
• Negotiable instruments shall produce the
effect of payment only when they have
been encashed or when through the fault
of the creditor they have been impaired.
[Art. 1249, Civil Code]
• BUT a CHECK which has been cleared and
credited to the account of the creditor
shall be equivalent to a delivery to the
creditor of cash.
• Settled is the rule that payment must be
made in legal tender. A check is not legal
tender and, therefore, cannot constitute a
valid tender of payment. Since a
negotiable instrument is only a substitute
for money and not money, the delivery of
such an instrument does not, by itself,
operate as payment. Mere delivery of
checks does not discharge the obligation
under a judgment. The obligation is not
extinguished and remains suspended
until the payment by commercial
document is actually realized. [BPI vs.
Royeca, G.R. No. 176664 (2008)]
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
II. Forms and
Interpretation
A. REQUISITES OF NEGOTIABILITY
(Most Frequently Asked since 1992; Last
appeared in 2013)
Sec. 1, Negotiable Instruments Law (NIL). Form
of negotiable instruments. - An instrument to
be negotiable must conform to the following
requirements:
(a) It must be in writing and signed by the
maker or drawer;
(b) Must contain an unconditional
promise or order to pay a sum certain
in money;
(c) Must be payable on demand, or at a
fixed or determinable future time;
(d) Must be payable to order or to bearer;
and
(e) Where the instrument is addressed to
a drawee, he must be named or
otherwise indicated therein with
reasonable certainty.
Note: Sections 184 and 126 define a
promissory note and a bill of exchange using
the requisites listed in Section 1.
A.1. IN WRITING AND SIGNED BY THE
MAKER OR DRAWER
Sec. 18, NIL. Liability of person signing in trade
or assumed name. - No person is liable on the
instrument whose signature does not appear
thereon, except as herein otherwise expressly
provided. But one who signs in a trade or
assumed name will be liable to the same
extent as if he had signed in his own name.
IN W RITING
What is considered "In writing" - includes
print; written or typed. Section 191 of the NIL
provides that the word “’written’ includes
printed, and ‘writing’ includes print.”
Rationale for requirement: Since an
instrument is a document, there must be
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MERCANTILE LAW
something in written form that can be
transferred from person to person. (Abad)
SIGNED
General Rule: No person is liable on the
instrument whose signature does not appear
thereon.
Note:
• One who signs in a trade or assumed
name will be liable to the same extent as
if he had signed in his own name. [Sec. 18,
NIL]
• Signature of any party may be made by
duly authorized agent; no particular form
of appointment necessary. [Sec. 19, NIL]
• Signature is binding and may be in one’s
handwriting, printed, engraved,
lithographed or photographed so long as
it is intended or adopted as the signature
of the signer or made with his authority.
(Campos)
• Signature may appear on any part of the
instrument. However, if the signature is
so placed upon the instrument that it is
not clear in what capacity the person
intended to sign, he is deemed an
indorser. [Sec. 17 (f), NIL]
A.2. CONTAINING AN UNCONDITIONAL
PROMISE TO PAY OR ORDER TO PAY A
SUM CERTAIN IN MONEY
Sec. 3, NIL. When promise is unconditional. -
An unqualified order or promise to pay is
unconditional within the meaning of this Act
though coupled with:
(a) An indication of a particular fund out
of which reimbursement is to be made
or a particular account to be debited
with the amount; or
(b) A statement of the transaction which
gives rise to the instrument.
But an order or promise to pay out of a
particular fund is not unconditional.
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

UNCONDITIONAL • As to promissory note: Promise to pay

should be express on the face of the
• The promise or order to pay, to be
instrument. (Campos)
unconditional, must be unqualified.
(Campos) o The word "promise" is not
absolutely necessary. Any
• Must not be dependent upon a expression equivalent to a
contingent event that is not certain to promise is sufficient.
happen. (Abad) (Campos)
• The fact that the condition appearing on o Mere acknowledgment of a
the instrument has been fulfilled will not debt is insufficient. (Campos)
convert it into a negotiable one. [Sec. 4,
NIL] • As to bill of exchange: Order –
command made by the drawer
• An instrument which contains an order or addressed to the drawee ordering the
promise to do an act in addition to the latter to pay the payee or the holder a
payment of money (with the exception of sum certain in money; the instrument
certain acts enumerated in Sec. 5 of the is, by its nature, demanding a right.
NIL) is not negotiable.
o Words which are equivalent
• An instrument where the maker or the to an order are sufficient.
person primarily liable has the option to
require something to be done in lieu of o A mere request or authority to
payment of money is not negotiable. But pay does not constitute an
it is negotiable if the option to require order. Although the mere use
something to be done in lieu of payment of polite words like "please"
of money is with the holder.[Campos] does not of itself deprive the
instrument of its
characteristics as an order, its
language must clearly
Fund indicate a demand upon the
Particular Fund
for Reimbursement drawee to pay.
(conditional)
(unconditional)

The drawee pays the The drawee pays SUM PAYABLE MUST BE CERTAIN
payee from his own directly from the
funds. Afterwards, particular fund Sec. 2, NIL. What constitutes certainty as to
the drawee pays indicated. sum. - The sum payable is a sum certain within
himself from the the meaning of this Act, although it is to be
indicated fund. paid:

Indicated fund is not Particular fund (a) with interest; or

the direct source of indicated is the direct (b) by stated installments; or
payment. source of payment. (c) by stated installments, with a
(Sundiang and provision that, upon default in
Aquino) payment of any installment or of
interest, the whole shall become due;
or
(d) with exchange, whether at a fixed rate
When conditional: A negotiable instrument is or at the current rate; or
conditional when reference to the fund clearly (e) with costs of collection or an
indicates an intention that such fund alone attorney's fee, in case payment shall
should be the source of payment. not be made at maturity.
[Metropolitan Bank vs. CA, G.R. No. 88866
(1991)]
ORDER OR PROMISE TO PAY
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UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
Note: A sum is certain if from the face of the
instrument it can be determined even if it
requires mathematical computation.
(Sundiang and Aquino)
PAYABLE IN MONEY
• The instrument must be capable of being
transformed into money, since negotiable
instruments are intended to be
substitutes for money
• “Money” as used in the law is not
necessarily limited to “legal tender” as
defined by law but includes any particular
kind of current money. [Sec. 6(e), NIL and
PNB v. Zulueta, G.R. No. L-7271 (1957)]
• An agreement to pay in foreign currency
is valid. (RA 8183)
• An instrument payable in personal
property like merchandise, shares of
stock or gold is non-negotiable.
A.3. PAYABLE ON DEMAND, OR AT A
FIXED OR DETERMINABLE FUTURE TIME
Rationale: to inform the holder of the
instrument of the date when he may enforce
payment thereof.
ON DEMAND
Sec. 7, NIL. When payable on demand. - An
instrument is payable on demand:
(a) When it is so expressed to be payable
on demand, or at sight, or on
presentation; or
(b) In which no time for payment is
expressed.
Where an instrument is issued, accepted, or
indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it,
payable on demand.
Note: The holder may call for payment any
time; and the maker has an option to pay at
any time. The refusal of the holder to accept
payment will terminate the running of
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MERCANTILE LAW
interest, if any, but the obligation to pay the
note remains.
AT A FIXED TIME
• Only on the stipulated date, and not
before, may the holder demand its
payment.
• Should he fail to demand payment, the
instrument becomes overdue but remains
valid and negotiable. It is merely
converted to a demand instrument with
respect to the person who issued,
accepted, or indorsed it when overdue.
[Sec. 7, NIL]
AT A DETERMINABLE FUTURE TIME
Sec. 4, NIL. Determinable future time; what
constitutes. - An instrument is payable at a
determinable future time, within the meaning
of this Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable
future time specified therein; or
(c) On or at a fixed period after the
occurrence of a specified event which
is certain to happen, though the time
of happening be uncertain.
An instrument payable upon a contingency is
not negotiable, and the happening of the
event does not cure the defect.
Note: It is required that the maturity of the
instrument can be absolutely determined
with certainty. (Abad)
Examples:
• At a fixed period after date or sight, e.g.,
“30 days after date.”
• On or before a fixed or determinable
future time specified therein, e.g.,
“payable on or before December 1, 2000”
• On or at a fixed period after the
occurrence of a specified event which is
certain to happen, though the time of
happening be uncertain, e.g., “payable
within 60 days after the death of Jose”
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Effect of Acceleration Provisions
• If option (absolute or conditional) to
accelerate maturity is on the maker, the
instrum ent is still negotiable. (Campos)
• If option to accelerate is on the holder
and can be exercised only after the
happening of a specified event/act over
which he has no control (conditional), the
instrument is still negotiable. (Campos)
Note: If option on the part of the holder is
absolute, the instrument is non-negotiable.
Insecurity Clauses
Provisions in the contract which allow the
holder to accelerate payment “if he deems
himself insecure.” The instrument is rendered
non-negotiable. (Sundiang and Aquino)
Provisions extending tim e of paym ent
General rule: Negotiability not affected.
Effect is similar with that of an acceleration
clause at the option of the maker. (Campos)
Exception: Where a note with a fixed
maturity provides that the maker has the
option to extend time of payment until the
happening of contingency, the instrument is
NOT negotiable. The time for payment may
never come at all.
Extension Clauses
An instrument is payable at a definite time if
by its terms, it is payable at a definite time
subject to extension at the option of the
holder, ot to an extension to a further definite
time at the option of the maker or acceptor or
automatically upon or after a specified event
or act. (Sundiang and Aquino)
Paym ent on Installm ents
If the instrument states that the amount shall
be paid in two equal installments, the second
being payable pm a fixed date, the
instrument can be considered negotiable
since the first installment would then be
payable on demand. (Vitug)
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MERCANTILE LAW
A.4. PAYABLE TO ORDER OR TO BEARER
• The negotiability or non-negotiability of
an instrument is determined from the
face of the instrument itself. [Caltex vs.
CA, G.R. No. 97753 (1992)]
• Therefore, the instrument must contain
words of negotiability. (2012 Bar
Question) For example:
o “Pay to the order of Juan Cruz”, or
“I promise to pay to the order of
Juan Cruz”
o “Pay to Juan Cruz or bearer”, or “I
promise to pay Juan Cruz or
bearer”
• Instrument need not follow the language
of the law, but any term which clearly
indicates an intention to conform to the
legal requirements is sufficient.
PAYABLE TO ORDER
Sec. 8, NIL. When payable to order. - The
instrument is payable to order where it is
drawn payable to the order of a specified
person or to him or his order. It may be drawn
payable to the order of:
(a) A payee who is not maker, drawer, or
drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time
being.
Where the instrument is payable to order, the
payee must be named or otherwise indicated
therein with reasonable certainty.
Note: Without the words "to order" or "to the
order of" the instrument is payable only to
the person designated therein and is
therefore non-negotiable. [Consolidated
Plywood Industries vs. IFC Leasing, G.R. No.
72593 (1987)]
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
PAYABLE TO BEARER
Sec. 9, NIL. When payable to bearer. - The
instrument is payable to bearer:
(a) When it is expressed to be so payable;
or
(b) When it is payable to a person named
therein or bearer; or
(c) When it is payable to the order of a
fictitious or non-existing person, and
such fact was known to the person
making it so payable; or
(d) When the name of the payee does not
purport to be the name of any person;
or
(e) When the only or last indorsement is
an indorsement in blank.
Exam ples:
(1) Expressed to be so payable - "I promise
to pay the bearer the sum"
(2) Payable to a person named therein or
bearer -"Pay to A or bearer"
(3) Payable to the order of a fictitious person
or non-existing person, and such fact was
known to the person making it so payable
- “Pay to John Doe or order"
(4) Name of payee does not purport to be the
name of any person – "Pay to cash"; "Pay
to sundries."
(5) Only or last indorsement is an
indorsement in blank.
Fictitious Payee Rule
• It is not necessary that the person
referred to in the instrument is really non-
existent or fictitious to make the
instrument payable to bearer. The person
to whose order the instrument is made
payable may in fact be existing but he is
still fictitious or non-existent under Sec.
9(c) of the NIL if the person making it so
payable does not intend to pay the
specified persons. [PNB v. Rodriguez, G.R.
No. 170325 (2008)]
• A check drawn payable to the order of
"CASH" is a check payable to bearer, and
the bank may pay it to the person
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MERCANTILE LAW
presenting it for payment without the
drawer's indorsement. [Ang Tek Lian vs.
CA, G.R. No. L-2516 (1950)]
W here the Maker is the Payee
• In effect making himself liable to himself.
Thus, the instrument produces no legal
effect.
• It will produce legal effects only once the
payee-maker indorses the instrument to
another person because such
indorsement will then give rise to rights
and obligations. (Abad)
A.5. DRAWEE MUST BE NAMED OR
DESIGNATED WITH REASONABLE
CERTAINTY
• Applies only to a bill of exchange.
• A bill may be addressed to two or more
drawees jointly whether they are partners
or not, but not to two or more drawees in
the alternative or in succession. [Sec. 128,
NIL]
• Examples:
o “To Juan Cruz and Jose Reyes” –
negotiable
o “To Juan Cruz or Jose Reyes” – not
negotiable; no certainty as to
drawee
B. DETERMINATION OF
NEGOTIABILITY
• In determining the negotiability of an
instrument, the instrument in its entirety
and by what appears on its face must be
considered. It must comply with the
requirements of Sec. 1 of the Negotiable
Instruments Law. [Caltex Phils. v. CA, G.R.
No. 97753 (1992)]
• The acceptance of a bill of exchange is
not important in the determination of its
negotiability. The nature of acceptance is
important only on the determination of
the kind of liabilities of the parties
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

involved. [PBCOM vs. Aruego, G.R. Nos. Manila Oil Refining, G.R. No. L-18103
L-25836-37 (1993)] (1922)]

Omissions and
Additional Provisions
Provisions That Do
That Do Not Affect
Not Affect
Negotiability
Negotiability

(1) Non-dating of the (1) Authorizes the

instrument sale of collateral
securities on
(2) Non-specification
default;
of value given, or
that any value (2) Authorizes
had been given confession of
judgment on
(3) Non-specification
default;
of place where it
is drawn or place (3) Waives the benefit
where it is of law intended to
payable protect the
debtor; or
(4) Bears a seal
(4) Allows the
(5) Designation of
creditor the
particular kind of
option to require
currency in which
something in lieu
payment is to be
of money. (Sec. 5)
made. (Sec. 6)

Note: Negotiability is
affected when
instrument contains a
promise or order to do
any act in addition to
the payment of
money.

