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ZPG & ASSOCIATES (Zambales.Pablo.

Gonzales)
ACT NO. 2031 1. equivalent words be used such as “agree”, “will pay”,
February 03, 1911 “shall pay”; or that
2. words implying a promise are contained in the
THE NEGOTIABLE INSTRUMENTS LAW instrument such as “Good to” or “payable on
demand” (e.g. Good to X or order P10.)
I. FORM AND INTERPRETATION
Mere acknowledgement of a debt is not enough but an
Section 1. Form of negotiable instruments. - An instrument acknowledgment followed by the phrase “to be paid” implies a
to be negotiable must conform to the following promise to pay. (I acknowledge a debt of P10 to be paid on
requirements: demand) Further, an instrument which stated “Due X or order
(a) It must be in writing and signed by the maker on demand P10” is negotiable because “to be paid” though not
or drawer; stated, is required by the sense of the statement. Similarly, it is
(b) Must contain an unconditional promise or not necessary that the word “order” be used. Equivalent words
order to pay a sum certain in money; or those which show the drawer’ will that the money should be
(c) Must be payable on demand, or at a fixed or paid are sufficient. All that must be remembered is that the
determinable future time; BOE is more than mere asking of a favor and that it is an
(d) Must be payable to order or to bearer; and instrument demanding a right. Thus, a mere requests to pay or
(e) Where the instrument is addressed to a mere authorization to ay is not enough to render it negotiable
drawee, he must be named or otherwise indicated for it gives a discretion whether or not to pay. To be
therein with reasonable certainty. unconditional or absolute, the order or promise to pay must
not be subject to a condition (a contingent event). If the event
is certain to happen, it is not contingent nor is it a condition.
What are the requisites for a negotiable note? Under Art. 1179 of the NCC, a condition is a (1) future and
uncertain event; or (2) a past event unknown to the parties
A Promissory note, to be negotiable , must conform to the (See also Sec. 3 for further meaning).
following requirements:
1. it must be in writing and signed by the maker; The amount of money to be paid must be
2. Must contain an unconditional promise to pay a sum determinable (at the time of issue) by inspection and must be
certain in money stated plainly on the face of the instrument. The sum is certain
3. must be payable on demand or at a fixed or even is mathematical computation is still needed because the
determinable future time amount to be paid is still ascertainable from the instrument
4. must be payable to order or bearer alone without reference to any outside source. (see also Sec.
2). The payment must be for a sum of money. To be
What are the requisites of a negotiable bill? negotiable, the bill or note must not be payable in goods,
wares, property or service nor in bonds, stocks, checks or
A bill of exchange, to be negotiable, must conform to the foreign bills. The reason for the requirement is that money is
following requirements: the one standard of value in actual business. Exception to this
1. in writing and signed by the drawer rule is Sec. 5d. an instrument payable in money or goods,
2. contain an unconditional; order to pay a sum certain services et. at the option of the holder. Further, while R.A. 529
in money requires that the discharge of obligations be in legal tender of
3. payable on demand or at a fixed or determinable the Philippines the instrument’s negotiability and validity are
future time not affected by the fact that another currency is stipulated
4. payable to order or bearer (Sec. 6e) In such case, the indemnity to be allowed should be
5. the drawee must be named or otherwise indicated expressed in Phil. Currency on the basis of the current rate of
therein with reasonable certainty exchange at the time of payment. But, to be negotiable, the
instrument must state the denomination in which it is to be
payable.
What is meant by “in writing” and signed by the maker or
drawer?” When is an instrument payable on demand?

The instrument must in writing for if it were not there In accordance with Sec. 7, a note is payable on demand:
would be nothing to be negotiated or passed from hand to
hand. The medium in which it is written and where it is written 1. When it is so expressed to be payable on demand or
is not important. It may be in ink, print or pencil. It may be in at sight or on presentation;
parchment, cloth, leather or any other substitute of paper. 2. when no time for payment is expressed;
What is important is it is in writing and such writing is capable 3. when an instrument is issued, accepted or indorsed
of being transferred or negotiated. (e.g. A note written on a when overdue- as to the party so issuing, accepting or
blackboard is not negotiable). In signing, the maker thereby indorsing, it is payable on demand.
binds himself to be liable for the note (Sec. 18) It may be the
maker’s full name or his surname only or signature. It may be When is an instrument payable at a fixed or determinable
in initials or numbers. But , where the name is not signed, the future time?
holder must prove that what is written is intended as the
signature of the person sought to be charged. In fact, for as It is payable at a fixed time when a date is specified.
long as it be shown that such was adopted and used by the But where the date is given as “Dec. 2,” it is not fixed because
maker as his signature, it is sufficient. (Note: he who makes it the time of payment is not determinable as the year is not
possible for the commission of fraud, bears the loss). given.

What is meant by “an unconditional promise/order to pay a In accordance with Sec. 4, an instrument is payable at a
sum certain in money?” determinable future time when it is expressed to be payable-
1. at a fixed period “after date or sight; or
The promise to pay must be on the note itself although it 2. on or before a fixed or determinable future time
is not necessary to use the word “promise.” It is enough that specified therein; or
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ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
3. on or at a fixed period after the occurrence of a understood to be the legal rate which is 12% for loans or
specified event which is certain to happen though the forbearance of money.
time of happening be uncertain.
What is an escalation clause? A de-escalation clause?

When is an instrument payable to order? To bearer? An escalation clause is a stipulation in an agreement


pertaining to a loan or forbearance of money, goods or credits
In accordance with Sec. 9b, an instrument is payable to bearer providing that the rate of interest agreed upon may be
when increased in the event that the applicable maximum rate of
1. it is expressed to be so payable; interest, is increased by law or by the Monetary Board. De-
2. it is payable to a specified person or bearer; escalation clause is stipulation in the agreement that the rate of
3. it is payable to the order of a fictitious or non-existing interest agreed upon shall be reduced if the maximum rate of
person and this fact is known to the maker or drawer; interest is decreased by law or by the Monetary Board. The
4. when the name of the payee does not purport to be escalation clause is valid if there is also a de-escalation clause
the name of any person; in the agreement.
5. when the only or last indorsement is an indorsement
in blank
What are the requirements as regards payment of
It is not important that the words “order” or “ bearer” be
installments?
used. It is sufficient that words of similar import are put in
its place. (e.g. Pay to B or assigns or “assignees” or
1. The amount of installment must be stated –
“holder” or “possessor”). A note payable to the order or
(the sum payable for each installment must
bearer is payable to order and such instrument may be
not be uncertain. It can be ascertainable.)
negotiated only by bearer’s indorsement. (The bearer is
2. The maturity date of each installment must
the payee.)
be fixed or determinable.
When is the indication of the drawee’s name sufficient?
What is the rule on acceleration clause?
It is sufficient that the name of the person on whom a
An instrument, which is to be paid in, stated installment is not
bill is drawn should appear on the face of the instrument.
rendered non-negotiable despite a provision that upon default
Otherwise, the instrument would not be negotiable. But,
of any installment or of interest, the whole amount shall
under Sec. 14, the drawee’s name may be omitted and be
become due. Such is called an acceleration clause because it
filled in under implied authority like any other blank.
hastens the payment of the whole note. The failure to pay any
(REMEMBER: Sec. 14 refers to the incomplete but
installment renders the balance of the amount immediately due
delivered instruments and that the authority to fill up
and demandable. An acceleration clause does not make the
should be in strict accordance with the authority given).
instrument payable upon a contingency (thus, non-negotiable)
Also, an acceptance by the drawee may supply the
since payment is surely to be made and its time of payment is
omission of a designation and renders said instrument
surely come. In a sense, it is deemed to be payable on or
negotiable.
before a fixed or determinable future time specified therein
(sec.4b)
Sec. 2. What constitutes certainty as to sum. - The sum
payable is a sum certain within the meaning of this Act,
What is the rule on provisions for exchange?
although it is to be paid:
1. with interest; or
Exchange is defined to be the difference in value of the same
2. by stated installments; or
amount of money in different countries. The exchange may be
(c) by stated installments, with a provision that,
at the (1) current rate, or at a (2) fixed rate indicated therein.
upon default in payment of any installment or of
Such provision does not render the instrument non-negotiable
interest, the whole shall become due; or
because while the rate of exchange is not always the same and
(d) with exchange, whether at a fixed rate or at the
while it is technically true that resort must be had to extrinsic
current rate; or
evidence to ascertain what it is, yet the current rate of
(e) with costs of collection or an attorney's fee, in
exchange between 2 places at a particular date is a matter of
case payment shall not be made at maturity.
common commercial knowledge, or at least easily ascertained
by any one so that the parties can always, without difficulty,
What is the rule regarding the sum payable being definite
ascertain the exact amount necessary to discharge the paper. It
and certain?
must be remembered that this provision applies only to
instruments drawn in one country and payable in another.
Since a NI is a device intended to take the place of
Where an instrument is drawn in one country and payable in
money, it is therefore essential that it represents a fixed
the same country, there can be no exchange, so a provision for
amount of money. The amount of money must be determinable
payment of exchange may be disregarded.
by inspection and must be stated plainly on the face/ body of
the instrument.
Why doesn’t a stipulation for attorney’s fees render the
When can it be said that the sum is certain despite the sum uncertain?
stipulation of interest?
Although such a stipulation will make the sum payable after
A stipulation of interest does not render the sum to be maturity uncertain, it will not affect the certainty of the sum
paid as uncertain because given the interest rate, the amount payable at maturity and, therefore will not affect the
due can be easily computed. Provided the principal sum is negotiability of the instrument in which it is stipulated. The
certain, the amount due becomes a matter of mathematical purpose of the stipulation is not to give the lender a larger
computation ascertainable from the face of the instrument compensation for the loan than the law allows, but to
alone. Further, where interest is stipulated but not specified (as safeguard the lender against future loss or damage by being
to rate), the note is still negotiable and the rate is to be compelled to retain counsel to institute judicial proceedings to

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ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
collect his debt. The provision refers only to reasonable Instruments are not issued without any transaction
attorney’s fees. upon which they are based. The statement of transaction is the
reason giving rise to the issuance of the instrument and the
mere fact that it. Is stated in the instrument will not make the
promise or order conditional. Eg. Pay to B or order P10 for
payment of a debt.
But where the promise or order is made subject to the
What is the effect of negotiable after the note is overdue?
terms and conditions of the transaction stated, then the
instrument is rendered non-negotiable. Besides would be
contrary to the rule that the negotiability of an instrument
After the date of maturity, the instrument will no longer be (whether there is an un-conditional order or promise) must be
negotiable in the full commercial sense, that is, in the sense determined only from the document itself and not elsewhere.
that any transferee acquiring it would not be a holder in due Eg. I promise to pay B or order P10 subject to the terms
course, as he acquire the instrument after it is overdue. Since contained in the contract between A & C. Normally, an
the transferee would not be a holder in due course (HIDC), he instrument’s negotiability is not affected by the fact that it is
would hold the instrument subject to the defenses as if it were secured by a mortgage. But, where such provision become in
non-negotiable. the note will render the amount uncertain or where such
provisions become part of the note, even though they are not
in the note itself, the instrument is rendered non-negotiable.
Sec. 3. When promise is unconditional. - An unqualified Thus, where the note is not only secured by a mortgage but
order or promise to pay is unconditional within the also made subject to its provisions, the note is non-negotiable.
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 Sec. 4. Determinable future time; what constitutes. - An
account to be debited with the amount; or instrument is payable at a determinable future time,
within the meaning of this Act, which is expressed to be
(b) A statement of the transaction which gives rise payable:
to the instrument. (a) At a fixed period after date or sight; or
But an order or promise to pay out of a particular fund is (b) On or before a fixed or determinable future
not unconditional. time specified therein; or
(c) On or at a fixed period after the occurrence of
What are the difference between par A. and the last par. of a specified event which is certain to happen,
sec 3.? though the time of happening be uncertain.

An instrument payable upon a contingency is not


In the first case, the particular fund indicated is not the direct negotiable, and the happening of the event does not cure
source of payment. It is only the source of reimbursement. The the defect.
payment of the instrument is not made subject to the condition
of availability or sufficiency of funds in the said account. What does “at a fixed period after… sight” mean?
Here, the drawee first pays the payee from his own funds,
then, afterwards, the drawee pays himself from the funds
indicated. The order or promise to pay is upon the general “After sight” means after the drawee has seen the instrument
credit of the drawer or the maker. In the second case, the upon presentments doe acceptance. The instrument becomes
particular fund indicated is the direct source of payment. Here, payable after a fixed period subsequent to date of presentment
there is only one act, which is that the drawee pays directly to the drawee.
from the fund indicated. The payment is, thus, subject to the
condition that the funds indicated are sufficient. But the funds
indicated may or may not be sufficient so that the instrument is
What is the rule on “the occurrence of a specified events”?
rendered non-negotiable because payment is conditional.
Eg. 1st case- pays to B or order P10 and reimburses yourself
out of the money in your hands. It is essential that the specified event must be certain to
happen although the time of happening is uncertain. If the
2nd case- pays to B or order P10 out of my part of the
event specified is not certain to happen, then it is a condition
estate.
and the instrument would be rendered non-negotiable, it is
But, where the sum payable is to be paid out of a particular payable upon a contingency and, according to the law, the
fund yet payment is not restricted to such fund alone, happening of the contingency or condition does not cure the
negotiability is not destroyed. Eg. Pay to B or order P10 out of defect.
the monthly rental due from A and secured to be paid by my
BPI account. Similarly, where the instrument indicates a
particular account to be debited with the amount, the When an instrument states, “ I promise to pay X or order
instrument remains unconditional and negotiable. The P1000, 10 days after Y’s death. Sgd.z. is this instrument
instrument, in this case, is to be first paid and afterwards, the negotiable and why?
particular account will be debited. The payment is not subject
to the sufficiency of account to be debited. Eg. Pay to B or
order P10 and charge the same to my account. The instrument is negotiable because payment is still certain to
be made (unconditionally), i.e. Y’s death will surely happen.

What is a statement of transaction?


But if in the previous example, Z promises to pay 10 days
before the death of ‘ Y, would such instrument be negotiable?

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ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)

No, because the maturity is uncertain (as no one can tell


a. They enlarge the field for fraud. 2.
exactly when another person will die). Further, when Y is
Promissor bargains away his day in court
already dead, the instrument will already be over due and will
and the effect of the instrument is to strike
not be negotiable in its full commercial sense.
down the right of appeal accorded by the
statute. But while the provision as to
Sec. 5. Additional provisions not affecting negotiability. - An confession of judgment is not rendered valid
instrument which contains an order or promise to do any (because it is illegal) by virtue of the last
act in addition to the payment of money is not negotiable. par. of sec.5, the instrument is never the less
But the negotiable character of an instrument otherwise negotiable.
negotiable is not affected by a provision which:
1. authorizes the sale of collateral securities in (c). Waives the benefit of any law intended for the
case the instrument be not paid at maturity; advantage or protection of the
or obligator- such as the rights to (1) presentment for
payment (sec.70); (2) notice of honor (sec.110); (3)
(b) authorizes a confession of judgment if the protest (sec.111). These being rights, they may be waived
instrument be not paid at maturity; or unless the waiver be contrary to law, public policy, etc.
(art.6 of NCC.)
(c) waives the benefit of any law intended for the
advantage or protection of the obligor; or
(d) Gives the holder an election to require something
(d) gives the holder an election to require other than money- even if there is an additional act, the
something to be done in lieu of payment of money. instrument still remains negotiable provided that the right
to choose is in the hands of the holder.
But nothing in this section shall validate any
provision or stipulation otherwise illegal.
Sec. 6. Omissions; seal; particular money. - The validity and
What is the general rule as regards the requirement of negotiable character of an instrument are not affected by
additional acts contained in an instrument? the fact that:
 it is not dated; or

The general rule is that an instrument must not contain an (b) does not specify the value given, or that any
order or promise to do any act in addition to payment of value had been given therefor; or
money. Otherwise the instrument would be rendered non-
negotiable. But the rest of negotiability is whether or not the (c) does not specify the place where it is drawn or
promise to do any additional act would give rise to a cause of the place where it is payable; or
action for breach of contract if the said act is not done, if it
does, the instrument is rendered non-negotiable. Eg. I promise (d) bears a seal; or
to pay X or order P1000 and 1 horse. Such is non-negotiable
because it contains an additional act to be performed aside (e) designates a particular kind of current money
from payment of money. Eg. . I promise to pay X or order in which payment is to be made.
P1000 and a horse. Such is also non-negotiable because the
choice to pay money or deliver the horse is at the option of the But nothing in this section shall alter or repeal any
debtor. But, if the phrase “ at the option of X “ is added to the statute requiring in certain cases the nature of the
instrument, such is negotiable because the option lies with the consideration to be stated in the instrument.
holder rendering the sum payable still certain.
What is the rule on payment in other currencies (par. e)?
What are the exceptions to the general rule? Even if the money in which the instrument is to be
payable is not legal tender, provided is current money or
foreign money which has a fixed value in relation to the
The negotiable character of an instrument otherwise money of the country in which the instrument is payable, the
negotiable is not affected by a provision which- negotiability of the instrument is not affected, as it is still
considered payable in money.
1. Authorizes the sale of collateral securities in case of
failure to pay- the additional act to be performed is to
be executed after the date of maturity. Before the date
of maturity, no additional act is to be performed Sec. 7. When payable on demand. - An instrument is
except the payment of money. Eg. “ I promise to pay payable on demand:
X or order P100 on the December 31,1950 provided (a) When it is so expressed to be payable on
that if I fail to do so, X may sell the rin I delivered to demand, or at sight, or on presentation; or
secure payment of the note. Sgd. A.
(b) In which no time for payment is expressed.
2. Authorizes a confession of judgment if the instrument Where an instrument is issued, accepted, or indorsed when
be not paid- the additional act is to be performed after overdue, it is, as regards the person so issuing, accepting,
the date of maturity when the instrument ceases to be or indorsing it, payable on demand.
negotiable in its full commercial sense. A power of
attorney to confess judgment anytime before maturity
renders a note non-negotiable. Further, in the Give example of the above.
Philippines, confessions of judgment have been
declared void as against public policy because
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ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
Ex. 1) of when “it is expressed to be payable on demand” BOE may either be payable to order or to bearer. Similarly, a
PN may also be payable to order or bearer.
“I promise to pay on demand P 1,000 to X or bearer.
Sgd. A.
What is the rule on naming the payee?
-- Instead of “ on demand” the words “on sight” or “ on
presentation” may be used. The words “at sight” are not
The law requires that the payee must be named or
ordinarily used in promissory notes.
otherwise indicated with reasonable certainty. The payee of an
instrument payable to order must be a person in being, natural
or legal, and ascertained at the time of issue. If there is no
2) Of when “ no time for payment is expressed”
payee indicated, no one could indorse the instrument.
“Pay to X or order P1, 000 to Y. sgd. Z. Consequently, it is useless to consider it as negotiable.

-- Where the instrument contains a blank space for the date NOTES: 1) Where the instrument is payable to the
but no date is indicated, it has been held to be payable on order of the drawer and it is acceptable by the drawee, the
demand. However, it may be properly considered as an instrument is equivalent to a promissory note by the acceptor
incomplete instrument and may fall under the provisions if in favor if the drawer.
sec.14 or 15 depending upon how it was delivered (or not).
2) Being joint payees is indicated by the
conjunction “and”.
3. Of the last par. Eg. “I promise to pay A and B or order
a. as regards the person so issuing P100. sgd. X.”
A note dated July 30, 1984 and payable “30
3) Being solidary payees is indicated by the
days after date” is issued on August 4,1984.
conjunction “or”.
b. as regards the person so accepting
Eg. “I promise to pay to the order of A or B
A bill payable on August 20,1984 is
P100. sgd. X.”
accepted by the drawee on August 21,1984.
4) Example of par. f – “ Pay to the order of
c. as regards the indorser
Cashier of U.P. P10.”
A note payable “30 days after August 1,
1984” is indorsed on September 2,1984.
Is the following instrument payable to order: “Pay to the
order of Ms. Laya P100. sgd. Coach.”?
-- After the date of maturity, the instrument can no longer be
negotiated as to make the partios who acquire the instrument
after the date of maturity holders in sue course because they
Yes, because the instrument is payable to the order of a
become holders thereof with notice that it is already overdue,
specified person or to him or his order.
as it can be determined from the face of the instrument itself.
It is payable in demand only as between the immediate parties.
When can an instrument originally payable to order
become one payable to bearer?
Sec. 8. 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 Under Sec. 98, when the only or last indorsement is an
payable to the order of: indorsement in blank.
(a) A payee who is not maker, drawer, or
drawee; or
(b) The drawer or maker; or What is the rule re: the conversion of order noted to bearer
(c) The drawee; or notes?
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time The rule is once a bearer instrument, always a bearer
being. instrument. This rule refers to instruments originally payable
to bearer. But an order instrument may be converted to a
Where the instrument is payable to order, the bearer instrument by blank endorsement of the payee or last
payee must be named or otherwise indicated therein with endorsee. It may again be converted to an order instrument, by
reasonable certainty. virtue of sec. 35, by writing over the signature in blank any
contract not inconsistent with the character of the
What does payable to order mean?
endorsement.

