Commercial Law – Negotiable signed by the maker, engaging to pay on demand

or a fixed determinable future time a sum certain

Instruments Law in money to order or bearer. When the note is
1. Negotiable Instruments – written contracts drawn to maker’s own order, it is not complete
for the payment of money; by its form, intended until indorse by him. (Sec. 184 NIL)
as a substitute for money and intended to pass
from hand to hand, to give the holder in due Parties:
course the right to hold the same and collect the
sum due. 1. maker
2. payee
2. Characteristics of Negotiable Instruments:
6. Bill of Exchange – unconditional order in
writing addressed by one person to another,
a. negotiability – right of transferee to hold
signed by the person giving it, requiring the person
the instrument and collect the sum due
to whom it is addressed to pay on demand or at a
b. accumulation of secondary contracts – fixed or determinable future time a sum certain in
instrument is negotiated from person to person money to order or to bearer. (Sec. 126 NIL)

3. Difference between Negotiable Parties:

Instruments from Non-Negotiable Instruments:
1. drawer
Negotiable Non-negotiable 2. payee
Instruments Instruments 3. drawee/ acceptor
7. Check – bill of exchange drawn on a bank
Contains all the does not contain all the and payable on demand. (Sec. 185 NIL)
requisites of Sec. 1 of requisites of Sec. 1 of 8. Difference between Promissory Note and
the NIL the NIL Bill of Exchange
Promissory Note Bill of Exchange
Transferred by transferred by
negotiation assignment Unconditional promise unconditional order
Holder in due course transferee acquires Involves 2 parties involves 3 parties
may have better rights rights only of his
than transferor transferor drawer only
Maker primarily liable secondarily liable
Prior parties warrant prior parties merely
payment warrant legality of title generally 2
presentments – for
Transferee has right of only 1 presentment – acceptance and for
recourse against transferee has no right for payment payment
intermediate parties of recourse 9. Distinctions between a Check and Bill of
4. Difference between Negotiable Exchange
Instruments and Negotiable Documents of Title CHECK BOE
Negotiable Negotiable
Instruments Documents of Title – always drawn upon – may or may not be
a bank or banker drawn against a bank
does not contain
Have requisites of Sec. requisites of Sec. 1 of – may be payable on
1 of the NIL NIL demand or at a fixed or
– always payable on determinable future
Have right of recourse demand time
against intermediate
parties who are no secondary liability – not necessary that it – necessary that it be
secondarily liable of intermediate parties be presented for presented for
acceptance acceptance
Holder in due course transferee merely
may have rights better steps into the shoes of – not drawn on a
than transferor the transferor – drawn on a deposit deposit

Subject is money subject is goods – the death of a

drawer of a check,
instrument is merely with knowledge by – the death of the
evidence of title; thing the banks, revokes the drawer of the ordinary
of value are the goods authority of the bill of exchange does
Instrument itself is mentioned in the banker pay not
property of value document
– must be presented – may be presented for
for payment within a payment within a
5. Promissory Note – unconditional promise to
pay in writing made by one person to anther, reasonable time after reasonable time after
 writing may be in ink, print or pencil. It may be
its issue (6 months) its last negotiation. upon parchment, cloth, leather or any other
10. Distinctions between a Promissory Note and substitute of paper.
Check
– It must be signed by the maker or drawer.
PN CHECK
It may consist of mere initials or even numbers,
– there are three (3) but the holder must prove that what is written is
intended as a signature of the person sought to be
– there are two (2) parties, the drawer, charged.
parties, the maker and the drawee bank and
the payee the payee – The Bill must contain an order, something
more than the mere asking of a favor.
– may be drawn against
any person, not – always drawn – Sum payable must be in money only. It
necessarily a bank against a bank cannot be made payable in goods, wares, or
merchandise or in property.
– may be payable on
demand or at a fixed or – A drawee’s name may be filled in under
determinable future -always payable on Section 14 of the NIL
time demand
15. Determination of negotiability
– a promise to pay – an order to pay 1. by the provisions of the Negotiable Instrument
Law, particularly Section 1 thereof
11. Other Forms of Negotiable Instruments: 2. by considering the whole instrument
3. by what appears on the face of the instrument
a. certificates of deposits and not elsewhere