Note:
• A confession of judgment is provision
given by the maker authorizing the
plaintiff's attorney to sign judgment and
issue execution for the value of the
instrument, costs, and attorney's fees.
This is also called a judgment cognivit
actionem. If accompanied by withdrawal
of plea, it is called judgment relicta
verificatione.
• A confession of judgment is not
recognized in our country, as it is against
public policy. It denies due process, and
deprives the right of appeal. [PNB v.

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UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
III. Kinds of Negotiable
Instruments
A. PROMISSORY NOTE
Sec. 184, NIL. Promissory note, defined. - A
negotiable promissory note within the
meaning of this Act is an unconditional
promise in writing made by one person to
another, signed by the maker, engaging to pay
on demand, or at a fixed or determinable
future time, a sum certain in money to order or
to bearer. Where a note is drawn to the
maker's own order, it is not complete until
indorsed by him.
A.1. KINDS OF PROMISSORY NOTES
(1) Certificate of deposit – a form of
promissory note which is a written
acknowledgment of a bank of its receipt
of a certain sum with a promise to repay
the same.
(2) Bonds – a certificate or evidence of a
debt on which the issuing company or
governmental body promises to pay the
bondholders a specified amount of
interest for a specified length of time, and
to repay the loan on the expiration date.
(3) Debenture – a promissory note or bond
backed by the general credit of a
corporation and usually not secured by a
mortgage or lien on any specific property.
(Sundiang and Aquino)
B. BILL OF EXCHANGE
Sec. 126, NIL. Bill of exchange, defined. - A bill
of exchange is an unconditional order in
writing addressed by one person to another,
signed by the person giving it, requiring the
person to whom it is addressed to pay on
demand or at a fixed or determinable future
time a sum certain in money to order or to
bearer. (Sec. 126)
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MERCANTILE LAW
B.1. KINDS OF BILLS OF EXCHANGE
(1) Draft – used synonymously with bill of
exchange although it normally refers to a
bill of exchange used in documentary
exchange like letters of credit
transactions.
(2) Inland and foreign bill – an Inland
bill is a bill which is, or on its face
purports to be, both drawn and payable
within the Philippines. Any other bill is a
foreign bill.
(3) Time draft – draft that is payable at a
fixed date.
(4) Sight or dem and draft – payable
when the holder presents it for payment.
(5) Trade acceptance – used in contracts
of sale where the seller as drawer orders
the buyer (as drawee) to pay a sum
certain to the same seller (payee).
(6) Banker’s acceptance – a time draft
across the face which the drawee has
written the word accepted. (Sundiang
and Aquino)
(7) Check - A bill of exchange drawn on a
bank payable on demand (Sec. 185). It is
the most common form of bill of
exchange.
B.2. INSTANCES WHEN A BILL OF
EXCHANGE MAY BE TREATED AS A
PROMISSORY NOTE
(2011 and 2015 Bar Question)
Sec. 130, NIL. When bill may be treated as
promissory note. - Where in a bill the drawer and
drawee are the same person or where the
drawee is a fictitious person or a person not
having capacity to contract, the holder may treat
the instrument at his option either as a bill of
exchange or as a promissory note.
Sec. 17, NIL. Construction where instrument is
ambiguous. - Where the language of the
instrument is ambiguous or there are omissions
therein, the following rules of construction apply:
x---x
(e) Where the instrument is so ambiguous that
there is doubt whether it is a bill or note, the
holder may treat it as either at his election;
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x---x IV. Completion and

(1) The drawer and the drawee are the same Delivery
person;
(2) Drawee is a fictitious person; A. STEPS IN THE EXECUTION OF
(3) Drawee does NOT have the capacity to NEGOTIABLE INSTRUMENTS
contract (Sec. 130, NIL)
(4) Where the bill is drawn on a person who (1) Writing of the instrument completely in
is legally absent; accordance with the requisites of
negotiability under Sec. 1.
(5) Where the instrument is so ambiguous
that there is doubt whether it is a bill or (2) Delivery of the instrument by the maker
note, the holder may treat it as either at or the drawer to the payee in order to give
his election (Sec. 17[e], NIL) legal effect thereto. (Abad)
Note: It may sometimes be difficult to locate
the boundary line between a complete and an
Promissory Note Bill of Exchange incomplete instrument... It would seem that if
an instrument contains all the requisites for
Unconditional Unconditional order making it a negotiable one, it should be
promise considered as complete though it in fact may
Involves two parties Involves three parties have blanks as to non-essentials... (Campos)
Maker is primarily Drawer is only
liable secondarily liable
B. INSERTION OF DATE
Only one Two presentments:
presentment: for for acceptance and for
(2012 Bar Question)
payment payment
Sec. 13, NIL. When date may be inserted. -
Bill of Exchange Check Where an instrument expressed to be payable
at a fixed period after date is issued undated,
Not necessarily It is necessary that a or where the acceptance of an instrument
drawn on a deposit. check be drawn on a payable at a fixed period after sight is
The drawee need not bank deposit. undated, any holder may insert therein the
be a bank Otherwise, there true date of issue or acceptance, and the
would be fraud. instrument shall be payable accordingly. The
Death of a drawer of a Death of the drawer of insertion of a wrong date does not avoid the
BOE, with the a check, with the instrument in the hands of a subsequent
knowledge of the knowledge of the holder in due course; but as to him, the date so
bank, does not revoke bank, revokes the inserted is to be regarded as the true date.
the authority of the authority of the
drawee to pay. banker to pay.
Any holder may insert the true date of issue
or acceptance of an instrument where:
May be presented for Must be presented for
payment within payment within a (1) The instrument is expressed to be
reasonable time after reasonable time after payable at a fixed period after date is
its last negotiation. its issue. issued undated; or
May be payable on Always payable on (2) The acceptance of an instrument
demand or at a fixed demand payable at a fixed period after sight is
or determinable undated.
future time

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C. EFFECT OF ANTE-DATING AND
POST-DATING
Sec. 12, NIL. Ante-dated and post-dated. - The
instrument is not invalid for the reason only
that it is ante-dated or post-dated, provided
this is not done for an illegal or fraudulent
purpose. The person to whom an instrument
so dated is delivered acquires the title thereto
as of the date of delivery.
D. COMPLETION OF BLANKS
Sec. 14, NIL. Blanks; when may be filled. -
Where the instrument is wanting in any
material particular, the person in possession
thereof has a prima facie authority to complete
it by filling up the blanks therein. And a
signature on a blank paper delivered by the
person making the signature in order that the
paper may be converted into a negotiable
instrument operates as a prima facie authority
to fill it up as such for any amount. In order,
however, that any such instrument when
completed may be enforced against any
person who became a party thereto prior to its
completion, it must be filled up strictly in
accordance with the authority given and within
a reasonable time. But if any such instrument,
after completion, is negotiated to a holder in
due course, it is valid and effectual for all
purposes in his hands, and he may enforce it
as if it had been filled up strictly in accordance
with the authority given and within a
reasonable time.
E. INCOMPLETE AND UNDELIVERED
INSTRUMENTS
Sec. 15, NIL. Incomplete instrument not
delivered. - Where an incomplete instrument
has not been delivered, it will not, if completed
and negotiated without authority, be a valid
contract in the hands of any holder, as against
any person whose signature was placed
thereon before delivery.
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MERCANTILE LAW
In this case a real defense exists and not even
a holder in due course can recover on the
instrument, for the law is specific that it is not
a valid contract in the hands of any holder.
(Campos)
Note: A drawee bank whose negligent
custody of the checks, after partial execution,
contributed to its escape, is estopped from
raising the real defense under Sec. 15 of the
NIL. (Campos)
F. COMPLETE AND UNDELIVERED
INSTRUMENTS
Sec. 16, NIL. Delivery; when effectual; when
presumed. - Every contract on a negotiable
instrument is incomplete and revocable until
delivery of the instrument for the purpose of
giving effect thereto. As between immediate
parties and as regards a remote party other
than a holder in due course, the delivery, in
order to be effectual, must be made either by
or under the authority of the party making,
drawing, accepting, or indorsing, as the case
may be; and, in such case, the delivery may be
shown to have been conditional, or for a
special purpose only, and not for the purpose
of transferring the property in the instrument.
But where the instrument is in the hands of a
holder in due course, a valid delivery thereof by
all parties prior to him so as to make them
liable to him is conclusively presumed. And
where the instrument is no longer in the
possession of a party whose signature appears
thereon, a valid and intentional delivery by him
is presumed until the contrary is proved.
• Non-delivery of a complete instrument is
a personal defense. (Campos)
• Delivery of an instrument is a prerequisite
for liability. If the instrument is complete
in all its particulars, but is not delivered,
there is no contract. However if the
instrument is no longer in the possession
of a party who has signed it, a delivery is
presumed until the contrary is proved.
(Campos)
• If the holder of the instrument is a holder
in due course, the instrument is not
merely prima facie deemed delivered, but
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

this fact is conclusively presumed. Thus, evidence that there was no

(Campos)
• Until the same is delivered, the
instrument remains revocable.
G. INCOMPLETE AND DELIVERED
INSTRUMENTS (SEC. 14, NIL)
(1) Holder has prima facie authority to fill up
the instrument, but he must first prove
that he has the authority to fill up. For
such presumption to apply, issuance is
necessary.
Note: Prima facie authority to complete
the check does not extend to its use (i.e.,
subsequent transfer or negotiation) once
the check is completed. Only the
authority to complete the check is
presumed. The law’s use of the term
"prima facie" underscores the fact that
the authority which the law accords to a
holder is a presumption juris tantum only;
hence, subject to subject to contrary proof.
authority or that the authority granted
has been exceeded may be presented by
the maker in order to avoid liability under
the instrument. [Patrimonio v. Gutierrez
and Marasigan, G.R. No. 187769 (2014)]
(2) The instrument must be filled up strictly
in accordance with the authority given
and within reasonable time
(3) HDC may enforce the instrument as if
filled up according to (2) above.
This provision merely raises a personal
defense. (Campos)
H. COMPLETE AND DELIVERED
INSTRUMENTS
In a complete and delivered instrument,
rights and liabilities under the negotiable
instruments law attach.

Section 14 Section 15 Section 16

Delivery

Delivered Undelivered Undelivered

Completeness

(1) Wanting in any material

particular; Mechanically incomplete Mechanically incomplete
(2) Blank paper with signature

Authority of Person in Possession

(1) Prima facie authority to

complete it by filling up the May negotiate if delivered to him
blanks; No authority to complete and/or by or under the authority of the
(2) Signature operates as a prima negotiate party making, indorsing, drawing,
facie authority to fill it up for any or accepting
amount

When Enforceable

Delivery is made by or under

Filled up strictly in accordance
with authority given and within a
reasonable time
authority of the party making,
Not enforceable
indorsing, drawing, or accepting,
as the case may be

PAGE 21 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

Kind of Defense

Personal Real Personal

Rights of Holder

Can enforce the instrument. Here,

(1) If HDC, he can enforce the the instrument is in the hands of a
instrument as completed as HDC, a valid delivery thereof by all
against parties prior or parties prior to him so as to make
subsequent to the completion; them liable to him is conclusively
(2) If not a HDC, he can enforce None in the hands of any holder. presumed. Where the instrument
the instrument as completed only is no longer in the possession of a
against parties subsequent to the party whose signature appears
completion but not against those thereon, a valid and intentional
prior thereto. delivery to him is presumed until
the contrary is proved.