In BOE, it means that the drawer orders the drawee to Sec. 9. When payable to bearer. - The instrument is payable
pay the payee indicated or if not him, to anybody designated to bearer:
by him. Such designation is made by indorsement of the (a) When it is expressed to be so payable; or
payee. In PN, the maker promises to pay the payee indicated (b) When it is payable to a person named therein
or if not him, to anybody designated by him through (also) or bearer; or
indorsement. It does not mean that a bill is necessarily payable (c) When it is payable to the order of a fictitious or
to order because it contains an unconditional order to pay. A non-existing person, and such fact was known to
the person making it so payable; or

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ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
(d) When the name of the payee does not purport the true date of making or drawing; (2) in an accepted bill of
to be the name of any person; or exchange, the acceptance is dated; in which case it is
(e) When the only or last indorsement is an presumed to bethe true date of acceptance; (3) an instrument is
indorsement in blank. indorsed and the indorsement is dated, in which case it is
presumed to be the true date of indsorsement. But all such
presumptions may be rebutted by competent proof to the
What is the rule re: fictitious or non-existing persons?
contrary. The burden of proving belongs to the persons who
disputes the veracity of the dates indicated.
This provision has 2 requisites: (1) the payee named
must be fictitious or non-existent; and (2) the one making the
Sec. 12. Ante-dated and post-dated. - The instrument is not
instrument so payable must know him to be fictitious or non-
invalid for the reason only that it is ante-dated or post-
existing. The first requisite must be qualified. The words
dated, provided this is not done for an illegal or fraudulent
“fictitious person” are not limited to persons having no real
purpose. The person to whom an instrument so dated is
existence. An existing person may be considered a fictitious
delivered acquires the title thereto as of the date of
payee, depending upon the intention of the one making or
delivery.
drawing the instrument. “Fictitious person” means never
intended who has no right to the instrument because the
What is the rule on ante-dating and post-dating?
drawer or maker never intended for it to be payable to the said
person. The want of interest in the payee is not the controlling
Sec. 12 contemplates ante-dating or post –dating
consideration in determining whether an instrument is payable
where the parties have mutually agreed to such dating. An
to bearer, as payable to a fictitious person. Rather, it is the
instrument is post-dated when the date written thereon is later
intention the maker or drawer not to make said person the
than the true date of its issuance or delivery. An instrument is
payee. Thus, it does not matter whether the name of the payee
ante- dated when the date written thereon is earlier than the
used by the drawer or maker be that of one living or dead or
true date of its issuance or delivery. The general rule on such
one who never existed. The name is fictitious when it is
instrument is that an ante-dated or post-dated instrument is not
feigned or pretended and a non-existent person is one who
rendered invalid or non-negotiable by that fact alone. It may
does not exist in the sense that he was not intended to be payee
be negotiated before or after the date given as long as it is not
by the drawer. Thus, an instrument made payable to the order
negotiated after its maturity. The only limitation is that the
of non-existing person or of a person having no interest in the
ante-dating or post-dating is not done for illegal and fraudulent
transaction where the makers believes that such person exist
purposes. Further, title to the instrument is not acquired as of
and has an interest in the transaction and intends that he shall
the date written on the instrument but rather as of the actual
receive the same, is not payable to a fictitious person or to
date of delivery.
bearer. Only if such maker, knowing the person to be non-
existing, never intended it to be paid to the designated person,
Sec. 13. When date may be inserted. - Where an instrument
can the instrument be payable to a fictitious person or to a
expressed to be payable at a fixed period after date is
bearer.
issued undated, or where the acceptance of an instrument
payable at a fixed period after sight is undated, any holder
may insert therein the true date of issue or acceptance, and
NOTES: 1) Under the NIL, a check drawn payable to the instrument shall be payable accordingly. The insertion
the order of “cash” is a check payable to bearer., and the bank of a wrong date does not avoid the instrument in the hands
may pay it to the person presenting it for payment without the of a subsequent holder in due course; but as to him, the
drawer’s endorsement. date so inserted is to be regarded as the true date.
2) In sec.9e, the instrument contemplated is Is the date necessary to an instrument?
one originally payable to order. It becomes payable to
bearer where: (a) there is only one endorsement and Under Sec. 6, the date is not necessary for the
such is in blank: or (b) there are several endorsement negotiability of the instrument. However, the date may be
but the last one is in blank. But, a blank endorsement necessary; (1) where an instrument is payable at a fixed period
cannot make a non-negotiable instrument (because after date but is issued updated; and (2) where an instrument is
payable to a specified person) negotiable. The word payable at a fixed period after sight but the acceptance is
“indorsement refers only to negotiable instruments. updated. In these 2 cases, any holder may insert the true date
of issue or acceptance.
Sec. 10. Terms, when sufficient. - The instrument need not Rhoda issues an undated instrument to Sioson, does the fact
follow the language of this Act, but any terms are sufficient that is undated affect is negotiability?
which clearly indicate an intention to conform to the
requirements hereof.
No. sioson can just fill in the true date of issues in order to
NOTES: It is advisable to use the words of the law in order to determine the date of maturity. But, the instrument’s
avoid uncertainty. However, under Sec. 10, it is not necessary negotiability is not affected in accordance with sec. 6.
to use the exact words of the law. The substance of the
transaction rather than the form is the criterion for the In the same example, suppose Sioson puts a false date on the
negotiability. instrument and negotiates it to Lyn, an innocent party. What
are the effects?
Sec. 11. Date, presumption as to. - Where the instrument or
an acceptance or any indorsement thereon is dated, such The date Sioson inserted is void, but as to Lyn, she can enforce
date is deemed prima facie to be the true date of the it against Rhoda as the performer is a subsequent holder in due
making, drawing, acceptance, or indorsement, as the case course. Remember the rule is that between 2 innocents, the
may be. one who made possible the commission of the wrong bears the
loss. Also, as to Sioson, the instrument becomes void. This
NOTES: Sec, 11 applies to 3 cases: (1) the instrument being in accordance with this section as well as with sec. 12,
contains the date of issue, in which case it is presumed to be

7
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
that ante or post dating (which ever case) for fraudulent being enough) THEN- the law presumes
purposes renders the instrument void. authority to fill up to any amount.

2) But, to hold PRIOR (before completion) parties liable


To a person filling up and to holder not a HIDC- (1)
Sec. 14. Blanks; when may be filled. - Where the instrument the blank must be filled up strictly in accordance with
is wanting in any material particular, the person in the authority given and (2) filled up within a
possession thereof has a prima facie authority to complete reasonable time. (Reasonable time depends on the
it by filling up the blanks therein. And a signature on a nature of the instrument, the usage of the trade or
blank paper delivered by the person making the signature business and the facts of a particular case sec. 193.)
in order that the paper may be converted into a negotiable so much so that lack of one of the two would
instrument operates as a prima facie authority to fill it up result in a failure to enforce the instrument
as such for any amount. In order, however, that any such against said parties.
instrument when completed may be enforced against any To a holder who is a HIDC- it is necessary that either
person who became a party thereto prior to its completion, was followed for being a HIDG, he takes the note
it must be filled up strictly in accordance with the (sec. 52)
authority given and within a reasonable time. But if any
such instrument, after completion, is negotiated to a holder o Complete and regular on its face;
in due course, it is valid and effectual for all purposes in o Before it was overdue and without notice or
his hands, and he may enforce it as if it had been filled up dishonor
strictly in accordance with the authority given and within o In good faith and value
a reasonable time. o Without notice of infirmity in the instrument
or defect in the title of the owner.
What are the 2 steps in execution of NI?
 The maker or drawer cannot blame
 The mechanical act of writing the instrument an innocent party for a mistake
completely and in accordance with sec. 1, of NI; which he himself made possible
and (for not completing the notice).
 The delivery of the instrument with the intention of
giving effect to it. THUS, failure to fill up strictly in accordance with authority
given and within a reasonable time is- a personal defense. This
To what step does sec. 14 refer? is so because it is available as a defense only as against those
holders not HIDC (including the person filling up). The maker
Sec. 14 refers to instrument that are not complete on its face or drawer is not liable to them. But, as to HIDC, it is not a
but delivered by the maker/drawer. It applies to cases where valid defense. The maker is still liable despite the error.
the instrument is incomplete but delivered. The first step is,
thus, not fully satisfied. WITH REGARD TO PARTIES AFTER FILLING UP, they
are estopped or precluded from claiming that the notice was
What are the 2 cases referred to in sec. 14? What are the not filled up strictly in accordance with the authority given. As
rules on each case? to them, they negotiate the instrument for the value filled up
strictly.
1. PRIMA FACIE AUTHORITY TO FILL UP
BLANKS- Suppose: Toby executed a note ”I promise to pay Erwin or
Where the instrument is wanting in any material order-------. Sdg. Toby then gave Erwin the note
particular, the person in possession thereof has a authorizing him to place any amount not exceeding P5,
prima facie authority to complete it by filling up to 000. But Erwin placed P10, 000 and negotiated it to Ian.
the blanks therein. Can Ian go against Erwin? Can Ian go against Toby?
a. Material particular- may either be a
particular the omission of which will render
the instrument non-negotiable As to Erwin, being a party to the completion and having
Eg. Of (a) – name of payee, of the drawer negotiated the note for such value, Erwin, regardless of
Of (b) – date, rate of interest, place of payment whether Ian is a HIDC or not, can be held liable for the value.
any particular proper to be inserted in a negotiable As to Toby, if Ian is not HIDC, Toby cannot be held liable for
instrument to make it complete (given the circumstances the erroneous completion (Toby), the holder must be a HIDC,
of the instrument) the note would be valid and effectual as if it had been
o GIVEN 2 FACTS: (1) there is want of material completed in strict accordance with the authority given and
particular in the instrument; and (2) there is within a reasonable time. While it is true that Toby did not
possession by a person other than the drawer or authorize such amount, by his negligence in making the
maker THEN- the law presumes agency fraudulent act possible, he rather the Ian- an innocent party,
or authority to fill up the blanks. must suffer the consequences of its acts.

2 PRIMA FACIE AUTHORITIES TO FILL UP TO If Ian, pretending to be a fan of Erap, secures his
ANY AMOUNT- autograph on a blank piece of paper and, then, writes a
A signature in a blank paper delivered by a promissory note over it, may Ian enforce the note? If Ian
person making the signature in order that the proper negotiate it Toby, may the latter enforce the note against
may be converted into a negotiable instrument Erap?
operates as a prima facie authority to fill it up as such
for any amount.
1) GIVEN 2 FACTS: (1) A signature in a blank paper, Both may not enforce the note. Sec. 14, while it allows for the
and (2) the paper is delivered with the intention of filling up of a blank paper with a signature, does not give such
having converted into a NI (mere possession not authority when the said paper with no intention of it being
converted to a NI. It does not matter whether Toby is HIDC or
not. Toby’s remedy would be to go after Ian, the endorser.
8
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
highly improbable that the next party physically will not know
such conditions or limitations).
Sec. 15. Incomplete instrument not delivered. - Where an
incomplete instrument has not been delivered, it will not, if What may the maker, drawer, indorser show as against the
completed and negotiated without authority, be a valid immediate party or a holder not a HIDC?
contract in the hands of any holder, as against any person
whose signature was placed thereon before delivery. As against such parties, he may prove that: (1) no delivery was
made; or (2) if there was a delivery, it was not authorized; or if
What is the rule on incomplete and undelivered the delivery was made or authorized, the delivery was
instrument? conditional or for a special purpose and not for the purpose of
transferring the title to the instrument. In conditional
Here, both stances in the execution of a NI are wanting. The deliveries, what is conditional is the delivery, not the promise
non-delivery of an incomplete instrument renders the note or order to pay. If the promise or order to pay is conditional,
unenforceable as against the person whose signature was the instrument is rendered non-negotiable. Eg. A deliver the
placed thereon and is a valid defense, not only between the note to B with the condition that the delivery be binding only
original parties but also against a HIDC. The law does not if C’s signature was secured. The delivery is not binding on A
make a distinction when it says that it is not a “valid contract until C’s signature appears thereon. (The promise or order to
in the hands of any holder” which includes a HIDC. It is, thus, pay remains unconditional on the face.) As to special
a real defense as it is available even as against a HIDC. purposes, if a delivers a bearer instrument to B for (1)
However, the invalidity of the instrument is only with safekeeping or (2) for collection, B cannot enforce the note
reference to parties whose signature appears on the instrument against A.
prior to delivery. As to parties whose signatures appear on the
instrument after delivery, the instrument may be invalid.
What is the rule on lost or stolen instrument?
Suppose Toby, before he could complete a note, placed the
said paper between the pages of his book. Erwin who As soon as the owner discover that he has lost a NI, he should
borrowed the book and finds the said note, completes it, instantly give notice of the lose to all parties on such paper and
signs Toby’s name and negotiates it to Ian. Ian negotiates it inform them not to pay the amount to any one except to the
to Jon. Can Jon go against Ian? loser or is order. This is especially important in bearer
instrument (but may also apply to order instrument). No title
As the note was incomplete and undelivered, Toby has a real to a lost bill or note vest in the finder and the owner when he
defense as against Jon. It does not matter whether Jon is a has identified it, may maintain ero an action where the
HIDC or not. As to Toby, there was never any valid contract to defendant found an article and refused to return it to the
make him liable. But, Jon can still go against Erwin and Ian as owner) against the finder. If the finder has negotiated it and
they are considered to be parties whose signature appear after has received value for it, an action for money be maintained
the delivery (Erwin’s signature would appear as an against him for such use. A party liable will net be discharged
instrument.) if he pays the amount to the holder of the lost instrument
All notes when presented for payment arew persumed to before maturity or if he had notice of the loss unless the holder
be complete and delivered. The purpose of sec. 14, 15 & 16 is is a HID. (in such case, the party liable should recover from
to show what defenses are available to makers/drawers upon the finder).
the presentment of these instruments. For example, in the
hands of a HIDC when the note is originallly incomplete and
undelivered’ such presumption is only prima facie. Proof of Sec. 16. Delivery; when effectual; when presumed. - Every
non-delivery may be presented to rebut the presumption. In contract on a negotiable instrument is incomplete and
contrast, if the note was mechanically but undelivered, the revocable until delivery of the instrument for the purpose
presumpiton is conclusive as to a HIDC. No proof may be of giving effect thereto. As between immediate parties and
presentewd to rebut it. as regards a remote party other than a holder in due
It has been held that where the custody of the course, the delivery, in order to be effectual, must be made
incomplete instrument has been entrusted to another who either by or under the authority of the party making,
wrongfully completes and negotiates the note to a HIDC, drawing, accepting, or indorsing, as the case may be; and,
delivery to the agent is asufficient delivery to bind the drawer in such case, the delivery may be shown to have been
or maker. conditional, or for a special purpose only, and not for the
purpose of transferring the property in the instrument.
Thus, the defense is only a personal defense. The one who But where the instrument is in the hands of a holder in due
being held liable may only show lack of delivery if and when course, a valid delivery thereof by all parties prior to him
the holder is not a HIDC (may either an immediate party or a so as to make them liable to him is conclusively presumed.
holder not a HIDC). Once the holder proves that he is a HIDC, And where the instrument is no longer in the possession of
the defense is no longer available. a party whose signature appears thereon, a valid and
intentional delivery by him is presumed until the contrary
is proved.
What is meant by “immediate parties”

The term immediate parties is confined to those who are What is the general rule in Sec. 16?
immediate, in the sense of knowing or bieng held know the
conditions or limitations placed upon the delivery of the Every contract on a NI even if it is completely written
instrument. It means privity not proximity. The cretirion is is incomplete and revocable until its delivery. Before delivery,
whether or not the party in question knows of the conditions or the maker or drawer can revoke, cancel or tear up the
limitationas placed upon delivery or the facts that the instrument. The payee named therein acquires no right until
instrument was not delivered but stolen. Thus, if a party knows the instrument is delivered to him. Delivery is essential to the
of such conditions or limitation, he is an immediate party even validity of any NI. An undelivered instrument is inoperative
if he is physically remote (eg. Maker indorsee who because delivery is a prerequisite of liability. However, if a
knows)n (NOTE: While proximity is not the critirion, it is complete instrument is found in the possession of an
9
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
immediate party or a remote party other than a HIDC, there is the letter “Y” in eighty thousand is unclear (with
a prima facie presumption of delivery but subject to rebuttal. If P8,000 on margin) or when the note is payable for
the holder is a HIDC the presumption becomes conclusive and “one pesos” ( with P 100 on margin) or P365 is
not subject to rebuttal. written as “three sixty five pesos”, the marginal
figures control.
If the note is found with immediate party or a holder (b) Where the note stipulates that the amount to be paid
not a HIDC, the one being held liable can show that delivery is “with interest at ______% from____”, it is deemed
was not made either him or under his authority. (Delivery may payable from the date in the note or if issue at the
be made by the maker/ drawer himself or through an legal rate.
authorized agent. Delivery may also mean issuance.) But, if (c) Where the note states “I promise to pay to the rule of
the note is with a HIDC, the one being held liable cannot J.M ONLY P 10. sgd. X.” with “J.M ONLY” in
prove such because he is conclusively presumed to have handwriting, the note is non-negotiable as it is
delivered it. Thus, is a maker denies having delivered a payable to a specified person only. The handwritten
complete note, the holder must only show that he is a HIDC words prevail because the written words are deemed
and the former can no longer prove his accusation. to express the true intention of the maker because
they are written by him while the printed words are
Sec. 17. Construction where instrument is ambiguous. - printed with no contract in view.
Where the language of the instrument is ambiguous or (d) Where a note states “I promise to pay Erwin or order
there are omissions therein, the following rules of P 10. sgd. Toby. Ian”, the payee or holder may treat it
construction apply: as either a note or bill according to his preference.
(a) Where the sum payable is expressed (e) Usually, the signature of the maker/drawer is placed
in words and also in figures and there in the lower right hand corner if the face, the acceptor
is a discrepancy between the two, the across the face and the indorser at the back. Where it
sum denoted by the words is the sum is not clear which if the three a person belongs as he
payable; but if the words are signs on the margins, he is presumed to be an
ambiguous or uncertain, reference indorser.
may be had to the figures to fix the (f) Where a note states “I promise to pay C or order P10.
amount; sgd. A&B.”, the makers are deemed to be solidarily
bound.
(b) Where the instrument provides
for the payment of interest, without Sec. 18. Liability of person signing in trade or assumed
specifying the date from which name. - No person is liable on the instrument whose
interest is to run, the interest runs signature does not appear thereon, except as herein
from the date of the instrument, and otherwise expressly provided. But one who signs in a trade
if the instrument is undated, from the or assumed name will be liable to the same extent as if he
issue thereof; had signed in his own name.

(c) Where the instrument is not dated, it will be What is the general rule? Exceptions?
considered to be dated as of the time it was issued;
GENERAL RULE: A person whose signature does not appear
(d) Where there is a conflict between the written on the instrument cannot be held liable thereon
and printed provisions of the instrument, the EXCEPTIONS:
written provisions prevail; (1) The principal is liable if duly authorized agent signs
on his own behalf (Sec. 19);
(e) Where the instrument is so ambiguous that (2) In case of forgery is liable even if his signature does
there is doubt whether it is a bill or note, the not appear on the instrument (Sec. 23);
holder may treat it as either at his election; (3) Where a person sought to be charged signs on paper
separate from the instrument itself, as in an allege
(f) Where a signature is so placed upon the although the allege may be considered a part of the
instrument that it is not clear in what capacity the instrument, or where an acceptance is written on
person making the same intended to sign, he is to another paper other than the bill (Sec. 134 & 135);
be deemed an indorser; (4) Where a person signs under an assumed or trade
name- not really an exception, rather an instance
(g) Where an instrument containing the word "I where a person’s business name serves the same
promise to pay" is signed by two or more persons, purpose as his signature. There must be an intention
they are deemed to be jointly and severally liable to be found by signing the trade name.
thereon.

 The rules stated shall not be availed of if the terms of the Sec. 19. Signature by agent; authority; how shown. - The
instrument in question are clear and admit of no doubt. It is signature of any party may be made by a duly authorized
only when the instrument in question is ambiguous, doubtful agent. No particular form of appointment is necessary for
or obscure or when there are omissions therein will the rules this purpose; and the authority of the agent may be
apply. established as in other cases of agency.

EXAMPLE OF THE RULES: a. The party may sign personally or thru an


(a) Where a PN reads “twelve pesos” in its body and P agent. Agency may be oral or written
1,200 (in figures) at the margin, the note is good only authority. It may be proved by oral or
for P 12. The reasons are: (a) the figures in the written evidence, unless specific provisions
margin do not form part of the instrument and is only of the general law require otherwise (eg.
for convenience: (b) it is easier to change the figures Statute of Frauds).
or to commit a mistake than a sum in words. But
when the words are ambiguous or uncertain as when
10
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
Sec. 20. Liability of person signing as agent, and so forth. -
Where the instrument contains or a person adds to his Lawrence can hold Lynn liable because he acquires title to the
signature words indicating that he signs for or on behalf of instrument by virtue of sec. 22. The instrument is validly his.
a principal or in a representative capacity, he is not liable But Lawrence cannot hold Paz liable because Paz has a valid
on the instrument if he was duly authorized; but the mere defense – her minority. Minority is real defense in the sense
addition of words describing him as an agent, or as filling a that the Paz may use it as against any holder (even a HIDC).
representative character, without disclosing his principal, But, Lynn cannot make use of the same defense as it is
does not exempt him from personal liability. personal to the minor – Paz. Further, as maker, Lynn warrants
the existence of the thing as well as the capacity of the payee
What are the requisites for an agent to escape liability? to enter into the contract. The maker is therefore precluded
from putting up the defense that the payee had no capacity.
(1) The agent must be duly authorized.
(2) Must add words to his signature indicating that he
Sec. 22 is also applicable to endorsements by lunatics,
signs as an agent, that is, for or on behalf of a
imbeciles, and other incapacitated parties.
principal.
(3) Must disclose his principal.

EXAMPLES
Sec. 23. Forged signature; effect of. - When a signature is
Of no.2 - “Jose Cruz by Pedro Vega” “Pedro Vega as
forged or made without the authority of the person whose
agent of “Jose Cruz”
signature it purports to be, it is wholly inoperative, and no
Of no.3 – “sdg. Pedro Vega, agent” – Vega is liable as
right to retain the instrument, or to give a discharge
he fails to disclose his principal (even if he acts within his
therefor, or to enforce payment thereof against any party
authority). “Agent” is deemed as merely a descriptive word,
thereto, can be acquired through or under such signature,
also “trustee”, “administrator” – one is not relieved from
unless the party against whom it is sought to enforce such
liability by adding descriptive words.
right is precluded from setting up the forgery or want of
Of no. 3 – the disclosure of the principal in order to
authority.
relieve the agent need not be in signature (can be in the body).
Eg. “ I promise to pay X or order P100 for money loaned to Y
& Co. sgd. J, Treasurer.” The principal is obvious”. What is forgery?

Sec. 21. Signature by procuration; effect of. - A signature by By forgery is meant the counterfeit making or fraudulent
"procuration" operates as notice that the agent has but a alteration of any writing, and may consist in the signing of
limited authority to sign, and the principal is bound only in another’s name or the alteration of an instrument in the name,
case the agent in so signing acted within the actual limits of amount, description of the person and the likes, with intent to
his authority. defraud. The intent to defraud distinguishes forgery from
innocent alterations and spoliation.
What is the authority of an agent by procuration?

This agent has but a limited authority to sign and he must act What are the forgeries not referred to in sec. 23?
within the limits of his authority. The words “per proc.”
or “p.p.” serves as a notice to whole world that the agent
has but a limited authority. It is the duties of the 3rd - fraud in factum – or fraud in esse contractus.
person dealing with such agent ascertain the limits of the Here, there is fraud in the sense that ther was
agent’s authority. He must remember that he is dealing at really no intention to issue an instrument. As it
his own risk. amounts to forgery, it has the effects of forgery
such that it is a real defense.
FORM: “Jose Cruz (principal), per proc.: Pedro Vega (agent)”
eg. B obtains the signature of A by
telling A that it is only for autograph
purposes or that it is for some document
Sec. 22. Effect of indorsement by infant or corporation.- The
(other than a NI) then B converts the
indorsement or assignment of the instrument by a
paper into a NI. The fraud here amounts
corporation or by an infant passes the property therein,
to forgery.
notwithstanding that from want of capacity, the
corporation or infant may incur no liability thereon. This must be distinguished from fraud in document
because the letter is only a personal defense as there
really was an intention of issuing an instrument. Eg.
What is the rule: a minor or corporation indorsing? A sell to B a diamond rings showing the merchandise
to A. But it is only glass. A makes out a check in B’s
Ordinarily, a minor cannot give consent to contracts and a favor for it. While the consent is vitiated, thus
contrast entered into by him is avoidable. In the case of rendering the contract voidable, there was still intent
corporations, they cannot perform acts beyond the escape to issue a check. The defense is only available as
of their authority. Such acts would be ultra vires Never against the party who perpetrated.
the less, if a minor or a corporation endorsee an
- Duress amounting to fraud – ordinarily, duress is
instrument, the endorsee acquires titles to it and can
a personal defense. The only
enforce it agains the maker or acceptor or other parties
exception is if it amounts to forgery as when someone
prior to the minor.
forcibly takes one’s hands

Suppose: Lyn prepares a note for Paz, “ I promise to pay Paz and affixes that the person’s signature. Here, there is a real
or order P1, 000. sdg. Lynn” But Paz is only a minor. Paz defense as there was no intention of issuing a negotiable
negotiated the instrument to Lawrence. Can he hold Lynn instrument.
liable Paz?
11
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
- Fraudulent impersonation – in such cases, the acquired through or under such a signature
maker/drawer is said to have a/double intent. forged or made without authority.
First he intends to make the instrument payable That, nevertheless, as against a party
to the person before him or in front of him – the preclude from setting up to the forgery or
person is he is dealing with regardless of want of authority, the signature forged or
whoever he is. The 2nd intent is that he intends made without authority is operative, and,
that it be payable not to the person in front of rights to retain the instrument the
him but to the real person – the payee that this instrument, to give discharge therefore , or
person says he is. In general, the rule is if the 1st to enforce payment thereof, can be acquired
intent was present the maker/drawer is liable. So, through or under the signature forged or
what is important is the determination of who the made without the authority.
payee intended is.
Eg. A person approaches me and says, “ I am
What is meant by “it is wholly inoperative?
Pablo. I have a check in my favor for P10, 000.” But the
person is really Pedro. Now I issue a check in the name of The word it refers to forged signature, not to the
Pablo. What is my intention? whole instrument. It means that the forged signature cannot be
used to transfer title ever that the instrument to another person.
1st : I intend to the check to the person in
The forged signature cannot operate to transfer title to another.
front of me – to the person I am
Because the signature is inoperative, the holder never acquires
dealing with. It does not matter whether his name is valid title to the instrument so that it is a real defense as
Pablo or Pedro. I am making against any holder.
the transaction because of what he offers regardless EXCEPTIONS:
of his identity.
1) but, only the signature forged or made without
2nd : I intend to make the check payable to authority is stated by the law to be inoperative,
the real Pablo – the person who neither the instrument nor the genuine signatures are
rendered inoperative. Proof that the one of several
Pedro says he is.
signatures in a note was forged does not necessarily
avoid the note as to those whose signatures as are
genuine – such as those who actively procured the
(a) The 1st intent governs because of the theory of
forgery or had knowledge.
actual intent and of stopped or negligence. If the
check is encashed, the bank, in paying Pedro
would merely give due course to my real intent – 2) further, the instrument can be enforced by holders to
that it be paid to the person I directly dealt with whose title ever the instrument the forged signature is
and to whom I intended it to be paid to. not necessary., such as, an endorsement of an
Secondly, because the bank is innocent as I am instrument which on its faco is payable to bearer.
too, and as between two innocent parties, the one Whether an indorsement on a not necessary for the
who was negligent must be bear the loss. I was holder’s title is genuine or forged is immaterial to his
negligent is not ascertaining his identity. I am right to recover such instruments can be negotiated
stopped to deny my real intent because it was by mere delivery so that the forged signature is
within my power to ascertain but that I failed to irrelevant to his title.
do so.
(b) The 1st intent cannot rule when the maker/drawer
PROBLEM: A made a Promissory note “I promise to pay
issues to a person an instrument where the
B or order P1, 000. sdg A. “A is the maker and B is the
person before him purports only to be an agent of
payee. B however lost the instrument. C found it and
the intend payee (given: maker was’nt
simulated the signature of B and negotiated the instrument
negligent).
to D. D negotiated it to E. Can E go against A, B, C, D?
Explain.
What type of forgery does sec. 23 refer to?

