In the Philippines, personal checks, credit cards,

and counterfeit money are not considered legal

tender.

Explanation

Checks

Checks are not legal tender because they are

negotiable instruments, which are substitutes
for money.

Credit cards

Credit cards are not legal tender because they

are a form of noncash payment.

Counterfeit money

Counterfeit money is not legal tender because it

is an imitation of a genuine coin or note.

Unauthorized reproductions

Unauthorized reproductions of legal tender

money are not legal tender because they are
made without the proper authority.

Legal tender is the currency that is used to pay

off debts. In the Philippines, all monetary
obligations must be settled in the Philippine
currency.
TITLE 1 2. maker – promissory notes

NEGOTIABLE INSTRUMENTS IN GENERAL Drawer – bill of exchange

Chapter 1 3. “unconditional promise” – promissory note

FORM AND INTERPRETATION “an unconditional order” – bill of exchange

SECTION 1. Form of negotiable instrument.— 4. subsection (c) to (d) – promissory notes and
An instrument to be negotiable must conform bill of exchange
to the following requirements:
Subsection (e) – bill of exchange
(a) It must be in writing and signed by the
maker or drawer; Formal Requirements explained

(b) Must contain an unconditional promise or 1. The instrument must be in writing

order to pay a sum certain in money; - writing includes print or typed
(c) Must be payable on demand, or at a fixed - oral promise can make it difficult to determine
or determinable future time; liability and create a danger of fraud
(d) Must be payable to order or to bearer; and 2. The instrument must be signed by the maker
(e) Where the instrument is addressed to a or drawer
drawee, he must be named or otherwise (a) his signature is prima facie evidence of his
indicated therein with reasonable certainty. intention to be bound
Commercial Paper – written promises or - not clear – indorser
obligation
3. The instrument must contain an
- Commercial transactions unconditional promise or order to pay
- Promissory notes and Bills of exchange
4. The instrument must be payable in a sum
Formal Requirements of Negotiability in certain in money
General
(a) money is the one standard of value in actual
1. Form and Contract – contractual obligation business
to pay money
(b) money is the medium of exchange
2. Matters to be considered – (a) whole; (b)
what appears on the face; (c) provisions of the - cash
NIL
- legal tender – “that currency which a debtor
Applicability of Formal Requirements can legally compel a creditor to accept in
payment of a debt in money when tendered by
1. Subsection (a) to (d) – Promissory notes the debtor in the right amount.”
Subsection (a) to (e) - Bill of exchange
5. The instrument must be payable at a fixed 1. Two Parties
or determinable future time or on demand
a. Maker – makes promise and signs
6. The instrument must be payable to order
b. Payee – party to whom the promise is
7. The instrument must be payable to bearer made or the instrument is payable

8. The drawee must be named – bills and 2. Payee – by name or office or title or may
checks be unspecified

Non-negotiable Instrument Defined 3. Seek payment personally

- Instrument which is not negotiable 4. Maker’s signature must appear on the

- Not meet the requirement laid down face of the note

(a) Example: check payable only to a specified - additional parties can also become
person involved

(b) may not be negotiated but it may be Note:

assigned or transferred
Where no time for payment is expressed,
(c) transfer of non-negotiable instruments – an instrument is payable on demand
Civil Code on assignment of contract rights
Bill of Exchange Defined
(d) persons who transfer or assign contractual
or non-negotiable rights pass only the rights 1. Unconditional order in writing
that they had Order made by another to pay money to a
Nature of Non-negotiable Instrument third person

1. Merely a simple contract in writing - Drawn on bank and payable on demand

- Check – most common type of order
2. May not be negotiated but may be assigned paper
and transferred
Original Parties to a Bill of Exchange
Promissory Note Defined
- Order paper or three-(3) party paper
1. Unconditional promise in writing
1. At least three (3) parties – the drawer,
2. Written promise to pay a sum of money the drawee and the payee

- note (a) Drawer – who issues and draws the

order bill – he does not pay directly
- time instrument
(b) Drawee – to whom the bill is addressed
Original Parties to a Promissory Notes and who is ordered and expected to pay –
- Promise paper acceptor – is a bank in case of a check
(c) Payee – whose favor the bill is originally 3. Actual/rate of interest not specified
issued or is payable
- legal rate of 6% if not specified
2. Parties need not be distinct persons
Sum Payable by States Installments
Note:
- “by stated installments”
- The word “pay to”
Stated Installments:
Idea and Purpose of a Bill of Exchange
(a) the interest of each installment
1. Drawer’s funds in hands of drawee
(b) the due date of each installment must be
2. Liability of drawee for non-payment fixed in the installment

SEC. 2. Certainly as to sum ; what constitutes. Sum to be Paid by Stated Installments with
—The sum payable sum is a sum certain within Acceleration Clause
the meaning of this Act, although it is to be
paid— 1. Accelaration dependent on maker

(a) With interest; or - i.e., a promise that if any installment or

interest is not paid as agreed, the whole shall
(b) By stated installments^ or become due.