PAGE 22 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
V. Signature
Sec. 18, NIL. Liability of person signing in trade
or assumed name. - No person is liable on the
instrument whose signature does not appear
thereon, except as herein otherwise expressly
provided. But one who signs in a trade or
assumed name will be liable to the same
extent as if he had signed in his own name.
General rule: One whose signature does
not appear on the instrument shall not be
liable thereon.
Exceptions:
(1) The principal who signs through an agent
(2) The forger
(3) One who indorses in a separate
instrument (allonge) OR where an
acceptance is written on a separate paper
(4) One who signs his assumed or trade
name
(5) A person negotiating by delivery (as in the
case of a bearer instrument) is liable only
to his immediate indorsee.
A. SIGNING IN TRADE NAME
One who signs in a trade or assumed name
will be liable to the same extent as if he had
signed in his own name [Sec. 18, NIL]
B. SIGNATURE OF AGENT
Sec. 19, NIL. Signature by agent; authority;
how shown. - The signature of any party may
be made by a duly authorized agent. No
particular form of appointment is necessary for
this purpose; and the authority of the agent
may be established as in other cases of
agency.
Sec. 20, NIL. Liability of person signing
as agent, and so forth. - Where the
instrument contains or a person adds to his
PAGE 23 OF 320
MERCANTILE LAW
signature words indicating that he signs for or
on behalf of a principal or in a representative
capacity, he is not liable on the instrument if
he was duly authorized; but the mere addition
of words describing him as an agent, or as
filling a representative character, without
disclosing his principal, does not exempt him
from personal liability.
Signature of any party may be made by duly
authorized agent, established as in ordinary
agency.
B.1. LIABILITY OF AN AGENT
General rule: Where a person adds to his
signature words indicating that he signs on
behalf of a principal, then he is not liable if he
was duly authorized.
Exceptions:
(1) Mere addition of words describing
him as an agent WITHOUT disclosing
his principal [Sec. 20, NIL]
(2) Where a broker or agent negotiates
an instrument without indorsement,
he incurs all liabilities in Sec. 65 of the
NIL, unless he discloses name of
principal and the fact that he is only
acting as an agent. [Sec. 69, NIL]
Requisites to negative personal
liablity of agent:
(1) He must be duly authorized;
(2) He must act within the scope of his
authority
(3) He must indicate in the instrument that
he is signing merely as agent; and
(4) He must disclose his principal.
C. SIGNATURE PER PROCURATION
(2011 Bar Question)
• A signature per procuration operates as
notice to the holder that the agent has a
limited authority to sign, and the
principal is bound only in case the agent
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
in so signing acted within the actual
limits of his authority [Sec. 21, NIL]
• According to the majority rule, the words
“per proc” or “procuration” must appear
on the note for this rule in Section 21 to
be applicable (Campos)
D. INDORSEMENT BY MINOR OR
CORPORATION
• The indorsement or assignment of the
instrument by a corporation or by an
infant (minor) passes the property therein,
notwithstanding that from want of
capacity, the corporation or infant may
incur no liability thereon. [Sec. 22, NIL]
• The provision does not change the rule in
civil law on minor's contracts, which
provides that a contract enetered into by
a minor is voidable, and the minor cannot
be held liable thereon unless he ratifies it
upon reaching majority.
• However, under Section 22 of the NIL,
should the minor indorse a negotiable
instrument, although he cannot be held
liable on his contract of indorsement, title
to the instrument passes to his indorsee
and the latter can rightfully recover from
the maker, free from the defense of
minority. (Campos)
• REAL defense but available only to the
incapacitated party (i.e. the minor or the
corporation).
F. FORGERY
(3rd Most Frequently Asked Since 1992)
(2006, 2008, 2010, 2011 2015 Bar Question)
Sec. 23, NIL. Forged signature; effect of. -
When a signature is forged or made without
the authority of the person whose signature it
purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a
discharge therefor, or to enforce payment
thereof against any party thereto, can be
acquired through or under such signature,
unless the party against whom it is sought to
enforce such right is precluded from setting up
PAGE 24 OF 320
MERCANTILE LAW
the forgery or want of authority.
Counterfeit making or fraudulent alteration of
any writing, which may consist of:
(1) Signing of another’s name with intent to
defraud; or
(2) Alteration of an instrument in the name,
amount, name of payee, etc. with intent
to defraud.
General rule: When a signature is forged or
made without the authority of the person,
only the forged signature (not the instrument
itself and the other genuine signatures) is
wholly inoperative
Effects:
(1) No right to retain the instrument
(2) No right to give a discharge therefor
(3) No right to enforce payment thereof
against any party thereto can be acquired
through or under such signature
Exception: The party against whom it is
sought to be enforced is precluded from
setting up the forgery or want of authority as
a defense. [Sec. 23, NIL]
F.1 PERSONS PRECLUDED FROM SETTING
UP DEFENSE OF FORGERY (CAMPOS)
(1) Those who warrant or admit the
genuineness of the signature in question.
This includes indorsers, persons
negotiating by delivery and acceptors.
(2) Those who, by their acts, silence, or
negligence, are estopped from setting up
the defense of forgery.
(3) Those who are negligent.
F.2 RULES ON FORGERY
F.2.A. PROMISSORY NOTE
Maker’s signature forged
(1) Maker is not liable because he never
became a party to the instrument.
(2) Indorsers subsequent to forgery are liable
because of their warranties.
(3) Party who made the forgery is liable.
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

[Associated Bank vs. CA, G.R. No. 107382

(1996)]
Payee’s signature forged
(4) Indorsers subsequent to forgery are liable
(1) Payee is not liable.
(such as collecting bank or last endorser)
(2) Maker is still liable. (REASON:
Indorsement is not necessary to title and (5) Party who made the forgery is liable
the maker engages to pay holder)
Payee’s signature forged
(3) Indorsers subsequent to forgery are liable.
(4) Party who made the forgery is liable. (1) Payee is not liable
(2) Drawer is still secondarily liable
Indorser’s signature forged
(3) Drawee is liable if it paid or accepted
(1) Maker, payee, indorser whose signature/s the instrument [Sec. 62, NIL; Price v.
was/were forged, and all indorsers Neal, 3 Burr. 1354 (1762)], but it may
preceding the forgery are not liable. pass liability back through the
(2) Indorsers subsequent to forgery are liable. collection chain
(3) Party who made the forgery is liable.
(4) Indorsers subsequent to forgery are
liable (such as collecting bank)
F.2.B. BILL OF EXCHANGE
(5) Party who made the forgery is liable
Drawer’s signature forged
Indorser’s signature forged
(1) Drawer is not liable because he was never
(1) Drawer, payee, indorser whose
a party to the instrument.
signature/s was/were forged and all
(2) Drawee is liable if it paid or accepted the indorsers preceding the forgery are
instrument (no recourse to drawer) not liable.
because he admitted the genuineness of
(2) Drawee is liable if it paid or accepted
the drawer’s signature [Sec. 62, NIL; Price
the instrument [Sec. 62, NIL; Price v.
v. Neal, 3 Burr. 1354 (1762)]
Neal, 3 Burr. 1354 (1762)]
(3) Drawee cannot recover from the
(3) Indorsers subsequent to forgery are
collecting bank because there is no privity
liable. (such as collecting bank)
between the collecting bank and the
drawer. The collecting bank does not give (4) Party who made the forgery is liable.
any warranty re: the drawer’s signature.

SUMMARY OF RULES ON FORGERY AS TO PROMISSORY NOTES

Order Instrument Bearer Instrument

Maker’s Signature Forged

Maker is not liable because he never became a party

Same
to the instrument.

Indorsers subsequent to forgery are liable because Indorsers may be made liable to those persons who
of their warranties. obtain title through their indorsements.

Payee’s Signature Forged

Maker and payee not liable. Maker is liable.

Indorsers subsequent to forgery are liable because Indorsers may be made liable to those persons who
of their warranties. obtain title through their indorsements.

PAGE 25 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

Order Instrument Bearer Instrument

Indorser’s Signature Forged

Maker, payee and indorser whose signature was
forged are not liable.
Indorsers subsequent to forgery are liable because
of their warranties.
Maker is liable. Indorsement is not necessary to
pass title and the maker engages to pay any bearer
of the instrument.
Only the indorser whose signature was forged can
raise the defense of forgery against a HDC.

SUMMARY OF RULES ON FORGERY AS TO BILLS OF EXCHANGE

Order Instrument Bearer Instrument
Drawer’s Signature Forged
Drawer is not liable because he was never a party to
Same
the instrument.
Drawee-acceptor is liable, without recourse to
Drawee-acceptor is liable if it paid. It cannot recover
drawer, if it paid because he admitted the genuiness
from the collecting bank because it is bound to
of the drawer’s signature.
know the drawer’s signature since the latter is its
depositor.
Drawee also cannot recover from the collecting
bank because there is no privity of contract between
The drawee may recover from the drawer when the
the collecting bank and the drawer. The collecting
latter’s negligence is the proximate cause of the loss
bank does not give any warranty regarding the
or contributed thereto.
signature of the drawer.
Indorsers subsequent to forgery (such as collecting Indorsers may be made liable to those persons who
bank or last endorser) are liable. obtain title through their indorsements.
Payee’s Signature Forged
Drawer, drawee and payee not liable. Drawer is liable (his indorsement is not necessary to
pass title).
Cut-off rule applies.
Drawee is liable (no privity between drawer and
Indorsers subsequent to forgery (such as collecting payee because indorsement of payee is not
bank) are liable without prejudice to their right to necessary).
proceed against the forger.
Payee is not liable.

Collecting bank is liable because of warranty.

Indorser’s Signature Forged
Drawer, payee and indroser whose signatures were
forged are not liable.
Cut-off rule does not apply.
Drawee is liable if it paid.
Indorsers subsequent to forgery (such as collecting
bank) are liable.
However, it may recover from the person who forged
the indorsement on the check and deposited or
encashed the same.
Drawer is liable even if special indorsement was
forged because indorsement is not necessary to
title.
Drawee is liable.
Indorser whose signature was forged is liable
because indorsement is not necessary to title.

PAGE 26 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
G. ACCEPTANCE AND PAYMENT
UNDER MISTAKE
Sec. 62, NIL. Liability of acceptor. - The
acceptor, by accepting the instrument,
engages that he will pay it according to the
tenor of his acceptance and admits:
(1) The existence of the drawer, the
genuineness of his signature, and his
capacity and authority to draw the
instrument; and
(2) The existence of the payee and his
then capacity to indorse.
(1) W hen the drawee accepts or pays a
forged instrum ent
• Price v. Neal doctrine: As between equally
innocent persons, the drawee who pays
money on, or accepts, a check or draft the
signature on which was forged CANNOT
recover the money from the one who
received it. The drawee is bound to know
the signature of its depositor.
• A bank is bound to know the signatures of
its depositors. If a bank pays a forged
check it must be considered as making
the payment out of its own funds and
cannot charge the account of the
depositor whose signature was forged.
[PNB vs. Quimpo, G.R. No. L-53194
(1988)]
• A bank is liable, irrespective of its good
faith, in paying a forged check. [Samsung
vs. Far East Bank, G.R. No. 129015
(2004)]
(2) Extensions of Price v. Neal
doctrine
The bar to recovery on the part of a drawee
who pays money on, or accepts, a check or
draft, is extended to overdrafts and stop
payment orders.
a) Overdraft occurs when a check is issued
for an amount more than what the
drawer has in deposit with the drawee
bank.
PAGE 27 OF 320
MERCANTILE LAW
Rule: The drawee who pays the holder of the
bill cannot recover from the holder what he
paid under mistake. (Campos)
b) Stop Paym ent Order is one issued by
the drawer of a check countermanding
his first order to the drawee bank to pay
the check.
Rule: The drawee bank is bound to follow the
order, provided it is received prior to its
certification or payment of the check.
(Campos)
(3) Effects of Negligence of Depositor
• If such negligence of the depositor was
the proximate cause of the loss, the
drawee-bank would NOT be liable.
• The negligence of the depositor/drawer
would consist of the failure to to carefully
examine bank statements, cancelled
checks, his check stubs, and other
pertinent records within a reasonable
time and to report any errors without
unreasonable delay to the drawee bank.
• If a drawer/depositor’s negligence and
delay should cause a bank to honor a
forged check, the drawer cannot later
complain should bank refuse to recredit
his account. (Campos)
(4) Effect of Paym ent under Forged
Indorsements
• In the case of a drawee's acceptance or
payment of a bill on which only an
INDORSEMENT has been forged, the
drawee can recover the amount paid out
by him. RATIONALE: The drawee makes
no warranty as to the genuineness of any
indorsement. (Campos)
(5) Effect of negligence of drawee in
inform ing recipient of forgery
• The rule is that a drawee's acceptance or
payment of a bill on which only an
INDORSEMENT has been forged is not a
bar to his right to recover the amount
paid out by him; however, there is an
exception to this rule.
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

• If it is shown that the drawee on learning o However, it should be noted that as

of the forgery did not give prompt notice
of it to the holder and that damage
resulted to said holder, recovery by the
drawee is barred [Clearfield Trust Co. vs.
US, 318 U.S. 363 (1943)]
(6) Effect of negligence of drawer in
case of forged indorsem ent on checks
• The drawer, as soon as he comes to know
of a forged indorsement should promptly
notify the drawee bank. Otherwise,
should his negligent delay be the
proximate cause of any subsequent loss
to the bank, the latter may properly
charge it to the drawer's account.
an exception to the rule that a drawee
bank is not liable for a forged
indorsement, when the negligence of
the drawee bank is the proximate
cause of the collecting bank’s
payment of a check with a forged
indorsement, the drawee bank may
be held liable to the collecting bank.
o Furthermore, when both the
collecting bank and the drawee bank
are guilty of negligence, the degree of
negligence of each will be weighed in
considering the amount of loss which
each should bear. [BPI vs. CA, G.R. No.
102383 (1992)]

(7) Com paring the liability of a

collecting bank and a drawee bank
• A collecting bank is only liable for forged
indorsements and not forgeries of the
drawer or maker’s signature. [PNB vs. CA,
G.R. No. L-26001 (1968)]
o Rationale: In presenting the checks
for clearing, the collecting agent
made an express guarantee on the
validity of “all the prior
endorsements.”
• The collecting bank or last indorser
generally suffers the loss because it has
the duty to ascertain the genuineness of
all prior indorsements considering that
the act of presenting the check for
payment to the drawee is an assertion
that the party making the presentment
had done its duty to ascertain the
genuineness of the indorsements. [BPI vs.
CA, G.R. No. 102383 (1992)]
• A drawee bank is not liable for forged
indorsements.
o Rationale: The drawee bank is not
similarly situated as the collecting
bank because the former makes no
warranty as to the genuineness of any
indorsement. The drawee bank’s duty
is but to verify the genuineness of the
drawer’s signature and not of the
indorsement because only the drawer
is its client.
PAGE 28 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
VI. Consideration
Sec. 25, NIL. Value, what constitutes. — Value
is any consideration sufficient to support a
simple contract. An antecedent or pre-existing
debt constitutes value; and is deemed such
whether the instrument is payable on demand
or at a future time.
Sec. 191, NIL. Definition and meaning of
terms. - In this Act, unless the contract
otherwise requires:
x---x
"Value" means valuable consideration;
x---x
“Value” and “consideration” are generally
convertible terms. However, they may have
different implications.
“Consideration” is the proper term when the
payee of a note sues the maker, or the payee
of a bill sues the drawer, or an indorsee sues
his immediate indorser.
“Value” is the proper term when a holder
sues any party to the instrument with whom
he himself has not dealt, the term “value” is
more appropriate.
An antecedent or pre-existing debt
constitutes value; and is deemed such
whether the instrument is payable on
demand or at a future time. [Sec. 25, NIL]
Value need not be full and a holder will be
one for value even if he gave less than the
face value of the instrument, provided the
intention of the transferor is to transfer the
full amount represented by the instrument.
A. WHO IS A HOLDER FOR VALUE
(HFV)?
1. A holder of an instrument for which value,
which need not be in full, has been given
at any given time but only with respect to
all parties who have become parties to
the instrument prior to the time at which
value has been given. [Sec 26, NIL]
2. A holder who has a lien on the instrument
but only to the extent of his lien. [Sec 27,
NIL] (2011 Bar Question)
PAGE 29 OF 320
MERCANTILE LAW
B. BURDEN OF PROOF -
PRESUMPTION OF CONSIDERATION
Sec. 24, NIL. Presumption of consideration. -
Every negotiable instrument is deemed prima
facie to have been issued for a valuable
consideration; and every person whose
signature appears thereon to have become a
party thereto for value.
Because of the presumption, it is immaterial
whether or not “for value received” appears in
the instrument.
C. EFFECT OF WANT OF
CONSIDERATION
Sec. 28, NIL. Effect of want of consideration. -
Absence or failure of consideration is a matter
of defense as against any person not a holder
in due course; and partial failure of
consideration is a defense pro tanto, whether
the failure is an ascertained and liquidated
amount or otherwise.
Absence or failure of consideration is a
matter of defense as against any person not a
holder in due course, hence, it is a personal
defense.
Partial failure of consideration is a defense
pro tanto, meaning a defense to the extent of
the failure. (Abad)
Effect of an illicit or unlawful
consideration: Illicit or illegal
consideration does not affect the negotiability
of the instrument as validity of consideration
is not one of the requisites of a negotiable
instrument. It is merely constitutes a defect of
title hence such illegality of consideration is
merely a personal defense which cannot be
raised against a holder in due course. [Sec. 55
and 57, NIL] [2009 bar question]
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

