Negotiable Instruments

Atty. Ampil

Notes

INTRODUCTION
Negotiable Instruments
Determined by whole instrument, by
what appears on face, and not elsewhere
Intent: To make negotiable instruments
just like cash; to facilitate commercial
transactions; faith in the instrument
2 Primary Characteristics
1. Negotiable security, held free from
defenses (v. Assignment not free from
defenses)
2. Accumulation of secondary contracts
(A game of who ultimately will play)
Negotiability property may pass
from hand to hand, similar to money,
right to hold, and collect sum payable
Negotiable Instruments:
1. Promissory note Maker, Payee,
Bearer; a promise
2. Bills of Exchange Drawer, Payee,
Acceptor(drawee, addressee); an
order or command; checks
Other parties to negotiated instruments:
indorser, indorsee, persons negotiating
by mere delivery(payable to bearer),
persons to whom the instrument is
negotiated by delivery
Holder payee or indorsee of a bill or
note who is in possession of it or the
bearer thereof
Selling the Instrument
Requirements:
1. Must be a Negotiable Instrument
2. Sec. 52 Must be a holder in due
course (holder in good faith of
negotiable instrument where no
infirmity known to him at time it
was negotiated)
3. There must be a valid negotiation
Bearer delivery
Order Indorsement + Delivery

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Difference between Negotiable

Instrument and Cash
- Generally, a holder in due course is
protected from personal defenses but
not real defenses
Incidents in the Life of a Negotiable
Instrument
1. Issue first delivery of instrument
complete in form
Delivery transfer of possession
with intent to transfer title
2. Negotiation mode of transferring
instrument; makes transferee
holder of the instrument
3. Presentment for acceptance, in
certain kinds of bills of exchange
consists of exhibiting bill to drawee
and demanding that he accept it
4. Acceptance signification of drawee
of his assent to order of drawer;
write word accepted followed by
signature of drawee
5. Dishonor by Non-Acceptance
6. Presentment for Payment
7. Dishonor by non-payment
8. Notice of Dishonor must be given
to drawer and to each indorser
9. Discharge by payment in due
course by or on behalf of the
principal debtor
Indorsement legal transaction effected
by the writing of ones own name on the
back of the instrument or upon a paper
attached thereto, transfer of full legal
title to the paper transaction and an
implied guaranty that instrument will
be duly paid (special and blank
indorsement); an indorsement
completed by delivery
- Mere delivery without indorsement
in instruments payable to order is a
mere assignment and not
negotiation
- An instrument payable to bearer is
negotiated by mere delivery

Negotiable Instruments
Atty. Ampil

Notes

NEGOTIABLE INSTRUMENTS LAW

- Act No.2031, took effect June 2, 1911

*Check is not legal tender except if

authorized by law or creditor
*Treasury certificate not legal tender

Section 1
Form of Negotiable Instruments.
An instrument to be negotiable must
conform to the following requirements:
a. It must be in writing and signed by
the maker or drawer;
b. Must contain an unconditional
promise or order to pay a sum
certain in money;
c. Must be payable on demand, or at a
fixed or determinable future time;
d. Must be payable to order or to
bearer; and
e. Where the instrument is addressed
to a drawee, he must be named or
otherwise indicated therein with
reasonable certainty.
*Instrument Writing
*Signature Adopted, Used
*Unconditional Absolute
*Sum Certain Inclusion of interest
allowed, money only(standard in
business); specify denomination
*Fixed or Determinable Future time
must have year
*Order/Bearer Words of
Negotiability; must not be payable to a
specified personif it is then no longer
payable to order (assigns, assignees,
holder on return of instrument properly
endorsed)
*Drawee Named, or blank to be filled
in
Legal Tender
- Money which law compels creditor to
accept in payment of his debt when
tendered by debtor in right amount
- Philippine Peso
- Issued by Central Bank (Notes,
Coins)
- Managers Check, Certified
Cashier;s Check

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Section 14
- Incomplete but delivered
instruments
- Delivery is made with intention of
giving effect to it
- Provides for prima facie authority
for person in possession of an
instrument to complete it by filling
up the blanks therein (agency to fill
up blank)
1. Want of a material particular in
the instrument
2. Possession by a person other
than drawer or maker
3. Person had authority to fill up
blank
- Prima facie authority existing based
on (1) signature on blank paper and (2)
delivery by person signing for purpose of
converting it into a negotiable
instrument
Material Particular:
1. One that would render the
instrument non-negotibale
2. A particular omission of which
would NOT render the instrument
non-negotiable
- date, rate of interest, place of
payment

An indorser warrants that an

instrument is in all respects what it
purports to be and that if he is a
general indorser, that it is valid and
subsisting
Reasonable v. unreasonable time: 8
months, 14 months
Rights of holder in due course can
collect from maker, personal defense
not available

Negotiable Instruments
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Notes

Personal Defense: that instrument

was not filled up strictly in
accordance with the authority given
or that it is not filled up within a
reasonable time