ANSWER:
Sec. 23says, “when a signature is forged…” it applies
First, does this problem involved sec. 23, forgery of
therefore only to (1) forged signatures (forger does not purport
a signature? Obviously, it does. Second, find out where
to be an agent of the person whose signature he has forged) or
the forgery occurred. In this case, the forgery occurred at
(2) signatures made without the authority of the person whose
the point of C. So this is the cut-off point. All those below
signature it purports to be (forger purports to be agent but has
or subsequent to the cut-off point. Are liable to the holder.
no authority). If the problem is something else other than the
All those above or prior to the cut-off point are not liable
signature, then sec. 23 will not apply. If what was changed was
to the holder.
the amount or the name of the payee, sec. 124 on material
alternation rather than sec. 23 should apply. Visually
A } not liable
What are the three fundamental rules as to the effect B } not liable
of a forged signature?
---------------------- cut-off point
C } liable
that the signature forged or made without
D } liable
authority is wholly inoperative;
that no right to retain the instrument, or to E } holder
give discharge therefore or enforce payment
thereof against any party thereto can be
12
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
(1) as to D, under sec. 23, D is preclude from setting up Who are precluded from setting up the defense of forgery?
the defense of forgery. This is because, under sec. 65
& 66, an indorser warrants that an instrument is
genuine and in all respects what it purports it to be. In Those who warrant or admit the genuineness of the
other words, when D negotiated the note to E, in signature in question:
effect, he said, the instrument is genuine and it is
valid. “ Having impliedly said this, he cannot  indorser – whether general or qualified, warrant that the
thereafter say that the instrument is invalid. He is instrument is
stopped by his own warranty. genuine and in all respects what it
As to C, being the forger, he is guilty of a purports to be (sec. 65 & 66)
criminal offense and is liable for all the  person negotiating by mere delivery – also by sec. 65.
consequence of his criminal act. But, more than  Acceptors – by accepting the bills, he admits genuineness
that, under sec. 18 as an exception to the general
rule, the forger is liable as he is deemed to have
signed under a trade name or assumed name. Those who, by their acts, silence or negligence are
Thus, the forger has the same warranty as the stopped from setting up the defense of forgery.
general indorser. Otherwise, the forger would be Whenever a party has, by his own declaration, act
occupying a position better than of a general or omission, intentionally and deliberately led
indorser. another in believe that his or another’s signature in an
(1) As to B, because under sec. 10 “ A person where instrument is genuine, an to act upon such belief, he
signature does not appear thereon is not liable on the cannot, in any litigation, a rising out of such
instrument. “B did not sign. Somebody signed for declaration, act or omission, be permitted to set up
him without his authority. His signature does not the forgery of such signature. Stopped arises from:
appear on the instrument and thus, he cannot be liable (1) a declaration;
thereon. Moreover, under sec. 23, the forged (2) an act;
signature (made by C) is totally or wholly (3) omission or negligence – (such as unreasonable
inoperative. Therefore, no title was validly delay)
transferred from B to C to D to E. therefore E What are the causes of forgery in general?
acquired only the right that cannot be upheld as
against B and any party prior to the forgery, it being I. Forgery of promissory notes:
wholly inoperative, there is no right even to retain the i. forgery of an endorsement in the
instrument or to enforce payment thereof against any note;
party thereto. 2.)forgery of the maker’s signature
(2) As to A, insofar as A is concerned, the signature
forged is wholly inoperative and therefore it did not II. forgery of bills of exchange:
validly transfer title to the instrument to E. And E as a) forgery of an indorsement in the bill;
against A has no right to retain the instrument ant to b) forgery of the drawer’s signature.
enforce payment thereof. (Further, A bound himself a. with acceptance by the drawee, or
to pay the order of B. E cannot be regarded as such. b. without such acceptance but the bill is paid
by the drawee.
The cut-off point rule discussed above is a
SUPPOSE: In problem 1, the note was a bearer instrument but sufficient guide to see who can be held liable on
instruments payable to order whether the forgery is
C, in forging B’s signature, indicated that it was payable to of the indorsement or maker’s/drawer’s signature.
What remains to be discussed is the liability of the
him in the back was put “ Pay to D. sgd.C.” D negotiated it to drawee in bills where the indorsement is forged.
(below)
E, “Pay to E. sgd.D” Can E now go against A,B,C,D? As mentioned, when the note/bill is payable to
bearer, sec. 23 is not applicable but a holder who is
(1) Sec. 23 applies only the instrument payable to order a HIDC can recover not by virtue of sec. 16 (given
not to those payable to bearer. The forged signature of the instrument is complete).
B is not necessary to the title of the holder. The As to the acceptor, his acceptance precludes him
holder can even cross out all those indorsement not from setting up the defense of forgery by virtue of
necessary (sec. 48). Once an instrument is payable to his warranties in accepting. Also, in paying without
bearer, it will always remain a bearer instrument not previous acceptance, the drawee cannot collect
withstanding the special indorsement. If the crosses from the drawer nor the recipient HIDC. The
them out, it will be as if the note was delivered acceptor is deemed constructively negligent in
directly in him. Therefore. E can hold A, B, C, D. failing to meet its obligation to know its customer’s
(drawer) signature. The basis of such liability is not
While the cut-off point rule is used above in that payment is tantamount to acceptance but that
the situation of an indorser, it is also of his negligence. (Here it is the drawer’s signature
applicable to forgeries of a maker’s/drawer’s which is forged).
signature such that all parties such that all
parties below the cut-off point (all parties
subsequent to the maker/drawer) can be held What rules used govern checks?
liable but not the maker/drawer. Further,
under sec. 18, he whose signature does not
appear thereon is not liable on the
The same rule used for the other NI – the cut-off point rule –
instrument.
with the exception of the determination of the drawee bank’s
liability vis-à-vis each other.
13
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
indorser) claiming that a payee or indorsee did not give
valuable consideration for an instrument must prove that there
METRO BANK VS. FNCB (118 SCRA 537)
really was no valuable consideration given.

Cunanan & Co. drew a check for P 50, 000 with FNCB as the
Sec. 25. Value, what constitutes. — Value is any
drawee in favor of Manila Polo Club. By unknown
consideration sufficient to support a simple contract. An
circumstances, Sales was able to obtain the check, altered the
antecedent or pre-existing debt constitutes value; and is
same (making it payable to cash and for P 50, 000) and
deemed such whether the instrument is payable on
deposited it with Metro Bank. MB then sent the check to the
demand or at a future time.
CB clearing house with stamp on the back: “ Metro Bank
cleared…office all prior endorsement and/ or lack of
What is valuable consideration?
endorsement guaranteed. “ the check cleared the same day and
FNCB paid MB the P 50, 000. Within 6 days, Sales whose
Consideration means inducement to a contract that is,
account was credited with the amount, withdrew the money.
the cause, motive, price or impelling influence which induces
But before the last withdrawal, MB, alarmed at the activity of
a contracting party to enter into a contract. Valuable
the account, clarified the matter with FNCB which gave its
consideration consists either in some right, interests, profit or
approval. Upon receipt of the check, Cunanan notified FNCB
benefit accruing to the party who makes the contract, or so,
of the alternation. FNCB asked MB to reimburse the amount
forbearance, detriment, loss or some responsibility to act or
but the latter refused. Who is liable?
labor, or service given, suffered or undertaken by the other
SC declared that under CBC no. 9, the drawee bank side. Consideration founded on (1) love and affection, or (2)
(FNCB) must return the check within 24 hrs. from receiving it upon gratitude, is good consideration, but does not constitute
from the CB clearing house to the collecting bank for any such valuable consideration as is sufficient to support the
defect such as an alteration. The stamped guarantee of MB obligation of a bill or note, as between original parties.
must be read with CBC no.? That the liability of the collecting Included on this are gifts, services without expectation of
bank on such stamp is limited to the said 24 hrs. Here, FNCB compensation, moral obligations. These are not valuable
returned the check only after 9 days. Further, the approval consideration contemplated by the NIL., although the same are
given by FNCB of the last withdrawal shows the drawee’s considered so by the Civil Code. A valuable consideration
negligence and stopps them from claiming otherwise. FNCB need not be adequate. It is sufficient if it is a valuable one.
IS LIABLE.
Sec. 26. What constitutes holder for value. - Where value
CBC No. 9 has been superseded by CBC No. 580 has at any time been given for the instrument, the holder is
(1997). Under 580 the attention of the collecting bank deemed a holder for value in respect to all parties who
must be called within 24 hrs. from the date of become such prior to that time.
discovery of the fraud, forgery or material alteration.
If the case happened at present, MB would have to What is a holder for value?
reimburse FNCB for the amount.
This case, strictly speaking, involves material One who gives valuable consideration for an
alteration and is not applicable to Sec. 23 except as instrument issued or negotiated to him is a holder for value.
tro the liabilities of the drawee bank and the
collecting bank in cases falling within the scope of ILLUSTRATION: A, maker, B, payee. B indorses to C, C to
Sec. 23. D, D to E, holder. Between A & B no valuable consideration.
Between B & C valuable consideration is given. Between D &
Therefore, if the drawee bank is vigilant as to inform E it is not known whether value was given.  E is a holder for
the collecting bank within 24 hrs. from discovery, the value as to A, B and C because at C’s time there was valuable
liability for forged checks will lie with the latter. The consideration given and A, B, and C were partiers prior to the
remedy of the collecting bank is to insure itself time when value had been given. As to D, it is not known.
against such losses. If the public cannot hold the
collecting bank liable, it will no longer use checks but Sec. 27. When lien on instrument constitutes holder for
rather cash. Commercial transaction s will bog down. value. — Where the holder has a lien on the instrument
Consequently, the economy will stand still and the arising either from contract or by implication of law, he is
banks will suffer. The drawee bank is liable only for deemed a holder for value to the extent of his lien.
the signature of the drawer. It is only to such party
that the bank has privity with. The collecting bank Suppose: Erwin, out of love and affection, issued a
has privity with the depositor who is the principal promissory note in favor of Anne Marie, “ I promise to pay
culprit in the case. Thus, it has duty of diligence. Anne Marie or order P1,000.00. sgd. Erwin.” As a birthday
gift. But Anne Marie owes Peter P6000.00. Because of the
persistence of Peter for AM to pay him, she surrenders the
II. CONSIDERATION instrument to him. Peter is now the holder. Can Peter go
against Erwin?
Sec. 24. Presumption of consideration. - Every negotiable
instrument is deemed prima facie to have been issued for a Given the lack of valuable consideration between
valuable consideration; and every person whose signature Anne Marie and Erwin applying Sec. 27, Peter is considered a
appears thereon to have become a party thereto for value. holder for value to the extent of his debt or lien- P600 and can
go against Erwin for such amount. As to the P400 remaining,
What does this section provide? as Peter is not considered a holder for value to such extent, he
may not collect it. Absence of consideration, being a personal
Under this Section, the mere introduction or defense (Sec. 28), can be used as against those not HIDC.
negotiation of a note raises a disputable presumption of a Since being a holder for value is one of the requisites of a
sufficient consideration . It is unnecessary to aver or prove HIDC, Peter can not be considered as HIDC and thus, the
consideration, for consideration is imported and presumed defense of lack of consideration is available to Erwin as
from the fact that it is a NI. The person (maker/drawer or against Peter. HOWEVER, if sufficient consideration existed
14
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
between Anne Marie and Erwin, Peter may collect the entire 1. ACCOMODATION MAKER- A wanted to borrow
sum subject to the obligation to return the excess to AM. But, money from B. But B would not lend the money to A
also, if the defense of Erwin is a real defense, Peter may not because of the former’s bad reputation. A would only
recover from the instrument despite his lien. lend B the money if the latter were able to secure the
signature of C. B asks C to execute a PN in his(B)
favor. C makes a PN, “I promise to pay B or order
Sec. 28. Effect of want of consideration. - Absence or failure P1,000.00 sgd. C.” B then indorses the note to A and
of consideration is a matter of defense as against any B gets the P1,000.00 from A.
person not a holder in due course; and partial failure of
consideration is a defense pro tanto, whether the failure is In this eg., B is the accommodated party. C
an ascertained and liquidated amount or otherwise. is the accommodated party (maker). He
become a party to the instrument as maker
What is absence of consideration? Failure of consideration? but only for the purpose of lending his name
Distinguish the two. or credit to B so that B can raise the money
he needs. C who as a maker is ordinarily
Absence of consideration is a total lack of any valid primarily liable, is only secondarily liable, is
consideration such as when the consideration for commercial primarily liable. This is because ultimately,
paper is clearly fraudulent. Failure of consideration is the the accommodated party is the one required
neglect or failure of one of the parties to give, to do or to to pay. But if due date comes and B cannot
perform the consideration agreed upon. Want or absence of pay, C can be held liable to pay despite A’s
consideration embraces transactions where no consideration knowledge that C is only an accommodated
was intended to pass while failure of consideration was party. Then, C after payment can have
contemplated but that it failed to pass. recourse as against the one primarily liable,
the accommodated party -. (In my opinion,
Illustrate partial failure of consideration. when due date comes is C that A should go
against. After payment, only then can B held
Suppose that in a note for P1,000.00 the extent of liable. So, the maker is still primarily liable
want of consideration is only P600.00 That is, B., payee, gave – at least, at first).
A, maker valuable consideration to the extent of P400.00. A
can interpose want of consideration pro tanto, or A corporation cannot be held liable as an
proportionate- only to the extent of P600.00. C, holder, if he is accommodation party. This is because a
not a HIDC, can only collect from A P400.00. But, if he were corporation cannot issue instruments without
a HIDC, he can collect the entire amount. a consideration. And under sec. 22, while
title may pass as to the instrument, the
What kind of defense is absence or failure of consideration? corporation may not be held liable due to its
want of capacity (to issue “consideration -
Failure or absence of consideration , whether total or less” NI). In such cash, it is the officers who
partial, can be interposed as a defense only against persons not issued the instrument who must be held
HIDC but not against HIDC. These defenses are, therefore, liable in their individual capacities. Such an
only personal or equitable defenses. act is considered ultra vires. (See cases)

Sec. 29. Liability of accommodation party. - An 2) ACCOMODATION INDORSER – in the eg. Above
accommodation party is one who has signed the instead of asking C to execute a PN, B makes a note favor of
instrument as maker, drawer, acceptor, or indorser, A. B asks C to indorse the note without receiving value
without receiving value therefor, and for the purpose of therefore. Here, C is considered an accommodation indorser.
lending his name to some other person. Such a person is Such endorsement is for the purpose of better securing the
liable on the instrument to a holder for value, payment of the note.
notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party. 3) ACCOMMODATION DRAWER – in the eg. Above,
instead of executing a PN, C executes a BOE with B as the
What is an accommodation party? payee even though no valuable consideration is received by
C.B then indorses the bill to A, who gives the proceeds to B.
An accommodation party is one who has signed the
instrument as maker, drawer, acceptor or indorser without 4) ACCOMMODATION ACCEPTOR – in the eg. Above,
receiving value therefore, and for the purpose of lending his instead of ask C to accept the bill drawn by him (B) in this
name to some other person. The requisites therefore are : (1) own favor. Then, B indorses the bill (that was accepted by C)
he must be a party to the instrument, signing as maker, drawer, to who gives the money.
acceptor or indorser; (2) he must not receive value therefore;
and (3) he must sign for the purpose of lending his name or What is the legal position of the accommodation party?
credit. Thus, it is not a valid defense that the accommodation
party did not receive any valuable consideration when he
executed the instrument as the law requires such absence. (In
contrast, under the Civil Law, the absence of consideration
renders the contract defective.) The placing on the note of the
words “ value received” does not negate the character of the
note as an accommodation paper. The phrase without receiving
value therefore “ means without receiving value by virtue of
the instrument and not as it apparently is supposed to mean,
without receiving payment for lending his name.

ILLUSTRATION:

15
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
The accommodation party is generally regarded as a original payee. The effect of the assignment is that the p[arty
surety for the party accommodated. It is not the holding the right drops out of the contract and another takes
accommodation party that is ultimately liable for the his place. Each assignee takes his chances as to the exact
instrument issued. It is the accommodated party. When the position in which any party making an assignment of it stands.
accommodation party makes payment to the holder, they have Where the holder of a bill payable to order transfers it without
the right to see the accommodated party for reimbursement the indorsement, it operates as an equitable assignment but the
since the relation between them is in effect that of principal assignee has the right to compel the assignor to indorse the
and sureties. The accommodated party cannot recover from the instrument (Sec. 49).
accommodation party because, as between them, absence of
consideration is a valid defense. The understanding between When does transfer of operation of law occur?
them is either: (1) the accommodated party pays the
instrument directly to the holder; or (2) the accommodated The full title to a bill or note may pass without either
party reimburses the amount paid by the accommodation party assignment, indorsement or delivery but by operation of law
to the holder. by:
1. the death of the holder, where title vests in his
A holder despite his knowledge that the personal representative (Succession);
party he holds liable is just an 2. the bankruptcy of the holder, where title vests in the
accommodation party can still recover from assignee or trustee (insolvency), or
such party as if there was no contract of 3. upon the death of a joint payee or indorsee in which
accommodation. The knowledge of the case the general rule is that the title vests at once in
holder does not effect his being an otherwise the surviving payee or indorsee.
HIDC. Thus, to hold the accommodation
party liable, the holder, except for the What is negotiation?
knowledge of want consideration, must
meet all the requisites under sec. 52, that is, It is the transfer of an instrument form one person to
the holder for value must have acquired the another so as to constitute the other the holder thereof. There
instrument complete and regular on its face, is no negotiation if the transfer does not make the transferee
before it is overdue and without notice of the holder of the instrument. Where the instrument is payable
previous dishonor. Where he does not meet to order, it is negotiated by the indorsement of the holder
all these, thus not a HIDC, sec. 28 not a sec. completed by delivery, and where it is payable to bearer, by
29 applies. The accommodation party may mere delivery. But where the instrument is payable to bearer
interpose the defense of its being an and it was indorsed and delivered, the transferor shall be liable
accommodation party to a holder not HIDC. as an indorser. Further, for the holder to hold liable such
indorser, the former must be able to trace his title through an
A solidary accommodation party (1) may unbroken chain of indorsement (Sec. 40)
demand from the principal debtor
reimbursement of the amount he paid; and Sec. 31. Indorsement; how made. - The indorsement must
(2) may demand contribution from his co– be written on the instrument itself or upon a paper
accommodation makers without first attached thereto. The signature of the indorser, without
directing his action against the principal additional words, is a sufficient indorsement.
debtor provided that (a) he made the What is the nature of indorsements?
payment by virtue of a judicial demand; or
(b) the principal debtor is insolvent.
Indorsement is the writing of the name of the indorser
III. NEGOTIATION on the instrument with the intent either in transfer the title to
the same, or to strengthen the security to the holder by
Sec. 30. What constitutes negotiation. - An instrument is assuming a contingent liability for its future payment, or both.
negotiated when it is transferred from one person to An indorserment is not only a mode of transfer. It involves
another in such manner as to constitute the transferee the also a new contract and an obligation on the part of the
holder thereof. If payable to bearer, it is negotiated by indorser – an impiled guaranty that the instrument will be duly
delivery; if payable to order, it is negotiated by the paid according to the terms thereof. That, further, if the
indorsement of the holder and completed by delivery. instrument is not paid by the one primarily liable, the indorser,
after due notice of dishonor, will pay. There is an added
DEFINITION OF TERMS: obligation upon the instrument reside from what appears upon
1. Transfer- to convey property from one the face of the instrument.
person to another;
2. Holder- the payee or indorsee of a bill or
note who is in possession of it or the bearer Where is the indorsement written?
thereof (Sec. 191).

What are the 3 types of transfer? The indorsement may be written (1) on the
1. by assignment; instrument itself; or (2) upon a paper attached thereto. Where
2. by operation of law it is written on the instrument itself, it is usually written on the
3. by negotiation which may either be by indorsement back. But, the law looks to the intention of the parties rather to
completed by delivery or by mere delivery. the form as to indorsement. The place is not essential. Where
the instrument is written on a paper attached to the instrument,
What is assignment? such paper is called an “alone.” The paper must be attached to
the instrument so as to become part of it. A temporary
Generally, it is a method of transferring a non- attachment cannot be considered an allonge. Further, the use
negotiable instrument whereby the assignee is merely placed of an allonge is not limited to when there is an impossibility of
in the position of the assignor and acquires the instrument indorsing on the instrument due to lack of space. The
subject to all defenses that might have been set up against the indorserment is not invalidated by the fact that is written on
16
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
another paper even if there is still space for indorsement on the affect the negotiability of the instrument which is negotiable
instrument itself (Agbayani’s opinion). on its face (sec. 36) since it is only an indorsement.
NOTE: an indorsement has to be only in
writing. It may thus be printed such as
BLANK INDORSEMENT- ONE WHICH SPECIFIES NO
typewritten or stamped.
INDORSEE. Such an indorsement generally consists only of
the signature of the indorser.
Sec. 32. Indorsement must be of entire instrument. - The
indorsement must be an indorsement of the entire
instrument. An indorsement which purports to transfer to How are instruments so indorsed, negotiated further?
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 Where the instrument is originally payable to order and it is
instrument. But where the instrument has been paid in negotiated by the payee by special indorsement, it can be
part, it may be indorsed as to the residue. negotiated by the indorsee by indorsement completed by
delivery. Where the instrument is originally payable to order
and it is negotiated by the payee by blank indorsee, it can be
further negotiated by the holder by mere delivery. Where the
instrument is originally payable to bearer, it can be further
What is the rule on indorsements of the amount? negotiated by mere originally delivery, even if the original
bearer negotiated it by special indorsement. (once a bearer
instrument, always payable to bearer).
The general rule is that the indorserment must be of the entire
amount. An indorsement must of the part of the instrument
does not one rate as a negotiation thereof but may constitute a
Sec. 35. Blank indorsement; how changed to special
valid assignment binding between the parties ( thus, the holder
indorsement. - The holder may convert a blank
is susceptible to defenses available against the assigner). An
indorsement into a special indorsement by writing over the
instrument is said to be indorsed partially when eg. The note is
signature of the indorser in blank any contract consistent
for P1,000 but the indorsement states, “Pay to X P400”. But
with the character of the indorsement.
where the instrument has been paid in part, it may be indorsed
as to the residue (eg. in the eg. above, suppose the maker paid
P6000 already. The indorsement for P400 would then be valid The difference between special and blank indorsement is
as the negotiation). Further, an indorsement which purports to only significant. When the instrument is originally payable to
transfer the instrument to 2 or more indorsees severally does order because a bearer instrument, even if specially indorsed,
not operate as a negotiation. (eg. in the above eg., suppose the is no different from one indorsed in blank. They are still
indorsement read, “Pay to X P400 and Y P600 is not a valid negotiated by mere delivery.
negotiation but “Pay to X and Y P1,000” is).