VII. Accommodation accommodation party. [Stelco Marketing

Corp. v. CA, G.R. No, 96160 (1992)]
Party
B. ACCOMMODATION PARTY AS
Sec. 29, NIL. Liability of accommodation SURETY
party. - An accommodation party is one who
has signed the instrument as maker, drawer, • An accommodation party is generally
acceptor, or indorser, without receiving value regarded as a surety for the party
therefor, and for the purpose of lending his accommodated.
name to some other person. Such a person is
• When the accommodation party makes
liable on the instrument to a holder for value,
payment to holder of the note, he has the
notwithstanding such holder, at the time of
right to sue the accommodated party for
taking the instrument, knew him to be only an
reimbursement. [Cañeda v. CA, G.R. No.
accommodation party.
81322 (1990)]
• Note: A corporation cannot act as an
Accom modation Party
accommodation party. The issue or
(1) Must be a party to the instrument, endorsement of negotiable instruments
signing as maker, drawer, acceptor, or by a corporation without consideration
indorser; and for the accommodation of another is
ultra vires [Crisologo v. CA, G.R. No.
(2) Must not have receieved value therefor;
80599 (1989)]
and
(3) Signed for the purpose of lending his
Accom modation Party v. Regular
name to some other person.
Party

A. LIABILITY OF AN ACCOMMODATION Accommodation Party Regular Party

PARTY Purpose
• Whether the liability is primary or Signs instrument for
secondary will depend on whether he the purpose of Does not sign the
signs as a maker, acceptor, drawer or lending his name or instrument for the
indorser. credit to some other same purpose
person
• The holder for value to whom the Value Received
instrument thus executed is subsequently
negotiated has a right of recourse against Signs the intrument Signs the instrument
the accommodation party in spite of the without receiving for value
former’s knowledge that no consideration value therefor
passed between the accommodation and Absence or Failure of Consideration as Defense
accommodated parties. [Sec. 28, NIL]
Cannot avail of the Can avail of said
• Does this mean that the accommodation defense of absence or defense against a
party is liable to a holder even if he is not failure of person not a holder in
a holder in due course, provided he is a consideration against due course
holder for value? The Supreme Court has a holder not in due
ruled that an accommodation party is course
liable ONLY to a HOLDER IN DUE Right to Sue
COURSE. However, the mere fact that the
holder knew of the accommodation does After paying the May not sue any
not prevent him from being a holder in holder, may sue the subsequent party for
due course in order to recover from the accommodated party reimbursement
for reimbursement

PAGE 30 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

and completed by delivery.

VIII. Negotiation B.1. BY DELIVERY – IF PAYABLE TO

BEARER

Sec. 30, NIL. What constitutes negotiation. - Sec. 191, NIL. Definition and meaning of
An instrument is negotiated when it is terms. - In this Act, unless the contract
transferred from one person to another in such otherwise requires:
manner as to constitute the transferee the x---x
holder thereof. If payable to bearer, it is "Delivery" means transfer of possession,
negotiated by delivery; if payable to order, it is actual or constructive, from one person to
negotiated by the indorsement of the holder another;
and completed by delivery. x---x
"Issue" means the first delivery of the
instrument, complete in form, to a person who
A. NEGOTIATION DISTINGUISHED takes it as a holder;
FROM ASSIGNMENT x---x

Delivery means transfer of possession of

Transfer is a broader term than negotiation. If
an instrument is transferred without
negotiation, the transfer is a mere
assignment which constitutes the transferee
as a mere assignee, not a holder, subject to
all defenses existing among prior parties.
Transfer thus includes both an ordinary
assignment and a negotiation. (Campos)
instrument by the maker or drawer, with
intent to transfer title to the payee and
recognize him as holder thereof
Issuance is the FIRST delivery of the
instrument complete in form to a person who
takes it as a holder.