b. trade acceptances *In determining is the instrument is negotiable,

only the instrument itself and no other, must be
c. bonds in the nature of promissory notes examined and compared with the requirements
stated in Sec. 1. If it appears on the instrument
d. drafts which are bills of exchange drawn by that it lacks one of the requirements, it is not
1 bank to another negotiable and the provisions of the NIL do not
govern the instrument. The requirement lacking
e. letters of credit cannot be supplied by using a separate instrument
in which that requirement which is lacking
12. Trust Receipt – a security transaction appears.
intended to aid in the financing of importers and
retailers who do not have sufficient funds to 16. Sum is certain even if it is to be paid with:
finance their transaction and acquire credit
except to use as collateral the merchandise a. interest
imported
13. Requisites of a Negotiable Note (PN): b. in installments
(SUDO)
c. in installments with acceleration clause
It must:
d. with exchange
a. be in writing signed by the drawer
b. contains an unconditional promise or order e. costs of collection or attorney’s fees (Sec. 2
to pay a sum certain in money NIL)
c. be payable on demand or at a fixed
determinable future time 17. General Rule: The promise or order should
d. be payable to order or to bearer (Sec. 1 not depend on a contingent event. If it is
NIL) conditional, it is non-negotiable.
14. Requisites of a Negotiable Bill (BOE):
(SUDOC) Exceptions:

It must: a. indication of particular fund from which the

acceptor disburses himself after payment
1. be in writing signed by the drawer
2. contains an unconditional promise or order to b. statement of the transaction which gives
pay a sum certain in money rise to the instrument. (Sec. 3 NIL)
3. be payable on demand or at a fixed
determinable future time But an order or promise to pay out of a particular
4. be payable to order or to bearer fund is not unconditional
5. the drawee must be named or otherwise
indicated with reasonable certainty (Sec. 1
Notes on Section 3
NIL)
Notes on Section 1:
– The particular fund indicated should not be
the direct source of payment, else it becomes
– In order to be negotiable, there must be a
unconditional and therefore non-negotiable. The
writing of some kind, else there would be nothing
fund should only be the source of reimbursement.
to be negotiated or passed from hand to hand. The
– A statement of the transaction does not c. issued, accepted, or endorsed after
destroy the negotiability of the instrument. maturity (Sec. 7 NIL)
Exception: Where the promise to pay or order is
made subject to the terms and conditions of the Where an instrument is issued, accepted or
transaction stated. indorsed when overdue, it is, as regards to the
person so issuing, accepting, or indorsing it,
18. Instrument is payable upon a determinable payable on demand.
future time if:
Notes on Section 7
a. there is a fixed period after sight/date
– if the time for payment is left blank (as opposed
b. on or before a specified date/fixed to being omitted), it may properly be considered
determinable future time as an incomplete instrument and fall under the
provisions of Sec. 14, 15, or 16 depending on how
c. on or at a fixed date after the occurrence the instrument is delivered.
of an event certain to happen though the exact
date is not certain (Sec. 4 NIL) 22. Instrument is payable to order:

Notes on Section 4 – where it is drawn payable to the order of a

specified person or
– If the instrument is payable upon a
contingency, the happening of the event does not – to a specified person or his order
cure the defect (still non-negotiable)
It may be drawn payable to the order of:
19. General Rule: If some other act is required
other than the payment of money, it is non- 1. a payee who is not a maker, drawer, or
negotiable. drawee
2. the drawer or maker
Exceptions: 3. the drawee
4. two or more payees jointly
a. sale of collateral securities 5. one or some of several payees
6. the holder of an office for the time
b. confession of judgment being (Sec. 8 NIL)
Notes on Section 8
c. waives benefit of law
– The payee must be named or otherwise
d. gives option to the holder to require indicated therein with reasonable certainty.
something to be done in lieu of money (Sec. 5 NIL)
– If there is no payee, there would be no one
Notes of Section 5 to indorse the instrument payable to order.
Therefore useless to be considered negotiable.
– Limitation on the provision, it cannot
require something illegal. – Joint payees in indicated by the
conjunction “and”. To negotiate, all must indorse.
– There are two kinds of judgements by
confession: a) cognovit actionem b) relicta – Being several payees is indicated by the
verificatione conjunction “or”.