ILLUSTRATION: A makes a note with B as payee. B


Sec. 33. Kinds of indorsement. - An indorsement may be negotiates it to C, signing only his signature. C, holder, may
either special or in blank; and it may also be either place above such signature “Pay to C” to convert the blank
restrictive or qualified or conditional. indorsement into a special one.

What are the kinds of indorsement? LIMITATIONS: The holder must not write any contract not
consistent with the indorsement, that is, the contract so written
must not change the contrat of the blank indorsement.
It may either be: (1) special, or (2) in blank (both sec. 34), or Consistency shall be judge with the intention of the parties.
(3) restrictive, or (4)non – restrictive (sec. 36), or (5)
qualified, or (6) unqualified or general (sec. 38,66), or (7) Eg. of inconsistent – (1) “Pay to X and Y” when it was
conditional, or (8) unconditional, or (9) joint (sec. 41), intended to be payable to only one person. (2) “ Demand and
(10)successive (sec. 50,68), or (11) irregular (sec. 64), or (12) noticed waived”. (3) “ I guaranty payment”. (4) “ without
facultative (sec. 111). recourse.”

Sec. 34. 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 Sec. 36. When indorsement restrictive. - An indorsement is
indorsement of such indorsee is necessary to the further restrictive which either:
negotiation of the instrument. An indorsement in blank (a) Prohibits the further negotiation of the
specifies no indorsee, and an instrument so indorsed is instrument; or
payable to bearer, and may be negotiated by delivery.
(b) Constitutes the indorsee the agent of the
What are the 2 kinds of indorsement specified in sec.34? indorser; or

SPECIAL INDORSEMENT- one that (1) specifies the person (c) Vests the title in the indorsee in trust for or to
to whom the inodrsement is payable (eg. “Pay to A”) or (2) the use of some other persons.
specifies to whose order it is payable, (eg. “Pay to A or But the mere absence of words implying power to negotiate
order”). In both cases, the indorsement is followed by the does not make an indorsement restrictive.
signature of the indorser. The omission of the words of What is a restrictive indorsement?
negotiability such as “ or order” and “ to the order of “ do not

17
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
A restrictive endorsement is one so worded that it either instrument. But such subsequent indorsee acquires only the
restrict or prohibits entirely the futher negotiation of an title of the agent, A, whose right is merely to colloect.
instrument, an indorser notifies all prospective holders that the
indorsee has only the authority to deal with the instrument as
thereby directed and that the indorsee has only a restrictive The right to receive payment and the right to bring
title thereto. By such indorsement, an indorser can safeguard any action that the indorser could bring are available under
his interest whenever he should find it necessary to entrust any form of restrictive indorsement. The 2 rights are the basic
negotiable paper to another. A restrictive indorsement destroys rights of indorsees in instruments with restrictive indorsement.
the negotiability of the instrument and bars further negotiation
Not all forms of restrictive indorsement destroy
to a HIDC. All subsequent indorsees acquire only the title of
negotiability of an instrument. Only those which fall within
the first indorsee under the restrictive indorsement.
sec. 36 (a) do so. While all three forms of restrictivce
Eg. of (a) prohibition – indorsement impose some degree of limitation and it is the
indorsement itself that discloses the extent of the limitation.
“Pay to C only” or “ Pay to C and no other”.
This is the reason for (c). The indorsee may, if authorized,
Of (b) “ agency type” of restrictive indorsement negotiate further the instrument but all subsequent indorsees
acquire only the title of the original indorsee – an agent.
“Pay to C collection”. or “Pay to C for
deposit”.
- Here, C does not acquire title over the
Sec. 38. Qualified indorsement. - A qualified indorsement
instrument. He is merely an agent of the
constitutes the indorser a mere assignor of the title to the
indorser. Thus, he is subject to all the defenses
instrument. It may be made by adding to the indorser's
available as against the indorser.
signature the words "without recourse" or any words of
Of (c) in trust for another –
similar import. Such an indorsement does not impair the
“ Pay to X in trust for C.” or “ Pay to X for negotiable character of the instrument.
the use of C”. What is qualified indorsement?
- Here, there is transfer of legal title to the
instrument to the indorsee as trustee. And give
It is one made by adding to the indorser’s signature the words
notice that the paper cannot be negotiated by
“ without recourse”, “indorser not holden”, “ at indorsee’s one
him for his own debt or for his own benifit.
risk”, ao any words of similar import. It constitutes the
Further, it is he opinion of “learned writers”
indorser a mere assignor of the title to the instrument.
that the indorsee is not subject to the defenses
“Without recourse” means without resort to a person who is
available as against the indorser.
secondarily liable after the default of the person who is
primarily liable. The purpose of such indorsement is to trasfer
The restrictive indorsement which are hold to title without guaranteeing payment. In effect the indorser
negative the presumption of consideration are such as to states that “all parties to the paper and genuine, that the
indicate that they are not intended to pass title but merely to indoreser is the lawful holder of that paper and has title to it,
enable the indorsee to collect for the indorser. and that he knows of no reason why the indorsee cannot
recover, but that he does not guarantee the financial
Mere absence of the words implying power to
responsibility of the parties on the paper.
negotiate does not make an indorsement restrictive. Thus,
“Pay to X” is the same as “Pay to X order” where the
instrument is payable to order. The omission of the word
When can the qualified indorser be held secondarily
“order” does not render the indorsement restrictive. But while
liable?
the omission of the words of negotiability in the indorsement
does not affect the negotiability of the instrument, ssuch
omission in the body thereof will render the instrument non-
In general, an indorser is secondarily liable. A qualified
negotiable. Restrictive indorsements serve to limit only the
indorser is still secondarily liable but his liability is limited.
negotiability of an instrument originally negotiable.
He is not entirely free from secondarily liability. He is
secondarily liable on breaches of his warranties as an indorser
Sec. 37. Effect of restrictive indorsement; rights of indorsee. under sec. 65. He can be held liable if the instrument is
- A restrictive indorsement confers upon the indorsee the dishonored due to: 1 forgery 2 lack of good title on the party
right: of the indorser: 3 lack of capacity to indorse on the part of
(a) to receive payment of the instrument; prior or parties 4 the fact that, at the time of indorsement, he
knew that the instrument was valueless or not valid. The only
(b) to bring any action thereon that the indorser thing he does not warrant is the solvency of the person
could bring; primarilyliable if the failure to recover was due to the fact of
the insolvency at the time os indorsement, he is liable for
(c) to transfer his rights as such indorsee, where breach of is warranty that he did not know of any fact that the
the form of the indorsement authorizes him to do instrument was valueless.
so.
A qualified indorsement does not impair the negotiable
But all subsequent indorsees acquire only the title of the
character of the instrument.
first indorsee under the restrictive indorsement.

ILLUSTRATION: In the indorsement, “Pay to A for


collection. sgd. P”. A is merely an agent of P and because of Sec. 39. Conditional indorsement. - Where an indorsement
this, A may (1)receive payment of the instrument; (2) bring is conditional, the party required to pay the instrument
any action thereon that the indorsee could bring (subject to the may disregard the condition and make payment to the
same defenses available against the indorser); and (3) if indorsee or his transferee whether the condition has been
authorized, may transfer his right to another by negotiating the fulfilled or not. But any person to whom an instrument so
indorsed is negotiated will hold the same, or the proceeds
18
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
thereof, subject to the rights of the person indorsing E cannot go against B because. As a person who
conditionally. negotiates by mere delivery (to C), warranty under sec. 65
extends only to the immediate transferee. Thus, B is only
liable to C, not to D & E.
What is an absolute indorsement? A conditional
indorsement? E can go against C & D because E can trace his title to
C (& D) through an unbroken chain of indorsements.
An absolute indorsement is one by which the indorser binds
himself to pay, upon no other condition than the failure of NOTE: this section deals with special indorsements,
prior parties to do so, and upon due notice to him such failure. not blank indorsement. So, that if, in the eg. above, C blankly
On the other hand, a conditional indorsement is one by which indorsed it to D, E cannot go against C as it would be
the indorser annexes some other condition to his liability, that impossible for him to trace his title to C. (my opinion)
is, where there is some condition in the indorsement. The (contrary to Abad’s)
indorsement is subject to the happening of a contogent event
(an event that may or may not happen) or a past event
Sec. 41. Indorsement where payable to two or more persons.
unknown to the parties. Like restrictive indorsements, it must
- Where an instrument is payable to the order of two or
be remembered that the pressure of conditions in the
more payees or indorsees who are not partners, all must
indorsements does not render the instrument non-negotiable.
indorse unless the one indorsing has authority to indorse
Only if the condition is on the face or on the original contract
for the others.
of the instrument is the instrument rendered non-negotiable as
This section applies only to instrument payable to two
the promise or order to pay is conditional.
or more payees jointly (eg. “Pay to the order of A and B”). it
does not apply to instrument payable to two or more payees
severally. (eg. “Pay to the order of A and B”). the latter may be
ILLUSTRATION: A executes a note in favor of B for P100. B
negotiated by the indorsement of one payee.
indorses the note to C stating into the indorsement, “Pay to C,
if he passes the bar exams. Sgd. B. “it is a conditional
indorsement as the event is not certain to happen (and it is in
What is the rule in joint payees?
the indorsement). But, under sec. 39, the maker can disregard
the condition and pay C the proceeds despite the non-
occurrence of the event. The maker may also honor the
Where the instrument is payable to two or more payees
condition set and refuse to pay. If the note was paid, C holds
(jointly), all payees must each indorse in order to negotiate the
the proceeds thereof in trust while the condition is not
instrument. If only one indorses, he passes only his part of the
fulfilled. C does not acquire ownership over the sum. It is
instrument. But such an indorsement would not operate as a
upon fulfillment of the condition that such ownership over the
valid negotiation because it would not be an indorsement of
proceeds is absolutely acquired by the conditional indorsee.
the entire amount which is contrary to sec. 32. Exception is
made for such rule: (1) where the payee or indorser has
authority to indorse for he others; and (2) where the payees or
Sec. 40. Indorsement of instrument payable to bearer. - indorsees are partners.
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
Sec. 42. Effect of instrument drawn or indorsed to a person
indorser to only such holders as make title through his
as
indorsement.
cashier. - Where an instrument is drawn or indorsed to a
This section applies to instruments which are originally
person as "cashier" or other fiscal officer of a bank or
payable to bearer. It does not apply to order instruments
corporation, it is deemed prima facie to be payable to the
converted to bearer instruments because the only or last
bank or corporation of which he is such officer, and may
indorsement is in blank.
be negotiated by either the indorsement of the bank or
corporation or the indorsement of the officer.
What is the presumption raised in sec. 42?
What is the rule on indorsements of bearer instrument?
The presumption is that the instrument payable to the cashier
or other fiscal officer of a bank or corporation is presumed
By virtue of this sec., an instrument payable to bearer is not payable to the bank or corporation to which such person is a
converted into an instrument payable to order by being cashier or fiscal officer. It is presumed not payable to the said
indorsed specially and therefore, the indorsee mey further officer. The instrument may be indorsed by any duly
negotiate the instrument by mere delivery. This means that an authorized (by the laws of the said bank or corporation) officer
instrument which is originally payable to bearer is always of the entity other than the said cashier or fiscal officer. But
payable to bearer. But, such indorser, because of his the presumption established is disputable by sufficient proof to
indorsement, can be held liable secondarily by those holders the contrary (eg. that the instrument really belongs and is
who can trace their title to the instrument by the series of payable personally to the cashier as the real creditor of the
unbroken indorsements form such special indorser. His maker or drawer).
liability is that of a general indorser as provided in sec. 66.
This rule is equally “applicable” to instruments drawn
payable to the treasurer of municipal or public corporations
(eg. a town). But, since town does not fall within the scope of
ILLUSTRATION: A executes a note payable to bearer for
“corporation” in sec. 42, the treasurer may not indorse the said
P100 in favor of B. B delivered it to C. C specially indorsed it
instrument.
to D. D specially indorsed it to E, holder. Can E go against
A,B,C,D,?
E cannot go against B, because there is mere delivery
Sec. 43. Indorsement where name is misspelled, and so
and there is no unbroken chain of indorsements. The rule is
forth. - Where the name of a payee or indorsee is wrongly
that the holder must trace his title to the special indorser to
designated or misspelled, he may indorse the instrument as
make him liable through an unbroken chain of indorsement.
19
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
therein described adding, if he thinks fit, his proper
signature.
ILLUSTRATION: An instrument drawn payable to Alfie Sec. 47. Continuation of negotiable character. - An
Almedo when the name of the payee is really Alfie Almeda instrument negotiable in its origin continues to be
may be indorsed… negotiable until it has been restrictively indorsed or
discharged by payment or otherwise.
(1) by using the misspelled name – “Pay to X. sgd.
What is the general rule on the negotiable character of NI?
Alfie Almedo”.
(2) Or by writing the misspelled name with the
proper name - “Pay to X. sgd. Alfie Almedo sdg.
The rule is that once an instrument is negotiable at its origin, it
Alfie Almeda”.
continues to be negotiable until 1 it is respectively indorsed (in
such a way that is prohibits further negotiation of the
instrument under sec. 36 [a]); or 2 is discharged by payment or
Sec. 44. Indorsement in representative capacity. - Where any
otherwise. “ Otherwise” refers to the different ways to
person is under obligation to indorse in a representative
discharge an instrument enumerated in sec. 119.
capacity, he may indorse in such terms as to negative
personal liability.
How must an agent indorse?
Does the negotiable character cease after maturity?

He must indorse in the same manner as an agent of the maker,


No. the mercantile character (1) of the instrument as
drawer or acceptor should in order to escape personal liability
negotiable instrument and (2) of the contracts of the several
as required in sec. 20. Thus, (1) he must add words describing
parties to it, continues after it maturity and until it is paid
himself as an agent; and (2) at the same time disclose his
except (3) that an indorsee or transferee after maturity takes
principal (he may also sign only the name of the principal);
the instrument subject to defenses between the prior parties,
and (3) he must be duly authorized. Otherwise, he is
because after maturity such subsequent parties take the
personally liable.
instrument after becomes overdue, and thus, under sec. 52(b),
they are not HIDC. Transfer to such transferees would be
equivalent to a mere assignment and subject to defenses. The
Sec. 45. Time of indorsement; presumption. - Except where position of the holder is that he is a holder with notice because
an indorsement bears date after the maturity of the he takes a bill, which, on its face, ought to have been paid. He
instrument, every negotiation is deemed prima facie to is bound to make two inquiries: (1) has the bill been
have been effected before the instrument was overdue. discharged? And (2) if not, why not? Was there a defect in the
What does this mean and why is it important? title of the person who held it at maturity? But, even if he is
not a HIDC, he recover from the note subject only to defenses
as if it were non-negotiable.
When the payee indorsees the instrument without dating his
indorsement, the presumption is that he indorsed it on or
before the note’s maturity date. But, this presumption is
Sec. 48. Striking out indorsement. - The holder may at any
rebuttable or disputable by the sufficient proof to the contrary
time strike out any indorsement which is not necessary to
and the burden of proof is on the person who claims it was
his title. The indorser whose indorsement is struck out, and
negotiated after its date maturity. If the indorsement id=s
all indorsers subsequent to him, are thereby relieved from
dated, then the presumption in this sec. Will not arise but that
liability on the instrument.
presumption in sec. 11 that the date written is presumed the
When may the holder strike out indorsement?
true date of indorsement. This section is important because in
order to constitute one a holder in due course, he must have
taken the instrument before it was overdue. With this
A holder may strike out any indorsement which is not
presumption, the person who claims that the holder is not a
necessary to his title. But where an instrument is transferred
HIDC, has the burden of proving so.
by a special indorsement, the holder has no right to strike out
he name of the indorsee and place his name in its place nor to
convert such special inodrsement to a blank one. An
Sec. 46. Place of indorsement; presumption. - Except where instrument payable to bearer on its face may be negotiated by
the contrary appears, every indorsement is presumed mere delivery without indorsement. In case it is indorsed, the
prima facie to have been made at the place where the holder, by virtue of sec. 48, may strike out all intervening
instrument is dated. indorsemnent or any of them because none of them are
What is the importance of this sec.? essential to his title. But an instrument originally payable to
order may be negotiated only by the indorsement of the payee
completed by delivery. When the indorsement is special the
The place of indorsement is sometimes material because an indorsement of the special indorsee is necessary for further
indorsement is governed by the laws of the state where it is negotiation of the instrument and may not be struck out. When
indorsed, although the instrument is drawn or made in a the indorsement is in blank the instrument becomes payable to
different state. bearer and may be negotiated by mere delivery. Any special
indorsement subsequent to such blank indorsement may be
struck out as they are not they are not necessary to the
ILLUSTRATION: A bill is dated thus: “Manila, Phil., Jan. 7, holders’s title (he may claim that the payee blankly indorsed to
1990”. him) but the payee’s indorsement itself may not be struck out
as the indorsement is necessary to his title.
It is subsequently indorsed without writing the place of
indorsement. The presumption is that it was indorsed in
Manila. But such presumption is rebuttable.
What is the effect of striking out indorsement?

20
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
(1) the indorser whose indorsement is struck out is - Under this sec., B may continue to negotiate the
relieved form liability (secondary) on the instrument; note or may recover from it as a holder (he keeps
and it instead of negotiating it). Where he negotiates
it (prior to maturity), after paying the subsequent
(2) all subsequent indorsers are also relieved from their holder ( supposing he is held secondarily liable),
liability on the instrument. he may not claim payment from any of the
NOTE: conditional indorsements may not be struck intervening parties – C, D, E as it would result in
out even if they are not necessary to the title. circuity of suits. Also, if B decides to keep the
note and try to recover from it, be may not
enforce payment against C, D, E for the same
reason.
Sec. 49. Transfer without indorsement; effect of. - Where the
holder of an instrument payable to his order transfers it for
value without indorsing it, the transfer vests in the transferee
such title as the transferor had therein, and the transferee
IV. RIGHTS OF THE HOLDER
acquires in addition, the right to have the indorsement of the
transferor. But for the purpose of determining whether the
Sec. 51. Right of holder to sue; payment. - The holder of a
transferee is a holder in due course, the negotiation takes effect
negotiable instrument may to sue thereon in his own name;
as of the time when the indorsement is actually made.
and payment to him in due course discharges the
This sec. applies only to instrument payable to order. This instrument.
contemplates a case where there is delivery and payment of
value but no indorsement. There is lacking one element for the Who is a holder?
negotiation of the instrument – the indorsement by the payees
or indorser. Thus, it operates as an equitable assignment.
The holder is the person who is physically in possession of the
What are the rights of the transferee for value? instrument. If you are not in possession of an instrument, you
cannot be a holder, much less, a holder in due course. Even if
(1) the transferee acquires only the rights of the you are owners of an instrument but you are not physically in
transferor, such that if a defense is available against possession of it, the person primarily liable on the instrument
the transferee. has all the right to refuse payment because upon payment of
(2) The transferee has also the right to require the the instrument of the instrument by the person primarily liable
transferor to indorse the instrument. thereon, he has all the right to retrieve the instrument. Once
retrieved, he can have that instrument as a more voucher of
ILLUSTRATION: A executes a note in favor of B but there is payment. It is possible that you may have lost the instrument.
no valuable consideration. B delivers the note to C for value The ownership over it by the copy of the lost of instrument (?).
and under circumstances that would have made C a HIDC Only then will the person primarily liable on the instrument be
(such that C does not know of the absence of consideration) compelled to pay the instrument.
where it not for the lack of B’s indorsement. Can C recover
from A? What are the classes of holders?
No, because C acquires only B’s rights and B cannot
collect from A who can set up the absence of consideration. (1) Holders in general (sec. 51);
The transferee is not a holder because while he is in (2) Holders for value (sec. 26); and
possession of the instrument, he is not he indorsee. He is (3) Holders in due course (sec. 52,57)
merely an assignee.
What are the rights of a holder in general?
What can it be determined whether such transferee is a
HIDC? (1) He may sue on the instrument in his own name; and
(2) He may receive payment and if the payment in due
The time for determining whether the transferee is a HIDC is course, the instrument is discharged.
as of the time of actual indorsement not a time of the delivery.
The reason is that negotiation is completed at the time of Who has the right to sue on the instrument?
indorsement, not at the time of delivery.
The holder of a negotiable instrument may sue in his own
ILLUSTRATION: In the eg. above, suppose the note was name, even if he a holder only for collection or as a pledge of
delivered on Dec. 1, 1990 but was indorse only by B on Dec. an instrument. It is believed that even a transferee of an
15, 1990. but on Dec. 10, 1990, C found out of the absence of indorsed instrument (sec. 49) may sue in his own name if the
consideration. Thus, on Dec. 15, the time of indorsement, C transferee could have done so. This is because a transferee of
cannot be considered a HIDC as he had knowledge of a defect an instrument for value but without endorsement, under sec.
on the title at the time of negotiation. 49 is vested with such title such title as the transferor had if
the transferor had legal title, this must pass by the transfer
Sec. 50. When prior party may negotiate instrument. - Where although subject to defenses.
an instrument is negotiated back to a prior party, such party
may, subject to the provisions of this Act, reissue and further What is “payment in due course”?
negotiable the same. But he is not entitled to enforce payment
thereof against any intervening party to whom he was Payment in due course is payment made (1) at or after the
personally liable. maturity of the instrument, (2) to the holder thereof, (3) in
good faith and without notice that his title is defective.

