INTRODUCTION
Validity and negotiable character of an instrument are not
Function and Importance of Negotiable Instrument
1. Used as substitute for money
2. Media of exchange for most commercial transaction
3. Medium of credit transaction
Characteristics or Features of Negotiable Instrument
1. Negotiability
2. Accumulation of secondary contracts – as they are
transferred from one person to another
Common Form of Negotiable Instrument
1. Promissory Notes (maker and payee)
2. Bill of Exchange (drawer, payee, drawee)
Instruments with Limited Negotiability
1. Letter of Credit – it is in favor of a specified person and
not to order
2. Treasury Warrant – payable out of a specific fund or
appropriation
3. Postal Money Order – subject to restriction and limitations
(only 1 indorsement is allowed)
4. Bill of Lading – without an unconditional promise or order
to pay sum certain in money
5. Certificate of Stock – without an unconditional promise or
order to pay sum certain in money
6. Warehouse Receipt – without an unconditional promise or
order to pay sum certain in money
Chapter 1 – Form and Interpretation
Section 1. Form of Negotiable Instrument
Requirements:
(1) Must be in writing and signed by the maker or drawer
(2) Must contain an unconditional promiser or order to pay
sum certain in money
(3) Must be payable on demand, or at a fixed or determinable
future time
(4) Payable to order or bearer
(5) If the instrument is addressed to a drawee, he must be name
or otherwise indicated therein with reasonable certainty
Negotiable Instrument – a contractual obligation to pay money
In determining the negotiability of instrument, the following must be
considered:
1. Whole of instrument
2. What appears on the face of the instrument
3. Provision stated in Section 1
Section 2. Certainty as to Sum Section 6.
It is still sum certain money although it is paid: affected by the fact that
(1) With interest (1) Not dated
(2) By stated installments (2) Not specify the value given, or that any value has been given
(3) By stated installments with a provision upon default in (3) Not specify the place where it is drawn or where it is
payment of installment or interest, the whole shall become payable
due (4) Bears a seal
(4) With exchange, at fixed rate or at the current rate (5) Designates particular kind of current money in which
(5) With costs of collection or an attorney’s in case payment payment is to be made
shall not be made at maturity
Section 7. Payable on Demand
Section 3. When promise in Unconditional (1) Expressed to be payable on demand, at sight, or on presentation
It is still an unconditional promise or order even though coupled with (2) No time for payment is expressed
(1) Indication of a particular fund out of which reimbursement (3) Issued, accepted, or indorsed when overdue
is to be made or a particular account to be debited with the
amount Section 8. Payable to Order
(2) Statement of transaction which gives rise to the instrument When drawn payable to the order of a specified person or to him or
But to pay out of a particular fund is not unconditional (if the fund his order. (he must be name or otherwise indicated therein with
specified is the direct source of payment) reasonable certainty)
Section 4. Determinable Future Time Section 9. Payable to Bearer
(1) At a fixed after date or sight (1) Expressed to be so payable
(2) On or before a fixed or determinable future time specified (2) Payable to a person named therein or bearer
(3) On or at a fixed period after the occurrence of a specified Originally an order instrument turned to bearer instrument:
event which is certain to happen though the time of (3) Payable to the order of a fictitious or non-existing person,
happening be uncertain and such fact was known to the person making it so payable
Instrument payable upon a contingency is not negotiable, and the (4) Name of the payee does not purport to be the name of any
happening of the event does not cure the defect person
 “after date” = promissory note (5) Only or last indorsement is an indorsement in blank
 “after sight” = bill of exchange
Section 10. Any terms are sufficient if it clearly indicate an intention
Section 5. Additional Provisions Not Affecting Negotiability to conform to the requirements hereof
(1) Authorize sale of collateral securities in case of nonpayment
at maturity Section 11. When instrument is dated, such date is deemed prima
(2) Authorizes a confession of judgment if not to be paid at facie to be the true date of the making, drawing, acceptance, or
maturity indorsement, as the case may be.