– Confessions of judgement in the 23. Instrument is payable to bearer :

Philippines are void as against public policy.
a. when it is expressed to be so payable
– If the choice lies with the debtor, the
instrument is rendered non-negotiable. b. when payable to the person named or
bearer
20. The validity and negotiability of an
instrument is not affected by the fact that: c. payable to order of fictitious or non-
1. it is not dated existent person and this fact was known to drawer
2. does not specify the value given or that any
had been given d. name of payee not name of any person
3. does not specify the place where it is drawn
or payable e. only and last indorsement is an indorsement
4. bears a seal in blank (Sec. 9 NIL)
5. designates the kind of current money in which
payment is to be made (Sec. 6 NIL) Notes on Section 9
21. Instrument is payable upon demand if:
– “fictitious person” is not limited to persons
a. it is expressed to be so payable on sight or having no legal existence. An existing person may
upon presentation be considered fictitious depending on the
intention of the maker or the drawer.
b. no period of payment is stipulated
– “fictitious person” means a person who has
no right to the instrument because the maker or
drawer of it so intended. He was not intended to 1. It was delivered by the person making it in
be the payee. order that it may be converted into a
negotiable instrument
– where the instrument is drawn, made or 2. The holder has prima facie authority to fill it
prepared by an agent, the knowledge or intent of up as such for any amount. (Sec. 14 NIL)
the signer of the instrument is controlling. Notes on Section 14

– Where the agent has no authority to – if the instrument is wanting in material

execute the instrument, the intent of the principal particular, mere possession of the instrument is
is controlling enough to presume prima facie authority to fill it
up.
24. The date may be inserted in an instrument
when: – material particular may be an omission
1. an instrument expressed to be payable at a which will render the instrument non-negotiable
fixed period after date is issued undated (e.g. name of payee), an omission which will not
2. where acceptance of an instrument payable at render the instrument non-negotiable (e.g. date)
a fixed period after sight is undated (Sec. 13
NIL) – in the case of the signature in blank,
delivery with intent to convert it into a negotiable
Effects: instrument is required. Mere possession is not
enough.
– any holder may insert the true date of
issuance or acceptance 28. Incomplete and Undelivered Instrument:

– the insertion of a wrong date does not General Rule: Where an incomplete instrument
avoid the instrument in the hands of a subsequent has not been delivered, it will not, if completed
holder in due course and negotiated without authority, be a valid
contract in the hands of any holder against any
– as to the holder in due course, the date person who signed before delivery. (Sec. 15 NIL)
inserted (even if it be the wrong date) is regarded
as the true date. Notes on Section 15

25. Subsequent Holder in Due Course not – it is a real defense. It can be interposed
affected by the following deficiencies: against a holder in due course.

a. incomplete but delivered instrument (Sec. – delivery is not conclusively presumed

14 NIL) where the instrument is incomplete

b. complete but undelivered (Sec. 16 NIL) – defense of the maker is to prove non-
delivery of the incomplete instrument.
c. complete and delivered issued without
consideration or a consideration consisting of a 29. Complete but Undelivered:
promise which was not fulfilled (Sec 28 NIL)
General Rule: Every contract on a negotiable
26. Holder in Due Course Affected by instrument is incomplete and revocable until
Abnormality/Deficiency: delivery for the purpose of giving effect thereto.

a. incomplete and undelivered instrument a. If between immediate parties and remote

(Sec. 15 NIL) parties not holder in due course, to be effectual
there must be authorized delivery by the party
b. maker/drawer’s signature forged (Sec. 23 making, drawing, accepting or indorsing. Delivery
NIL) may be shown to be conditional or for a special
purpose only
27. Incomplete but Delivered Instrument:
b. If the holder is a holder in due course, all
1. Where an instrument is wanting in any material prior deliveries conclusively presumed valid
particular:
c. If instrument not in hands of drawer/maker,
a. Holder has prima facie authority to fill up valid and intentional delivery is presumed until
the blanks therein. the contrary is proven (Sec. 16 NIL)

b. It must be filled up strictly in accordance Rules on delivery of negotiable instruments:

with the authority given and within a reasonable
time. 1) delivery is essential to the validity of any
negotiable instrument
c. If negotiated to a holder in due course, it is
valid and effectual for all purpose as though it was 2) as between immediate parties or those is like
filled up strictly in accordance with the authority cases, delivery must be with intention of passing
given and within reasonable time. (Sec. 14 NIL) title