ILLUSTRATION: A executed a note payable to the order of B. Sec. 52. What constitutes a holder in due course. - A holder
It is indorsed as follows: A B C D E in due course is a holder who has taken the instrument
B. under the following conditions:

21
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
(a) That it is complete and regular upon its
face; An instrument is overdue after the date of maturity. The date
of maturity is the time fixed therein. It may be a fixed or
(b) That he became the holder of it before determinable future time. If the instrument is payable on
it was overdue, and without notice that it demand, the date of maturity is determined by the date of
has been previously dishonored, if such presentment. If it is a promissory note, it is supposed to be
was the fact; presented within a reasonable time after its issue. But if it is a
bill, it is should be presented within reasonable time after its
(c) That he took it in good faith and for last negotiation. Eg. Suppose an instrument is issued today,
value; July 17. In Aug., it was negotiated. In Oct., again, until Dec.
When was it supposed to be presented?
(d) That at the time it was negotiated to If it was a PN, it must have been presented within a
him, he had no notice of any infirmity in reasonable time after its issue, July. But if it was a BOE, it
the instrument or defect in the title of the must be presented within a reasonable time after its last
person negotiating it. negotiation, Dec. The point of reckoning will differ.
What is a holder in due course? Reasonable time is a relative term defending on a
circumstance.
A HIDC is a holder who took the instrument under the If the instrument is payable on the occurrence of a specified
conditions enumerated in sec. 52. All the four conditions must opening of the event. When the instrument contains an
concur a HIDC. If any one of them is absent., the holder acceleration clause and one installment is not paid. Knowledge
cannot be considered a HIDC. Under sec. 59, generally, every of the holder of this fact at the time of acquisition is notice that
holder is presumed prima facie to be a holder in due course. the instrument is overdue. Similarly, if, by the terms of an
Thus, a holder need out proved at a very outset that he is a instrument, the principal is due upon default of payment of
HIDC. Any one who claims otherwise must prove that the interest, the holder cannot be considered a HIDC where the
holder in question acquired the instrument with one or more interest is overdue. If the holder acquired the instrument on the
conditions lacking. date of maturity, it is not overdue as the debtor has the whole
day to pay. (If presented to a ba, anytime before close of
When is an instrument “complete and regular upon its banking hrs. if presented to a business office, anytime before
face”? close of business hrs. And if presented at the house of the
person primarily liable, anytime before the end of the VILMA
Complete means that the holder acquired the instrument Show or before rest hours.) A NI in circulation past its
without any material particular lacking thereon, that all maturity date carries strong indication that it has been
material particulars are present on the face of instrument at the dishonored.
time the holder acquired it. An instrument is deemed not
complete only when there is an omission of any material An instrument may be dishonored either by non-acceptance
particular or particular proper to be inserted in a negotiable (sec. 149) or by non-payment (sec. 85). Dishonored by non-
instrument without the same will not be complete. (Not all acceptance, refers only to a bill of exchange. While dishonor
forms of omissions will make the instrument incomplete. It by non-payment can only take place at the time of maturity,
must be necessary to the instrument). dishonor by non-acceptance of a bill may occur even before
Eg. The instrument is issued undated and stated, “ I the date of its maturity. The holder must, at the time of
promiz to pay X or order negotiation, have no knowledge that it had been dishonored
P100. sgd. Y”. Is it complete? Yes because the date is prior to his acquisition. Thus, an overdue or dishonored
not necessary. instrument may still be negotiated to the same extent as before
But if the note stated, “ I promise to pay X or order maturity (sec. 47) but, in case of the former, the holder cannot
P100 30 days after date now be a HIDC, while in the case of the latter, the holder without
Becomes a material particular, as maturity cannot be notice can be a HIDC.
determined without it. SUPPOSE: A PN reads: “ I promise to pay X or order P100 on
An incomplete instrument should put the holder in inquiry as July 17, 1991. Today is the due date. X presents the note at
to why it is incomplete. If he fails to do so, be takes the 10am. It was dishonored by non-payment. At 12nn X
instrument subject to all defenses as he is not a HIDC. negotiated it to P.P is now the holder of the note. Is P a HIDC?
 IT DEPENDS on whether at the time of negotiation P
Regular means that the holder acquired it without any knew of the fact that it was dishonored. Since it was
alteration or changes or erasures apparent on the face of the negotiated on the due date, it was still on July 18, P
instrument. (The most common type of irregularity is an can no longer be HIDC as it is overdue and he is
alteration. It must be apparent on the face; otherwise, the charge with knowledge of dishonor. The fact that the
matter is governed solely by sec. 124 which renders the note was already dishonored is not enough to deny P
instrument void). If it appears that there was a change in the of his capacity of being a HIDC if he had no
amount or in the name of the payee, etc., then the instrument is knowledge of such dishonor.
deemed not regular on its face and the holder now has the duty
of inquiring. Otherwise, if no inquiry is made , the holder What does acquired in good faith mean?
acquires the instrument not in good faith and deemed to have
notice of a defect or infirmity in the instrument. Good faith refers to the indorsee or transferee and not to the
ILLUSTRATION OF NOT “COMPLETE AND REGULAR”: indorser or transferee of the paper. Even if the indorsee is in
1) a note payable on a given date without bad faith, the indorsee may still be a HIDC. Under sec. 56, bad
naming the year; faith means that he must have knowledge of facts which
2) an accepted bill with no drawee named; render it, dishonest for him to take a particular piece of NI. To
3) a note payable to 2 payees but indorsed only show bad faith, it is not necessary to show knowledge of the
by 1; exact truth but actual knowledge of some truth that would
4) a printed note altered in printing; prevent action by th commercially honest men. Surmise,
5) a note payable “on or before after date”. suspicion or fear is not enough. The element of good faith
must be read together with the element of notice or knowledge
When is the instrument overdue? of an infirmity on the instrument or defect on the title of a
22
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
prior party. If the holder knew of such defect or infirmity, he negotiable, the assignee of the instrument cannot be
cannot be held to be in good faith. The term “ holder in good considered a HIDC.
faith” means a holder without knowledge or notice of equities
(defenses) of any sort which could be set up against a prior
holder of the instrument. Sec. 53. When person not deemed holder in due course. -
What does “for value” mean? Where an instrument payable on demand is negotiated on
an unreasonable length of time after its issue, the holder is
As discussed in sec. 25, the holder must take the instrument not deemed a holder in due course.
for valuable consideration. Any consideration sufficient to One of the requisites of a HIDC is that he aquires the
support a simple contract is value. But love and affection do instrument before it is overdue. But, obviously, where the
not constitute value. Where the holder takes the instrument instrument is payable on demand, the holder cannot determine
without giving valuable consideration, he cannot be whether the instrument is overdue or not as there is no
considered a holder for value, moreso a HIDC. It is not maturity date. The law here states that the holder must have
necessary that the consideration be adequate (art. 1355, NCC). acquired it a reasonable time after its issue. As to what
But if the amount asked for the instrument is insignificant as constitutes reasonable time, regard must be had to the nature
compared to the face value, it should be sufficient notice that of the instrument, the usage of trade of business with respect
there is something wrong and failure to inquiry is equivalent to to such instruments and the facts of a particular case (sec.
bad faith. 193).
With the regard the BOE, the law states that it should be
presented within a reasonable time from last negotiation. This
What is meant by “without notice of infirmity in should be read in the light of sec. 53 so that the last
instrument or defect in the title? negotiation should be itself within a reasonable time from its
issue. This is especially true for checks where after a certain
period the check becomes stale if not presented for payment
The NIL, in defining things that may be wrong with an wrong
within a reasonable period of time from issue.
with an instrument uses 3 terms. (1) Defects of title, (2)
defenses, and (3) infirmities. Defects of title cover all those
situations giving rise to equitable defenses. Defective title of a
Sec. 54. Notice before full amount is paid. - Where the
person over an instrument may result from circumstances
transferee receives notice of any infirmity in the
relating to the person’s acquisition of the instrument or as to
instrument or defect in the title of the person negotiating
how he negotiated it. Defect of title is further elucidated in
the same before he has paid the full amount agreed to be
sec. 35. In the cases cited in said section, the person acquiring
paid therefor, he will be deemed a holder in due course
the instrument is said to have a defective title over it. But, in
only to the extent of the amount therefore paid by him.
order for the holder to be not a HIDC, he must have
knowledge of the defect atr the time of negotiation. The term
ILLUSTRATION: A draws a bill in favor of B for P1, 000
“defenses” includes 1. mistake, 2. absence or failure of
with X as drawee. B indorsee it to C, who fails to give value
consideration (sec. 28); 3 minority and other forms of
therefore. C indorses it to D upon the terms of payment of
incapacity (sec. 22); 4. lack of authority of an agent (sec. 19).
P600 now and the balance of P400, D discovers the absence of
Infirmities on the other hand, include things that are wrong
consideration. Under the circumstances, D can be considered a
with the instrument itself, they are illnesses which attach to the
HIDC for the value paid by him before he had notice of the
instrument, such as:
defect - P600.
(1) wrong date as inserted (sec. 13);
(2) filling up of a blank instrument not strictly in
accordance with the authority given or not within a
Sec. 55. When title defective. - The title of a person who
reasonable time (sec. 14);
negotiates an instrument is defective within the meaning of
(3) filling up and negotiating without authority an
this Act when he obtained the instrument, or any signature
incomplete and undelivered instrument (sec. 15);
thereto, by fraud, duress, or force and fear, or other
(4) lack of valid and intentional delivery of a
unlawful means, or for an illegal consideration, or when he
mechanically complete instrument (sec. 16);
negotiates it in breach of faith, or under such
(5) agent signing per procuration beyond the scope of his
circumstances as amount to a fraud.
authority (sec. 21);
When is title of a person defective?
(6) for forgery (sec. 23);
(7) material alternation (sec. 124 & 125).
The title to a person in an instrument becomes defective either:
As in the case of defects in title, the mere fact that such
(1) in the acquisition of the instrument –
defenses and infirmities exist does not prevent the holder from
(a) by fraud;
being a HID. Rather, it is the fact that, at the time of
- refers to fraud in inducement - he
negotiation, he had actual knowledge of such defects, defenses
acquires the instrument by falsely
or infirmities. This fourth condition must be read together with
inducing its issuance or negotiation.
the condition that the holder take in good faith. In effect, the
(b) by duress, or force and fear;
fourth condition elucidates the meaning of good faith. Anyone
- refers to the use of violence and intimidation
who acquires the instrument with notice of such defects and
to cause the issuance or
infirmities would not qualify as a taker in good faith. To
negotiation.
constitute notice, under sec. 56, the holder must have had
(c) by other unlawful means;
actual knowledge of the infirmity or defect or must have acted
- such as theft.
in bad faith. The absence of knowledge and lack of bad faith is
(d) for an illegal consideration.
essential basis that renders a holder a HIDC.
- the instrument is issued or negotiated as a
As previously stated, notice of defect can also be
consideration for an illegal act
presumed when (1) one takes an overdue instrument, and (2)
or omission.
one acquires an instrument for grossly inadequate
(2) in the negotiation of the instrument –
consideration.
(a) with breach of faith;
Remember that the concept of HIDC is only applicable
- refers to negotiation of the instrument in
to negotiable instrument. Once the instrument is non-
contravention of the terms of
23
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
the agreement, or negotiation after it has mere existence of a real defense not imply that the
been paid (discharged), or instrument is valueless and can never be enforced. It just
negotiation before the consideration for means that the instrument is only unenforceable against
the instrument is given. the party entitled to set up the defense (eg. the one
(b) under circumstances as amount to a fraud. primarily liable) but can be enforced against those whom
- refers to negotiation after being told that such defense is not available (eg. those secondarily
payment would be resisted, liable). In many instances, the real defense applies only to
or transferor had no legal right to the person who made the instrument (but there are
transfer. exceptions). As a general rule, a real defense is a defense
which the person against whom one is endeavoring to
Sec. 56. What constitutes notice of defect. - To constitutes recover may set up and that person to usually the person
notice of an infirmity in the instrument or defect in the title primarily liable upon the instrument. Further, a defense
of the person negotiating the same, the person to whom it available to the makers will not be available to the
is negotiated must have had actual knowledge of the indorser (nor will a defense available to the indorser be
infirmity or defect, or knowledge of such facts that his available to the maker). [ in case of joint maker defense
action in taking the instrument amounted to bad faith. available to one joint maker is not, in general available to
When does the holder have notice of defect or the other except if the defense goes to the meat of the case
infirmity? defeating holder’s right to recover. For, eg,, if _ defense is
minority, it is available to both].
To constitute notice or defect or infirmity, the
Personal or equitable defenses are those which grow out
transferee must have actual knowledge, either: (1) of the
of the personal or equitable defenses.
defect or infirmity, or (2) of such facts that his action in
taking the instrument amounts to bad faith. Knowledge of Agreement or conduct of a particular person regard to the
some truth (at least) that the instrument is tainted in some instrument which renders it inequitable for him, though
way is necessary, not mere suspicion or surmise. Bad faith holding legal title, to enforce it against the person being
consist in guilty knowledge, or willful ignorance, showing held liable, but which are not available against HIDC.
a vicious or evil mind. While mere suspicion is not They are called personal defenses because they are only
enough, where there is knowledge of suspicious available against that person (payee or indorsee) or a
circumstances, coupled with means of verifying them, subsequent holder who stands in privity with him
taking of the instrument may amount of bad faith (if,
willfully, no inquiry is made). But negligence, even gross
negligence, is not bad faith. To what kind of defenses does a HIDC hold the
instrument free from?

Sec. 57. Rights of holder in due course. - A holder in due


course holds the instrument free from any defect of title of A HIDC holds the instrument free from any defect of title
prior parties, and free from defenses available to prior of prior parties and free from defenses available to prior
parties among themselves, and may enforce payment of the parties among themselves. The defenses referred to in sec.
instrument for the full amount thereof against all parties 57 from which the HIDC is free from, are not equitable
liable thereon. defenses only, not legal defenses.

What are the rights of a HIDC? Does the HIDC hold the instrument free from
infirmities of the instrument?

(1) he may sue on the instrument in his own (sec.


51); No, the holder of the instrument, if a HIDC, holds the
(2) he may receive payment and if payment is in due instrument free from defect of title prior parties and from
course, the instrument is discharged (sec.51); defenses available to prior parties among themselves (sec.
(3) he holds the instrument free from any defect of 57) but the law does not say that he acquires it free from
title of prior parties; the infirmities of the instrument. An infirmity is an illness,
(4) he holds the instrument free from defenses a defect which attaches to the instrument itself –
available to prior parties among themselves; and whenever it goes. They are attached to the instrument.
(5) he may enforce payment of the instrument for the They are real defenses which can be put up even against
full amount thereof against all parties liable HIDC. Infirmities are things that are wrong with the
thereon. instrument. The latter are only personal defenses. (Abad’s
opinion) (DISREGARD THIS QUESTION)
What are the 2 kinds of defenses that might be [NOTE: But if infirmities are real defenses, what good is
available to parties held liable on the instrument? it that the holder, under the sec. 52to be HIDC, must have
no notice of an infirmity in the instrument? Even if he had
no notice of it, the HIDC is prevented from collecting
Real or legal defenses are those that attach to the from person liable because of a real defense – the
instrument itself and can be set the whole world. It is infirmity.]
available against the holders including HIDC. They are
called real defenses because they attach to the res (the
instrument itself) regardless the merits or demerits of the What are examples of personal defenses?
holder. In real defenses, the right sought to be enforced
has never existed or ceased to exist. It is a defense against
everybody but it is not a defense available for everybody. (1) absence of failure of consideration, partial or
The instrument cannot be enforced only against the total;
person to whom the real defense is available. Thus, the

24
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
- (read sec. 28) – want of consideration may be - “original parties”
raised only as between immediate parties.
(definition of immediate in sec. 16)
(2) want of delivery of complete instrument; (read
sec. 16)
(3) inserting of wrong date in an instrument where it
is payable at a fixed period after date and it is
issued undated, or where it is payable at a fixed
period after sight and the acceptance is undated;
(read sec. 13)
(4) filling up blank contrary to authority given or not
within reasonable time, where the instrument is
delivered; (read sec. 14)
(5) fraud in inducement; (read sec. 55)
- in fraud in inducement, one knew that he was
signing a negotiable paper, and thus, signed with
knowledge that the instrument would probably
pass into hands of an innocent purchaser but was
deceived into signing for a larger amount than he
intended, or on different terms. The signer is led Sec. 58. When subject to original defense. - In the hands
by deception to execute what knows is a of any holder other than a holder in due course, a
negotiable instrument. This is different from negotiable instrument is subject to the same defenses
fraud in factum where here is no intention to as if it were non-negotiable. But a holder who derives
issue a NI. his title through a holder in due course, and who is not
(6) acquisition of instrument by force, duress or fear himself a party to any fraud or illegality affecting the
(sec. 55) instrument, has all the rights of such former holder in
- Duress consist of depriving one of his will and respect of all parties prior to the latter.
understanding and by threat or
Unlawful means. Sec. 59. Who is deemed holder in due course. - Every
holder is deemed prima facie to be a holder in due
(7) acquisition of the instrument by unlawful means; course; but when it is shown that the title of any
(sec.55) person who has negotiated the instrument was
(8) acquisition of the instrument for an illegal defective, the burden is on the holder to prove that he
consideration; (sec. 55) or some person under whom he claims acquired the
(9) negotiation in breach of faith (sec. 55) title as holder in due course. But the last-mentioned
(10)negotiation under circumstances that amount to fraud; rule does not apply in favor of a party who became
(sec. 55) bound on the instrument prior to the acquisition of
such defective title.
(11)mistake;
- in order that mistake may vitiate consent, it must V. LIABILITIES OF PARTIES
refer to the substance of the
things which is the object of the contract or those Sec. 60. Liability of maker. - The maker of a negotiable
conditions which have principally moved one or instrument, by making it, engages that he will pay it
both parties to enter into the contract. according to its tenor, and admits the existence of the
payee and his then capacity to indorse.
(12) intoxication;
- intoxication so as to deprive the person sought to be Sec. 61. Liability of drawer. - The drawer by drawing the
charged of the exercise of instrument admits the existence of the payee and his then
capacity to indorse; and engages that, on due presentment,
is understanding and reason.
the instrument will be accepted or paid, or both, according
(13) ultra vires acts of corporation where the to its tenor, and that if it be dishonored and the necessary
corporation has the power to issue proceedings on dishonor be duly taken, he will pay the
amount thereof to the holder or to any subsequent indorser
negotiable paper but the issuance was not authorized
who may be compelled to pay it. But the drawer may insert
for the particular
in the instrument an express stipulation negativing or
purpose for which it was issued. limiting his own liability to the holder.
(14) want of authority of agent where he has apparent Sec. 62. Liability of acceptor. - The acceptor, by accepting
authority; (read art. 1869, the instrument, engages that he will pay it according to the
NCC) tenor of his acceptance and admits:
(a) The existence of the drawer, the genuineness of
(15) insanity where there is no notice of insanity on the his signature, and his capacity and authority to
part of the one draw the instrument; and
contracting with the insane person;
(b) The existence of the payee and his then
(16) illegality of contract where form or consideration capacity to indorse.
is illegal;
- eg. usury notes; Gambling notes. Sec. 63. When a person deemed indorser. - A person placing
(17) set-off between immediate parties; his signature upon an instrument otherwise than as maker,
drawer, or acceptor, is deemed to be indorser unless he
- this is a defense only when the holder has a debt clearly indicates by appropriate words his intention to be
against the person held liable. bound in some other capacity.
(18) discharge between original parties;
25
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
Sec. 66. Liability of general indorser. - Every indorser who
When is a person deemed an indorser? indorses without qualification, warrants to all subsequent
holders in due course:
When there is no indication in what capacity a a. The matters and things
person signs upon the instrument, he is deemed an indorser. mentioned in subdivisions (a),
(b), and (c) of the next preceding
EXCEPTION: One making a note payable to his own order section; and
does not assume liability as indorser despite his indorsement.
(b) That the instrument is, at the time of his
X placed his signature upon an instrument without indicating indorsement, valid and subsisting;
in what capacity he was signing. Later, X souight to show, by And, in addition, he engages that, on due presentment, it
parole evidence, his intention to be bound merely as an agent. shall be accepted or paid, or both, as the case may be,
Can X be allowed to do this? according to its tenor, and that if it be dishonored and the
necessary proceedings on dishonor be duly taken, he will
X cannot be allowed to show by parole evidence that he did pay the amount thereof to the holder, or to any subsequent
not intend to be bound as an indorser. The law requires that he indorser who may be compelled to pay it.
indicate by appropriate words his intention to be bound in
some other capcity on the instrument itself. In the absence of Sec. 67. Liability of indorser where paper negotiable by
this indication, X is deemed an indorser. delivery. — Where a person places his indorsement on an
instrument negotiable by delivery, he incurs all the liability
The following are examples of words indicating that the of an indorser.
person who signs on the instrument does not intend to be
bound as an indorser. Sec. 68. Order in which indorsers are liable. - As respect one
another, indorsers are liable prima facie in the order in
“ I hereby guarantee payment of this instrument.” which they indorse; but evidence is admissible to show
“ as surety”, “ as guarantor”, that, as between or among themselves, they have agreed
“ for identification only” otherwise. Joint payees or joint indorsees who indorse are
deemed to indorse jointly and severally.
But when the note itself reads., “ We, the signers, indorser,
sureties, and all of us in solido, promise to pay, etc.”, the
signers on the back of the instrument before delivery were Sec. 69. Liability of an agent or broker. - Where a broker or
held to be bound in solido, not as indorsers. This is a case other agent negotiates an instrument without indorsement,
where the intent to be bound in some other capacity may be he incurs all the liabilities prescribed by Section Sixty-five
found on the face of the instrument. of this Act, unless he discloses the name of his principal
and the fact that he is acting only as agent.

Sec. 64. Liability of irregular indorser. - Where a person, ILLUSTRATION: X is an agent of Y. X delivers to Z a note
not otherwise a party to an instrument, places thereon his payable to bearer in his capacity as Y’ agent. When X made a
signature in blank before delivery, he is liable as indorser, delivery, however, he did not tell Z that he was merely acting
in accordance with the following rules: as an agent. X incurs all the liabilities prescribed in Sec. 65.
(a) If the instrument is payable to the order of a He can not be released of these liabilities upon proving that he
third person, he is liable to the payee and to all was merely acting as an agent.
subsequent parties.