(c) By stated installments, with a provision 2. Installment at option of holder – non-

that upon default in payment of any negotiable
installment or of interest the whole shall
become due; or Sum to be Paid with Exchange

(d) With exchange, whether at a fixed rate or - Foreign currency

at the current rate; or 1. Meaning of exchange – charge for the
(e) With costs of collection or an attorney's expense of providing funds – it may be fixed
fee, in case payment shall not be made at rate or at the current rate
maturity. 2. Payment in foreign currency
Certainty of Sum Payable 3. Payment with exchange rate – applicable
1. Payment of fixed amount of money only to foreign bills

2. Permissible clauses or stipulations 4. Exchange not applicable to inland or

domestic bill
Sum to be Paid with Interest
Sum to be Paid with Costs of Collection or an
1. Interest at fixed rate Attorney’s Fee

2. Interest at increased or reduced rate 1. Increase in amount due effective after

maturity
2. Liability for attorney’s fee 2. Mere request to pay – The drawer does not
merely “ask” or even “expect” the drawee to
- can be reduced if unconscionable or pay, he demands it.
unreasonable
- order – command or imperative direction
- if not specified, then it shall be in reasonable
sum 3. Liability of drawer – immaterial

3. Acquisition of instrument after maturity – a When Promise or Order to Pay Unconditional

transferee acquiring the instrument when it is
overdue would not be a holder in due course 1. Instrument payable absolutely – must be
and consequently, would hold the instrument unconditional except implied conditions of
subject to defenses, as if it were non- presentment, protests and notice of dishonor as
negotiable. provided by the law.

SEC. 3. When promise is unconditional.—An 2. Reason for requisite – enhances the ability of
unqualified order or promise to pay is the instrument to circulate freely from one
unconditional within the meaning of this Act, person to another.
though coupled with— (a) No one would accept a paper for debt if the
(a) An indication of a particular fund out of right to recover were not absolute or
which reimbursement is to be made, or a unconditional in nature
particular account to be debited with the (b) Even if the condition or event is very likely to
amount; or occur, or indeed, even if it, in fact did occur
(b) A statement of the transaction which gives subsequently, the instrument remains non-
rise to the instrument. negotiable, although it would, of course,
become payable at that time.
But an order or promise to pay out of a
particular fund is not unconditional. 3. Terms not affecting unconditional liability

When Promissory Note Contains a Promise to Indication of a particular Fund Out of which
Pay Reimbursement is to be made

1. Implied promise to pay – unconditional - The drawee is not limited to the money
promise to pay in his hands belonging to the drawer
- The fund indicated is not the direct
2. Bare acknowledgement of indebtedness – source of payment but only the source
(like “I.O.U.” , “due P P1,000”, “for value of reimbursement which is act
received,” etc.) alone is not a negotiable subsequent to the payment
instrument. However, “due P or order”, or “dur
P or bearer”, “I.O.U. P10,000 to be paid on Sept. Indication of a Particular Fund Out of which
30”, the instrument is negotiable. Payment is to be made

- An instrument payable out of a

particular or specified fund is non-
 negotiable – depend upon the (c) a statement that is given in accordance
adequacy or existence of the fund with the terms of a contract between the
designated same parties
- The test of negotiability is whether the
instrument carries the general personal SEC. 4. Determinable future time; what
credit of the maker or drawer. constitutes.—An instrument is payable at a
determinable future time, within the
The intention to limit payment to a meaning of this Act, which is expressed to
particular fund must be made plain. be payable—

Indication of a Particular Account to be (a) At a fixed period after date or sight; or

Debited with the Amount
(b) On or before a fixed or determinable
- An instrument which contains a future time specified therein; or
direction to debit a particular account is
negotiable because the promise / order (c) On or at a fixed period after the
is not also made conditional. occurrence of a specified event, which is
certain to happen, though the time of
Statement of Transaction which gives Rise happening be uncertain.
to Instrument
An instrument payable upon a contingency
1. Mere recital of consideration for is not negotiable, and the happening of the
instrument or origin of transaction – event does not cure the defect.
Instruments are issued by reason of the
transaction upon which they are based. Certainty of Time of Payment

2. Terms and conditions contained in 1. Instrument payable at all events –

another paper – The instrument is not essential requirement for negotiability of an
negotiable because the obligation to pay is instrument
burdened to the terms and conditions of 2. When time of payment certain – In case
another contract, subjecting recovery on of demand (or sight) instrument, the holder
the instrument to defenses available under may call the payment at any time. On the
the contract. other hand, a term or time instrument is
The rule of Section 3 may be stated this: payabkle only upon the arrival of the time
“The negotiability of a bill or note is not for payment. Checks, by definition, must be
affected by the reference which is simply: payable on demand.