2. Where only a signature on a blank paper was 3) an instrument signed but not completed by
delivered: the drawer or maker and retained by him is invalid
as to him for want of delivery even in the hands of – no liability attached to the infant or the
a holder in due course corporation

4) but there is prima facie presumption of – the instrument is still valid and the
delivery of an instrument signed but not indorsee acquires title
completed by the drawer or maker and retained
by him if it is in the hands of a holder in due
course. This may be rebutted by proof of non-
delivery. 34. General rule: a signature which is forged or
made without authority is wholly inoperative.
5) an instrument entrusted to another who
wrongfully completes it and negotiates it to a Effects:
holder in due course, delivery to the agent or
custodian is sufficient delivery to bind the maker 1. no right to retain
or drawer. 2. no right to give a discharge
3. no right to enforce payment can be
6) If an instrument is completed and is found in acquired. (Sec. 23 NIL)
the possession of another, there is prima facie
evidence of delivery and if it be a holder in due Exception:
course, there is conclusive presumption of
delivery. – the party against whom it is sought to be
enforced is precluded from setting up the forgery
7) delivery may be conditional or for a special or want of authority.
purpose but such do not affect the rights of a
holder in due course. Notes on Section 23

30. General rule: a person whose signature – Section 23 applies only to forged signatures
does not appear on the instrument in not liable. or signatures made without authority

Exception: – Alterations such as to amounts or like fall

under section 124
1. one who signs in a trade or assumed name
(Sec. 18) – Forms of forgery are a) fraud in factum b)
2. a duly authorized agent (Sec. 19) duress amounting to fraud c) fraudulent
3. a forger (Sec. 23) impersonation

– Only the signature forged or made without

authority is inoperative, the instrument or other
31. General rule: an agent is not liable on the signatures which are genuine are affected
instrument if he were duly authorized to sign for
or on behalf of a principal. – The instrument can be enforced by holders
to whose title the forged signature is not
Requisites: necessary

1. he must be duly authorized – Persons who are precluded from setting up

2. he must add words to his signature indicating the forgery are a) those who warrant or admit the
that he signs as an agent genuineness of the signature b) those who are
3. he must disclose his principal (Sec. 20 NIL) estopped.
Notes on Section 20
– Persons who are precluded by warranting
– if an agent does not disclose his principal, are a) indorsers b) persons negotiating by delivery
the agent is personally liable on the instrument. c) acceptors.

32. Per Procuration – operates as notice that – drawee bank is conclusively presumed to
the agent has a limited authority to sign. know the signature of its drawer

Effects: – if endorser’s signature is forged, loss will

be borne by the forger and parties subsequent
– the principal in only bound if the agent thereto
acted within the limits of the authority given
– drawee bank is not conclusively presumed
– the person who takes the instrument is to know the signature of the indorser. The
bound to inquire into the extent and nature of the responsibility falls on the bank which last
authority given. (Sec. 21 NIL) guaranteed the indorsement and not the drawee
bank.

– Where the payee’s signature is forged,

33. General rule: Infants and corporations incur payments made by the drawee bank to collecting
no liability by their indorsement or assignment of bank is ineffective. No debtor/creditor
an instrument. (Sec. 22 NIL) relationship is created. An agency to collect is
created between the person depositing and the
Effects: collecting bank. Drawee bank may recover from
collecting bank who may in turn recover from the 36. Where value has at any time been given for
person depositing. the instrument, the holder is deemed a holder for
value in respect to all parties who become such
Rules on liabilities of parties on a forged prior to that time. (Sec. 26 NIL)
instrument
In a PN