Requisites
Negotiation Assignment (1) Mechanical act of writing the instrument
completely and in accordance with the
The transfer of the The transferee does requirements of Section 1 of the NIL; and
instrument from one not become a holder,
person to another so nor can he become a (2) The delivery of the complete instrument
as to constitute the holder in due course; by the maker or drawer, with the
transferee the holder and he merely steps intention of giving effect to it, to the
thereof. [Sec.30, NIL] into the shoes of the payee or holder.
transferor. As such,
any defense available
against the transferor Presumption of delivery
is available against • Where the instrument is no longer in the
the transferee. possession of a party whose signature
appears thereon, a valid and intentional
delivery by him is presumed until the
B. MODES OF NEGOTIATION contrary is proved [Sec. 16, NIL]
• If it is in the hands of a holder in due
Sec. 30, NIL. What constitutes negotiation. - course, the presumption of a valid
An instrument is negotiated when it is delivery is conclusive [Sec. 16, NIL]
transferred from one person to another in such
manner as to constitute the transferee the
holder thereof. If payable to bearer, it is Presumption as to date
negotiated by delivery; if payable to order, it is
negotiated by the indorsement of the holder • Date is not an essential element of
negotiability; it is not included in the
PAGE 31 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
requirements for an instrument to be
negotiable under Sec. 1 of the NIL.
• An undated instrument is considered to
be dated as of the time it was issued [Sec.
17 (c), NIL]
B.2. BY INDORSEMENT COMPLETED BY
DELIVERY – IF PAYABLE TO ORDER
Sec. 191, NIL. Definition and meaning of
terms. - In this Act, unless the contract
otherwise requires:
x---x
"Indorsement" means an indorsement
completed by delivery;
x---x
B.2.A. INDORSEM ENT; HOW DONE
Sec. 31, NIL. Indorsement; how made. - The
indorsement must be written on the
instrument itself or upon a paper attached
thereto. The signature of the indorser, without
additional words, is a sufficient indorsement.
(1) W here placed – The indorsement
must be written [Sec. 31, NIL]:
(a) On the instrument itself [Sec. 31, NIL] , or
(b) On a separate piece of paper attached to
the instrument called “allonge”[Sec. 31, NIL]
(2) Signature of the indorser,
without additional words, is a •
sufficient indorsement [Sec. 31, NIL]
(3) Must be of the ENTIRE instrum ent
Sec. 32, NIL. Indorsement must be of entire
instrument. - The indorsement must be an
indorsement of the entire instrument. An
indorsement which purports to transfer to the
indorsee a part only of the amount payable,
or which purports to transfer the instrument
to two or more indorsees severally, does not
operate as a negotiation of the instrument.
But where the instrument has been paid in
part, it may be indorsed as to the residue.
PAGE 32 OF 320
MERCANTILE LAW
• CANNOT indorse a part only of the
amount payable; BUT if the instrument
has been paid in part, then the
instrument may be indorsed as to the
residue [Sec. 32, NIL] (2012 Bar Question)
• CANNOT transfer the instrument to two
or more indorsees severally [Sec. 32, NIL]
• If not an indorsement of the entire
instrument, the transfer remains valid,
but as a mere assignment which subjects
the holder to all defenses on the
instrument (Campos)
(4) If name misspelled in
indorsement, indorsement will be
prim a facie deemed not valid.
Sec. 43, NIL. Indorsement where name is
misspelled, and so forth. - Where the name of
a payee or indorsee is wrongly designated or
misspelled, he may indorse the instrument as
therein described adding, if he thinks fit, his
proper signature.
• The indorsement should be made by the
holder in the manner he was designated,
otherwise the signature will prima facie
not be a valid indorsement of the
instrument [Sec 43, NIL]
(5) Indorsem ent where there are joint
payees
Where the instrument is payable or
indorsed to “A and B,” they are joint
payees and an indorsement by either A or
B only will not constitute a valid
negotiation, UNLESS the one indorsing is
authorized by the other. (Campos)
• But where the instrument is payable to “A
or B”, they payees are merely in the
alternative, and either one may valdily
negotiate the same. (Campos)
C. KINDS OF INDORSEMENT
Sec. 33, NIL. Kinds of indorsement. - An
indorsement may be either special or in blank;
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
and it may also be either restrictive or qualified
or conditional.
Four bases of classification of
indorsem ents under the NIL:
(1) Special or in blank
(2) Restrictive or Non-Restrictive
(3) Qualified or unqualified
(4) Conditional or unconditional
All of the four bases of classification coexist
with each other; thus, an indorsement may be
special and qualified at the same time. It may
also be special and unqualified, special and
restrictive, special, unrestrictive and
unqualified and so on. (Campos)
C.1. AS TO MANNER OF FUTURE METHOD
OF NEGOTIATION
Sec. 34, NIL. Special indorsement;
indorsement in blank. - A special indorsement
specifies the person to whom, or to whose
order, the instrument is to be payable, and the
indorsement of such indorsee is necessary to
the further negotiation of the instrument. An
indorsement in blank specifies no indorsee,
and an instrument so indorsed is payable to
bearer, and may be negotiated by delivery.
Sec. 40, NIL. Indorsement of instrument
payable to bearer. - Where an instrument,
payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery;
but the person indorsing specially is liable as
indorser to only such holders as make title
through his indorsement.
Sec. 35, NIL. Blank indorsement; how changed
to special indorsement. - The holder may
convert a blank indorsement into a special
indorsement by writing over the signature of
the indorser in blank any contract consistent
with the character of the indorsement.
Special
PAGE 33 OF 320
MERCANTILE LAW
• Specifies the person to whom/to whose
order the instrument is to be payable; and
the indorsement of such indorsee is
necessary to further negotiation.
• A special indorser is liable to all
subsequent holders, unless the
instrument is an originally bearer
instrument, in which case he is liable only
to those who take title through his
indorsement. [Sec. 40, NIL]
• An instrument, payable to bearer, and
indorsed specially, may nevertheless be
further negotiated by delivery. [Sec 40,
NIL]
• Originally bearer instrument always
remains a bearer instrument. (Sundiang
and Aquino)
Blank
• Specifies no indorsee, instrument so
indorsed is payable to bearer, and may be
negotiated by delivery
• The holder may convert a blank
indorsement into a special indorsement
by writing over the signature of the
indorser in blank any contract consistent
with the character of the indorsement.
[Sec 35, NIL]
• An order instrument may be converted
into a bearer instrument by means of a
blank indorsement, and may be later
reconverted into an order instrument by a
subsequent special indorsement
C.2. AS TO TITLE TRANSFERRED
Sec. 36, NIL. When indorsement restrictive. -
An indorsement is restrictive which either:
(a) Prohibits the further negotiation of the
instrument; or
(b) Constitutes the indorsee the agent of
the indorser; or
(c) Vests the title in the indorsee in trust
for or to the use of some other
persons.
But the mere absence of words implying power
to negotiate does not make an indorsement
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
restrictive.
Sec. 37, NIL. Effect of restrictive indorsement;
rights of indorsee. - A restrictive indorsement
confers upon the indorsee the right:
(a) to receive payment of the instrument;
(b) to bring any action thereon that the
indorser could bring;
(c) to transfer his rights as such indorsee,
where the form of the indorsement
authorizes him to do so.
But all subsequent indorsees acquire only the
title of the first indorsee under the restrictive
indorsement.
(1) Restrictive – Such indorsement either:
(a) Prohibits further negotiation of
instrument
(b) Constitutes indorsee as agent of
indorser
Vests title in indorsee in trust for another [Sec
36, NIL]
RIGHTS OF RESTRICTIVE INDORSEE
• Receive payment
• Bring any action thereon that the indorser
could bring.
• Transfer his rights as such indorsee, but
all subsequent indorsees acquire only the
title of first indorsee under restrictive
indorsement. [Sec 37, NIL]
(2) Non-restrictive
C.3. AS TO KIND OF LIABILITY ASSUMED
BY INDORSER
Sec. 38, NIL. Qualified indorsement. - A
qualified indorsement constitutes the indorser
a mere assignor of the title to the instrument.
It may be made by adding to the indorser's
signature the words "without recourse" or any
words of similar import. Such an indorsement
does not impair the negotiable character of
the instrument.
PAGE 34 OF 320
MERCANTILE LAW
(1) Qualified
• Constitutes indorser as mere assignor of
title
• Made by adding the words “without
recourse”, “sans recourse,” “indorser not
holder,” “at the indorser’s own riske,” and
other terms of similar import. [Sec. 38,
NIL].
• But this does not mean that the
transferee only has the rights of an
assignee; transfer remains a negotiation
and transferee can still be a holder
capable of acquiring a title free from
defenses of prior parties.
Effects:
1. Relieves the qualified indorser of his
liability to pay the instrument should the
maker be unable to pay
2. The qualified indorser does not guarantee
the solvency of the maker, but merely his
legal title to the instrument
3. A qualified indorsement does not impair
the negotiable charater of the
intstrument
(2) Non-qualified
C.4. AS TO PRESENCE/ABSENCE OF
EXPRESS LIMITATIONS
Sec. 39, NIL. Conditional indorsement. - Where
an indorsement is conditional, the party
required to pay the instrument may disregard
the condition and make payment to the
indorsee or his transferee whether the
condition has been fulfilled or not. But any
person to whom an instrument so indorsed is
negotiated will hold the same, or the proceeds
thereof, subject to the rights of the person
indorsing conditionally.
(1) Conditional
• Additional condition annexed to
indorser’s liability; such condition must
be expressed
• Where an indorsement is conditional, a
party required to pay the instrument may
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
disregard the condition, and make
payment to the indorsee or his transferee,
whether condition has been fulfilled or
not.
• But any person to whom an instrument so
indorsed is negotiated, will hold the same,
or the proceeds thereof, subject to the
rights of the person indorsing
conditionally. [Sec. 39, NIL]
(2) Unconditional
C.5. OTHER KINDS OF INDORSEMENT
(1) Absolute – One by which the indorser
binds himself to pay, upon no other
condition than the failure of prior parties
to do so, and of due notice to him of such
failure
(2) Joint – All must indorse when an
instrument is payable to the order of two
or more payees or indorsees who are not
partners. [Sec. 41, NIL]
Exceptions:
• Where the payee or indorsee are partners;
and
• Where the payee or indorsee indorsing
has authority to indorse for the others.
(3) Irregular – A person who, not otherwise
a party to an instrument, places thereon
his signature in blank before delivery.
[Sec. 64, NIL]
Liability of Irregular Indorser:
• If the instrument is payable to the order
of a third person, he is liable to the payee
and to all subsequent parties.
• If the instrument is payable to the order
of the maker or drawer, or is payable to
bearer, he is liable to all parties
subsequent to the maker or drawer.
• If he signs for the accommodation of the
payee, he is liable to all parties
subsequent to the payee. [NIL, Sec. 64]
PAGE 35 OF 320
MERCANTILE LAW
IX. Rights of the Holder
A. DEFINITION OF A HOLDER
Sec. 191, NIL. Definition and meaning of terms.
- In this Act, unless the contract otherwise
requires:
x---x
"Holder" means the payee or indorsee of a bill
or note who is in possession of it, or the bearer
thereof;
A.1. RIGHTS OF A HOLDER
A holder is a payee or indorsee of a bill or
note who is in possession of it, or the bearer
thereof [Sec. 191, NIL]. He has the following
rights [Sec. 51, NIL]:
(1) To sue on the instrument in his
own nam e
• Unindorsed instruments: Section. 49, NIL.
Transfer without indorsement; effect of.
Where the holder of an instrument
payable to his order transfers it for value
without indorsing it, the transfer vests in
the transferee such title as the transferor
had therein, and the transferee acquires
in addition, the right to have the
indorsement of the transferor. But for the
purpose of determining whether the
transferee is a holder in due course, the
negotiation takes effect as of the time
when the indorsement is actually made.
Note: This section applies only to an
instrument payable to the order of the
transferor. This cannot apply to bearer
instruments.
• Cancellation of indorsement: Section 48,
NIL. Striking out indorsement. The holder
may at any time strike out any
indorsement which is not necessary to his
title. The indorser whose indorsement is
struck out, and all indorsers subsequent
to him, are thereby relieved from liability
on the instrument.
• Indorsement by agent: Section 20, NIL.
Liability of person signing as agent, and so
forth. Where the instrument contains or a
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
person adds to his signature words
indicating that he signs for or on behalf of
a principal or in a representative capacity,
he is not liable on the instrument if he
was duly authorized; but the mere
addition of words describing him as an
agent, or as filling a representative
character, without disclosing his principal,
does not exempt him from personal
liability.
(2) Payment in due course to the
holder discharges instrum ent
B. HOLDER IN DUE COURSE [HDC]
(2nd Most Frequently Asked since 1992)
Sec. 52, NIL. What constitutes a holder in due
course. - A holder in due course is a holder
who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon
its face;
(b) That he became the holder of it
before it was overdue, and without
notice that it has been previously
dishonored, if such was the fact,
(c) That he took it in good faith and for
value;
(d) That at the time it was negotiated to
him he had no notice of any infirmity
in the instrument or defect in the title
of the person negotiating it.
Sec. 58, NIL. When subject to original
defense. - In the hands of any holder other
than a holder in due course, a negotiable
instrument is subject to the same defenses as
if it were non-negotiable. But a holder who
derives his title through a holder in due
course, and who is not himself a party to any
fraud or illegality affecting the instrument,
has all the rights of such former holder in
respect of all parties prior to the latter.
Section 59, NIL. Who is deemed holder in due
course. - Every holder is deemed prima facie
to be a holder in due course; but when it is
shown that the title of any person who has
negotiated the instrument was defective, the
burden is on the holder to prove that he or
PAGE 36 OF 320
MERCANTILE LAW
some person under whom he claims acquired
the title as holder in due course. But the last-
mentioned rule does not apply in favor of a
party who became bound on the instrument
prior to the acquisition of such defective title.
B.1. WHO ARE HOLDERS IN DUE COURSE
(1) Holder in due course [HDC] under Sec. 52,
NIL
(2) HDC under Sec. 58, NIL: A holder who
DERIVES title to the instrument through
a HDC has all the rights of the latter even
though he himself satisfies none of the
requirements of due course holding
HDC under Sec. 59, NIL
[presum ption]: Every holder is deemed
prima facie to be a holder in due course
Sec. 191 of the NIL defines holder as the
payee or indorsee of a bill or note, who is in
possession of it, or the bearer thereof. The
word “holder” in the first clause of Sec. 52
and in the second subsection thereof may be
replaced by the definition in Sec. 191 so as to
read “a holder in due course is a payee or an
indorsee in possession, etc.” [De Ocampo vs.
Gatchalian, G.R. No. L-15126 (1961)]
B.2. THE SIGNIFICANCE OF DUE COURSE
HOLDING
• The question of whether a holder is a
holder in due course or not is significant
only when there is an existing defense
between prior parties. (Campos)
• A holder in due course can acquire a
better title than his predecessors because
he takes the instrument free from any
defect of title of prior parties. He is
furthermore free from defenses available
to prior parties among themselves.
(Campos)
• A holder not in due course, on the other
hand, takes the instrument subject to all
defenses because he is treated as a
transferee of a non-negotiable paper.
Real defenses, however, which attach to
the instrument itself would be available
even against a holder in due course.
(Campos)
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
B.3. RIGHTS OF A HOLDER IN DUE
COURSE
Sec. 51, NIL. Right of holder to sue; payment.
- The holder of a negotiable instrument may
to sue thereon in his own name; and payment
to him in due course discharges the
instrument.
Sec. 57, NIL. Rights of holder in due course. -
A holder in due course holds the instrument
free from any defect of title of prior parties,
and free from defenses available to prior
parties among themselves, and may enforce
payment of the instrument for the full
amount thereof against all parties liable
thereon.
Sec. 58, NIL. When subject to original
defense. - In the hands of any holder other
than a holder in due course, a negotiable
instrument is subject to the same defenses as
if it were non-negotiable. But a holder who
derives his title through a holder in due
course, and who is not himself a party to any
fraud or illegality affecting the instrument,
has all the rights of such former holder in
respect of all parties prior to the latter.
(1) To sue on the instrument in his own name
[Sec. 51, NIL]
(2) To receive payment on the instrument
[Sec. 51, NIL]
(3) Holds instrument free of any defect of
title of prior parties [Sec. 57, NIL]
(4) Free from defenses available to prior
parties among themselves [Sec. 57, NIL]
(5) May enforce payment of instrument for
full amount, against all parties liable
[Sec. 57, NIL]
PAGE 37 OF 320
MERCANTILE LAW
B.4. REQUISITES OF A HOLDER IN DUE
COURSE
Sec. 52, NIL. What constitutes a holder in due
course.- A holder in due course is a holder
who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon
its face;
(b) That he became the holder of it
before it was overdue, and without
notice that it has been previously
dishonored, if such was the fact;
(c) That he took it in good faith and for
value;
(d) That at the time it was negotiated to
him, he had no notice of any infirmity
in the instrument or defect in the title
of the person negotiating it.
These four requisites must concur. If any one
of them is absent, the holder cannot be
considered a holder in due course. (Campos)
B.4.A. COM PLETE AND REGULAR
UPON ITS FACE
An instrument is incomplete when it is
wanting in any material particular or
particular proper to be inserted in a
negotiable instrument without which the
same will not be complete. (De Leon)
B.4.B. BECAM E THE HOLDER BEFORE
OVERDUE AND W ITHOUT NOTICE OF
PREVIOUS DISHONOR
“Overdue” – The Following Cannot Be
Holders in Due Course:
(a) A holder who became such after the
date of maturity of the instrument
[instrument is overdue; Sec. 53, NIL]
(b) In case of demand instruments: a
holder who negotiates it after an
unreasonable length of time after its
issue [Sec. 53, NIL]
The fact that the instrument is overdue is a
strong indication that it was dishonored and
the law puts the potential holder on inquiry
as to whether it was dishonored and the
reason therefor. (Campos)
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

An instrument may be dishonored either by “Value”

non-acceptance or by non-payment.
(1) Any consideration sufficient to support a
(1) Dishonor by non-acceptance – takes simple contract [Sec. 25, NIL]
place when the drawee refuses to accept
(2) An antecedent or pre-existing debt
the order of the drawer as stated in the
constitutes value, whether the instrument
bill. Can refer only to a bill of exchange.
is payable on demand or at a future time
(2) Dishonor by non-paym ent – takes [Sec. 25, NIL]
place when the party primarily liable fails
to pay the instrument at the date of
maturity. (Campos) “Holder For Value”
(1) Where value has at any time been given
for the instrument, the holder is deemed
Notes:
a holder for value in respect to all parties
(1) An overdue instrument is still negotiable, who become such prior to that time [Sec.
but it is subject to the defenses (real and 26, NIL]; and
personal) existing at the time of the
(2) Where the holder has a lien on the
transfer.
instrument, he is deemed a HFV to the
(2) As to what constitutes a reasonable time, extent of his lien [Sec .27, NIL]
regard is to be had to the nature of the
The holder is a holder for value only to the
instrument, the usage of trade or
extent that the consideration agreed upon
business with respect to such instrument,
has been paid, delivered, or performed.
and the facts of the particular case. [Sec.
(Sundiang and Aquino)
193, NIL]
A negotiable instrument may be given as a
(3) An instrument is not invalid for the
gift to the indorsee or transferee. In such
reason only that it is ante-dated or
cases, whatever defenses can be set up
postdated provided it is not done for an
against the transferor can also be set up
illegal or fraudulent purpose. The person
against the transferee, but where the holder
to whom an instrument so dated is
gave valuable consideration for the note and
delivered acquires the title thereto as of
the other requisites of Sec. 52 are present, he
the date of delivery [Sec. 12, NIL]
will be free from such defenses.
(4) Instruments with fixed maturity
Value need not be full and a holder will be
but subject to acceleration: ultimate
one for value even if he gave less than the
date of maturity is the date of maturity for
face value of the instrument, provided that
the purpose of determining whether a
intention of the transferor is to transfer the
purchaser is a HDC
full amount represented by the instrument.
(5) Undated instrum ents: Prima facie (Campos)
presumption that it was negotiated
Presumption: Every negotiable instrument
before it was overdue [Sec. 45, NIL]
is deemed prima facie issued for valuable
consideration; and every person whose
signature appears thereon is deemed to have
B.4.C. THAT HE TOOK IT IN GOOD
become a party thereto for value. [Sec. 24,
FAITH AND FOR VALUE
NIL]
“Good Faith”
Such presumption cannot be overcome by the
Holder must have taken the instrument in petitioner’s bare denial of receipt of the
good faith and that at the time it was consideration. [Bayani v. People, G.R. No.
negotiated to him he had no notice of any 154947 (2004)]
infirmity in the instrument or defect in the
title of the person negotiating it. (Campos)
B.4.D. NO NOTICE OF INFIRMITY IN
THE INSTRUMENT OR DEFECT IN THE
PAGE 38 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
TITLE OF THE PERSON NEGOTIATING
IT
“Defective title”
Sec. 55, NIL. When title defective. – The title
of a person who negotiates an instrument is
defective within the meaning of this act when
he obtained the instrument, or any signature
thereto, by fraud, duress, or force and fear, or
other unlawful means, or for an illegal
consideration, or when he negotiates it in
breach of faith, or under such circumstances
as amount to a fraud.
Title is defective when [Sec. 55, NIL]
(1) instrument/signature obtained by fraud,
duress, force or fear or other unlawful
means OR for an illegal consideration; or
(2) instrument is negotiated in breach of
faith, or fraudulent circumstances
Title is not defective when at the time it was
negotiated to him, he had no notice of:
(1) any infirmity in instrument
(2) any defect in title of person negotiating
Note: Due course holding is not affected by
the holder’s acquisition of knowledge after he
has taken the instrument.
To constitute notice of an infirmity in the
instrument or defect in the title of the person
negotiating the same, the person to whom it
is negotiated must have had actual
knowledge of the infirmity or defect, or
knowledge of such facts that his action in
taking the instrument amounted to bad faith.
[Sec. 56, NIL]
A transferee who receives notice of any
infirmity or defect before he has paid the full
amount for the instrument will be deemed a
HDC only to the extent of the amount
therefore paid by him [Sec.54, NIL]
Gross negligence in itself would not
constitute notice since it is not the equivalent
of actual knowledge nor of bad faith.
PAGE 39 OF 320
MERCANTILE LAW
“Suspicious circumstances”
General rule: A purchaser of an instrument
is not required to investigate every suspicious
circumstance; failure to investigate such
circumstances does not constitute him as
being in bad faith or having a notice of defect.
(Campos)
Rationale: The general principle that a
purchaser who has knowledge of certain facts
is put on inquiry does not operate to its full
extent in the law of negotiable instruments.
Negotiable instruments are usually issued in
pursuance of commercial transactions where
time is of the essence. To require
investigation of every suspicious
circumstance would hamper their function of
facilitating exchange; thus negligence in
tracking down a suspicious circumstance
which would put a prudent man on inquiry is
not of itself sufficient to prevent recovery.
(Campos)
Exceptions:
(a) Suspicious circumstances together
with other circumstances, may be
admitted as evidence of bad faith.
(b) Where the suspicious circumstances
are so cogent and obvious
A check with 2 parallel lines in the upper left
hand corner means that it could only be
deposited and may not be converted to cash.
Consequently, such circumstance should put
the payee on inquiry and upon him devolves
the duty to ascertain the holders’ title to the
check or the nature of his possession. Failing
in this respect, the payee is declared guilty of
gross negligence amounting to legal absence
of good faith and as such the consensus of
authority is to the effect that the holder of the
check is not a holder in good faith. [State
Investment House vs. IAC, G.R. No. 72764
(1989)]
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