(b) If the instrument is payable to the order of the VI. PRESENTATION FOR PAYMENT
maker or drawer, or is payable to bearer, he is
liable to all parties subsequent to the maker or Sec. 70. Effect of want of demand on principal debtor. -
drawer. Presentment for payment is not necessary in order to
charge the person primarily liable on the instrument; but
(c) If he signs for the accommodation of the payee, if the instrument is, by its terms, payable at a special place,
he is liable to all parties subsequent to the payee. and he is able and willing to pay it there at maturity, such
Sec. 65. Warranty where negotiation by delivery and so ability and willingness are equivalent to a tender of
forth. — Every person negotiating an instrument by payment upon his part. But except as herein otherwise
delivery or by a qualified indorsement warrants: provided, presentment for payment is necessary in order to
(a) That the instrument is genuine and in all charge the drawer and indorsers.
respects what it purports to be;

(b) That he has a good title to it; Sec. 71. Presentment where instrument is not payable on
demand and where payable on demand. - Where the
(c) That all prior parties had capacity to contract; instrument is not payable on demand, presentment must
be made on the day it falls due. Where it is payable on
(d) That he has no knowledge of any fact which demand, presentment must be made within a reasonable
would impair the validity of the instrument or time after its issue, except that in the case of a bill of
render it valueless. exchange, presentment for payment will be sufficient if
But when the negotiation is by delivery only, the warranty made within a reasonable time after the last negotiation
extends in favor of no holder other than the immediate thereof.
transferee.
Sec. 72. What constitutes a sufficient presentment. -
The provisions of subdivision (c) of this section do not Presentment for payment, to be sufficient, must be made:
apply to a person negotiating public or corporation (b) By the holder, or by some person
securities other than bills and notes. authorized to receive payment on his
behalf;
26
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
(b) At a reasonable hour on a business day; Of (b): “ In the same note, “PNB, Manila is omitted
(c) At a proper place as herein defined; but it was signed as “sgd. Y, 404 Regina Bldg.,
(d) To the person primarily liable on the Manila;”
instrument, or if he is absent or inaccessible, Of (c ): The note neither specifies a place of payment
to any person found at the place where the nor does it indicate the address of the person to pay.
presentment is made. But the maker’s residence or business office is known
by the holder. Either place will do.
What is the importance of Sec. 72? Of (d): If no place is specified, no address is given,
Sec. 72 establishes the four requisites for a sufficient and both the address and business office is not
presentment for payment. If the presentment does not comply known, presentment is made when seen (anywhere).
with ay of the four, it is not sufficient. Consequently, it would
be as if, the presentment was made and, thus, the persons Sec. 74. Instrument must be exhibited. - The instrument
secondarily liable are discharged. must be exhibited to the person from whom payment is
demanded, and when it is paid, must be delivered up to the
Who makes presentment? party paying it.
Presentment for payment must be made (1) by the holder of
the instrument , or (2) by some person authorized to receive Why is exhibition of the instrument necessary?
payment on his behalf.
Presentment includes not only demand for payment
When and where must presentment be made? but also the exhibition of the instrument. Valid presentment
requires personal, or face to face demand at the proper place,
It must be made “ at a reasonable hour on a business day.” exhibiting the instrument to the person from whom payment
What is reasonable hour on a business day depends upon the is demanded. If the instrument is not exhibited, the
general custom at the place of the particular transaction. In the presentment would be ineffectual, as the debtor is entitled to
Philippines, for example, commercial banks are open 9am to 4 see the instrument and demand its surrender upon payment.
pm. Presentment for payment can not be made on a Sunday or Thus, the purpose of exhibition is to enable the debtor: (1) to
holiday (Sec. 85, 194). The presentment must be made at the determine the genuineness of the instrument and the right of
proper place as defined in Sec. 73. the holder to receive the payment; and t (2) to enable him to
reclaim/ possession upon payment.
To whom must presentment be made?
Can presentment be made through telephone?
It must be made to the person primarily liable. If a note, it
must be made to the maker. If a bill, it must be made to the No, because the instrument must be physically produced and
acceptor. It is not made to the person secondarily liable. But, if this is not possible through phone. This is because the person
the person primarily liable is absent or inaccessible, primarily liable has the right to inspect and retrieve or take
presentment can be made to any person found at such place possession of the instrument upon payment. Once, it is
even without special authority given him. retrieved, the instrument becomes merely a voucher of
payment and prevents the instrument from being negotiated to
Sec. 73. Place of presentment. - Presentment for payment is innocent 3rd parties who are unaware of the fact of discharge
made at the proper place: and may hold the person primarily liable for payment again.
(a) Where a place of
payment is specified in the instrument and it is there When is exhibition excused?
presented;
(b) Where no place of (1) When the debtor does not demand to see the instrument
payment is specified but the address of the person to but refuses payment on some other grounds; and
make payment is given in the instrument and it is (2) When the instrument is lost or destroyed.
there presented;
(c) Where no place of Sec. 75. Presentment where instrument payable at bank. -
payment is specified and no address is given and the Where the instrument is payable at a bank, presentment
instrument is presented at the usual place of business for payment must be made during banking hours, unless
or residence of the person to make payment; the person to make payment has no funds there to meet it
(d) In any other case if at any time during the day, in which case presentment at
presented to the person to make payment wherever he any hour before the bank is closed on that day is sufficient.
can be found, or if presented at his last known place of
business or residence. What is the rule where the instrument is payable at a bank?

What is the rule on proper place of presentment? Where an instrument is payable at a bank, it is
The proper place of presentment is the place specified in the equivalent to an order to the bank to make payment for the
order of enumeration from subsection (a) to subsection (d). account of the principal debtor (Sec. 87). If the instrument is
This means that if subsection (a) can be applied (eg. A place of payable at a bank and the person to make payment has fund in
payment is actually specified), presentment in any other place the bank to meet it on the date of maturity, presentment must
under subsection (b) to (d) will be improper and will not meet be made during banking hours. Presentment made outside
the requirement of Sec. 72 (c). Similarly, subsec (c) is only banking hours is not sufficient inasmuch as banks do not make
applicable if subsec. (a) and (b) cannot be applied. Lastly, payments outside of banking hours. In the Philippines. The
subsec. (d) is applicable only if presentment cannot be made at banking hours are from 9 am to 4 am (but Agbayani claims it
any other place. is only up to 2:30pm) from Monday to Friday. There are no
banking hours on Saturdays and Holidays. Consequently
ILLUSTRATION: presentment must be made between 9 am to 4 pm on ordinary
Of (a) : “ I promise to pay to X or order P100 at PNB, days. Otherwise, presentment would not be sufficient and
Manila. Sgd. Y.” persons secondarily liable on the bill are discharged. But it
must be remembered that the person to make payment has
until the close of banking hours in which to pay it, and if
27
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
before the close of such hours, he deposits funds there enough the instrument will be paid if presented.
to pay it, a demand earlier in the day is premature. However, if
the person to make payment has no funds in the bank to meet NOTE: Sec. 79 refers only to the drawer specifically. All other
the payment at any time during the day, presentment at any parties secondarily liable will be discharged ( since no
hour before the bank is closed is sufficient to hold persons presentment). Similarly, Sec. 80 refers only to the indorser for
secondarily liable- the reason being that at any rate, the bill whose accommodation an instrument is made or accepted. All
cannot be paid even is presented during banking hours. (The others parties secondarily liable are discharged. These 2
last rule is important as the persons secondarily liable may sections give 2 exceptions to the general rule that if no
claim that presentment is premature. resentment for payment is made, the persons secondarily liable
are discharged.
Sec. 76. Presentment where principal debtor is dead. -
Where the person primarily liable on the instrument is When is presentment not required to charge the drawer
dead and no place of payment is specified, presentment for liable?
payment must be made to his personal representative, if 1. In case of a check upon which payment
such there be, and if, with the exercise of reasonable has been stopped.
diligence, he can be found. 2. Where the drawer’s balance is less than
the amount of the check (at the time of
Sec. 77. Presentment to persons liable as partners. - Where presentment) unless arrangements have
the persons primarily liable on the instrument are liable as been made for payment of the bill.
partners and no place of payment is specified, presentment 3. Where the drawer of a bill containing
for payment may be made to any one of them, even though the words “Pay from balance” had no
there has been a dissolution of the firm. money on deposit with the drawee but
expected to arrange with the broker to
Sec. 78. Presentment to joint debtors. - Where there are cover the drafts.
several persons, not partners, primarily liable on the 4. Where the drawer and the drawee are
instrument and no place of payment is specified, the same person or where the drawee is
presentment must be made to them all. a fictitious person, or a person without
capacity to contract (Sec. 130) because
NOTE: The rules stated in all 3 sections apply only, to cases the holder mat treat it as a note and the
where no place for presentment is specified. If there us a place drawer is considered a maker. Under
specified, these rules are inapplicable and presentment must be section 70, a maker is liable even
made at the place specified. without presentment.

What is the rule on the death of primary party? Why is the accommodated party-indorse not discharged?

In case of the death of the person primarily liable, The accommodated party-indorser is the real debtor and not
and no place of payment is specified, presentment for payment the maker or acceptor. As the accommodated party did not
may be made to his executor or administrator, (1) if there be give value to the accommodation party, the former has no
one, and (2) if he can be found. The holder must use reason to expect that the instrument will be paid upon
reasonable diligence to find the personal representative, if presentment.In effect, the accomodated party is the person
there be one. primarily liable. Hence, the accomodated party –indorser,
being in effect the person primarily liable is not discharged
What is the rule if the persons primarily liable are partners? even if no presentment for payment is made. This is in
consonance with the rule that failure to make presentment for
Presentment may be made to any one of the partners, payment will not discharge the person primarily liable.
even if their partnership has been dissolved. The reason is that
each partner is an agent of the partnership or his co-partners. Sec. 81. When delay in making presentment is excused. -
Accordingly, in case of death of one of the makers who are Delay in making presentment for payment is excused when
partners, presentment shall not be made to his personal the delay is caused by circumstances beyond the control of
representative but to the surviving partners. the holder and not imputable to his default, misconduct, or
negligence. When the cause of delay ceases to operate,
What if the parties primarily liable are not partners? presentment must be made with reasonable diligence.

If the persons primarily liable are not partners, their Sec. 82. When presentment for payment is excused. -
liability is only joint. In joint obligation, there are as many Presentment for payment is excused:
debts as there are debtors, each debt being considered distinct (a) Where, after the exercise of reasonable
and separate from 1208, C.C. ) Thus, presentment must be diligence, presentment, as required by this Act,
made to all of them. However, if one of them is duly cannot be made;
authorized by the others for the purpose, presentment to him
would be sufficient. (b) Where the drawee is a fictitious person;

Sec. 79. When presentment not required to charge the (c) By waiver of presentment, express or implied.
drawer. - Presentment for payment is not required in order Sec. 83. When instrument dishonored by non-payment. - The
to charge the drawer where he has no right to expect or instrument is dishonored by non-payment when:
require that the drawee or acceptor will pay the (a) It is duly presented for payment and payment
instrument. is refused or cannot be obtained; or

Sec. 80. When presentment not required to charge the (b) Presentment is excused and the instrument is
indorser. - Presentment is not required in order to charge overdue and unpaid.
an indorser where the instrument was made or accepted Sec. 84. Liability of person secondarily liable, when
for his accommodation and he has no reason to expect that instrument dishonored. - Subject to the provisions of this
Act, when the instrument is dishonored by non-payment,
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ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
an immediate right of recourse to all parties secondarily paper given has been itself paid except when parties
liable thereon accrues to the holder. agree otherwise.
A check presented by the holder to the bank where it
Sec. 85. Time of maturity. - Every negotiable instrument is is drawn and receive as a deposit and credited to his
payable at the time fixed therein without grace. When the amount, this amounts to a payment of the checks.
day of maturity falls upon Sunday or a holiday, the
instruments falling due or becoming payable on Saturday VII. NOTICE OF DISHONOR
are to be presented for payment on the next succeeding
business day except that instruments payable on demand Sec. 89. To whom notice of dishonor must be given. - Except
may, at the option of the holder, be presented for payment as herein otherwise provided, when a negotiable
before twelve o'clock noon on Saturday when that entire instrument has been dishonored by non-acceptance or non-
day is not a holiday. payment, notice of dishonor must be given to the drawer
and to each indorser, and any drawer or indorser to whom
Sec. 86. Time; how computed. - When the instrument is such notice is not given is discharged.
payable at a fixed period after date, after sight, or after
that happening of a specified event, the time of payment is What a notice of dishonor?
determined by excluding the day from which the time is to
begin to run, and by including the date of payment. Notice of dishonor is bringing, either verbally or by
writing to the knowledge of the drawer or indorser of
NOTE: In determining the proper date for presentment, count an instrument, the fact that a specified negotiable
from the day following the date from which the time is to run instrument, upon proper proceedings taken, has not
(e.g. the date of the instrument, or date of sight, or date of the been paid and that the party notified is expected to
happening of the specified event) and include the last day of pay it. (If such notice is given by a notary public, it is
the period as the maturity date. called a protest (sec. 153).
But if dated 5 April 1991 and payable one month
after, the due date is 5 May 1991. What are the purposes of a notice of dishonor?
If dated 31 January and payable one month after, the
due date is Feb 28 or 29 depending on whether it is a leap (1)to inform the parties secondarily liable that the
year. maker or acceptor, as the case may be has failed to
meet his engagement;
Sec. 87. Rule where instrument payable at bank. - Where the (2) to advice such parties that they will be required to
instrument is made payable at a bank, it is equivalent to an make payment.
order to the bank to pay the same for the account of the
principal debtor thereon.
What is the rule on notice of dishonor?

Sec. 88. What constitutes payment in due course. - Payment When an instrument is dishonored by (1) non-acceptance (bill)
is made in due course when it is made at or after the or (2) non- payment (both bill and note), notice of such
maturity of the payment to the holder thereof in good faith dishonor must be given to persons secondarily liable, namely,
and without notice that his title is defective. the drawer (in a bill) and indoresers (in both bill and note).
Otherwise, such parties are discharged. However, the holder is
What are the requisites for payment in due course? not required to notify the drawer and all indorsers. He may
select to hold only one or some of the indorsers and any party
(1) payment must be made at or after the date of not so notified is discharge. Therefore, the holder, in order to
maturity; fix the liabilities of the parties secondarily liable, must give a
- payment made before maturity would constitute notice of dishonor at least, to such parties he may have
a negotiation back the person primarily liable selected. Further, it is incumbent upon the holder to prove the
and he can re-negotiate it (sec. 50). fact of giving notice, in accordance with the law, as part of his
(2) payment must be the holder; and case. His cause of action (enforcement of payment) will not
- payment to indorsee who is not in possession of given substance or will not be upheld by court if he fails to
the instrument is not payment in due course and prove such fact. Lastly, the law does not require that the notice
is at the risk of the party so paying. Party making be given to the persons primarily liable (maker or acceptor)
payment must insist on the presentment of the because they are the very ones who dishonored the instrument.
paper by the person demanding payment in order
to make sure that it is at the time in his NOTE: The exceptions to this general rule of notice are found
possession and not outstanding in other. in secs. 109, 112, 114, 115, 116, 117.
(3) payment must be made by the debtor in good
faith and without notice that the holder’s title is In instruments payable in installments, does failure give such
defective. notice of dishonor of a previous installment to persons
- payment to a person by the debtor who knows secondarily liable discharge them on succeeding installment?
that such person stole it, is not payment in due
course , as such payment is not in good faith. The It depends. If the instrument contains no acceleration clause,
maker or acceptor must satisfy himself, when it they are not discharged because each installment is equivalent
is presented for payment, that the holder traces to a separate note. If there is an acceleration clause and it is
his title through genuine indorsements. automatic (in operation), they are discharged. If the
acceleration clause is optional and it is not exercised, it is the
Medium of payment the payment of debts in money same as if no such clause existed and as a result, they are not
shall be made in the currency stipulated and if not discharged therefore. If the optional acceleration clause has
possible, in the currency which legal tender in the been exercised, the persons secondarily liable are excused.
Philippines. When payment of an instrument is made
by giving (other than legal tender), as a general such
payment will not be considered absolute until the
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ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
Sec. 90. By whom given. - The notice may be given by or on To whom does this benefit inure to?
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, Notice given by or on behalf of the holder inures to the
and who, upon taking it up, would have a right to benefit:
reimbursement from the party to whom the notice is given. (1) of all parties prior to the holder, who have the right of
recourse against the party to whom the notice is given; and
Who gives the notice of dishonor? (2) of all holders subsequent to the holder giving notice.

(1) the holder; or ILLUSTRATION: M makes a note payable to the order of P. P


(2) another behalf of the holder; or negotiates it to A. A to B, B to C, C to D, holder. M dishonors.
(3) by a party to the instrument who may be compelled to pay D notifies P, A B, and C.
it to the holders; (a)the notice given by D to P operates to the benefit of A,
- However, such a party cannot give notice of B and C although they were not the one who gave the notice
dishonor to everybody but only to another party against whom as they have the right of recourse against P if any of them be
he has a right of reimbursement should such party giving held liable to pay the instrument.
notice pay the instrument. (b) but, the notice given by D to B does not operate to the
(4) another person in behalf of such party; benefit of P and A since the latter do not have the right of
recourse against B. The notice to B, though, would benefit C
Notice by a mere stranger is ineffectual unless he is acting as who has such right of recourse against B.
agent of a party who is entitled to give notice of dishonor. (c) if D subsequently negotiates the note E, the notice inures to
E’s benefit although he himself did not give any E need not
ILLUSTRATION: M makes a note payable to the order of P. P give another notice of dishonor.
negotiates the note to A. A to B, B to C, C to D, holder. M (d) Suppose D, when the instrument was dishonored, gave
dishonors the note in the hands of D. notice only P, A and C. D later negotiated it to E. Can E go
(a) D or his agent may give notice of dishonor to P, A, B, C, or after B to whom notice was given? No. the effect of D’s failure
to any one of them. to notify B was to discharge him from liability. The benefit of
(b) if the D notifies C only, the latter, who thereby can be sec. 92 cannot be extended to those already discharged.
compelled by D to pay, may, in turn, notify P, A and/or B – to (following this trend of thought, if E goes after C and the later
whom C, if he pays,. Has the right of reimbursement. pays, C can no longer go after B even if he had a right of
(c) if D give notice only B, the effect is to discharge C due to recourse against him).
lack of notice since B would have no right of reimbursement
from C and thus, no right to give notice to him.
(d) C, upon his discharge, becomes a total stranger and as such Sec. 93. Effect where notice is given by party entitled thereto.
is not entitled to give notice unless he is acting as an agent of a - Where notice is given by or on behalf of a party entitled
party who can give proper notice of dishonor. to give notice, it inures to the benefit of the holder and all
parties subsequent to the party to whom notice is given.
May a maker or acceptor, at any time, give notice or
dishonor? How is sec. 93 different from sec. 92?

Yes, only when the maker or acceptor acts as an agent of the The principal involved is the same. However, the notice sec.
person entitled to give notice. 93 is given, not by the holder but by a party entitled to give
notice under sec. 90 namely, by party to the instrument who
might be compelled to pay it to the holder, and who, upon
Sec. 91. Notice given by agent. - Notice of dishonor may be taking it p, would have a right of reimbursement from the
given by any agent either in his own name or in the name party to whom notice is given. Such notice inures to the
of any party entitled to given notice, whether that party be benefit of: (1) the holder, and (2) all parties subsequent to the
his principal or not. party to whom notice is given.

NOTE: Notice of dishonor may be give by an agent (sec. 90). ILLUSTRATION: M made a note payable to the order P. P
The agent need not be authorized by the principal to give the negotiated it to A. A to B, B to C, C to D, holder. M dishonors
notice. Notice may be given by the agent: (1) in the name of the note and D notifies only C.
any party entitled to give the notice (sec. 90); or (2) in his (a) Ordinarily, A, B and P are considered discharged from their
(agent’s) own name. Thus, any person can be agent of any liability for lack of notice (sec. 89).
party entitled to give notice (so as long as he gives notice for (b) But, if C, within the time fixed by law (sec. 94, 107), gives
such party and not for his own sake). due notice to B, and B gives notice to A and A to P, all three
will not be considered discharged. (Subsequent notices must
each be within the time fixed by law).
(c) Can D go after P despite the absence of notice given by the
Sec. 92. Effect of notice on behalf of holder. - Where notice former to the latter? Yes, the notice given by A to P inured to
is given by or on behalf of the holder, it inures to the the benefit of D, holder (sec. 93) although the latter failed to
benefit of all subsequent holders and all prior parties who give notice P.
have a right of recourse against the party to whom it is (d) Suppose D instead went after B and succeeded in
given. collecting. May B go after P? yes, Although B never gave
notice personally to P, the notice by A also inures to the benefit
What does “benefit” mean? of parties subsequent to the party to whom notice is given.

The word “benefit” refers to the right to charge the person


secondarily liable who receive notice. In other words, the Sec. 94. When agent may give notice. - Where the
party to whom this benefit inures can charge the party instrument has been dishonored in the hands of an agent,
receiving notice of dishonor, even if he himself did not give he may either himself give notice to the parties liable
the notice. thereon, or he may give notice to his principal. If he gives
notice to his principal, he must do so within the same time
30
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
as if he were the holder, and the principal, upon the receipt said party, despite the misdescription, is not misled, the notice
of such notice, has himself the same time for giving notice is sufficient.
as if the agent had been an independent holder.
How may the notice be given?
What may the agent do if the instrument in his hands is
dishonored? The party giving said notice to serve notice: (1) by personal
delivery; or (2) by mail. But, in a personal service, it must be
(1) he may directly give notice to the persons secondarily shown that either actual personal service, or an ordinary
liable thereon; or intelligent, diligent effort to make personal service upon the
- the agent must do so within the time fixed by secs. 102, indorser at his place of business during business hours or at his
103, 104 and 107. Otherwise, the parties secondarily liable residence if he has place of business, was made.
are discharged for lack of notice unless the principal himself
notified them. Sec. 97. To whom notice may be given. - Notice of dishonor
(2) he may gave notice, within the time fixed by law, to his may be given either to the party himself or to his agent in
principal. that behalf.
- the time in which the principal was a party secondarily
liable.the principal, upon receiving such notice, has also the NOTE: Under sec. 91, the agent giving notice need not be
same time for giving notice to the parties secondarily liable as authorized by the principal. But, under sec. 97, an agent to be
if the instrument was dishonored on the day he received the competent to receive notice of dishonor must be authorized.
notice. Thus, notice to the agent of dishonor does not The reason for the difference is that, while in sec. 91, the
constitute notice to the principal. The agent is treated like an giving of notice benefits the principal, in sec. 97, the receipt of
independent holder. notice creates liability. If the agent, in sec. 97, is not
authorized, the notice in valid.
Sec. 95. When notice sufficient. - A written notice need not
be signed and an insufficient written notice may be Suppose notice was attempted to be given to the party himself
supplemented and validated by verbal communication. A but he was not present. Does the notice have to be given only
misdescription of the instrument does not vitiate the notice to an authorized agent?
unless the party to whom the notice is given is in fact
misled thereby. No. Notice to agent must be distinguished from notice
attempted to be given to the party himself where he is absent.
Sec. 96. Form of notice. - The notice may be in writing or In the latter case, the notice may be left with anyone found in
merely oral and may be given in any terms which charge in the party’s place of residence or business. Such
sufficiently identify the instrument, and indicate that it has notice is sufficient and it is irrelevant that the person was not
been dishonored by non-acceptance or non-payment. It so authorized by the principal.
may in all cases be given by delivering it personally or
through the mails.
Sec. 98. Notice where party is dead. - When any party is
Is there any form required for the notice of dishonor? dead and his death is known to the party giving notice, the
notice must be given to a personal representative, if there
No. Notice of dishonor may be in writing or merely oral. Thus, be one, and if with reasonable diligence, he can be found. If
notice may be given by telephone provided that it may be there be no personal representative, notice may be sent to
clearly shown that the party notified was really communicated the last residence or last place of business of the deceased.
with, that is fully indentified as the party at the receiving end
of the line. What are the requisites of this sec.?

What must the notice contain? When the person to be given notice of dishonor (the party
sought to be charged) is dead, notice must be given to his
(1) sufficient description of the instrument to identify it; personal representative, provided that: (1) his death know to
(2) a statement that it has been presented for payment or for the party giving notice,; (2) there is a personal representative;
acceptance, and that it has been dishonored. (If protest is and (3) if with reasonable diligence he could be found.
necessary, the notice must also cointain a statement that it has Accordingly, where the holder knew the indorser to be dead,
been protested); and he must use reasonable diligence to find out whether there is a
(3) a statement that the party giving notice to look for the party personal representative of such decedent or not, and, if there is
addressed for payment. one, his identity. But, although the party is dead, (1) if his
death is not known to the party giving notice but there is no
What if one of the three is omitted? personal representative, or (3) if there is one but he cannot be
found with reasonable diligence, then, notice may be sent to
The fact that the insufficient does not invalidated it. The notice the last residence or last place of the deceased. The first
may be supplemented by oral or verbal communications preference will be the person, the representative. Only in his
stating the things lacking. In fact, even if the notice was not be absence should the notice be sent to such place.
invalidated.
Sec. 99. Notice to partners. - Where the parties to be
Supposing there is a misdescription of the instrument, will notified are partners, notice to any one partner is notice to
that fact affect the validity of the notice? the firm, even though there has been a dissolution.

Generally, misdescription of the instrument, such as to the NOTE: the reason for the rule is that each partner is an agent
amount or the date of the name of the parties or the date of of the partnership of which he is a member. Notice to one is
maturity, does not vitiate the notice provided that the person to notice to the others. This is true even though the notice was
whom such notice is addressed is not misled thereby as to the fraudulently suppressed by the partners receiving it.
identity of the instrument, if the said party is misled, the notice
is vitiated. The purpose of the notice is to appraise the party Sec. 100. Notice to persons jointly liable. - Notice to joint
entitled thereto of the dishonor of the instrument so that if the persons who are not partners must be given to each of
31
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
them unless one of them has authority to receive such have been: (1) presented for acceptance or for payment, and
notice for the others. (2) it was dishonored.