(a) a recital of the consideration for which 3. Reasons why time must be certain – The
the paper was given; or time must be certain so that the holder will
know when he may enforce the instrument,
(b) a statement of the origin of the and the person liable – the maker, drawee,
transaction; or or acceptor – when he may be required to
pay, or the secondary parties – the drawer,
indorser, or accommodation party – when (a) Authorizes the sale of collateral
his obligation will arise. securities in case the instrument be not
paid at maturity; or
When Instrument Payable at Determinable
Future Time (b) Authorizes a confession of judgment if
the instrument be not paid at maturity; or
- An instrument which is only payable
upon a contingency is not negotiable (c) Waives the benefit of any law
because it does not appear on its face intended for the advantage or protection
whether or not it will be paid. of the obligor; or

(1) Payable at a fixed time (d) Gives the holder an election to require
something to be done in lieu of payment of
(2) Payable at a fixed period after date money.
(3) Payable at a fixed period after sight But nothing in this section shall validate
After sight means after the instrument is any provision or stipulation otherwise
seen by the drawee upon presentment for illegal.
acceptance or accepted by the drawee. Acts in Addition to Payment of Money
(4) Payable on or before a fixed time A negotiable instrument must be payable in
(5) Payable on or before a determinable “a sum certain in money”
future time 1. General Rule – the instrument is non-
(6) Payable on the occurrence of a negotiable if it contains a promise or order
specified event to do any act in addition to the payment of
money.
(7) Payable after the occurrence of a
specified event 2. Exceptions –

(8) Payable upon a contingency (a) Sale of collateral securities

Contingency – an uncertain future event or (b) Confession of judgment – a written

event which may or may not happen acknowledgement by the defendant of his
indebtedness or liability to the plaintiff.
SEC. 5. Additional provisions not affecting
negotiability.—An instrument which Warrants of attorney to confess
contains an order or promise to do any act judgment, however, are not authorized nor
in f addition to the payment of money is contemplated by our law.
not negotiable. But the negotiable A confession of judgment given after
character of an instrument otherwise the auction is brought to save expenses is
negotiable is not affected by a provision valid.
which—
(c) Waiver of benefit granted by law
Neither does waiver of protest, 2. When date necessary –
presentment for payment, or demand,
destroy the negotiability of an instrument. (a) said date is tied

(d) Election of holder to require some (b) interest is stipulated

other act (c) determining whether a party acted
In this case, the holder has the choice. The within a reasonable time
instrument is, therefore, negotiable as it is Instruments may be ante-dated or post-
as good as an instrument payable in dated
money.
3. Date stated not in calendar – the law will
If the option is with the promissor, the deem the nearest date of the month the
instrument is non-negotiable because the date intended
holder cannot compel him make payment in
money. Effect of Omission of Value

SEC. 6. Omissions; seal; particular money. “value received” – does not even necessary
—The validity and negotiable character of to state that value has been received for
an instrument are not affected by the fact the instrument because consideration is
that— presumed

(a) It is not dated; or Effect of Omission of Place

(b) Does not specify the value given, or - Does not require a negotiable
that any value has been given therefor; or instrument to specify the place where it
is made or drawn or where it is payable
(c) Does not specify the place where it is
drawn or the place where it is payable; or Effect of Presence of Seal

(d) Bears a seal; or 1. The fact that the instrument bears a seal
does not destroy its negotiability
(e) Designates a particular kind of current
money in which payment is to be made. 2. It is advisable, however, to have a bill or
note appear in a public instrument so that it
But nothing in this section shall alter or will be included among the preferred
repeal any statute requiring in certain credits with respect to other property of
cases the nature of the consideration to be the debtor.
stated in the instrument.
Effect of designation of particular kind of
Effect of Omission Date current money payable
1. Date of instrument generally not Money – not necessarily limited to “legal
necessary – the omission of the date will tender”
not make the instrument non-negotiable.
- Current money or foreign money
SEC. 7. When payable on demand.—An (e) One or some of several payees; or
instrument is payable on demand—
(f) The holder of an office for the time being.
(a) Where it is expressed to be payable on
demand, or at sight, or on presentation; or Where the instrument is payable to order the
payee must be named or otherwise indicated
(b) In which no time for payment is expressed. therein with reasonable certainty.