(3) Waives the benefit of any law intended for advantage or
protection of the obligor (generally, drawee is the primary Section 12. Ante-dated and Post-dated Instrument
liable) Not invalid unless it is done for an illegal or fraudulent purposes
(4) Gives the hold an election to require something to be done  Ante-dated (contains a date earlier that the true date of its
in lieu of payment of money issuance)
If an instrument contains to do any act in addition to the payment of  Post-dated (date later than the true date of its issuance)
money, it is not negotiable
 Confession of Judgment – written acknowledgment by the
defendant of his indebtedness
Section 13. When date may be inserted Section 17. Construction where instrument is ambiguous Chapter 2 – Consideration
(1) Payable at a fixed period after date but is issued undated (1) Discrepancy in sum payable expressed in words and in Section 24. Every instrument is deemed prima facie to have been
(2) Payable at a fixed period after sight but the acceptance is figures - by words but if uncertain, the figure issued for a valuable consideration, and every person whose signature
undated (2) No date from which interest is to run - from the date of appears thereon are party for value
Insertion of a wrong date will be regarded as the true date if the instrument, if undated, from the issue Consideration – inducement to a contract, the cause in entering the
holder is a holder in due course only (Sec. 52 – Holder in Due (3) Between written and printed provision - written prevails contract
Course) (4) Whether it is a bill or note - at holder’s election
(5) Signature’s unclear intention – deemed to be an indorser Section 25. Value
Section 14. Incomplete Instrument which has been delivered (6) “I promise to Pay” signed by two or more persons – Any consideration sufficient to support simple contract
If the instrument is wanting in any material particular, person in deemed to be jointly and severally liable (solidary liable) - Antecedent or pre-existing debt constitutes value.
possession has a prima facie authority to complete in by filling up the Need not to be adequate. Sufficient if it is a valuable one.
blanks Section 18. Person Liable on an Instrument
- To be enforce (valid), it must be filled up strictly in General Rule: only persons whose signature appear on an instrument Section 26. Holder for Value
accordance with the authority given and within a reasonable as liable. One who has given a valuable consideration for the instrument issued
time Exceptions: or negotiated to him
- If negotiated to holder in due course, valid and effectual (1) Signs in a trade or assumed name (Pacman for Pacquiao)
and may be enforce as if it had been filled up strictly (2) Principal is liable if duly authorized agent signs Section 27. Lien on Instrument
Steps in issuance of negotiable instrument: (3) In case of forgery, the forger Considered as holder for value (taken the instrument as collateral
1. Mechanical act of writing (4) Acceptor makes his acceptance of a bill on a separate paper security for a debt has a lien on the instrument)
2. Delivery (5) Written promise to accept a bill/note before it is drawn
(6) Person negotiating by mere delivery Section 28. Effect of Want of Consideration
Section 15. Incomplete Instrument not delivered A matter of defense as against any person not a holder in due course
Not be a valid contract, and if completed and negotiated without Section 19. Signature of any party may be made by a duly authorized - Partial failure of consideration is a defense pro tanto, whether
authority, it is still not valid against the holder including holder in agent and no particular form of appointment is necessary the failure is an ascertained and liquidated amount or
due course otherwise
Section 20. In order the agent not to be personally liable:  Absence of Consideration – total lack of any valid consideration
Section 16 Complete Instrument but not delivered (1) Duly authorized  Failure of Consideration – failure or refusal of one of the parties
Every instrument is incomplete and revocable until delivery for the (2) Adds words to his signature that he signs as an agent to do, perform, or comply with the consideration agreed upon
purpose of giving effect thereto. (3) Discloses his principal
 Between immediate party and as to remote party - to be Section 29. Accommodation Party
effectual, the delivery must be made either or under the Section 21. Effect of Signature by Procuration (pp) Liable on the instrument to a holder for value
authority of the party making the instrument Operates as notice that the agent has but a limited authority to sign  Accommodation Party – signed the instrument without
 Between holder in due course – conclusively presumed as - Principal is not bound if the agent exceeded the actual receiving value and for the purpose of lending his name
valid delivery limits of his authority
 Accommodated Party – one who favor the accommodation
Immediate Party – has direct contractual relation party
Remote Party – has no direct contractual relation Section 22. Effect of Indorsement by Infant or Corporation
 Accommodation Bill or Note – which the accommodation
( A → B → C = C’s immediate party is B and A as his remote party) Not incapacitated to transfer certain right but cannot be hold liable
party signs
 Delivery – transfer of possession, actual or constructive,
Section 23. Forged Signature
from one person to anther Chapter 3 – Negotiation
Signature is inoperative and no rights can be acquired through the
 Issue – first delivery of the instrument, complete in form,
forged signature but the instrument and genuine signatures are still Section 30. Negotiation is the transfer of a negotiable instrument
to a person who takes it as holder from one person to another made in such manner as to constitute the
valid
transferee the holder thereof
 Payable to Bearer – negotiated by delivery
 Payable to Order – negotiated by indorsement completed
by delivery
Section 31. Indorsement must be written on the instrument itself or Section 36. Restrictive Indorsement Section 41. Indorsement payable to two or more persons
upon a paper attached there to.  Prohibits the further negotiation All must indorse unless the one indorsing has (1) authority to indorse