B.5. PRESUMPTION IN FAVOR OF DUE Holder in Due Course Not Holder in Due
COURSE HOLDING Course
Every holder is deemed prima facie to be a
Rights
holder in due course. [Sec. 59, NIL]
(1) Burden shifts when it is shown that the Has the right to Has the right to
title of any person who has negotiated enforce payment, sue enforce payment, sue
the instrument was defective. Holder in his own name, and in his own name, and
must then prove that he or some person negotiate the negotiate the
under whom he claims acquired the title instrument instrument
as a holder in due course.
(2) But the last mentioned rule does not
apply in favor of a party who became C. DEFENSES AGAINST THE HOLDER
bound on the instrument prior to the
acquisition of such defective title.
Real Defenses Personal Defenses

Those which Attach to

B.6. HOLDER NOT IN DUE COURSE the instrument itself
Those wherein a true
(1) One who became a holder of an and generally disclose
contract appears, but
instrument without any, some or all of the an absence of one of
where for some
requisites under Sec. 52 of the NIL the essential
reason, such as fraud,
elements of a contract
(2) With respect to demand instruments, if it the defendant is
or where the admitted
is negotiated an unreasonable length of excused from the
contract is void for all
time after its issue, the holder is deemed obligation to perform
purposes for reasons
not a holder in due course. [Sec. 53, NIL]
of public policy
Rights of a holder not in due course
[Sec. 51, NIL] Available against all Can be raised only
holders, including against holders not in
(1) To sue on the instrument under in his holders in due course due course
own name
(2) To enforce the instrument Forgery, incapacity, Those mentioned in
fraud in the execution, Sec. 55 (fraud, duress,
The only disadvantage of a holder who is not some types of duress, force and fear, other
a holder in due course is that the negotiable and lack of delivery of unlawful means,
instrument is subject to defenses as if it were an incomplete illegal consideration,
non-negotiable. [Chan Wan vs. Tan Kim, G.R. instrument negotiating in breach
No. L-15380 (1960)] of faith), want of
consideration,
incompleteness of the
Holder in Due Course Not Holder in Due instrument, lack of
Course delivery of a
completed instrument
Compliance with Requisites

All the requisites Not all of the

under Sec. 52, NIL are requisites under Sec.
complied with 52 are complied with

Defenses

His rights can only be His rights can be

defeated by real defeated by real and
defenses personal defenses

PAGE 40 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
X. Liabilities of Parties
Primary liability: The unconditional
promise attaches the moment the maker
makes the instrument while the acceptor’s
assent to the unconditional order attaches
the moment he accepts the instrument. No
further act is necessary in order for the
liability to accrue. Presentment for payment
is all that is necessary.
A. PARTIES PRIMARILY LIABLE
Sec. 192, NIL. Person primarily liable on
instrument. – The person “primarily” liable
on an instrument is the person who by the
terms of the instrument is absolutely required
to pay the same. All other parties are
“secondarily” liable.
A.1. MAKER
Sec. 60, NIL. Liability of maker. – The maker
of a negotiable instrument by making it
engages that he will pay it according to its
tenor, and admits the existence of the payee
and his then capacity to indorse.
The term “maker” applies only to the
promissory note.
By signing the note, the maker also
represents to the world that the payee named
has the capacity to indorse at the time of the
making of such note and thus represents that
the named payee can transfer a good and
valid title to the note by indorsement. The
maker is therefore precluded from setting up
such defenses as minority or insanity of the
payee or ultra vires act of a payee-corporation.
(Campos)
A.2. ACCEPTOR
Sec. 62, NIL. Liability of acceptor. – The
acceptor by accepting the instrument
engages that he will pay it according to the
tenor of his acceptance; and admits:
(a) The existence of the drawer, the
PAGE 41 OF 320
MERCANTILE LAW
genuineness of his signature and his
capacity and authority to draw the
instrument, and
(b) The existence of the payee and his
then capacity to indorse.
A drawee has no liability on the bill until and
unless he accepts the same.
Unconditionally liable; the acceptor is duty-
bound to pay the holder at date of maturity,
WON holder demands payment from him,
and he is not relieved from liability even if the
instrument should become overdue due to
failure of holder to make such demand.
(Campos)
Requisites for a valid acceptance
(a) It must be in writing;
(b) It must be signed by the drawee; and
(c) It must not change the implied promise of
the acceptor to pay only in money. [Sec.
132, NIL]
Note: A bill may be accepted even after it is
overdue or dishonored, since an instrument
does not lose its negotiability by the mere
fact that its maturity date has passed or that
the drawee has refused to accept or pay it.
(Campos)
B. PARTIES SECONDARILY LIABLE
Secondary liability: A party secondarily
liable is not bound to pay unless the
following have been fulfilled:
(a) Due presentment or demand to the
primary party
(b) Dishonor by such party
(c) Notice of dishonor to secondary party,
and, in cases of foreign bills of exchange,
protest of the bill
Presentment means that the instrument is
presented at maturity to the party primarily
liable for the purpose of obtaining payments
thereof. Without this presentment, the
secondary parties cannot be held liable
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
should the primary party have refused to pay
upon such presentment. (Campos)
B.1. DRAWER
Sec. 61, NIL. Liability of drawer. – The drawer
by drawing the instrument admits the
existence of the payee and his then capacity
to indorse; and engages that on due
presentment the instrument will be accepted
or paid, or both, according to its tenor, and
that if it be dishonored, and the necessary
proceedings on dishonor be duly taken, he
will pay the amount thereof to the holder, or
to any subsequent indorser who may be
compelled to pay it. but the drawer ay insert
in the instrument an express stipulation
negativing or limiting his own liability to the
holder.
The drawer warrants the existence of the
payee and the latter’s capacity to indorse the
instrument at the time of its issuance.
(Campos)
B.2. INDORSERS
The following indorsers assume the liability
to pay the instrument:
(1) General or Unqualified Indorser; and
(2) Irregular Indorser
B.2.A. GENERAL OR UNQUALIFIED
INDORSER
(2011 Bar Question)
Sec. 66, NIL. Liability of general indorser. –
Every indorser who indorses without
qualification, warrants to all subsequent
holders in due course:
(a) The matters and things mentioned in
subdivisions [a],[b] and [c] of the next
preceding section;
(b) That the instrument is at the time of
his indorsement valid and subsisting.
And in addition, he engages that on due
presentment, it shall be accepted or paid, or
both, as the case may be, according to its
tenor, and that if it be dishonored, and the
necessary proceedings on dishonor be duly
PAGE 42 OF 320
MERCANTILE LAW
take, he will pay the amount thereof to the
holder, or to any subsequent indorser who
may be compelled to pay it.
W ho is a qualified indorser? One who is
constituted as a mere assignor of the title to
the instrument by adding to his signature the
words "without recourse" or any words of
similar import.
A qualified indorser does not assume the
liability to pay the instrument since he is
merely an assignor of the title to the
instrument. However, he becomes liable once
he breaches a warranty.
W ho is a general or unqualified
indorser? Every person who indorses
without qualification [Sec. 66, NIL]
A person placing his signature upon an
instrument other than as a maker, drawer, or
acceptor unless he indicates by appropriate
words his intention to be bound in some other
capacity [Sec. 63, NIL]
A person, who places his signature on an
instrument negotiable by delivery, incurs all
the liabilities of an indorser [Sec. 67, NIL]
The general indorser makes two contracts:
(1) An assignment or sale of the
instrument; and
(2) A special contract of indorsement
B.2.B. IRREGULAR INDORSER
When a person not otherwise a party to an
instrument, places thereon his signature in
blank before delivery, he is liable as an
indorser, in accordance with these rules:
(1) Instrument payable to order of
3rd person: liable to payee and to
all subsequent parties
(2) Instrument payable to the
order of m aker/drawer, or
payable to bearer: liable to all
parties subsequent to maker/drawer
(3) Signs for accom m odation of
payee: liable to all parties
subsequent to payee [Sec. 64, NIL]
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

B.3. ORDER OF LIABILITY AMONG
INDORSERS
Sec. 68, NIL. Order in which indorsers are
liable. – As respects one another, indorsers
are liable prima facie in the order in which
they indorse; but evidence is admissible to
show that as between or among themselves
they have agreed otherwise. Joint payees or
joint indorsees who indorse are deemed to
indorse jointly and severally.
Among themselves, indorsers are liable prima
facie in the order they indorse.
Sec. 68 does not bind the holder, and he may
sue any of the indorsers, regardless of the
order of their indorsement. (Campos)
Promissory Note Bill of Exchange
XI. Warranties
The primary or secondary liability of the
parties should be distinguished from their
warranties.
(1) Primary or secondary liability of the
parties makes them liable to pay the
sum certain in money stated in the
instrument.
(2) Warranties are affirmations of the
fact on the part of the parties that
impose no direct obligation to pay in
the absence of breach thereof.
(Aquino)
In case of breach of warranties, the person
who breached the same may either be liable
or he may be barred from asserting a
particular defense.

No person primarily A. MAKER’S WARRANTIES

liable to pay until and
unless the drawee (1) The maker admits the existence of the
Maker is the person accepts the order of payee AND
primarily liable the drawer to pay; (2) His then capacity to indorse [Sec. 60, NIL]
when the drawee
accepts, he becomes
the acceptor
B. DRAWER’S WARRANTIES
Indorsers are Drawer and indorsers
secondarily liable. are secondarily liable (1) The drawer admits the existence of the
payee AND
(2) His then capacity to endorse

C. ACCEPTOR’S WARRANTIES

(1) As to the drawer, the acceptor admits:

(a) His existence
(b) Genuineness of his signature
(c) Capacity and authority to draw the
instrument
(2) As to the payee, the acceptor admits:
(a) His existence
(b) His then capacity to indorse [Sec. 62,
NIL]