INCOMPLETE INSTRUMENT
- want of a material particular
DELIVERED
NOT DELIVERED
Personal defense:
Real defense: want
not filled up
of delivery of a
strictly in
mechanically
accordance with
incomplete
the authority given
instrument
or that it is not
filled up within a
reasonable time
Cannot be
Can be interposed
interposed against
to ANY holder
holder in due
- presumption of
course
delivery rebutted
by proof of nondelivery
To a holder not in
Instrument can be
due course:
enforced to parties
different views,
subsequent to
either instrument
completion
cannot be enforced
Indorsers are
or enforced up to
liable
extent of authority
given; instrument
can be enforced
against parties
subsequent to
completion
Presumption of delivery
Under Section 15: Incomplete and
Undelivered Instrument
- Prima facie presumption of delivery in
hands of holder in due course
Under Section 16: Mechanically
complete and Undelivered Instrument
- Presumption of valid delivery is not
merely prima facie but conclusive when

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instrument is in possession of holder in

due course
Immediate privity not proximity
Conditional delivery condition
imposed on delivery and not on the
promise or oder to pay
Section 16
Personal defense: want of delivery of a
mechanically complete instrument
- not available against holder in
due course
Rights of finder No title to a lost bill or
note vests in the finder
Remedy: Maintain trover, action for
money had and received for his use,
replevin -- against finder
DELIVERY OF NEGOTIABLE
INSTRUMENT
1. Delivery is essential to the validity
of any negotiable instrument
2. As between immediate parties, or
those in like cases, delivery must
have been with intention of passing
title
3. An instrument signed by maker or
drawer but not completed by him
and retained in his own custody, is
invalid as to him for want of
delivery, even though stolen and
negotiated to holder in due course
4. But when the instrument in (3) is in
the hands of holder in due course,
there is prima facie presumption of
delivery
5. Where custody of incomplete
instrument is entrusted to another,
who wrongfully completes and
negotiates it to holder in due course,
delivery to agent or custodian is
sufficient delivery to bind the drawer
or maker
6. Where maker or drawer executes a
complete instrument found in
possession of another:

Negotiable Instruments
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Notes

a. Holder in due course conclusive

presumption of delivery
b. Holder not in due course prima
facie presumption of delivery
Section 17 (+)Ambiguous or (+)
Omissions
1. Sum payable: Words over figures,
unless words are ambiguous or
uncertain (marginal figures control
in case of ambiguity in words)
2. Payment of Interest, date not
specified: runs from (1) date of
instrument (2) date of issue
3. Date of undated instrument date is
time of issue
4. Provisions: Written over Printed
5. Bill or Note: Holder may treat it as
either
6. Signature, not clear in what capacity
person making it intended to sign:
deemed to be Indorser
7. I promise to pay, signed by two or
more persons jointly and severally
liable
Section 18
General Rule: A person whose signature
does not appear on the instrument is not
liable
Exceptions:
1. Where duly authorized agent signs
for a person, person is liable
2. When a person sought to be charged
forges the signature of another
person, forger is liable
3. Where a person sought to be charged
signs on a paper separate from
instrument itself, as in allonge,
although the allonge may be
considered part of the instrument; or
when acceptance is written on a
paper other than the bill itself,
under sections 134 and 135.
4. Where the person uses an assumed
name or trade name equivalent to
signature

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Section 19
- The signature of a party may be
made by duly authorized agent,
no particular form of
appointment necessary
- Authority established as in other
cases of agency
Section 20
Requisites for Agent to escape liability
1. Must be duly authorized
2. Add words to his signature
indicating that he signs as an agent,
that is, for or on behalf of a
principal, or in a representative
capacity
3. Disclose his principal(need not be in
signature)
Section 21
Per Procuration, P.P.
- warning that agent has a limited
authority and a person who takes
instrument is bound at his peril
to inquire into extent and nature
of agency
Section 22
- An indorsement made by a minor or
corporation may be enforced against
maker or acceptor or other parties
prior to the minor
- Incapacity of indorser cannot be set
up as a defense
- Applicable to lunatics, imbeciles and
other incapacitated persons

Negotiable Instruments
Atty. Ampil

Notes

Section 23.
Forged Signature; effect of.
When a signature is forged or made
without the authority of the person
whose signature it purports to be, it
is wholly inoperative, and no right to
retain the instrument, or to give
discharge therefor, or to enforce
payment thereof against any party
thereto, can be acquired through or
under such signature, unless the
party against whom it is sought to
enforce such right is precluded from
setting up the forgery or want of
authority.
-

Forgery: counterfeit making or

alteration of any writing, and may
consist in the signing of anothers
name or the alteration of an
instrument in the name, amount,
description of the person and the
like, with intent to defraud.
Applies to forged signatures or
signatures made without the
authority of the person whose
signature it purports to be
Forgery:
1. Ordinary forgery
2. Fraud in factum fraud
amounting to forgery(distinguish
from fraud in inducement)
3. Duress amounting to forgery
4. Fraudulent impersonation
- Double intent: controlling intent
is that an instrument is made
payable to person before him
EXCEPT if name of payee
already known to maker or
drawer or was more particularly
identified in some manner
- Theory of actual intent(regard of
person before him as actual
payee), Theory of estoppel
Persons precluded from setting up
defense of forgery