Indorsement – writing of the name of the indorser on the instrument  Constitutes the indorsee the agents of the indorser for the others or (2) they are partners
with the intent either to transfer the title or to strengthen the security (subsequent indorsees acquire only the title of the first
of the holder indorsee) Section 42. Instrument drawn/indorsed to a person as “cashier”
Allonge – paper attached thereto where the indorsement is located  Vests the title in the indorsee in trust for or to the use of When indorsed to “cashier” or other fiscal officer of a bank or
some other person (transfer the title but cannot be corporation, deemed prima facie to be payable to the bank or
Section 32. Indorsement must be of entire instrument negotiated) corporation of which he is such officer
Does not operate as negotiation: Mere absence of words implying power to negotiate does not make - May be negotiated by either the indorsement of the bank,
(1) To transfer to the indorsee a part only of the amount an indorsement restrictive or corporation, or of the officer
payable
(2) To transfer the instrument to two or more indorsees Section 37. Rights of Indorsee because of Restrictive Indorsement Section 43. Indorsement where name is misspelled
severally Indorse the instrument as therein described adding, if he thinks fit,
 Receive payment
Valid Negotiation: his proper signature
 Bring any action thereon that the indorser could bring
 Part of the amount has already been paid, the unpaid
 Transfer his rights as such indorsee, where the form of Section 44. Indorsement in Representative Capacity
balance may be indorsed
indorsement authorizes him to do so If under obligation to indorse in a representative capacity, he may
Section 33. Kinds of Indorsement All subsequent indorsees acquire only the title of the first indorsee indorse in such terms as to negative personal liability (save from
(1) Special liability)
(2) Blank Section 38. Qualified Indorsement
- Constitutes the indorses a mere assignor of the instrument Section 45. Time of Indorsement
(3) Restrictive
(4) Qualified (transfer the title without guaranteeing payment) If the indorsement has no date, every negotiation is deemed prima
- Adding to the indorser’s signature the words “without facie to have been effected before it was overdue
(5) Conditional
recourse” or any words similar - Importance: to determine whether the holder is a holder in
- Secondarily liable for breach of warranties as an indorser due course
Section 34. Special Indorsement and Blank Indorsement
Special Indorsement: under Section 65 but not liable if the instrument is
dishonored for reason like insolvency of primarily liable. Section 46. Place of Indorsement
 Specifies the person to whom, or to whose, order, the
instrument is to be payable Presumed prima facie to have been made at the place where the
Section 39. Conditional Indorsement instrument is dated unless contrary appears
 Indorsement of such indorsee is necessary to the further Indorser annexes some other condition to his liability
negotiation - Party required to pay (primarily liable) may disregard the
Indorsement in Blank (Blank Indorsement): Section 47. Ceases the negotiability of the instrument
condition and make payment to the indorsee or his Instrument negotiable in origin is always negotiable (even though it
 Specifies no indorsee transferee, whether the condition has been fulfilled or not is overdue) but ceases when:
 Payable to bearer, and may be negotiated by delivery - Any person to whom an instrument so indorsed is (1) It has been restrictively indorsed
negotiated will hold the same subject to the right of the (2) Discharged by payment or otherwise
Section 35. Blank indorsement may be converted into a special person indorsing conditionally
indorsement by writing over the signature of the indorser.
Section 48. Striking out of indorsements
- A bearer instrument always remain to be a bearer Subject 40. Indorsement of Instrument Payable to Bearer
Subsequent indorsers of indorser whose indorsement is struck out,
instrument negotiable by mere delivery whether the last Even it is endorsed specially, it may nevertheless be further negotiated are relived from liability (indorsers after him)
indorsement is a blank or special by delivery
- Person indorsing specially is liable as indorser to only such Section 49. Transfer without Indorsement
holders as make title through his indorsement (liable to Transferee for value acquires the right to have the indorsement of the
only holders who obtain their title through his transferor
indorsement) - Negotiation takes effect as of the time when the
indorsement is actually made (to determine if he is a holder
in due course)
Section 50. Right of Prior Party to Negotiate Section 57. Rights of Holder in Due Course Parties according to liability:
- Refers to a reacquirer or a holder who negotiates an - Holds the instrument free from any defect of title of prior parties  Primary Liable – absolutely required to pay
instrument then subsequently reacquires it - Free form defenses available to prior parties among themselves (1) Maker of promissory note
- Not entitled to enforce payment thereof against any - May enforce payment for the full amount against all parties liable (2) Acceptor of a bill of exchange (ex. drawee’s acceptor)
intervening party to whom he was personally liable thereon (3) Certifier of check
Real Defenses not Personal Defenses can be set up against to holder  Secondarily Liable – pay the instruments only after
Chapter 4 – Rights of the Holder in due course conditions have been fulfilled: (a) presentment for payment
Section 51. Right of a Holder or acceptance to the primary party; (b) proper dishonor of
(1) Sue on the instrument on his name Section 58. Defenses such party;
(2) Receive payment and if the payment is in due course, the Holder who derives his title through a holder in due course, who is (1) Drawer of a bill
instrument is discharged in good faith, has all the rights of that holder in due course respect (2) Indorses of a note or bill
Payment in Due Course – payment made at or after the of all parties prior to the holder in due course.