– a party whose indorsement is forged on a 37. Effect of want of consideration:

note payable to order and all parties prior to him
including the maker cannot be held liable by any 1. Absence or failure of consideration may be set
holder up against a holder not a holder in due course
(personal defense)
– a party whose indorsement is forged on a 2. Partial failure of consideration is a defense
note originally payable to bearer and all parties pro tanto (Sec 28 NIL)
prior to him including the maker may be held
liable by a holder in due course provided that it
was mechanically complete before the forgery
Notes on Section 28
– a maker whose signature was forged
cannot be held liable by any holder
– absence of consideration is where no
consideration was intended to pass.
In a BOE
– failure of consideration implies that
– the drawer’s account cannot be charged by consideration was intended by that it failed to
the drawee where the drawee paid pass

– the drawer has no right to recover from – the defense of want of consideration is
the collecting bank ineffective against a holder in due course

– the drawee bank can recover from the – a drawee who accepts the bill cannot
collecting bank allege want of consideration against the drawer

– the payee can recover from the drawer

– the payee can recover from the recipient 38. An accommodation party is one who signs the
of the payment, such as the collecting bank instrument as maker, drawer, acceptor, or
indorser without receiving value therefor and for
– the payee cannot collect from the drawee the purpose of lending his name to some other
bank person.

– the collecting bank bears the loss but can Effects:

recover from the person to whom it paid
– an accommodation party is liable to the
– if payable to bearer, the rules are the holder for value notwithstanding that such holder
same as in PN. knew that of the accommodation. (Sec. 28 NIL)

– if the drawee has accepted the bill, the

drawee bears the loss and his remedy is to go
after the forger Notes on Section 28

– if the drawee has not accepted the bill but – the accommodated party cannot recover
has paid it, the drawee cannot recover from the from the accommodation party
drawer or the recipient of the proceeds, absence
any act of negligence on their part. – want of consideration cannot be interposed
by the accommodation party

– an accommodation maker may seek

35. Every negotiable instrument is deemed prima reimbursement from a co-maker even in the
facie to have been issued for a valuable absence of any provision in the NIL; the deficiency
consideration. (Sec. 24 NIL) is supplied by the New Civil Code.

Effects: – he may do this even without first

proceeding against the debtor provided:
– every person whose signature appears
thereon is a party for value a. he paid by virtue of judicial demand

– presumption is disputable b. principal debtor is insolvent

39. An instrument is negotiated when: – negotiation takes effect as of the time the
indorsement is actually made (Sec. 49 NIL)
1. it is transferred from one person to another
2. that the transfer must be in a manner as to 45. Rights of a holder:
constitute the transferee a holder
– a holder may sue in his own name
For a bearer instrument – by delivery
– a holder may receive payment.
For payable to order – by indorsement and delivery
(Sec. 30 NIL) Effects:

– if in due course it discharges the

instrument (Sec. 51 NIL)
40. Indorsement to be must be:
46. Requisites for a Holder in Due Course
1. written (HDC):
2. on the instrument itself or upon a piece of
paper attached (Sec. 31 NIL) a. receives the instrument complete and
Notes on Section 31 regular on its face
– the paper attached with the indorsement is b. became a holder before it was overdue and
an allonge had no notice that it had been previously
dishonored if such was the fact
– an allonge must be attached so that it
becomes a part of the instrument, it cannot be c. takes the instrument for value and in good
simply pinned or clipped to it. faith
41. Kinds of Indorsements: d. at time he took the instrument, no notice
1. Special (Sec. 34) of infirmity in instrument or defect in the title of
2. Blank (Sec. 35) the person negotiating it (Sec. 52 NIL)
3. Restrictive (Sec. 36)
4. Qualified (Sec. 38)
5. Conditional (Sec. 39 NIL)
42. Effects of indorsing an instrument
originally payable to bearer:

– it may further be negotiated by delivery

– the person indorsing is liable as indorser to

such persons as to make title through his
indorsement (Sec. 40 NIL)

Notes on Section 40

– Section 40 applies only to instruments

originally payable to bearer

– It cannot apply where the instrument is

payable to bearer because the only or last
indorsement is in blank.

43. A holder may strike out any indorsement

which is not necessary to his title.

Effects:

– An indorser whose indorsement is struck

out is discharged

– All indorsers subsequent to such indorser

who has been discharged are likewise relieved.
(Sec. 48 NIL)

44. Effects of a transfer without endorsement:

– the transferee acquires such title as the

transferor had

– the transferee acquires the right to have

the indorsement of the transferor