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A. Those who warrant or admit

genuineness of the signature in
question
1. Indorsers
2. Persons negotiating by
delivery
3. Acceptors (A drawee, by
accepting the bill, admits the
genuiness of the signature of
the drawer)
B. Those who by their acts, silence
or negligence are estopped from
setting up the defense of forgery
- Declaration, Act, Omission or
Negligence
- Unreasonable Delay(the one who
ought to be apprised of forgery
must have been prejudiced)
- Estoppel by negligence in
delivery
CONSIDERATION
Section 24
Every negotiable instrument is deemed
prima facie to have been issued for a
valuable consideration; and every
person whose signature appears thereon
to have become a party thereto for
value.
- presumption is satisfactory if not
contradicted
Section 25
Value is any consideration sufficient to
support a simple contract. An
antecedent or pre-existing debt
constitutes value; and is deemed such
whether the instrument is payable on
demand or at a future time.
Consideration means inducement to a
contract: cause, motive, price or
impelling influence which induces a
contracting party to enter into a
contract
Gift notes are not supported by
sufficient consideration

Negotiable Instruments
Atty. Ampil

Notes

Section 26
HOLDER FOR VALUE
Where value has at any time been given
for the instrument, the holder is deemed
holder for value in respect to all parties
who become such prior to that time
Section 27
Where the holder has a lien on the
instrument arising either from contract
or by implication of law, he is deemed a
holder for value to the extent of his lien.
Section 28
Absence or failure of consideration is a
matter of defense against any person
not a holder in due course; and partial
failure of consideration is a defense pro
tanto, whether the failure is an
ascertained and liquidated amount or
otherwise.
Absence of consideration:
1. Where A issues check for payment of
forged certificates of stock
2. Note given for future illicit
cohabitation
3. Note by husband to his wife, upon
promise of wife to withdraw all
opposition to proceedings for divorce
instituted by him
4. A note given in consideration of an
agreement to stifle or hinder a public
prosecution for a felony
5. When the consideration for
commercial paper is clearly
fraudulent
Failure of Consideration
- Neglect or failure of one of the
parties to give, to do or to perform
the consideration agreed upon
- Giving of valuable consideration was
contemplated but that it failed to
pass

Requisites: Accommodation Party

1. He must be a party to the
instrument, signing as maker,
drawer, acceptor or indorser
2. He must not receive value therefor
3. He must sign for purpose of lending
name or credit
-Accommodation party is generally
regarded as surety for party
accommodated
- Corporations are not liable as
accommodation party even to holders for
value(ultra vires)
- Officers signing as accommodation
party without authority to do so for
their individual dents or transactions
are personally liable thereon
- Accomodation party can interpose
defense of want of consideration against
one not a holder in due course
III. NEGOTIATION
Section 30
An instrument is negotiated when it is
transferred from one person to another
in such manner as to constitute the
transferee the holder thereof. If payable
to bearer, it is negotiated by delivery; if
payable to order, it is negotiated by the
indorsement of the holder completed by
delivery.
Method of Transfer
1. By assignment
2. By operation of law(death of holder,
insolvency, death of joint payee)
3. By Negotiation

Section 29
Liability of Accommodation Party
Accommodation Party An
accommodation party is one who has
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signed the instrument as maker,

drawer, acceptor, or indorser, without
receiving value therefore, and for the
purpose of lending his name to some
other person.
Such a person is liable on the
instrument to a holder for value,
notwithstanding such holder, at the
time of taking the instrument, knew
him only to be an accommodation party.

Page 6

Negotiable Instruments
Atty. Ampil

Notes

- Negotiation is not confined to delivery

to payee
Section 31
The indorsement must be written on the
instrument itself or upon a paper
attached thereto. The signature of the
indorser, without additional words, is a
sufficient indorsement
Indorsement:
- mode of transfer
- contract
Allonge indorsement written on paper
attached to the instrument, must be
tacked or pasted to instrument so as to
become a part of it; allowable only when
there is physical impossibility of writing
indorsement on instrument
itself(questionable view, will not
facilitate fraud)
Section 32
1. GENERAL RULE: Indorsement
must be of entire instrument
2. A partial indorsement, when
unauthorized, does not operate as an
indorsement
3. Exception: Where the instrument
has been paid in part, it may be
indorsed as to the residue
4. Transfer to two or more persons
severally does not operate as a
negotiation of the instrument
Section 33
Kinds of Indorsement:
1. Special specifies to whom or to
whose order the instrument is to be
payable
2. In Blank
3. Absolute
4. Conditional
5. Restrictive
6. Qualified
7. Joint
8. Successive
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9. Irregular
10. Facultative
Section 35
The holder may convert a blank
indorsement into a special indorsement
by writing over the signature of the
indorser in blank any contract
consistent with the character of the
indorsement
LIMITATIONS:
- Must not change the contract of
blank indorser: pay to x and y;
demand and notice waived; I
guaranty payment; without recourse
Section 36
An indorsement is restrictive which
either:
1. Prohibits the further negotiation of
the instrument
2. Constitutes the indorsee the agent of
the indorser
3. Vests the title in the indorsee in
trust for or to the use of some other
persons
The mere absence of words implying
power to negotiate does not make an
indorsement restrictive.
- There is a presumption of
consideration in restrictive
indorsement
Section 37
A restrictive indorsement confers upon
the indorsee the right
a. To receive payment of the
instrument
b. To bring any action thereon that the
indorser could bring
c. To transfer his rights as such
indorsee, where the form of the
indorsement authorizes him to do so
But all subsequent indorsees acquire
only the title of the first indorsee under
the restrictive indorsement.