maturity to the holder in good faith and without notice of Kinds of Defenses Section 61. Liability of Drawer
the defect (Section 88) 1. Real Defenses – defenses attach to the instrument itself (1) Admits the existence of the payee and his then capacity to
2. Personal defenses – available only against that person or indorse
Section 52. Holder in Due Course subsequent holder who stands in privity with the party (2) On due presentment of the instrument will be accepted or
Holder who has taken the instrument under: seeking to enforce it (between original parties or immediate paid, or both, according to its tenor
(1) It is complete and regular upon its face parties or against one who is not a holder in due course (3) If it be dishonored, and necessary proceedings on dishonor
(2) He became the holder before it was overdue, and without Kinds of Parties be duly taken, he will pay the amount to the holder or to
notice that it had been previously dishonored, if such was 1. Immediate Party – has direct contractual relation any subsequent indorser who may be compelled to pay it
the fact 2. Remote Party – no direct contractual relation May insert in the instrument an express stipulation limiting his own
(3) He took it in good faith and for value Kinds of Fraud liability
(4) At the time it was negotiated to him, he had no notice of 1. Fraud in Factum (fraud in the execution) – a person,
any infirmity in the instrument or defect in the title of the without negligence, has signed an instrument which he was Section 62. Liability of Acceptor
person negotiating it deceived by the character of the instrument [real defense] Drawee of a bill is not liable before acceptance.
2. Simple Fraud (fraud in inducement) – relates to the quality, After his acceptance, he will pay it according to his tenor of
Section 53. Person not deemed Holder in Due Course quantity, value, or character of the consideration of the acceptance (not tenor of the instrument), and admits:
Payable on demand is negotiated an unreasonable length of time after instrument (he knew what he was signing but was induced (1) Existence of the drawer, the genuineness of his signature,
the issue (reasonable time – section 193) by fraud to sign) and his capacity and authority to draw the instrument
(2) Existence of the payee and his then capacity to indorse.
Section 54. Notice before full amount paid Section 59. Holder presumed as a Holder in Due Course
Holder in due course to the extent of the amount paid by him before Every holder is deemed prima facie to be a holder in due course. Section 63. Indorser
he received the notice of infirmity in the instrument or defect in the - When it is shown that the title of person who negotiated it Person placing his signature upon an instrument otherwise than as
title of the person negotiating it was defective, the burden is in the holder in proving that he maker, drawer, or acceptor unless he clearly indicates by appropriate
is a holder in due course. words his intention
Section 55. Defective title of a person  Person liable as guarantor – liable only subsidiarily after the
He obtained the instrument, or any signature thereto, by Chapter 5 – Liabilities of Parties assets of the principal debtor has been exhausted unlike an
(1) fraud, duress, or force and fear, or other unlawful means Section 60. Liability (Warranty) of Maker indorser
(2) for an illegal consideration (1) He will pay it according to its tenor
 Person liable as surety – primarily and absolutely liable
(3) negotiates it in breach of faith (2) Admits the existence of the payee and his then capacity to
with the principal debtor without benefit of exhaustion of
(Any circumstances as amount to a fraud) indorse
the principal debtor’s properties and without necessity of
presentment or notice of dishonor
Section 56. Notice of Defect
When person to whom it is negotiated must have
(1) Had actual knowledge of the infirmity or defect or
(2) Had knowledge of such facts that his action in taking the
instrument amounted to bad faith
Section 64. Liability of Irregular Indorser
Iregular Indorser - indorser who is not a party to an instrument places
thereon his signature in blank before delivery
- Liable as indorser if:
(1) Payable to the order of a third person, liable to the
payee and to all subsequent parties
(2) Payable to the order of maker or drawer, or to bearer,
liable to all parties subsequent to the maker or drawer
(3) For the accommodation of payee, liable to all
subsequent parties of the payee
Section 65. Warranty of Person Negotiating by Delivery or By a
Qualified indorsement
(1) Instrument is genuine and in all respects what it purports
to be
(2) He has a good title to it
(3) All prior parties had capacity to contract
(4) Has no knowledge of any fact which would impair the
validity or render it valueless
 If negotiation by delivery only, warranty extends in favor only
of his immediate transferee
 If by qualified indorsement, to all subsequent holder
Do not assume to pay the instrument in the event of its dishonor
unless these four warranties were violated.