PAGE 43 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
The acceptor is precluded from setting up
certain defenses by reason of his warranties
like the defense that the drawer is a minor or
the signature of the drawer is forged.
(Aquino)
D. GENERAL INDORSER’S
WARRANTIES
(1) That the instrument is genuine in and
in all respects what it purports to be
(2) That he has a good title to it
(3) That all prior parties had capacity to
contract
(4) That the instrument is, at the time of
his indorsement, valid and subsisting
[Sec. 66, NIL]
These warranties are in favor of all
subsequent holders in due course. [Ang Tiong
v. Ting, G.R. No. L-26767 (1968)]
E. QUALIFIED INDORSER’S
WARRANTIES
(1) That the instrument is genuine in and in
all respects what it purports to be
(2) That he has a good title to it
(3) That all prior parties had capacity to
contract
(4) That he has no knowledge of any fact
which would impair the validity of the
instrument or render it valueless. [Sec. 68,
NIL]
PAGE 44 OF 320
MERCANTILE LAW
XII. Presentment for
Payment
A. PRESENTMENT; MEANING
Presentment for payment is the presentation
of the instrument, whether a note or a bill, to
the person primarily liable for the purpose of
demanding and obtaining payment thereof.
(Campos)
(1) The production of a Bill of Exchange to
the drawer or acceptor for payment; or
(2) The production of a Promissory Note to
the party liable for payment.
B. DATE AND TIME OF PRESENTMENT
Sec. 72, NIL. What constitutes sufficient
presentment. - Presentment for payment, to
be sufficient, must be made:
(a) By the holder, or by some person
authorized to receive payment on his
behalf;
(b) At a reasonable hour on a business
day;
(c) At a proper place as herein defined;
(d) To the person primarily liable on the
instrument, or if he is absent or
inaccessible, to any person found at
the place where the presentment is
made.
(1) Bearing fixed m aturity/not
payable on demand – on the day it
falls due [Secs. 71 and 85, NIL]
(2) Payable on demand – within a
reasonable time after its issue [Sec. 7,
NIL]
(3) Dem and bill of exchange – within a
reasonable time after the last negotiation.
[Sec. 71, NIL]
Presentment for payment cannot be made on
a Sunday or legal holiday, and if the note
matures on such a day, since the maker
cannot be compelled to pay sooner than he
promised, the note or bill will have to be
presented on the next business day. (Campos)
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
XIII. Notice of Dishonor
Notice of dishonor is bringing either verbally
or in writing, to the knowledge of the drawer
or the indorser of the instrument, the fact
that a specified negotiable instrument, upon
proper proceedings taken, has not been
accepted, or has not been paid, and that the
party notified is expected to pay it. [Martin v.
Brown, 75 Ala. 442]
Notice given by holder or his agent to party or
parties secondarily liable that the instrument
was dishonored by:
(1) Non-acceptance by the drawee of a
bill; or
(2) Non-payment by the acceptor of a
bill; or
(3) Non-payment by the maker of a note
[Sec. 89, NIL]
Requisites:
(a) Given by holder or his agent, or by
any party who may be compelled by
the holder to pay [Sec. 90, NIL]
(b) Given to secondary party or his agent
[Sec. 97, NIL]
(c) Given within the periods provided by
law [Sec. 102, NIL]
(d) Given at the proper place [Secs. 103
and 104, NIL]
A. PARTIES TO BE NOTIFIED
(1) Non-acceptance [bill] – to
persons secondarily liable, namely,
the drawer and indorsers as the case
may be
(2) Non-paym ent (both bill and
note) – to indorsers
Note: Notice must be given to persons
secondarily liable. Otherwise, such parties
are discharged. Notice may be given to the
party himself or to his agent.
A.1. TO WHOM IN GENERAL
PAGE 46 OF 320
MERCANTILE LAW
Notice of dishonor may be given either to the
party himself or to his agent in that behalf.
[Sec. 97, NIL]
A.2. IF GIVEN BY AGENT
Where the instrument has been dishonored in
the hands of an agent, he may either himself
give notice to the parties liable thereon, or he
may give notice to his principal. [Sec. 94, NIL]
A.3. IF PARTY IS DEAD
The notice must be given to a personal
representative, if there be one, and if with
reasonable diligence, he can be found.
If there be no personal representative, notice
may be sent to the last residence or last place
of business of the deceased. [Sec. 98, NIL]
A.4. TO PARTNERS
Where the parties to be notified are partners,
notice to any one partner is notice to the firm,
even though there has been a dissolution.
[Sec. 99, NIL]
A.5. TO JOINT PARTIES
Notice to joint parties who are not partners
must be given to each of them, unless one of
them has authority to receive such notice for
the others. [Sec. 10, NIL]
A.6. TO BANKRUPT
Where a party has been adjudged a bankrupt
or an insolvent, or has made an assignment
for the benefit of creditors, notice may be
given either to the party himself or to his
trustee or assignee. [Sec. 101]
B. WHEN GIVEN
Notice may be given as soon as the
instrument is dishonored [Sec. 102, NIL]
C. WHEN NOT NECESSARY TO GIVE TO
DRAWER
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
(2011 Bar Question)
Notice of dishonor is not required to be given
to the drawer in any of the following cases:
(1) Drawer and drawee are the same;
(2) Drawee is a fictitious person or not having
the capacity to contract;
(3) Drawer is the person to whom the
instrument is presented for payment;
(4) The drawer has no right to expect or
require that the drawee or acceptor swill
honor the instrument;
(5) Where the drawer has countermanded
payment [Sec. 114, NIL]
D. WHEN NOT NECESSARY TO GIVE TO
INDORSER
(2011 Bar Question)
Notice of dishonor is not required to be given
to an indorser in the following cases:
(1) Drawee is a fictitious person or does
not have the capacity to contract, and
indorser was aware of that fact at the
time he indorsed the instrument;
(2) Indorser is the person to whom the
instrument is presented for payment;
(3) Instrument was made or accepted for
his accommodation. [Sec. 115, NIL]
E. WHO WILL BENEFIT
If given by or on behalf of the holder:
(1) All subsequent holders
(2) All prior parties (as to holder) who have a
right of recourse against the party to
whom it is given. [Sec. 92, NIL]
If given by the indorser:
(1) Holder
(2) All parties subsequent to the party to
whom notice is given. [Sec. 93, NIL]
F. PARTIES WHO MAY GIVE NOTICE OF
DISHONOR
PAGE 47 OF 320
MERCANTILE LAW
The notice may be given by or on behalf of the
holder, or by or on behalf of any party to the
instrument who might be compelled to pay it
to the holder, and who, upon taking it up,
would have a right to reimbursement from
the party to whom the notice is given. [Sec.
90, NIL]
F.1. WHO SHOULD GIVE
(1) Holder
(2) Agent or representative of holder.
(3) Any party who may be compelled to
pay like indorsers.
(4) Agent of any party who may be
compelled. [Sec. 90, NIL]
G. EFFECT OF NOTICE
Notice of dishonor is required to charge
parties secondarily liable.
Upon valid notice of dishonor, immediate
right of recourse against the indorser arises. It
is as if the indorser becomes primarily liable
in the sense that the holder need not claim
payment from the person primarily liable
(Sundiang and Aquino)
H. FORM OF NOTICE
The notice may be:
(1) In writing; or
(2) Merely oral
The notice may be given in any terms which:
(1) Sufficiently identify the instrument;
and
(2) Indicate that it has been dishonored
by non-acceptance or non-payment
It may in all cases be given by delivering it
personally or through the mails. [Sec. 96 NIL]
No misdescription of the amount, or of the
date, or of the name of the parties, or of the
time the paper falls due, or other defect will
vitiate the notice of dishonor, unless it
misleads the party to whom it is sent.
(Campos)
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
I. WAIVER
Notice of dishonor may be waived either
before the time of giving notice has arrived or
after the omission to give due notice, and the
waiver may be expressed or implied. [Sec. 109,
NIL]
Where the waiver is embodied in the
instrument itself, it is binding upon all
parties; but, where it is written above the
signature of an indorser, it binds him only.
[Sec. 110, NIL]
J. DISPENSATION WITH NOTICE
Notice of dishonor is dispensed with:
(1) When party to be notified knows about
the dishonor, actually or constructively
[Secs. 114-117, NIL]
(2) If waived [Sec. 109, NIL]
(3) When after due diligence, it cannot be
given [Sec. 112, NIL]
K. EFFECT OF FAILURE TO GIVE
NOTICE
Failure to give notice to parties secondarily
liable discharges such parties
An omission to give notice of dishonor by
non-acceptance does not prejudice the rights
of a holder in due course subsequent to the
omission [Sec. 117, NIL]
Note: A holder in due course cannot be
prejudiced by the failure or neglect of a
previous holder to give notice of dishonor by
non-acceptance.
A dishonor by non-payment necessarily
presupposes the instrument has matured,
and therefore, no holder subsequent thereto
can be a holder in due course. Such dishonor
by non-payment will thus prejudice al
subsequent holders. (Campos)
PAGE 48 OF 320
MERCANTILE LAW
XIV. Discharge of
Negotiable Instrument
Discharge: The release of all parties,
whether primary or secondary, from the
obligation on the instrument. It renders the
instrument without force and effect and,
consequently, non-negotiable (De Leon)
A. DISCHARGE OF NEGOTIABLE
INSTRUMENT
Sec. 119, NIL. Instrument; How discharged. - A
negotiable instrument is discharged:
(1) By payment in due course by or on behalf
of the principal debtor;
(2) By payment in due course by the party
accommodated, where the instrument is
made or accepted for his
accommodation;
(3) By the intentional cancellation thereof by
the holder;
(4) By any other act which will discharge a
simple contract for the payment of
money;
(5) When the principal debtor becomes the
holder of the instrument at or after
maturity in his own right.
B. BY PAYMENT IN DUE COURSE
(2000 Bar Question)
Sec. 51, NIL. Right of Holder to Sue for
Payment. – The holder of a negotiable
instrument may sue thereon in his own name;
and payment to him in due course discharges
the instrument.
Sec. 88, NIL. What Constitutes Payment in
Due Course. - Payment is made in due course
when it is made at or after the maturity of the
payment to the holder thereof in good faith
and without notice that his title is defective.
(Sec. 88)
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
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 holder’s title is
defective.
• Payment should be in money in order to
effect its discharge. (Campos)
• If payment is made before maturity and
the note is negotiated to a HDC, the latter
may recover on the instrument.
• Payment to one of several payees or
indorsees in the alternative discharges
the instrument, but payment to one of
several joint payees or joint indorsers is
not a discharge. The party receiving
payment must have been authorized by
others to receive payment.
By whom m ade:
(1) Payment in due course by or on behalf of
the principal debtor.
(2) Payment in due course by party
accommodated where party is made/
accepted for accommodation whether or
not he appears to be a party to the
instrument.
• If payment is not made by the parties
enumerated, it would constitute a
purchase or negotiation and the
instrument would remain outstanding.
• Principal debtor: includes the maker
and the acceptor.
• If the primary party is an accommodation
party, like a guarantor or a surety,
payment by him does not discharge the
instrument. [Fox v. Kroeger, 119 Tex. 511
(1931)]
PAGE 49 OF 320
MERCANTILE LAW
C. BY INTENTIONAL CANCELLATION
(2011 Bar Question)
Sec. 123, NIL. Cancellation; Unintentional;
Burden of Proof. - A cancellation made
unintentionally or under a mistake or without
the authority of the holder, is inoperative; but
where an instrument or any signature thereon
appears to have been cancelled, the burden
of proof lies on the party who alleges that the
cancellation was made unintentionally or
under a mistake or without authority.
• The burden of proving that a cancellation
was made unintentionally or by mistake
or through fraud, is on the person
claiming its effectiveness. Cancellation is
presumed to be intentional. (Campos)
• Cancellation need not be supported by
consideration and is effective even
without notice to the primary party.
D. BY OTHER ACTS THAT DISCHARGE A
SIMPLE CONTRACT
FOR PAYMENT OF MONEY
Any other act which discharges a simple
contract for payment of money.
Sec. 1231, Civil Code. Obligations are
extinguished by:
(1) Payment or performance;
xxx
(3) By condonation or remission of the debt;
(4) By the confusion or merger of the rights of
a debtor;
(5) By compensation;
(6) By novation
Other causes of extinguishment of
obligations, such as annulment, rescission,
fulfillment of a resolutory condition, and
prescription, are governed elsewhere in this
Code.
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
E. BY REACQUISITION OF PRINCIPAL
DEBTOR IN HIS OWN RIGHT
Principal debtor becomes holder of
instrument at or after maturity in his own
right and not as an agent or for and in behalf
of another.
• Reacquisition must be at or after maturity
for the instrument to be discharged,
otherwise the instrument may be further
negotiated. (Campos)
F. BY MATERIAL ALTERATION
Section 125, NIL. What constitutes a material
alteration. - Any alteration which changes:
(1) Date
(2) Sum payable, either for principal or
interest
(3) Time or place of payment
(4) Number or relations of the parties
(5) Medium or currency in which payment
is to be made
(6) Or which adds a place of payment
where no place of payment is
specified
(7) Or any other change or addition
which alters the effect of the
instrument in any respect
Material alteration without assent of all
parties liable avoids instrument except as
against party to alteration and subsequent
indorsers [Sec. 124, NIL] (2011 Bar Question)
G. DISCHARGE OF PARTIES
SECONDARILY LIABLE
Sec. 120, NIL. When Persons Secondarily
Liable on, Discharged.- A person secondarily
liable on the instrument is discharged:
(1) 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;
PAGE 50 OF 320
MERCANTILE LAW
(4) By a valid tender or payment made by
a prior party;
(5) By a release of the principal debtor
unless the holder's right of recourse against
the party secondarily liable is expressly
reserved;
(6) By any agreement binding upon the
holder to extend the time of payment or to
postpone the holder's right to enforce the
instrument unless made with the assent of
the party secondarily liable or unless the right
of recourse against such party is expressly
reserved.
OTHER GROUNDS
(1) Failure to make due presentment
Sec. 144, NIL. When Failure to Present
Releases Drawer and Indorsers. - Except as
herein otherwise provided, the holder of a bill
which is required by the next preceding
section to be presented for acceptance must
either present it for acceptance or negotiate it
within a reasonable time. If he fails to do so,
the drawer and all indorsers are discharged.
(2) Failure to give notice of dishonor
(3) Certification of check at instance of
holder
Sec. 188, NIL. Effect where the holder of check
procures it to be certified. - Where the holder
of a check procures it to be accepted or
certified, the drawer and all indorsers are
discharged from liability thereon.
(4) Reacquisition by prior party
Sec. 121, NIL. Right of party who discharges
instrument. - Where the instrument is paid by
a party secondarily liable thereon, it is not
discharged; but the party so paying it is
remitted to his former rights as regard all
prior parties, and he may strike out his own
and all subsequent indorsements and against
negotiate the instrument, except:
(a) Where it is payable to the order of a
third person and has been paid by the
drawer; and
(b) Where it was made or accepted for
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
accommodation and has been paid by
the party accommodated.
• Where instrument negotiated back to a
prior party, such party may reissue and
further negotiate, but he is not entitled
to enforce payment against any
intervening party to whom he was
personally liable
Sec. 50, NIL. When prior party may negotiate
instrument. - Where an instrument is
negotiated back to a prior party, such party
may, subject to the provisions of this Act,
reissue and further negotiable the same. But
he is not entitled to enforce payment thereof
against any intervening party to whom he
was personally liable.
• Where instrument is paid by party
secondarily liable, it is not discharged,
but
(a) the party so paying it is remitted to
his former rights as regard to all prior
parties
(b) and he may strike out his own and all
subsequent indorsements, and again
negotiate instrument, except: where
it is payable to order of 3rd party and
has been paid by drawer or where it’s
made/accepted for accommodation
and has been paid by party
accommodated
(5) By taking a qualified acceptance
H. RIGHT OF PARTY WHO
DISCHARGED INSTRUMENT
Sec. 121, NIL. Where the instrument is paid by
a party secondarily liable thereon, it is not
discharged; but the party so paying it is
remitted to his former rights as regards to all
prior parties, and he may strike out his own
and all subsequent indorsements, and again
negotiate the instrument, except:
(1) Where it is payable to the order of a
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MERCANTILE LAW
third person, and has been paid by the
drawer;
(2) Where it was made or accepted for
accommodation, and has been paid by
the party accommodated.
• The discharge of a secondary party is not
the same as the discharge of the
instrument. The discharge of the
instrument prevents subsequent holders
from becoming holders in due course.
I. RENUNCIATION BY HOLDER
Sec. 122, NIL. Renunciation by Holder. - The
holder may expressly renounce his rights
against any party to the instrument before,
at, or after its maturity. An absolute and
unconditional renunciation of his rights
against the principal debtor made at or after
the maturity of the instrument discharges the
instrument. But a renunciation does not
affect the rights of a holder in due course
without notice. A renunciation must be in
writing, unless the instrument is delivered up
to the person primarily liable thereon.
Two forms of renunciation
(1) A written declaration to that effect; or
(2) By surrender of the instrument to the
primary party.
To Whom Made Effect
At or after maturity in Discharges the
favor of principal instrument
debtor
At or after maturity in Discharge only such
favor of any party party and the parties
subsequent to him
• Need not be supported by consideration.
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

XV. Material Alteration HDC, he may enforce payment

thereof according to its original tenor
regardless of whether the alteration
A. CONCEPT was innocent or fraudulent.
(2) Alteration by a stranger
• Any change in the instrument which (spoliation) (2011 Bar Question)-
affects or changes the liability of the the effect is the same as where the
parties in any way. alteration was made by a party
wherein a HDC can recover on the
• Any alteration which changes the date, original tenor of the instrument. [Sec.
sum payable, time or place of payment, 124, NIL]
number of relation of the parties, or
medium of currency of payment where
none is specified or which alters the effect
of the instrument in any respect [PNB v.
CA, GR No. L-26001 (1968)]
• An alteration is said to be material if it
alters the effect of the instrument. In
other words, a material alteration is one
which changes the items which are
required to be stated under Sec. 1 of the
NIL (ibid.)