Negotiable Instruments
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Notes

Extent of negotiability after restrictive

indorsement:
1. That all three forms of restrictive
indorsement impose some degree of
limitation of negotiability
2. That they do not all impose the same
degree of limitation
3. That the indorsement itself discloses
the extent of the limitation in the
particular case
Section 38
QUALIFIED INDORSEMENT
A qualifiedindorsement constitutes the
indorser a mere assignor of the title to
the instrument. It may be made by
adding to the indorsers signature the
words without recourse or any words
of similar import. Such an indorsement
does not impair the negotiable character
of the instrument.
- Without recourse to a person who is
secondarily liable after the default of the
person who is primarily liable
- Qualified indorser is secondarily liable
if the instrument is dishonored by nonacceptance or non-payment due to:
1. forgery
2. lack of good title on the part of the
indorser
3. lack of capacity to indorse on the
part of the prior parties
4. the fact that, at the time of the
indorsement, the instrument was
valueless or not valid and he knew of
the fact
- A qualified indorsement does not
impair the negotiable character of the
instrument
Section 39
CONDITIONAL INDORSEMENT
- A conditional indorsement does not
make an instrument non-negotiable;
but if the condition is on the face of
the instrument, making the order or
promise to pay conditional, the
condition renders it non-negotiable
- Maker can disregard conditions
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Conditional indorsee must hold

payment from maker in trust until
fulfillment of condition, subject to
rights of conditional indorser

Section 40
Where an instrument payable to
BEARER is indorsed SPECIALLY, it
may nevertheless be further negotiated
by delivery; but the person indorsing
specially is liable as indorser to only
such holders as make title through his
indorsement.
- An instrument originally payable to
bearer is always payable to bearer
Section 41
Where an instrument is payable to the
order of two or more payees or indorsees
who are not partners, all must indorse
unless the one indorsing has authority
to indorse for the others.
Exceptions:
1. Where payee indorsing has authority
to indorse for the others
2. When payees are partners
Section 42
Where an instrument is drawn or
indorsed to a person as cashier or
other fiscal officer of a bank or
corporation, it is deemed prima-facie to
be payable to the bank or corporation of
which he is such officer, and may be
negotiated by either the indorsement of
the bank or corporation or the
indorsement of the officer.
- Corporation does not include cities
and towns
Section 43
Where the name of a payee or indorsee
is wrongly designated or misspelled, he
may indorse the instrument as therein
described adding, if he thinks fit, his
proper signature.

Negotiable Instruments
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Notes

Section 44
Where any person is under obligation to
indorse in a representative capacity, he
may indorse in such term as to negative
personal liability.
Presumptions:
1. Instrument is drawn or indorsed to a
person as cashier or other fiscal
officer of a bank or corporation, it is
deemed prima-facie to be payable to
the bank or corporation of which he
is such officer
2. Every negotiation is deemed prima
facie to have been effected before
instrument was overdue (except
where indorsement bears date after
maturity of instrument)
3. Date written is presumed to be true
date.
4. Every indorsement is presumed
prima facie to have been made at
place where the instrument is dated.
Section 47
An instrument negotiable in its origin
continues to be negotiable until it has
been restrictively indorsed or discharged
by payment or otherwise.
- After maturity, an instrument
originally negotiable continues to be
negotiable in the sense that the
contracts of the parties to it continue
and are governed by the Negotiable
Instruments Law. However, it ceases to
be negotiable in the sense that a
transferee after maturity is not a holder
in due course and is therefore not free
from defenses obtaining between prior
parties. Transfer to such transferees
would be equivalent to a mere
assignment and subject to
defenses(would be a mere assignment).
Section 48
The holder may at any time strike out
any indorsement which is not necessary
to his title. The indorser whose
indorsement is struck out, and all
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indorsers subsequent to him, are

thereby relieved from liability on the
instrument.
Section 49
Equitable Assignment Transfer of a
negotiable instrument, payable to order,
by mere delivery and without
indorsement
Rights of transferee for value:
1. Acquires rights (and defenses) of
transferor
2. Right to require transferor to
indorse instrument
- The time when transferee becomes
holder in due course is at the time of
actual indorsement
Section 50
Where instrument is negotiated back to
prior party, such party may, subject to
the provisions of this Act, reissue and
further negotiate the same. But he is
not entitled to enforce payment thereof
against any intervening party to whom
he was personally liable.
- Avoid Circuitry of Suits