Section 66. Liability of General Indorser
(1) Instrument is genuine and in all respects what it purports
to be Section 71. Date of Presentment of Instrument
(2) He has a good title to it
(3) All prior parties had capacity to contract
(4) Instrument is, at the time of his indorsement, valid and
subsisting
(5) On due presentment, it shall be accepted or paid, or both,
according to its tenor and if properly dishonored, he will
pay the amount
Section 67. Indorses of Paper Negotiable by Delivery
Section 72. Sufficient Presentment
Incurs all the liabilities of an indorser
(1) Indorse specially, liable only to holders who make title
through his indorsement
(2) Indorses without qualification, as general indorser
Section 68. Order of Liability among Indorsers
Prima facie in order in which they indorse but evidence is admissible In this order of presentation:
to show that, as between or among themselves, they have agreed
otherwise.
- Joint payees or joint indorsees who indorsed are deemed to
indorse jointly and severally
As to holder, which instrument has been dishonored, indorsers are
liable in any order and none of them can interpose a defense against
him an agreement among themselves
Section 69. Liability of Agent or Broker
Incurs all liabilities in Section 65 if he did not discloses the name of
his principal and the fact that he is acting only as agent
Chapter 6 – Presentment for Payment
Section 70. Effect of Want of Demand on Principal Debtor
 Person primarily liable – presentment is not necessary in
order to charge him
 Secondarily Liable (drawer and indorsers) – necessary in During banking hours or any hour before the bank is closed on that
order to charge them ( if not presented, free from liability) day when the person to make payment has no funds in the bank
If payable at a special place, ability and willingness on the part of the
primary party to pay there at maturity are equivalent to a tender or
offer of payment (if not paid and it is overdue, he cannot be
considered in delay but not relieved from making payment)
Presentment for Payment - presentation of a bill or not to the person
primarily liable for the purpose of demanding and receiving payment
 If not payable on demand – on the day it falls due
 If payable on demand:
(1) Promissory Notes – within a reasonable time after its
issue
(2) Bill of Exchange – within a reasonable time after its
last negotiation. Exception:
o Check – within a reasonable time after its issue
(1) Made by the holder, or person authorized on his behalf
(2) Reasonable hour (section 193) on a business day
(3) At a proper place as defined at section 73
(4) To the person primarily liable, or if he is absent, to any
person found at the place where the presentment is made
Section 73. Place of Presentment
1. Specified place of payment
No specified place of payment:
2. Given address of the person to make payment
No address is given:
3. At the usual place of business or residence of the person to
make payment
Any other case:
4. Wherever he can be found, or at his last known place of
business or residence
Section 74. Manner of Presentment
Exhibit the instrument to the person from whom is demanded, and
when it is paid must be delivered up to that person
- Requires personal or face to face interaction
Section 75. Presentment of Instrument Payable at Bank
Section 76, 77, and 78 are applicable only if no place of payment is
specified
Section 76. Principal Debtor is Dead
- Presentment must be made to his personal representative
Section 77. Persons Liable as Partners
- Made to any on them, even though there has been a
dissolution of the firm
Section 78. Joint debtors
- If not partners, presentment must be made to them all
Section 79. Presentment Not Require to Charge the Drawer
When he has no right to expect or require that the drawee or acceptor
will pay the instrument (drawer has no longer funds in the drawee;
drawer and the drawee are the same person)
Section 80. Presentment Not Require to Charge the Indorser
Instrument was made or accepted for his accommodation and he has
no reason to expect the instrument will be paid if presented
(accommodation party)
Section 81. Excused delay in Making Presentment
If caused by circumstances beyond the control of the holder and not
imputable to his default, misconduct, or negligence
- When cause of delay ceases to operate, presentment must
be made with reasonable diligence
Section 82. When Presentment may be Dispensed
(1) After the exercise of reasonable diligence, presentment
cannot be made
(2) Drawee is fictitious person
(3) Waiver of presentment by secondarily liable, express or
implied
 Reasonable diligence implies active search

Section 83. Dishonored by Nonpayment

(1) Duly presentment for payment and payment is refused or
cannot be obtained
(2) Presentment is excused and the instrument is overdue and
unpaid

Section 84. Liability of Secondarily Liable when Dishonored

When dishonored by nonpayment, holder has the rights to enforce
the liabilities to the secondary liable