NOTE: Sec. 100 does not apply to joint payees or joint Why must notice be prompt?
indorsees. This is because, under sec. 68, such persons deemed
solidarily liable. Accordingly, sec. 100 applies to joint parties The purpose of giving prompt notice is to give the persons
other than joint payees and joint indorse, such as, to drawers secondarily liable every opportunity to secure themselves.
who sign a bill jointly, or to joint accommodation indorsers
who are not solidarily liable under sec. 68. if one of such joint
parties are not given notice, he will be discharged. Sec. 103. Where parties reside in same place. - Where the
person giving and the person to receive notice reside in the
Sec. 101. Notice to bankrupt. - Where a party has been same place, notice must be given within the following
adjudged a bankrupt or an insolvent, or has made an times:
assignment for the benefit of creditors, notice may be given (a) If given at the place of
either to the party himself or to his trustee or assignee. business of the person to
receive notice, it must be
NOTE: This sec. contemplates 2 situations: (1) the party given before the close of
secondarily liable has been declared a bankrupt or an insolvent business hours on the
and (2) the party secondarily liable has made an assignment of day following.
his properties for the benefit of creditors (even if not bankrupt
or insolvent). In either case, notice may be given to the party (b) If given at his
himself or to his trustee or assignee. From the moment that residence, it must be
notice is duly served, the liability of the secondary party is given before the usual
fixed. hours of rest on the day
In the case of bankruptcy or insolvency, it does not following.
mean that just because notice has been given, one can
immediately proceed against such party. It is still necessary to
file a complaint with the insolvency court and participate in (c) If sent by mail, it must be deposited in the post office in
the insolvency proceedings together with all creditors so that time to reach him in usual course on the day following.
the properties of the insolvent may be distributed to all those
with claims – pro rata. But, the act of giving notice of dishonor Sec. 104. Where parties reside in different places. - Where
must be proven in court. Otherwise, absence of proof the person giving and the person to receive notice reside in
discharge the insolvent from liability insofar as that instrument different places, the notice must be given within the
is concerned. following times:

Sec. 102. Time within which notice must be given. - Notice NOTE: Secs. 103 & 104 refer to the maximum time limit
may be given as soon as the instrument is dishonored and, allowed by the law to give notice. It may be given earlier.
unless delay is excused as hereinafter provided, must be However, if the notice was given beyond the time limit, it
given within the time fixed by this Act. would be considered not to have been given ant the parties
secondarily liable will be discharged from liability. The time
NOTE: The time for giving notice is fixed in secs. 103, 104 & limit for giving notice depends upon whether the person
107. receiving notice resides in the same place as the person as the
person giving it, or not
May notice of dishonor be given before the date of
maturity? What means are provided for in secs. 103 and 104 to give
notice?
No, because an instrument cannot be said to be dishonored for
non-payment unless presented and presentment must be made In sec. 103, notice of dishonor may be given either (1)
on the date of maturity unless presentment is excused. But personally; or (2) by mail. In sec. 104, it may be given either
even when presentment is excused, the instrument cannot be (1) by mail or (2) otherwise than by mail (eg. Messenger,
said to be dishonored by non-payment unless it is overdue and telegram).
unpaid. Notice must be given only when it is actually
dishonored. Notice given before the instrument is due is What is meant by
premature and insufficient.
(a) If sent by mail, it must be deposited in the post office in
ILLUSTRATION: A is in possession of a note which will time to go by mail the day following the day of dishonor, or
mature on Sept. 15, 1991 (30 days from today). The party if there be no mail at a convenient hour on last day, by the
primarily liable told A that he will not pay the instrument on next mail thereafter.
due date. Can A, before Sept. 15, give notice of dishonor
already? No, the note has not yet matured and notice given (b) If given otherwise than through the post office, then
earlier than such date is premature. within the time that notice would have been received in
due course of mail, if it had been deposited in the post
May it be given on the date of maturity? office within the time specified in the last subdivision.
Yes, provided that the notice of dishonor be given after the Sec. 105. When sender deemed to have given due notice. -
close of banking hours. The party primarily liable is given the Where notice of dishonor is duly addressed and deposited
whole day in which to make payment. If the instrument is in the post office, the sender is deemed to have given due
presented on the date of maturity and is dishonored, but later notice, notwithstanding any miscarriage in the mails.
in the day, the party is primarily liable manifests his
willingness to pay, any prior notice would be premature. Sec. 106. Deposit in post office; what constitutes. - Notice is
Remember, the party liable has the whole day in which to deemed to have been deposited in the post-office when
make payment. Further, to give notice, the instrument must deposited in any branch post office or in any letter box
under the control of the post-office department.
32
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
Sec. 115. When notice need not be given to indorser. —
Sec. 107. Notice to subsequent party; time of. - Where a Notice of dishonor is not required to be given to an
party receives notice of dishonor, he has, after the receipt indorser in either of the following cases:
of such notice, the same time for giving notice to (a) When the drawee is a fictitious person or
antecedent parties that the holder has after the dishonor. person not having capacity to contract, and the
indorser was aware of that fact at the time he
Sec. 108. Where notice must be sent. - Where a party has indorsed the instrument;
added an address to his signature, notice of dishonor must
be sent to that address; but if he has not given such (b) Where the indorser is the person to whom the
address, then the notice must be sent as follows: instrument is presented for payment;
(a) Either to the post-office nearest to his place of
residence or to the post-office where he is (c) Where the instrument was made or accepted
accustomed to receive his letters; or for his accommodation.

(b) If he lives in one place and has his place of NOTES: Remember FICPA
business in another, notice may be sent to either This section applies only to the indorser concerned. It
place; or does not excuse notice to other indorsers. Failure to give to the
others will result in their discharge. Under subsec (c) , the
(c) If he is sojourning in another place, notice may indorser (the accommodated party) is in fact the principal
be sent to the place where he is so sojourning. debtor and is not entitled to notice.
But where the notice is actually received by the party
within the time specified in this Act, it will be sufficient, EXAMPLE OF CASES WHER SEC. 115 DOES NOT
though not sent in accordance with the requirement of this APPLY:
section. In these cases, notice of dishonor to the indorser is not
excused:
Sec. 109. Waiver of notice. - Notice of dishonor may be 1. Where the maker of the instrument is a partnership
waived either before the time of giving notice has arrived and the indorser sought to be charged is a member
or after the omission to give due notice, and the waiver thereof;
may be expressed or implied. 2. Where no presentment was actually made;
3. where the indorser was treasurer of the maker
Sec. 110. Whom affected by waiver. - Where the waiver is corporation, not active in its management and signed
embodied in the instrument itself, it is binding upon all the note in behalf of the corp.
parties; but, where it is written above the signature of an
indorser, it binds him only. The bottom line, for Sec. 114 and 115 is that notice is not
needed to the drawer or indorser concerned when (1) he has
Sec. 111. Waiver of protest. - A waiver of protest, whether in knowledge of the dishonor by means other than through a
the case of a foreign bill of exchange or other negotiable formal notice; and (2) he has no reason to expect that the
instrument, is deemed to be a waiver not only of a formal instrument will be honored.
protest but also of presentment and notice of dishonor. Sec. 116. Notice of non-payment where acceptance refused. -
Where due notice of dishonor by non-acceptance has been
Sec. 112. When notice is dispensed with. - Notice of dishonor given, notice of a subsequent dishonor by non-payment is
is dispensed with when, after the exercise of reasonable not necessary unless in the meantime the instrument has
diligence, it cannot be given to or does not reach the been accepted.
parties sought to be charged.
Sec. 117. Effect of omission to give notice of non-
Sec. 113. Delay in giving notice; how excused. - Delay in acceptance. - An omission to give notice of dishonor by
giving notice of dishonor is excused when the delay is non-acceptance does not prejudice the rights of a holder in
caused by circumstances beyond the control of the holder due course subsequent to the omission.
and not imputable to his default, misconduct, or
negligence. When the cause of delay ceases to operate, Sec. 118. When protest need not be made; when must be
notice must be given with reasonable diligence. made. - Where any negotiable instrument has been
dishonored, it may be protested for non-acceptance or non-
Sec. 114. When notice need not be given to drawer. - Notice payment, as the case may be; but protest is not required
of dishonor is not required to be given to the drawer in except in the case of foreign bills of exchange.
either of the following cases:
(a) Where the drawer and drawee are the same VIII. DISCHARGE OF NEGOTIABLE INSTRUMENTS
person;
Sec. 119. Instrument; how discharged. - A negotiable
(b) When the drawee is fictitious person or a instrument is discharged:
person not having capacity to contract; (a) By payment in due course by or on behalf of
the principal debtor;
(c) When the drawer is the person to whom the
instrument is presented for payment; (b) By payment in due course by the party
accommodated, where the instrument is made or
(d) Where the drawer has no right to expect or accepted for his accommodation;
require that the drawee or acceptor will honor the
instrument; (c) By the intentional cancellation thereof by the
holder;
(e) Where the drawer has countermanded
payment. (d) By any other act which will discharge a simple
contract for the payment of money;

33
ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
(e) When the principal debtor becomes the holder PROBLEM: In the same example, if F, instead of canceling
of the instrument at or after maturity in his own the indorsement of C, presented the note to A who refused to
right. pay. F notifies
Sec. 120. When persons secondarily liable on the instrument
are discharged. - A person secondarily liable on the Sec. 121. Right of party who discharges instrument. - Where
instrument is discharged: the instrument is paid by a party secondarily liable
(a) By any act which discharges thereon, it is not discharged; but the party so paying it is
the instrument; remitted to his former rights as regard all prior parties,
and he may strike out his own and all subsequent
(b) By the intentional indorsements and against negotiate the instrument, except:
cancellation of his signature by (a) Where it is payable to the order of a third
the holder; person and has been paid by the drawer; and

(c) By the discharge of a prior (b) Where it was made or accepted for
party; accommodation and has been paid by the party
accommodated.
(d) By a valid tender or
payment made by a prior What are the effects of payment by a secondary party?
party;
1. The instrument is not discharged. But the party
(e) By a release of the principal paying is.
debtor unless the holder's right 2. The payer is remitted to his former rights against
of recourse against the party parties prior to him. If the payer was a HIDC, even
secondarily liable is expressly if at the time of payment he already had notice of
reserved; defects of title, he can enforce his rights as if he was
a HIDC.
(f) By any agreement binding 3. The payer can strike out his indorsement and those
upon the holder to extend the of subsequent parties to him.
time of payment or to postpone 4. The payer can renegotiate the instrument.
the holder's right to enforce the
instrument unless made with NOTE: The right to renegotiate is qualified by the exception
the assent of the party provided in pars. (a) and (b).
secondarily liable or unless the Sec. 122. Renunciation by holder. - The holder may
right of recourse against such expressly renounce his rights against any party to the
party is expressly reserved. instrument before, at, or after its maturity. An absolute
and unconditional renunciation of his rights against the
Why will the discharge of the instrument operate to principal debtor made at or after the maturity of the
discharge the secondary parties? instrument discharges the instrument. But a renunciation
does not affect the rights of a holder in due course without
If the instrument is discharged under sec. 119, it ceases to have notice. A renunciation must be in writing unless the
force and effect. Hence, all parties, primary or secondary, will instrument is delivered up to the person primarily liable
also be discharged since there is no instrument to be liable on. thereon.
But the discharge of the secondary parties does not necessarily
bring about the discharge of the instrument. Sec. 123. Cancellation; unintentional; burden of proof. - A
cancellation made unintentionally or under a mistake or
When will cancellation of the signature work as a without the authority of the holder, is inoperative but
discharge? where an instrument or any signature thereon appears to
have been cancelled, the burden of proof lies on the party
It is only when the signature of the indorser is intentionally who alleges that the cancellation was made unintentionally
cancelled by the holder that the former is discharge as if he has or under a mistake or without authority.
never been a party to the instrument. If there was a mistake in
the appreciation of facts, there is no intentional cancellation. Sec. 124. Alteration of instrument; effect of. - Where a
But, once an indorsement is canncelled, there is prima facie negotiable instrument is materially altered without the
presumption of intention cancel. Also, the right of the holder assent of all parties liable thereon, it is avoided, except as
to cancel the signature of an indorser is subject to the against a party who has himself made, authorized, or
limitation that the indorserment is not necessary to the holder’s assented to the alteration and subsequent indorsers.
title. But when an instrument has been materially altered and is
in the hands of a holder in due course not a party to the
Aside from the indorser’s discharge, what further effect alteration, he may enforce payment thereof according to its
will the cancellation have? original tenor.

The discharge of a party by intentional cancellation of his Sec. 125. What constitutes a material alteration. - Any
signature also operates as a discharge of parties subsequent to alteration which changes:
the party discharge. The reason for the rule is that the (b) The date;
discharge deprives a subsequent party of a right of recourse (b) The sum payable, either for
against the party discharged by the holder. Thus, suppose A, principal or interest;
maker, issues a note in favor of B. B negotiates it to C, C to D, (c) The time or place of payment:
D to E, E to F, holder. F cancels C’s signature. D and E will (d) The number or the relations of
also be discharged because both would be denied their right of the parties;
recourse against C in case one of them is made to pay the (e) The medium or currency in
instrument. which payment is to be made;
(f) Or which adds a place of
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payment where no place of it is drawn is deemed an actual acceptance in favor of
payment is specified, or any other every person who, upon the faith thereof, receives the bill
change or addition which alters the for value.
effect of the instrument in any
respect, is a material alteration. Sec. 136. Time allowed drawee to accept. - The drawee is
allowed twenty-four hours after presentment in which to
BILLS OF EXCHANGE decide whether or not he will accept the bill; the
acceptance, if given, dates as of the day of presentation.
IX. FORM AND INTERPRETATION
Sec. 137. Liability of drawee returning or destroying bill. -
Sec. 126. Bill of exchange, defined. - A bill of exchange is an Where a drawee to whom a bill is delivered for acceptance
unconditional order in writing addressed by one person to destroys the same, or refuses within twenty-four hours
another, signed by the person giving it, requiring the after such delivery or within such other period as the
person to whom it is addressed to pay on demand or at a holder may allow, to return the bill accepted or non-
fixed or determinable future time a sum certain in money accepted to the holder, he will be deemed to have accepted
to order or to bearer. the same.

Sec. 127. Bill not an assignment of funds in hands of Sec. 138. Acceptance of incomplete bill. - A bill may be
drawee. - A bill of itself does not operate as an assignment accepted before it has been signed by the drawer, or while
of the funds in the hands of the drawee available for the otherwise incomplete, or when it is overdue, or after it has
payment thereof, and the drawee is not liable on the bill been dishonored by a previous refusal to accept, or by non
unless and until he accepts the same. payment. But when a bill payable after sight is dishonored
by non-acceptance and the drawee subsequently accepts it,
Sec. 128. Bill addressed to more than one drawee. - A bill the holder, in the absence of any different agreement, is
may be addressed to two or more drawees jointly, whether entitled to have the bill accepted as of the date of the first
they are partners or not; but not to two or more drawees in presentment.
the alternative or in succession.
Sec. 139. Kinds of acceptance. - An acceptance is either
Sec. 129. Inland and foreign bills of exchange. - An inland general or qualified. A general acceptance assents without
bill of exchange is a bill which is, or on its face purports to qualification to the order of the drawer. A qualified
be, both drawn and payable within the Philippines. Any acceptance in express terms varies the effect of the bill as
other bill is a foreign bill. Unless the contrary appears on drawn.
the face of the bill, the holder may treat it as an inland bill.
Sec. 140. What constitutes a general acceptance. - An
acceptance to pay at a particular place is a general
Sec. 130. When bill may be treated as promissory note. - acceptance unless it expressly states that the bill is to be
Where in a bill the drawer and drawee are the same paid there only and not elsewhere.
person or where the drawee is a fictitious person or a
person not having capacity to contract, the holder may Sec. 141. Qualified acceptance. - An acceptance is qualified
treat the instrument at his option either as a bill of which is:
exchange or as a promissory note. (c) Conditional; that is to say,
which makes payment by the
Sec. 131. Referee in case of need. - The drawer of a bill and acceptor dependent on the
any indorser may insert thereon the name of a person to fulfillment of a condition
whom the holder may resort in case of need; that is to say, therein stated;
in case the bill is dishonored by non-acceptance or non-
payment. Such person is called a referee in case of need. It (b) Partial; that is to say, an
is in the option of the holder to resort to the referee in case acceptance to pay part only of
of need or not as he may see fit. the amount for which the bill is
drawn;
X. ACCEPTANCE
(c) Local; that is to say, an
Sec. 132. Acceptance; how made, by and so forth. - The acceptance to pay only at a
acceptance of a bill is the signification by the drawee of his particular place;
assent to the order of the drawer. The acceptance must be
in writing and signed by the drawee. It must not express (d) Qualified as to time;
that the drawee will perform his promise by any other
means than the payment of money. (e) The acceptance of some, one
or more of the drawees but not
Sec. 133. Holder entitled to acceptance on face of bill. - The of all.
holder of a bill presenting the same for acceptance may
require that the acceptance be written on the bill, and, if Sec. 142. Rights of parties as to qualified acceptance. - The
such request is refused, may treat the bill as dishonored. holder may refuse to take a qualified acceptance and if he
does not obtain an unqualified acceptance, he may treat
Sec. 134. Acceptance by separate instrument. - Where an the bill as dishonored by non-acceptance. Where a
acceptance is written on a paper other than the bill itself, it qualified acceptance is taken, the drawer and indorsers are
does not bind the acceptor except in favor of a person to discharged from liability on the bill unless they have
whom it is shown and who, on the faith thereof, receives expressly or impliedly authorized the holder to take a
the bill for value. qualified acceptance, or subsequently assent thereto. When
the drawer or an indorser receives notice of a qualified
Sec. 135. Promise to accept; when equivalent to acceptance. - acceptance, he must, within a reasonable time, express his
An unconditional promise in writing to accept a bill before dissent to the holder or he will be deemed to have assented
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thereto. arrangements for its payment on the date of maturity at the
place designated.
XI. PRESENTMENT FOR ACCEPTANCE
Sec. 145. Presentment; how made. - Presentment for
Sec. 143. When presentment for acceptance must be made. - acceptance must be made by or on behalf of the holder at a
Presentment for acceptance must be made: reasonable hour, on a business day and before the bill is
(a) Where the bill is payable after sight, or in any overdue, to the drawee or some person authorized to
other case, where presentment for acceptance is accept or refuse acceptance on his behalf; and
necessary in order to fix the maturity of the (a) Where a bill is addressed to two or more
instrument; or drawees who are not partners, presentment must
be made to them all unless one has authority to
(b) Where the bill expressly stipulates that it shall accept or refuse acceptance for all, in which case
be presented for acceptance; or presentment may be made to him only;

(c) Where the bill is drawn payable elsewhere than (b) Where the drawee is dead, presentment may
at the residence or place of business of the drawee. be made to his personal representative;
In no other case is presentment for acceptance necessary in
order to render any party to the bill liable. (c) Where the drawee has been adjudged a
bankrupt or an insolvent or has made an
Sec. 144. When failure to present releases drawer and assignment for the benefit of creditors,
indorser. - Except as herein otherwise provided, the holder presentment may be made to him or to his trustee
of a bill which is required by the next preceding section to or assignee.
be presented for acceptance must either present it for
acceptance or negotiate it within a reasonable time. If he How should presentment for acceptance be made?
fails to do so, the drawer and all indorsers are discharged. In order that presentment for acceptance may be proper, it is
necessary that it be:
What is presentment for acceptance? (a) made by or on behalf of the holder;
Presentment for acceptance is the production or exhibition of a (b) at a reasonable hour;
bill of exchange to the drawee for his acceptance. (c) on a business day;
(d) before the bill is overdue;
What is the general rule on presentment for acceptance? (e) within a reasonable time after acquisition
thereof; and
GEN.RULE: Presentment for acceptance is not necessary to (f) to the drawee or some person authorized to
render any party to the bill liable. accept or refuse acceptance on his behalf.

EXCEPTIONS: To whom should presentment for acceptance be made?


1. Where it is payable after sight or in any case where
presentment for acceptance is necessary to fix the Generally, it must be made to the drawee or some
maturity of the instrument; person authorized to accept or refuse acceptance on his behalf.
2. Where it is expressly stipulated; However, where there are 2 or more drawees, presentment
3. Where it is drawn payable elsewhere than at the must be made to all of them unless (1) one is duly authorized
residence or place of business of the drawee. to accept or refuse acceptance, or (2) they are partners. Where
the drawee is dead, it may be made to his personal
In these three cases, it is necessary (1) to present the representative. “May” is used because by Sec. 148(a),
bill for acceptance, or (2) to negotiate it within reasonable presentment is really excused. Where the drawee is adjudged a
time to charge the drawer and all indorsers. The reason is that bankrupt or has made an assignment, it may be made to him or
the drawer and indorser have a right in having the bill his trustee or his assignee. But, here, the use of “may” does
accepted immediately in order to shorten the time of payment not excuse non-presentment. It is used to mean that the choice
and thus put a limit to the period of their liability and likewise of to whom presentment will be made is in the alternative.
to enable them to protect themselves by other means before it
is too late, if the bill is not accepted and paid within the time Sec. 146. On what days presentment may be made. - A bill
originally contemplated by them. In the 3 cases, where the bill may be presented for acceptance on any day on which
is not presented for acceptance nor negotiated within negotiable instruments may be presented for payment
reasonable time, the parties secondarily liable will be under the provisions of Sections seventy-two and eighty-
discharged from liability. Other than the 3 cases, presentment five of this Act. When Saturday is not otherwise a holiday,
for acceptance is not required and failure to do so would not presentment for acceptance may be made before twelve
affect the instrument in any manner. o'clock noon on that day.

However, there is nothing wrong in making NOTE: The rule in Sec. 72 and 85 regarding day of
presentment for acceptance in other cases (even if not presentment for payment is the same as for presentment for
required). And, if the bill is dishonored, by non-acceptance, acceptance. Only in Sec. 146, no distinction is made between
the holder may treat the bill as if it had required acceptance. instruments payable on demand and those payable at a fixed or
determinable future time unlike in Sec. 85. Thus, whether it is
What are the reasons for the exceptions? payable on demand or at a fixed date, where it is presentment
In exception (1) it is essential to present for for acceptance, it may be made before 12 noon on Saturday
acceptance to fix the maturity date of the instrument. (e.g. A provided it is not a holiday.
bill payable 30 days after sight will not mature unless seen by
the drawee. Only when it is seen will the 30 day period start). Sec. 147. Presentment where time is insufficient. - Where
In exception (2) it is to comply with the expressed stipulation the holder of a bill drawn payable elsewhere than at the
of the parties in the bill itself. In exception (3) it is to inform place of business or the residence of the drawee has no
the drawee of the existence of the bill so that he can make time, with the exercise of reasonable diligence, to present
the bill for acceptance before presenting it for payment on
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the day that it falls due, the delay caused by presenting the recourse against the drawer and indorsers accrues to the
bill for acceptance before presenting it for payment is holder and no presentment for payment is necessary.
excused and does not discharge the drawers and indorsers.
What are the rights of the holder where bill is not accepted?
NOTE: Sec. 147 excuses delay in making presentment for
payment when such is caused by presenting the bill for When a bill is dishonored by non-acceptance, the
acceptance at a place other than the place where the bill ids holder, after giving notice of dishonor and protesting when
drawn payable. required, may immediately proceed against the drawer and
indorsers for the value of the bill without waiting for the date
Sec. 148. Where presentment is excused. - Presentment for of maturity. Presentment for payment need not be made since
acceptance is excused and a bill may be treated as payment can not be expected after acceptance has been
dishonored by non-acceptance in either of the following refused. There is no point in waiting for the date of maturity to
cases: present the bill for payment. But if the bill is subsequently
(a) Where the drawee is dead, or has absconded, accepted, presentment for payment is necessary.
or is a fictitious person or a person not having
capacity to contract by bill. XII. PROTEST

(b) Where, after the exercise of reasonable Sec. 152. In what cases protest necessary. - Where a foreign
diligence, presentment can not be made. bill appearing on its face to be such is dishonored by
nonacceptance, it must be duly protested for
(c) Where, although presentment has been nonacceptance, by nonacceptance is dishonored and where
irregular, acceptance has been refused on some such a bill which has not previously been dishonored by
other ground. nonpayment, it must be duly protested for nonpayment. If
it is not so protested, the drawer and indorsers are
NOTE: Sec. 147 excuses delay in making presentment for discharged. Where a bill does not appear on its face to be a
payment caused by presenting the bill for acceptance. Sec. 148 foreign bill, protest thereof in case of dishonor is
excuses non-presentment for acceptance. unnecessary.