Negotiable Instruments
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Notes

Section 51
The holder of a negotiable instrument
may to sue thereon in his own name;
and payment to him in due course
discharges the instrument.
Rights of a holder in general:
1. He may sue on the instrument in his
own name (even if he is a holder only
for collection or as a pledge of the
instrument)
- Transferee for value: delivery w/o
indorsement may sue in his own
name is the transferor could have
done so(transferor vests in
transferee such title as transferor
had)
2. He may receive payment and if the
payment is in due course, the
instrument is discharged
Payment in due course:
1. Made at or after maturity of the
instrument
2. To holder
3. Holder: In good faith and without
notice that his title is defective

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Section 52
What constitutes a holder in
Due Course.
A HOLDER IN DUE COURSE
is a holder who has
TAKEN THE INSTRUMENT
under the following conditions:
a. That it is
COMPLETE any
REGULAR
UPON ITS FACE;
b. That he became the
holder of it
BEFORE IT WAS OVERDUE,
and
WITHOUT NOTICE that it had
PREVIOUSLY been
DISHONORED,
if such was the fact;
c. That he took it in
GOOD FAITH and
FOR VALUE;
d. That at the
TIME it was
NEGOTIATED to him, he had
NO NOTICE of any
INFIRMITY in the instrument
or
DEFECT in the
TITLE of the person
negotiating it.

Negotiable Instruments
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Notes

1. PRESUMPTION: Every holder is

presumed prima facie to be a holder
in due course
2. Complete and Regular Instrument
no evidence of apparent alteration,
regular indorsement(in case of 2
payees, both indorse), with maturity
date, when omission is immaterial,
name of payee inserted after striking
out another name and is a common
practice of bank
3. An overdue instrument is notice that
it has been dishonored(OVERDUE
after date of maturity) refers to
instrument payable at a fixed or
determinable future time (payable
on demand is covered by Section 53.)
4. Chargeable with notice: (1) one
taking an overdue instrument; (2)
one acquiring an instrument for
grossly inadequate consideration
5. Good faith refers to indorsee or
transferee, not to seller of paper (bad
faith knowledge of facts which
render it dishonest for him to take a
particular piece of negotiable
paper(knowledge of some truth that
would prevent action by those
commercially honest man))
6. Inquiry important in case
circumstances are suspicious
7. Buying at a discount does not raise
an inference of a tainted instrument.
8. NIL: Things that may be wrong in
an instrument:
a. Defenses: absence or failure of
consideration; mistake, minority
and other forms of incapacity,
lack of authority of agent
b. INFIRMITIES: things that are
wrong in the instrument itself
c. DEFECTS OF TITLE: Equitable
defenses, breach of faith in
negotiation

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9. DEFECTS OF TITLE
a. Acquisition of instrument by
fraud, force, duress or fear,
unlawful means, illegal
consideration
b. Negotiation of instrument in
breach of faith, or under
circumstances that amount to
fraud
10. INFIRMITIES: Things that are
wrong in the instrument itself (as
distinguished from those that are
lacking in the contracts on the
instrument)
a. Wrong date inserted where the
instrument is expressed to be
payable at a fixed period after
sight is undated
b. Filling up of blanks not in
accordance with authority given
or within reasonable time where
instrument delivered wanting in
material particular
c. Filling up and negotiating
without authority an incomplete
and undelivered instrument
d. Lack of valid and intentional
delivery of a mechanically
complete instrument
e. Agent signing per procuration
beyond scope of his authority
f. Forgery
g. Material alteration
11. Drawee can not be a holder in due
course; Section 52 refers to an
indorsee, pledgee or payee; must be
a holder and not an acceptor
12. Where an instrument payable on
demand is negotiated an
unreasonable length of time after its
issue, the holder is not deemed a
holder in due course.
Unreasonable length of time
usually not more than 1 year(unless
installments paid monthly, or
interest or presented only upon
completion of contract covered by the
instrument)

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Notes

Section 54
Notice of Infirmity before full payment
Holder in due course only to the
extent of amount paid by him
Illustration: He can collect from
maker or drawer only to the extent of
the amount he paid for the instrument
prior to notice of infirmity or defect in
title
Section 55
DEFECTIVE TITLE: The title of a
person who negotiates an instrument is
defective within the meaning of this Act
When he obtained an instrument, or any
signature thereto, by FRAUD,
DURESS, or FORCE AND FEAR, or
OTHER UNLAWFUL MEANS, or for an
ILLEGAL CONSIDERATION, or when
he negotiates it in a breach of faith, or
under such circumstances as amount to
a fraud.
FRAUD (Intentional misrepresentation)
- Means to obtain instrument or
signature constitutes FRAUD
- Subsequent negotiation of said
instrument when indorsee knows of
the fraud makes the indorsee NOT a
holder in due course
DURESS, or FORCE AND FEAR
(Person signed because gun was pointed
at him)
OTHER UNLAWFUL MEANS(stolen
instrument)
ILLEGAL CONSIDERATION (If value
given for an instrument is illegal, the
one who gave the illegal consideration
has a defective title)
Negotiates it in a breach of faith(note
already paid, note held only as collateral
or security, note negotiated after he fails
to pay valuable consideration he agreed
to give in exchange of note) The
person negotiating the note in breach of
faith has a defective title
Circumstances amounting to a fraud