B. CHANGES IN THE FOLLOWING

CONSTITUTE MATERIAL ALTERATIONS
[Sec. 125, NIL]
(1) Date
(2) Sum payable, either for principal or
interest
(3) Time or place of payment
(4) Number or relations of the parties
(5) Medium or currency in which payment is
to be made
(6) That which adds a place of payment
where no place of payment is specified
(7) Any other change or addition which
alters the effect of the instrument in any
respect.

C. EFFECT OF MATERIAL ALTERATION

(1) Alteration by a party – Avoids the

instrument except as against the
party who made, authorized, or
assented to the alteration and
subsequent indorsers. However, if an
altered instrument is negotiated to a
PAGE 52 OF 320
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
XVI. Acceptance
A. DEFINITION
Acceptance: an acceptance completed by
delivery or notification. [Sec. 191, NIL] The
signification by the drawee of his assent to
the order of the drawer. [Sec. 132, NIL]
B. REQUISITES
[Sec. 132, NIL]
(1) In writing
(2) Signed by the drawee
(3) Does not express that the drawee will
perform his promise by and other means
than the payment of money
C. KINDS OF ACCEPTANCE
(1) General – assents without qualification
to the order of the drawer [Sec. 139, NIL]
(2) Qualified –which in express terms
varies the effect of the bill as drawn [Secs.
141 & 142, NIL]:
(a) Conditional – makes payment by
the acceptor dependent on the
fulfillment of a condition therein
stated
(b) Partial – an acceptance to pay part
only of the amount for which the bill
is drawn.
(c) Local – an acceptance to pay only at
a particular place.
(d) Qualified as to time
(e) The acceptance of some one or more
of the drawees but not of all.
D. PROOF OF ACCEPTANCE
(Sundiang and Aquino)
The written acceptance may be in the
instrument itself or in a separate instrument.
However, under Sec. 133, “the holder of a bill
presenting the same for acceptance may
require the acceptance be written on the bill,
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MERCANTILE LAW
and, if such request is refused, may treat the
bill as dishonored”
Effects: When an acceptance is written on a
paper than the bill itself, it does not bind the
acceptor except in favor of a person to whom
it is shown and who, on the faith thereof,
receives the bill for value.
E. MANNER
E.1. EXPRESS ACCEPTANCE
Must be in writing and signed by the drawee
and must not express that the drawee will
perform his promise by any other means than
the payment of money. [Sec. 132, NIL]
If request for a written acceptance is refused,
the holder may treat the bill as dishonored
[Sec. 13, NIL]
E.2. IMPLIED ACCEPTANCE
(1) If the drawee refuses to return the
instrument within 24 hours after it was
delivered for acceptance.
(2) If the drawee destroys the same.
(3) If the drawee makes an unconditional
promise in writing before the instrument is
drawn, with respect to every person who,
upon the faith thereof, receives the bill for
value.
F. TIME FOR ACCEPTANCE
[Sec. 136, NIL]
• The drawee is allowed twenty-four hours
after presentment in which to decide
whether or not he will accept the bill.
• The acceptance, if given, dates as of the
day of presentation.
G. RULES GOVERNING ACCEPTANCE
Implication of payment without acceptance
by a drawee [FEBTC vs. Gold Palace Jewellery
Co,, Nachura, G.R. No. 168274 (2008)]
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
• The NIL explicitly provides that the
acceptor, by accepting the instrument,
engages that he will pay it according to
the tenor of his acceptance.
• This provision applies with equal force in
case the drawee pays a bill without having
previously accepted it.
• His actual payment of the amount in the
check implies not only his assent to the
order of the drawer and a recognition of
his corresponding obligation to pay the
aforementioned sum, but also, his clear
compliance with that obligation.
• Actual payment by the drawee is greater
than his acceptance, which is merely a
promise in writing to pay. The payment of
a check includes its acceptance.
Right to unqualified acceptance
• The holder may refuse to take a qualified
acceptance and if he does not obtain an
unqualified acceptance, he may treat the
bill as dishonored by non-acceptance.
• Where a qualified acceptance is taken,
the drawers and indorsers are discharged
from liability on the bill unless they have
expressly or impliedly authorized the
holder to take a qualified acceptance, or
subsequently assent thereto.
• When the drawer or indorser receives
notice of a qualified acceptance, he must,
within a reasonable time, express his
dissent to the holder or he will be deemed
to have assented thereto.
• However, acceptance is presumed to be
unqualified or absolute. (Sundiang and
Aquino)
PAGE 54 OF 320
MERCANTILE LAW
XVII. Presentment for
Acceptance
A. REQUISITES:
(1) By the holder, or by some person
authorized to receive payment on his
behalf;
(2) At a reasonable hour on a business
day;
(3) At a proper place as herein defined;
(4) To the person primarily liable on the
instrument, or if he is absent or
inaccessible, to any person found at the
place where the presentment is made.
General rule: Presentment for acceptance
is not necessary in order to render any party
to the bill liable. [Sec. 143, NIL]
B. WHEN PRESENTMENT FOR
ACCEPTANCE NECESSARY:
Presentment for acceptance must be made:
(1) Where the bill is payable after sight, or
in any other case, where presentment
for acceptance is necessary in order to
fix the maturity of the instrument; or
(2) Where the bill expressly stipulates that
it shall be presented for acceptance; or
(3) Where the bill is drawn payable
elsewhere than at the residence or place
of business of the drawee.[Sec. 143, NIL]
Note: It is not necessary to present a check
for acceptance because it is not one of those
required under Sec. 143.
C. WHEN PRESENTMENT FOR
ACCEPTANCE EXCUSED:
Presentment for acceptance is excused and a
bill may be treated as dishonored by non-
acceptance in either of the following cases:
(1) Where the drawee is dead, or has
absconded, or is a fictitious person or a
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
person not having capacity to contract by
bill.
(2) Where, after the exercise of reasonable
diligence, presentment cannot be made.
(3) Where, although presentment has been
irregular, acceptance has been refused on
some other ground. [Sec. 148,NIL]
D. TIME/PLACE/MANNER OF
PRESENTMENT
D.1. WHEN MADE
A bill may be presented for acceptance on
any day on which negotiable instruments may
be presented for payment under the
provisions of Sections 72 and 85 of this Act.
When Saturday is not otherwise a holiday,
presentment for acceptance may be made
before twelve o'clock noon on that day. [Sec.
146, NIL]
E. WHAT CONSTITUTES SUFFICIENT
PRESENTMENT?
Presentment for payment, to be sufficient,
must be made:
(1) By the holder, or by some person
authorized to receive payment on his
behalf;
(2) At a reasonable hour on a business day;
(3) At the proper place as herein defined
[Sec. 73, NIL];
(4) To the person primarily liable on the
instrument or if he is absent or
inaccessible, to any person found at the
place where the presentment is made.
[Sec. 72, NIL]
Time of maturity: Every negotiable
instrument is payable at the time fixed therein
without grace. When they day of maturity
falls upon Sunday, or a holiday, the
instrument is payable on the next succeeding
business day. Instruments falling due or
becoming payable on Saturday are to be
presented for payment on the next succeeding
business day, except that instrument payable
PAGE 55 OF 320
MERCANTILE LAW
on demand may, at the option of the holder
be presented for payment before twelve
o’clock noon on Saturday when that entire day
is not a holiday. [Sec. 85, NIL]
F. HOW MADE
[Sec. 145, NIL]
In general:
(1) By or on behalf of the holder
(2) At a reasonable hour
(3) On a business day
(4) Before the bill is overdue
(5) To the drawee or his agent
W here a bill is addressed to 2 or m ore
drawees who are not partners –
presentment must be made to them all XPT.
One has authority to accept/refuse for all
W here the drawee is dead –
presentment may be made to his personal
representative
W here the drawee has been adjudged
a bankrupt or insolvent or has m ade
an assignm ent for the benefit of
creditors – presentment may be made to
him or to his trustee or assignee.
G. EFFECT OF FAILURE TO MAKE
PRESENTMENT
Failure to make presentment discharges the
drawer and all indorsers. [Sec. 144, NIL]
H. DISHONOR BY NON-ACCEPTANCE
W hen dishonored by non-acceptance:
A bill is dishonored by non-acceptance:
(1) When it is duly presented for acceptance
and such an acceptance as is prescribed
by this Act is refused or cannot be
obtained; or
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
(2) When presentment for acceptance is
excused and the bill is not accepted. [Sec.
149, NIL]
Duty of holder: Where a bill is duly
presented for acceptance and is not accepted
within the prescribed time, the person
presenting it must treat the bill as
dishonored by non-acceptance or he
loses the right of recourse against the drawer
and indorsers. [Sec. 150, NIL]
Effect: When a bill is dishonored by non-
acceptance, an immediate right of recourse
against the drawer and indorsers accrues to
the holder and no presentment for payment is
necessary. [Sec. 151, NIL]
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MERCANTILE LAW
XVIII. Promissory Notes
A promissory note is:
(1) An unconditional promise in writing
(2) Made by one person to another
(3) Signed by the maker
(4) Engaging to pay on demand, or at a fixed
or determinable future time
(5) A sum certain in money to order or to
bearer
(6) Where a note is drawn to the maker's own
order, it is not complete until indorsed by
him. [Sec. 184, NIL]
There are originally 2 parties in a promissory
note:
(1) Maker – party who executes the written
promise to pay.
(2) Payee – party in whose favor the
promissory note is made payable.
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
XIX. Checks
A. DEFINITION
A check is a bill of exchange drawn on a bank
payable on demand. Except as herein
otherwise provided, the provisions of this Act
applicable to a bill of exchange payable on
demand apply to a check. [Sec. 185, NIL]
B. KINDS
(1) Cashier’s Check – One drawn by the
cashier of a bank, in the name of the bank
against the bank itself payable to a third
person. It is a primary obligation of the
issuing bank and accepted in advance
upon issuance. [Tan vs. CA, G.R. No.
108555 (1994)]
(2) Manager’s Check – A check drawn by
the manager of a bank in the name of the
bank itself payable to a third person. It is
similar to the cashier’s check as to the
effect and use.
• In issuing a manager’s check, the bank
assumed the liabilities of the acceptor
under Sec. 62, NIL. [Equitable PCI Bank v.
Ong, G.R. No. 156207 (2006)]
(3) Memorandum Check – A check given
by a borrower to a lender for the amount
of a short loan, with the understanding
that it is not to be presented at the bank,
but will be redeemed by the maker
himself when the loan falls due and
which understanding is evidenced by
writing the word “memorandum”, “memo”
or “mem” on the check.
(4) Certified Check – An agreement
whereby the bank against whom a check
is drawn undertakes to pay it at any
future time when presented for payment
[Sec. 187, NIL]
(a) Certification is equivalent to
acceptance. [Sec. 187, NIL]
(b) Where the holder of a check procures
it to be accepted or certified, the
drawer and all indorsers are
PAGE 57 OF 320
MERCANTILE LAW
discharged from liability. [Sec. 188,
NIL]
(c) A check of itself does not operate as
an assignment of any part of the
funds to the credit of the drawer with
the bank, and the bank is not liable to
the holder unless and until it accepts
or certifies the check. [Sec. 189, NIL]
(5) Crossed Check – The NIL is silent with
respect to crossed checks, although the
Code of Commerce makes reference to
such instruments.
Article 541 of the Code of Commerce
states: “The maker or any legal holder of
a check shall be entitled to indicate
therein that it be paid to a certain banker
or institution, which he shall do by writing
across the face the name of said banker
or institution, or only the words ‛and
company.”
Under usual practice, crossing a check is
done by placing two parallel lines
diagonally on the left top portion of the
check. [State Investment House vs. IAC,
G.R. No. 72764 (1989)]
Types: Special and General
The crossing may be special wherein between
the two parallel lines is written the name of a
bank or a business institution, in which case
the drawee should pay only with the
intervention of that bank or company, or
crossing may be general wherein between two
parallel diagonal lines are written the words
"and Co." or none at all as in the case at bar,
in which case the drawee should not encash
the same but merely accept the same for
deposit.
C. EFFECTS
(1) The check may not be encashed; it may
only be deposited with the bank;
(2) The check may be negotiated only once to
a person who has an account with the
bank; and
(3) It serves as a warning to a holder that the
check has been issued for a definite
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

purpose. [Bataan Cigar vs. CA, G.R. No.

93048 (1994)]

D. PRESENTMENT FOR PAYMENT

A check of itself does not operate as an

assignment of any part of the funds to the
credit of the drawer with the bank. The bank
is not liable to the holder, unless and until it
accepts or certifies the check. [Sec. 189, NIL]

D.1. TIME
When to present? A check must be presented
for payment within reasonable time after its
issue.

E. EFFECT OF DELAY

The drawer will be discharged from liability

thereon to the extent of the loss caused by
the delay. [Sec. 186, NIL]

Certification of checks: An agreement

whereby the bank against whom a check is
drawn, undertakes to pay it at any future time
when presented for payment

Effects:
(1) Equivalent to acceptance [Sec. 187, NIL]
and is the operative act that makes banks
liable
(2) Assignment of the funds of the drawer in
the hands of the drawee [Sec. 189, NIL]
(3) If obtained by the holder, discharges the
persons secondarily liable thereon [Sec.
188, NIL]

Refusal of drawee bank to certify: The

holder has no action against the bank but he
has a right of action against the drawer. The
drawer in turn has right of action against the
bank based on the original contact of deposit
between them.

PAGE 58 OF 320