Where the drawee is (1) dead; (2) has absconded; (3) Sec. 153. Protest; how made. - The protest must be annexed
fictitious; or (4) a person not having capacity to contract, to the bill or must contain a copy thereof, and must be
presentment for acceptance is excused because it would be under the hand and seal of the notary making it and must
futile to expect that a valid acceptance would be given. specify:
(a) The time and place of presentment;
An irregular presentment in which acceptance is
refused on the other ground is where presentment is made on a (b) The fact that presentment was made and the
Sunday and thus, irregular but the acceptance is refused on manner thereof;
the ground that the drawee has no funds ion the hands of the
drawee. (c) The cause or reason for protesting the bill;

Sec. 149. When dishonored by nonacceptance. - A bill is (d) The demand made and the answer given, if
dishonored by non-acceptance: any, or the fact that the drawee or acceptor could
(a) When it is duly presented for acceptance and not be found.
such an acceptance as is prescribed by this Act is Sec. 154. Protest, by whom made. - Protest may be made by:
refused or can not be obtained; or (a) A notary public; or

(b) When presentment for acceptance is excused (b) By any respectable resident of the place where
and the bill is not accepted. the bill is dishonored, in the presence of two or
more credible witnesses.
NOTE: As to par (a) cases provided for in Sec. 132, 133 and Sec. 155. Protest; when to be made. - When a bill is
142. As to par. (b), it refers to Sec,. 148. But, it is not sufficient protested, such protest must be made on the day of its
that presentment for acceptance be excused but also that the dishonor unless delay is excused as herein provided. When
bill remains not accepted. a bill has been duly noted, the protest may be subsequently
extended as of the date of the noting.
Sec. 150. Duty of holder where bill not accepted. - Where a
bill is duly presented for acceptance and is not accepted Sec. 156. Protest; where made. - A bill must be protested at
within the prescribed time, the person presenting it must the place where it is dishonored, except that when a bill
treat the bill as dishonored by nonacceptance or he loses drawn payable at the place of business or residence of
the right of recourse against the drawer and indorsers. some person other than the drawee has been dishonored by
nonacceptance, it must be protested for non-payment at
What is the duty of the holder in Sec. 150? the place where it is expressed to be payable, and no
further presentment for payment to, or demand on, the
If, within 24 hrs. after presentment (sec. 136) the bill drawee is necessary.
is not accepted, the person presenting it must treat the bill as
dishonored. This means that the holder must take the Sec. 157. Protest both for non-acceptance and non-payment.
necessary proceedings against the drawer and each indorser , - A bill which has been protested for non-acceptance may
that is, have the bill protested when required and give notice of be subsequently protested for non-payment.
dishonor. Otherwise, the drawer and the indorsers will be
discharged. Sec. 158. Protest before maturity where acceptor insolvent. -
Where the acceptor has been adjudged a bankrupt or an
Sec. 151. Rights of holder where bill not accepted. - When a insolvent or has made an assignment for the benefit of
bill is dishonored by nonacceptance, an immediate right of creditors before the bill matures, the holder may cause the
bill to be protested for better security against the drawer
37
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and indorsers. maturity.

Sec. 159. When protest dispensed with. - Protest is dispensed (b) If it is to be presented in some other place than
with by any circumstances which would dispense with the place where it was protested, then it must be
notice of dishonor. Delay in noting or protesting is excused forwarded within the time specified in Section one
when delay is caused by circumstances beyond the control hundred and four.
of the holder and not imputable to his default, misconduct, Sec. 169. When delay in making presentment is excused. -
or negligence. When the cause of delay ceases to operate, The provisions of Section eighty-one apply where there is
the bill must be noted or protested with reasonable delay in making presentment to the acceptor for honor or
diligence. referee in case of need.

Sec. 160. Protest where bill is lost and so forth. - When a bill Sec. 170. Dishonor of bill by acceptor for honor. - When the
is lost or destroyed or is wrongly detained from the person bill is dishonored by the acceptor for honor, it must be
entitled to hold it, protest may be made on a copy or protested for non-payment by him.
written particulars thereof.
XIV. PAYMENT FOR HONOR
XIII. ACCEPTANCE FOR HONOR
Sec. 171. Who may make payment for honor. - Where a bill
Sec. 161. When bill may be accepted for honor. - When a bill has been protested for non-payment, any person may
of exchange has been protested for dishonor by non- intervene and pay it supra protest for the honor of any
acceptance or protested for better security and is not person liable thereon or for the honor of the person for
overdue, any person not being a party already liable whose account it was drawn.
thereon may, with the consent of the holder, intervene and
accept the bill supra protest for the honor of any party Sec. 172. Payment for honor; how made. - The payment for
liable thereon or for the honor of the person for whose honor supra protest, in order to operate as such and not as
account the bill is drawn. The acceptance for honor may be a mere voluntary payment, must be attested by a notarial
for part only of the sum for which the bill is drawn; and act of honor which may be appended to the protest or form
where there has been an acceptance for honor for one an extension to it.
party, there may be a further acceptance by a different
person for the honor of another party. Sec. 173. Declaration before payment for honor. - The
notarial act of honor must be founded on a declaration
Sec. 162. Acceptance for honor; how made. - An acceptance made by the payer for honor or by his agent in that behalf
for honor supra protest must be in writing and indicate declaring his intention to pay the bill for honor and for
that it is an acceptance for honor and must be signed by whose honor he pays.
the acceptor for honor. chanrobles law
What is payment for honor?
Sec. 163. When deemed to be an acceptance for honor of the
drawer. - Where an acceptance for honor does not Payment for honor is payment made by a person, whether a
expressly state for whose honor it is made, it is deemed to party to the bill or not, after it has been protested for non-
be an acceptance for the honor of the drawer. payment, for the benefit of any party liable thereon, or for the
benefit of the person whose account it was drawn. It is also
Sec. 164. Liability of the acceptor for honor. - The acceptor called payment supra protest because prior protest for non-
for honor is liable to the holder and to all parties to the bill payment is required. It is not applicable to promissory notes.
subsequent to the party for whose honor he has accepted. Payment for honor may be availed of when the holder,
knowing that the bill has already been dishonored for non-
Sec. 165. Agreement of acceptor for honor. - The acceptor payment, does not want to indorse the bill and thereby incur
for honor, by such acceptance, engages that he will, on due the liabilities of an indorser.
presentment, pay the bill according to the terms of his
acceptance provided it shall not have been paid by the What is the difference between acceptance for honor and
drawee and provided also that is shall have been duly payment for honor?
presented for payment and protested for non-payment and
notice of dishonor given to him. In acceptance for honor, there is an acceptor for honor. In
payment for honor, there is a payor for honor. The difference
Sec. 166. Maturity of bill payable after sight; accepted for between the two is that while in the former, the acceptor must
honor. - Where a bill payable after sight is accepted for ber a stranger to the bill, in the latter, the payer for honor may
honor, its maturity is calculated from the date of the noting be a party liable on the bill. Further, in the former, the bill
for non-acceptance and not from the date of the acceptance must not be overdue. In the latter, it is overdue. Also, in the
for honor. former, there may be several acceptors while, in the latter,
there can only be one payer. Finally, in the former, the protest
Sec. 167. Protest of bill accepted for honor, and so forth. - must be for non-acceptance or for better security, while, in the
Where a dishonored bill has been accepted for honor supra latter, it is for non-payment.
protest or contains a referee in case of need, it must be
protested for non-payment before it is presented for What are the requisites to perform a valid payment for
payment to the acceptor for honor or referee in case of honor?
need.
1. The bill has been dishonored for non-payment
Sec. 168. Presentment for payment to acceptor for honor, 2. The bill has been protested for non-payment
how made. - Presentment for payment to the acceptor for 3. Payment supra protest is made by any person, even a
honor must be made as follows: party thereto and as to form
(a) If it is to be presented in the place where the 4. the payment must be attested by notarial act appended to
protest for non-payment was made, it must be the protest, or form an extension to it
presented not later than the day following its
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5. The notarial act must be based on the declaration by the Sec. 176. Where holder refuses to receive payment supra
payer for honor or his agent of his intention to pay the protest. - Where the holder of a bill refuses to receive
bill for honor and for whose honor he pays. payment supra protest, he loses his right of recourse
against any party who would have been discharged by
such payment.
What is the procedure for payment for honor?
NOTE: In payment for honor, the holder cannot refuse
1. The payer or his agent goes to a notary public and payment. If he does, he cannot recover from the parties who
declares his intention to pay the bill and for whose honor would have been discharged had he accepted it. The rule is
he pays. different from acceptance for honor because in such a case, the
2. The notary then records the declaration in the protest or holder’s consent is necessary.
in a separate paper attached to it.
3. the payer then notifies the person for whose honor he pays ILLUSTRATION: In the above example, if Y offers to pay
within reasonable time. for the honor of C and F refuses, F loses the right of recourse
against D and E as they are parties who would have been
What if the payment for honor is not attested by a notarial discharged had the holder accepted payment. But as to C, the
act? party in whose honor Y offers to pay, is not discharged
because, as to him, even if F accepted, C would not be
It will operate as a mere voluntary payment and the discharged. The party for whom the instrument is paid for is
payer acquires no right to full reimbursement against the party never discharged from liability by the payment for honor of
for whose honor he pays. (Art. 1236-1237, NCC). He acquires the payer.
the right of reimbursement only up to the extent that the party
for whose honor he paid is benefited thereby. Similarly, failure Sec. 177. Rights of payer for honor. - The payer for honor,
to notify the person for whose honor he pays within on paying to the holder the amount of the bill and the
reasonable time will result in the payment being considered in notarial expenses incidental to its dishonor, is entitled to
the same manner. receive both the bill itself and the protest.

Sec. 174. Preference of parties offering to pay for honor. - What are the rights of the rights of the payer for honor?
Where two or more persons offer to pay a bill for the
honor of different parties, the person whose payment will 1. He acquires the rights of the holder (Sec. 175); and
discharge most parties to the bill is to be given the 2. He has also the right to receive the bill and the
preference. protest.
The purpose of (2) is to enable him to enforce his rights
Note: The rule is different in acceptance for honor (Sec. 161, against those who are liable to him by virtue of Sec. 175.
last clause)
XV. BILLS IN SET
ILLUSTRATION:
Sec. 178. Bills in set constitute one bill. - Where a bill is
A draws a bill payable to B, with X as drawee. B drawn in a set, each part of the set being numbered and
negotiates it to C, C to D, D to E, E to F, holder. X refuses to containing a reference to the other parts, the whole of the
honor it and F duly protests non-payment. If Y offers to pay parts constitutes one bill.
for the honor of C, while Z offers to pay for the honor of B,
the latter’s (Z) will be preferred as Z’s payment will discharge Sec. 179. Right of holders where different parts are
more (C, D, E). Y’s offer will only work to discharge D & E. negotiated. - Where two or more parts of a set are
negotiated to different holders in due course, the holder
Sec. 175. Effect on subsequent parties where bill is paid for whose title first accrues is, as between such holders, the
honor. - Where a bill has been paid for honor, all parties true owner of the bill. But nothing in this section affects
subsequent to the party for whose honor it is paid are the right of a person who, in due course, accepts or pays
discharged but the payer for honor is subrogated for, and the parts first presented to him.
succeeds to, both the rights and duties of the holder as
regards the party for whose honor he pays and all parties Sec. 180. Liability of holder who indorses two or more parts
liable to the latter. of a set to different persons. - Where the holder of a set
indorses two or more parts to different persons he is liable
What are the effects of payment for honor? on every such part, and every indorser subsequent to him
1. All parties subsequent to the party whose honor it is is liable on the part he has himself indorsed, as if such
paid are discharged; and parts were separate bills.
2. The payer for honor is subrogated for, and succeeds
to, both the rights and duties of the holder as regards Sec. 181. Acceptance of bill drawn in sets. - The acceptance
the party whose honor he pays and all parties liable to may be written on any part and it must be written on one
the latter. part only. If the drawee accepts more than one part and
such accepted parts negotiated to different holders in due
ILLUSTRATION: In the example above, suppose Z did not course, he is liable on every such part as if it were a
offer and, as a result, Y made payment. What are the effects? separate bill.
a. D and E are discharged because they are
parties subsequent to the party for whose Sec. 182. Payment by acceptor of bills drawn in sets. - When
honor it is paid ( C ). the acceptor of a bill drawn in a set pays it without
b. Y acquires the rights of F, holder, as against requiring the part bearing his acceptance to be delivered
C, B,A and X because C is the party for up to him, and the part at maturity is outstanding in the
whose honor he pays and the rest are hands of a holder in due course, he is liable to the holder
considered as parties liable to C. thereon.

Sec. 183. Effect of discharging one of a set. - Except as


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ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
herein otherwise provided, where any one part of a bill
drawn in a set is discharged by payment or otherwise, the Formula:
whole bill is discharged. 1. Get ratio between – PDIC: amount of deposit
2. MULTIPLY RATIO WITH AMOUNT OF CHECK
XVI. PROMISSORY NOTES AND CHECKS 3. Thus, Loss= PDIC__________ x amount of check
Amount of Deposit
Sec. 184. Promissory note, defined. - A negotiable 4. Loss= extent of drawer’s discharge
promissory note within the meaning of this Act is an
unconditional promise in writing made by one person to Suppose F, holder of a check for Php10,000.00 drawn by A. A
another, signed by the maker, engaging to pay on demand, has a deposit with the bank of Php80,000.00. F fails to present
or at a fixed or determinable future time, a sum certain in the check within reasonable time from issue. During such
money to order or to bearer. Where a note is drawn to the time, the bank collapsed. Can A go against the bank?
maker's own order, it is not complete until indorsed by
him. No. the fact that A issued a check does not mean that the
issuance immediately resulted in an assignment of funds in
Sec. 185. Check, defined. - A check is a bill of exchange favor of the payee. There is as yet no privity of contract
drawn on a bank payable on demand. Except as herein between F and the bank so that F cannot go against the bank.
otherwise provided, the provisions of this Act applicable to
a bill of exchange payable on demand apply to a check. Can F go against A, drawer? Yes, but only to the
extent not considered as lost. PDIC insures the depositor of
Sec. 186. Within what time a check must be presented. - A Php40,000.00. The amount of loss is thus computed:
check must be presented for payment within a reasonable
time after its issue or the drawer will be discharged from
liability thereon to the extent of the loss caused by the LOSS= PDIC x amt. of check = 40,000.00 x 10,000.00
delay. Deposit 80,000.00

When are checks supposed to be presented for payment? = ½ x P10,000.00= P5,000.00


The loss being to the extent of P5,000.00. F can only collect
Checks are to be presented within a reasonable time P5,000.00 from A.
after its issue or the drawer will be discharged from liability to
the extent of the loss caused by the delay of presentment. Finally, an unreasonable delay in the presentment of a
Although a check is a BOE, it must be presented within a check will discharge the indorsers whether or not he is
reasonable time from issues and not from last negotiation so prejudiced by the delay as the law presumes that he is
that the transfer of a check to successive holders does not prejudiced.
extend the time for presentment. A check is intended for
immediate use and not to circulate as promissory note. But the Sec. 187. Certification of check; effect of. - Where a check is
discharge of the drawer is predicated on the fact of loss so that, certified by the bank on which it is drawn, the certification
if there were no lose, then the drawer is not discharged is equivalent to an acceptance.
(though the check is stale) and the original obligation subsists.
What is certification of a check?
What are the requisites in order to discharge the drawer?
Certification is an agreement whereby the bank against whom
1. The check is not presented within a reasonable time a check is drawn, undertakes to pay it at any future time when
after its issue; presented for payment. It is equivalent to acceptance in that
2. The drawer suffers loss; and the drawee bank is bound on the instrument upon certification.
3. The loss suffered by the drawer is attributable to the It implies that the bank recognizes that the check is good; that
delay. the check is drawn upon sufficient funds in the hands of the
drawee; that they have been set apart for its satisfaction; and
What is reasonable time? that they shall be so applied whenever the check is presented
for payment. The purpose of procuring certification is to
What constitutes reasonable time is dependent upon the impart strength and credit to the paper by obtaining an
circumstances of each case. But the test is whether or not the acknowledgment from the certifying bank that the drawer has
payee employed such diligence as a prudent man would funds therein sufficient to cover the check and securing the
exercise in his own affairs. As stated earlier, our banking engagement of the bank that the check will be paid upon
practice sets the period within which presentment of a check presentation. When a check is certified, it ceases to possess the
must be made- 6 months. Otherwise, it is considered as stale. character of a check, and represents so much money on
deposit, payable to the holder on demand.
What is meant by “to the extent of the loss caused by the
delay?” Suppose the bank wrote across the check “certified” and it
was signed by an authorized official, is that sufficient
The discharge of the drawer is conditioned upon the suffering certification? Is there a form required?
of a loss attributable to the delay. If no loss or injury is shown,
the drawer is not discharged. The only loss which would be Yes, it is sufficient as no particular form, is required, only that
sustained by the drawer in case resentment was not made it be in writing. This is the usual method of certification.
within a reasonable time would be that caused by the Another is the use of the word “good” followed by the bank
insolvency of the bank subsequent to the delivery and prior to officer’s signature. But, “ok” followed by the signature is not
the presentment of the check. It does not include the acceptable. If it’s “good” it’s ok. If it’s “ok” it’s not good.
withdrawal by the drawer of the funds or deposits as the
benefits from the money he withdrew. What are the effects of “certification”

HOW COMPUTED: PDIC- the insurance benefits 1.) It is equivalent to acceptance and is the operative act
given for deposits is set at Php40,000.00: that makes the drawee bank liable;
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ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
2.) It operates as an assignment of the funds of the contract between the drawee bank and the payee or holder of
drawer in the hands of the drawee bank; the check.
3.) If obtained by the holder, it discharges persons
secondarily liable thereon; and When may a stop payment order be made?
4.) The payee or holder for all intents and purposes,
becomes the depositor of the drawee bank with rights As a check of itself does not operate as a n
and duties of one. assignment of funds of the drawer, the latter may countermand
(withdraw the order to pay) payment before its acceptance or
Supposing the holder of the check presented the check for certification. The order to stop payment must be
certification but the bank refused. Can the instrument be communicated to the bank before the check to which it refers
considered by the holder as dishonored? has been paid.

No. The certification of the check is not part of the warranties SUMMARY OF RIGHTS AND LIABILITIES OF THE
of the drawer. In so far as the drawer is concerned, he only PARTIES
warrants that the check will be paid if it is presented for
payment. It is not part of the warranties of the drawer that the 2. Where the drawee bank refuses to certify, or accept, or
check, if presented , will be certified or accepted by the bank. pay a check:
The refusal to certify will not mean a dishonor of the check. The holder has no action against it as a check is of
What will constitute a dishonor will be the non-payment of the itself is not an assignment if the funds of the drawer
check because the checks being payable on demand need not and the drawee bank is not liable on the check until it
be presented for acceptance. has accepted or certified it.
Neither has the holder a right of action against the
drawer where the drawee bank refuses to accept or
Sec. 188. Effect where the holder of check procures it to be certify the check but he has a right of action against
certified. - Where the holder of a check procures it to be the drawer where the drawee bank refuses to pay.
accepted or certified, the drawer and all indorsers are While the holder has no right of action against the
discharged from liability thereon. drawee bank which refuses to pay, accept, or certify
the check, the drawer has a right of action against the
NOTE: Where the holder procures the certification, the drawer drawee bank so refusing.
and endorsers are discharged. The reason for the rule is that
certification has the same effect as if the holder had drawn the
money redeposited it and taken a certificate of deposit for it. XVII. GENERAL PROVISIONS
Thus, the drawer (and indorser) is discharged on the check and
on the original debt. Further, only indorsers at the time of Sec. 190. Short title. - This Act shall be known as the
certification are discharged, not those subsequent. Negotiable Instruments Law.

However, if the certification is not obtained by the Sec. 191. Definition and meaning of terms. - In this Act,
holder but by other, i.e. the drawer (even at the instance of the unless the contract otherwise requires:
holder), or any other person, the drawer and the indorsers are "Acceptance" means an acceptance completed by
not discharged from liability. delivery or notification;

Sec. 189. When check operates as an assignment. - A check "Action" includes counterclaim and set-off;
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" includes any person or association of
bank is not liable to the holder unless and until it accepts persons carrying on the business of banking,
or certifies the check. whether incorporated or not;

What is the rule on checks as regards the funds? "Bearer" means the person in possession of a bill
or note which is payable to bearer;
Check drawn in the ordinary form is not an
assignment of the funds of the drawer in the bank. It does not "Bill" means bill of exchange, and "note" means
constitute a transfer of any money to the credit of the holder. It negotiable promissory note;
is simply an order by the drawer to pay the amount of the
check on presentment, and which may be countermanded and "Delivery" means transfer of possession, actual or
payment forbidden by the drawer at any time before it is constructive, from one person to another;
actually cashed. The banker’s liability to accept and pay is
conditioned upon the sufficiency of the drawer’s money in the "Holder" means the payee or indorsee of a bill or
hands of the bank. When the holder procures the check to be note who is in possession of it, or the bearer
certified, the check operates as an assignment of a part of the thereof;
funds to the credit of the drawer with the bank. The funds to
be under the control of the drawer and transfer to the credit of "Indorsement" means an indorsement completed
the holder or payee. by delivery;

Can the holder sue the bank of the check is not accepted or "Instrument" means negotiable instrument;
certified?
"Issue" means the first delivery of the instrument,
No. Before acceptance or certification, the bank is not complete in form, to a person who takes it as a
liable and the holder has no right to sue the drawee bank on holder;
the check. As a general rule, an action may not be maintained
by the payee of the check against the bank on which it is "Person" includes a body of persons, whether
drawn, unless the check has been accepted or certified. incorporated or not;
Without acceptance or certification there is no privity of
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ZPG & ASSOCIATES (Zambales.Pablo.Gonzales)
"Value" means valuable consideration;

"Written" includes printed, and "writing" includes


print.

Sec. 192. Persons primarily liable on instrument. - The


person "primarily" liable on an instrument is the person
who, by the terms of the instrument, is absolutely required
to pay the same. All other parties are "secondarily" liable.

Sec. 193. Reasonable time, what constitutes. - In


determining what is a "reasonable time" regard is to be
had to the nature of the instrument, the usage of trade or
business with respect to such instruments, and the facts of
the particular case.

Sec. 194. Time, how computed; when last day falls on


holiday. - Where the day, or the last day for doing any act
herein required or permitted to be done falls on a Sunday
or on a holiday, the act may be done on the next succeeding
secular or business day.

Sec. 195. Application of Act. - The provisions of this Act do


not apply to negotiable instruments made and delivered
prior to the taking effect hereof.

Sec. 196. Cases not provided for in Act. - Any case not
provided for in this Act shall be governed by the provisions
of existing legislation or in default thereof, by the rules of
the law merchant.

Sec. 197. Repeals. - All acts and laws and parts thereof
inconsistent with this Act are hereby repealed.

Sec. 198. Time when Act takes effect. - This Act shall take
effect ninety days after its publication in the Official
Gazette of the Philippine Islands shall have been
completed.

Enacted: February 3, 1911

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