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Section 56
NOTICE OF DEFECT
1. Actual knowledge of defect or
infirmity
- not mere suspicion, fear or
surmise
- Some truth such as that the
instrument is tainted in some
way, as would prevent the taking
of the instrument by
commercially honest men is
enough
- Knowledge of agent is knowledge
of principal
2. Actual knowledge of facts that his
action in taking the instrument
amounts to bad faith(actual or
constructive notice of facts is not
necessary to constitute bad faith)
- Knowledge and bad faith may be
established by circumstantial
evidence:
1. Duty of Inquiry
2. Ignoring strong and decisive
circumstantial evidence would be
negligence and an act of bad
faith
- Notice that there was something
wrong, not necessarily notice of
particular wrong committed,
amounts to bad faith in taking
instrument
- Willful ignorance(not just
negligence)
- Suspicious circumstances with
means of verifying them
3. Chargeable with notice: (1) one
taking an overdue instrument; (2)
one acquiring an instrument for
grossly inadequate consideration

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Notes

Section 57
RIGHTS OF A HOLDER IN DUE
COURSE
1. He may sue on instrument in his
own name
2. He may receive payment and if
payment is in due course, the
instrument is discharged
3. He holds the instrument free from
any defect of title of prior parties
and free from defenses available to
prior parties among themselves
(FREE FROM ALL PERSONAL
DEFENSES(EQUITABLE) BUT
NOT REAL(LEGAL) DEFENSES)
4. He may enforce payment of the
instrument for the full amount
thereof against all parties liable
thereon

Section 58
A person NOT a holder in due course
acquires the rights of a holder in due
course if: (free from personal defenses)
1. He derived title from holder in due
course
2. He was not himself a party to any
fraud or illegality affecting the
instrument
- He must therefore prove that the
person whom he derives his title was a
holder in due course
Exception: Does not apply to one who is
NOT a holder in due course who
reacquires the instrument from a holder
in due course; or when instrument is
retransferred to an agent of payee.

PERSONAL DEFENSES available

only against that person or a
subsequent holder who stands in privity
with him
REAL DEFENSES attaches to
instrument itself; defense against
everybody
1. Forged or unauthorized signature
2. Void contract
3. Signature obtained by
misrepresentation
4. Contract lost vitality(due to a
subsequent event, material
alteration, lapse of time, discharge
by payment in due course,
bankruptcy proceedings)
Exception: An instrument cannot be
enforced against the person to whom the
legal defense is available but it can be
enforced against those who precluded
from setting up the defense
Joint debtors/makers defense
available to both only if defense arises
from nature of obligation and not
defenses personal to only one(ex.
Minority)
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Section 59
Every holder is deemed prima facie to be
a holder in due course
EXCEPT:
- If it has been shown that title of
any person who has negotiated
the instrument is defective,
burden shifts to holder to prove
that he is a holder in due course
Exception to the Exception:
- If party became bound to the
instrument prior to the
acquisition of defective title,
burden is not shifted to
holder to prove that he is
holder in due course

REAL DEFENSE
(F2EU ADM2 WIWI)
1. Forgery (23)
2. Fraud in Factum
3. Execution of instrument between
public Enemies
4. Ultravires act of corporation, where
the corporation is absolutely prohibited
by its charter or statute from issuing
any commercial paper under any
circumstances
5. Alteration (124,125)

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Notes

6.
7.
8.
9.

Duress amounting to forgery

Minority (18)
Marriage in case of wife
Want of delivery of incomplete
instrument (16)
10. Insanity where the insane person has a
guardian appointed by court
11. Want of authority of agent (15)
12. Illegality of contract where it is the
contract or instrument itself which is
expressly made illegal by statute
LIABILITIES OF PARTIES
60 Liability of Maker
The maker of a negotiable instrument,
by making it, engages that he will pay it
according to its tenor, and admits the
existence of the payee and his then
capacity to indorse.
1. Liability of maker: Primarily,
Unconditional, Absolute Note
must be paid according to its terms
2. Admits existence of payee and
payees capacity to indorse
61 Liability of Drawer
The drawer by drawing the instrument
admits the existence of the payee and
his then capacity to indorse; and
engages that, on due presentment, the
instrument will be accepted or paid, or
both, according to its tenor, and that if it
be dishonored and the necessary
proceedings on dishonor be duly taken,
he will pay the amount thereof to the
holder or to any subsequent indorser
who may be compelled to pay it. But the
drawer may insert in the instrument an
express stipulation negativing or
limiting his own liability to the holder.
Liability of drawer is subject to
conditions:
1. That instrument is dishonored
2. That the necessary proceedings of
dishonor are duly taken
*He may negative his liability

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In favor of:
1. Holder
2. Any of indorsers intervening
between the holder and the drawer
is compelled to pay by the holder
62 Liability of Acceptor
The acceptor, by accepting the
instrument, engages that he will pay it
according to the tenor of his acceptance
and admits:
(a) The existence of the drawer, the
genuineness of his signature, and his
capacity and authority to draw the
instrument; and
(b) The existence of the payee and his
then capacity to indorse.
1. Acceptor primarily liable: pay
absolutely and unconditionally,
according to tenor of acceptance
2. Drawee is not liable on the bill
before acceptance
3. Acceptor engages to pay according to
tenor of his acceptance
63 When a person deemed indorsers.
A person placing his signature upon an
instrument otherwise than as maker,
drawer, or acceptor, is deemed to be
indorser unless he clearly indicates by
appropriate words his intention to be
bound in some other capacity.
- cannot be changed by parol evidence
64 Liability of irregular indorser.
Where a person, not otherwise a party
to an instrument, places thereon his
signature in blank before delivery, he is
liable as indorser, in accordance with
the following rules:
(a) If the instrument is payable to the
order of a third person, he is liable to
the payee and to all subsequent
parties.
(b) If the instrument is payable to the
order of the maker or drawer, or is
payable to bearer, he is liable to all

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Notes

parties subsequent to the maker or

drawer.
(c) If he signs for the accommodation of
the payee, he is liable to all parties
subsequent to the payee.
65 Warranty where negotiation by
delivery and so forth.
Every person negotiating an instrument
by delivery or by a qualified
indorsement warrants:
(a) That the instrument is genuine and
in all respects what it purports to be;
(b) That he has a good title to it;
(c) That all prior parties had capacity to
contract;
(d) That he has no knowledge of any
fact which would impair the validity
of the instrument or render it
valueless.
BUT when the negotiation is by delivery
only, the warranty extends in favor of no
holder other than the immediate
transferee.
The provision of subdivision (c) of this
section do not apply to a person
negotiating public or corporation
securities other than bills and notes.
PRESENTMENT FOR PAYMENT
A. Made by holder or person authorized
to receive payment on his behalf
B. To the person primarily liable of if
absent and inaccessible, to any person
found at place where payment is made
IF no place of payment specified:
1. Where person primarily liable is dead
and no place of payment specified,
presentment must be made to personal
representative, if such there be and he
can be reasonably found
2. Persons liable as partners
presentment may be made on any one of
them, even if firm dissolved
3. Several persons, not partners
presentment must be made to them all

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Page 15

Payable on demand reasonable time

after issue(note), or after last
negotiation(bill)
Not payable on demand Must be made
on day it falls due
Sunday, Holiday, Saturday next
business day
Instrument falling due or becoming
payable on Saturday, Payable on
Demand may be presented before 12
noon on Saturday
1. As specified in instrument
If payment payable at bank must be
during banking hours except if person to
make payment has no funds there to
meet it at any time during the day, then
presentment at any hour before bank is
closed is sufficient
- Where instrument is made payable at
a bank, it is equivalent to order to bank
to pay the same for the account of
principal debtor thereon
2. Address of person to make payment
3. Usual Place of business or residence
4. Where person can be found or last
known place of business or address
Instrument must be exhibited, and
when paid, it must be delivered
When Presentment for payment not
required:
1. To charge drawer: where drawer
has no right to expect or require
that the drawee or acceptor will pay
the instrument
2. To charge indorser: where
instrument was made or accepted
for his accommodation and he has
no reason to expect that instrument
will be paid if presented
Delay in making presentment excused:
when delay is caused by circumstances
beyond 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.

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Notes

Presentment for payment excused:

(a) Where, after the exercise of
reasonable diligence, presentment,
as required by this Act, cannot be
made
(b) Where drawee is a fictitious person
(c) By waiver of presentment, express
or implied

NOTICE OF DISHONOR
When instrument is dishonored by nonacceptance or non-payment
Notice of dishonor must be given to each:
1. Drawer
2. Indorser
Otherwise, they will be discharged.
They may also be given to agent
provided agent is duly authorized to
receive notice
Notice may be given to secretary at
public office or wife at home
When party entitle to notice is dead,
then May be given to personal
representative if with reasonable
diligence, he can be found or if no
personal representative, to residence or
last place of business
Notice to one partner is notice to firm,
even if there has been dissolution
Notice to persons jointly liable to
each of them unless one has authority
for the others
When a party has been adjudged
bankrupt or an insolvent, or has made
an assignment for benefit of creditors,
notice may be given to party himself or
to his trustee or assignee
Each installment, in the absence of an
acceleration clause, is equivalent to a
separate note.

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Page 16

WHO GIVES NOTICE OF DISHONOR?

1. Holder
2. Any person on behalf of holder
inures to benefit of all subsequent
holders
3. Any party to the instrument who may
be compelled to pay it(notice given
only to those whom he has a right of
reimbursement) inures to benefit of
holder and all parties subsequent to
party whom notice is given
4. May be given by agent if dishonored
in hands of agent, he may give notice
to parties liable or notice to his
principal (must give notice to principal
within time allowed by law)
NOTICE
1. May be written or verbal
2. May be an insufficient written notice
supplemented and validated by verbal
communication
3. Misdescription does not vitiate notice
unless party to whom notice is given is
in fact misled
4. Must be sufficient to identify
instrument and indicate that it has been
dishonored by non-acceptance or nonpayment
5. May be given by delivering personally
or through mails(once addressed and
deposited in the post-office, sender is
deemed to have given due notice
notwithstanding any miscarriage in the
malls)
6. Must have statement that party giving
notice intends to look for party
addressed for payment

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Notes

2. Not imputable to his default,

misconduct or negligence
3. Notice must be given when cause of
delay ceases to operate

WHEN TO GIVE NOTICE?

1. As soon as instrument is dishonored,
and unless delay is excused, within
time fixed by Act
2. Cannot give notice before maturity
but may give on date of maturity
provided instrument has been
presented and dishonored
3. Where a party receives notice of
dishonor, he has the same time for
giving notice to antecedent parties
4. On the day Following DIshonor
Notice given out of time would be
considered not to have been given.
*Place not important as long as party
receives it within specified time
NOTICE of DISHONOR may be
WAIVED, express or implied
1. If embodied in instrument, binding on
all
2. If written above signature of indorser,
binds indorser only
3. Where presentment waived, notice of
dishonor also waived
NOTICE is dispensed with when, after
exercise of reasonable diligence, it cannot
be given or does not reach parties sought
to be charged.
- Where due notice of dishonor by nonacceptance has been given, notice of a
subsequent dishonor by non-payment
is not necessary unless in the
meantime the instrument has been
accepted.
- An omission to give notice of nonacceptance does not prejudice the
rights of a holder in due course
subsequent to the omission
DELAY in giving Notice is excused:
1. When delay caused by circumstances
beyond control of holder

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Page 17

NOTICE NEED NOT BE GIVEN TO

DRAWER:
1. Where drawer and drawee are the
same person
2. When drawee is a fictitious person or a
person not having capacity to contract
3. When the drawer is the person to
whom the instrument is presented for
payment
4. Where the drawer has no right to
expect or require that the drawee or
acceptor will honor the instrument
5. Where the drawer has countermanded
payment
NOTICE NEED NOT BE GIVEN TO
INDORSER:
1. When drawee is a fictitious person or a
person not having capacity to contract,
and the indorser was aware of that fact
at the time he indorsed the instrument
2. Where the indorser is the person to
whom the instrument is presented for
payment
3. Where the instrument was made or
accepted for his accommodation.
WHEN PROTEST NEED NOT BE
MADE: where any negotiable instrument
has been dishonored, it may be protested
for non-acceptance or non-payment as the
case may be; but protest is not required
except in case of foreign bills of exchange.

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Notes

DISCHARGE OF NEGOTIABLE
INSTRUMENT
(a) By payment in due course by or on
behalf of principal debtor
(b) By payment in due course by the
party accommodated, where the
instrument is made or accepted for
his accommodation
(c) By the intentional cancellation of
holder
(d) By any other act which will
discharge a simple contract for the
payment of money
(e) When the principal debtor becomes
the holder of the instrument at or
after maturity in his own right
DISCHARGE OF PERSONS
SECONDARILY LIABLE
a. By any act which discharges the
instrument
b. By the intentional cancellation of
his signature by the holder
c. By the discharge of a prior party
d. By a valid tender or payment made
by a prior party
e. By a release of the principal debtor
unless the holders right of recourse
against the party secondarily liable
is expressly reserved
f. By any agreement binding upon the
holder to extend the time of
payment or to postpone the holders
right to enforce the instrument
unless made with the assent of the
party secondarily liable or unless
the right of recourse against such
party is expressly reserved
STRIKING OUT
Section 48. The holder may at any time
strike out any indorsement which is not
necessary to his title. The indorser
whose indorsement is struck out, and all
indorsers subsequent to him, are
thereby relieved from liability on the
instrument.

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Page 18

Section 121. Where the instrument is

paid by a party secondarily liable
thereon, it is not discharged; but the
party so paying it is remitted to his
former rights as regards all prior
parties, and he may strike out his own
and all subsequent indorsers and again
negotiate the instrument, except:
(a) Where it is payable to the order of a
third person and has been paid by the
drawer; and
(b) Where it was made or accepted for
accommodation and has been paid by
the party accommodated.
RENUNCIATION
1. The holder may expressly renounce
his rights against any party to the
instrument
2. Renunciation must be in writing
unless instrument is delivered to person
primarily liable
3. At any time before or after its
maturity
4. Instrument will be discharged if
renunciation:
a. Absolute and unconditional
b. Against Principal Debtor
c. Made at or after the maturity
of instrument
5. A renunciation does not affect the
rights of a holder in due course without
notice.
CANCELLATION: If made
unintentionally, under a mistake or
without authority of holder, it is
inoperative. But it must be proven by
the party making the allegation.
SPOLIATION: An alteration made by a
stranger to the instrument
- instrument is discharged but
debt survives (since holder in due
course can recover according to
original tenor)
- If alteration constitutes forgery,
original debt as well as
instrument is discharged