Where an instrument is issued, accepted, or Standard words of negotiability

indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it, “to the order of”, “or order”, “or bearer”, and
payable on demand. “to bearer”

When Instrument Payable on Demand When instrument payable to order

Instruments that are not payable on demand, 1. (a) to the order of specified person
called “time instruments”, are payable at a (b) to him or his order
definite time.
Note: An instrument payable to specified
1. Expressed to be payable on demand person is not an order instrument- non-
“on demand” – promissory note negotiable as a promise or order is limited to
paying one person
“at sight” - bill of exchange
2. “to P and assign” have been equivalent word
2. No time for payment is expressed
Person to whom order instrument may be
3. Payable on demand as regards the maker drawn

4. Payable on demand as regards the acceptor 1. to order of payee who is not the maker

5. Payable on demand as regards the indorser 2. to order of payee who is not the drawer

SEC. 8. When payable to order.—The 3. to order of payee who is not the drawee
instrument is payable to order where it is
drawn payable to the order of a specified 4. to order of drawer
person or to him or his order. It may be “Pay to cash” – draw a check
drawn payable to the order of—
5. to order of maker
(a) A payee who is not maker, drawer, or
drawee; or 6. to order a drawee

(b) The drawer or maker; or 7. to order of two or more payees jointly

(c) The drawee; or 8. to order of one or more of several payees

(d) Two or more payees jointly; or 9. to order a holder of an office for the time
being
“Pay to the order of the Commissioner of Fictitious Person – Meant to be one who,
Internal Revenue” or “Pay to the order of the though named as payee in an instrument, has
Treasurer, Philippines National Bank” no right to it

Effect where payee not named a described 4. Payable to order of a non-existing person

It should be noted that in an order instrument a An instrument payable to a person who is

specified must always be named therein either already dead is payable to bearer.
before or after the word “order”.
5. Name of payee not name of person
SEC. 9. When payable to bearer.—The
instrument is payable to bearer— 6. Only indorsement in blank

(a) When it is expressed to be so payable; or The blank indorsement makes the instrument
payable to bearer
(b) When it is payable to a person named
therein or bearer; or (c) When it is payable to 7. last indorsement in blank
the order of a fictitious or person, and such A blank indorsement cannot make a non-
fact was known to the person making it so negotiable instrument
payable; or
Indorsement – refers only to negotiable
(d) When the name of the payee does not instrument
purport to be the name of any person; or
SEC. 10. Terms, when sufficient.—The
(e) When the only or last indorsement is an instrument need not follow the language of
indorsement in blank, sufficient terms. this Act, but any terms are sufficient which
When instrument payable to bearer clearly indicate an intention to conform to the
requirements hereof.
Bearer – the person in possession of a bill or
note which is payable to bearer or legally Criterion of negotiability
qualifies as a bearer instrument. 1. Clear intention of the parties – the substance
- Good faith of the transaction rather than its form is the
- Without notice that his title is defective criterion of negotiability
at or after maturity, discharges the 2. Use of foreign language – written
instrument
3. Mere defect in language or grammatical
1. Expressed to be payable to bearer error – this not render an instrument non-
“bearer, P” – not negotiable – payable to negotiable
definite person only

2. Payable to person named therein or bearer

3. Payable to order of a fictitious person

SEC. 11. Date, presumption as to.—Where the purpose. The person to whom an instrument
instrument or an acceptance or any so dated is delivered acquires the title thereto
indorsement thereon is dated, such date is as of the date of delivery.
deemed prima facie to be the true date of the
making, drawing, acceptance, or indorsement, Antedated – date earlier than the true date of
as the case may be. its issuance

Date in instrument payable at a fixed future Postdated – date later than the true date of its
date issuance

Generally, a date is not essential to make an Effect of antedated and postdated

instrument negotiable. 1. Generally - both does not render it invalid or
Cases where the date is necessary to non-negotiable – as long as not negotiated after
determine the maturity (but not for its maturity
negotiability) of the instrument: 2. If done for an illegal or fraudulent purpose –
1. Where instrument is payable at a fixed invalid
period after date Antedated – done to conceal the charge of
2. Where instrument is payable at a fixed usurious interest
period after sight and presentment Postdated – to issue a postdated check in
Date in instrument payable on demand payment of an obligation because of
insufficiency of funds without bona fide
Ordinarily, an instrument payable on demand intention to cover the amount of the check
need not be dated since it is demandable at any
time. SEC. 13. When date may be inserted.—Where
an instrument expressed to be payable at a
1. Date of issue or last negotiation – fixed period after date is issued undated, or
promissory note must be presented within a where the acceptance of an instrument
reasonable time after its issue and the bill of payable at a fixed period after sight is undated,
exchange, within a reasonable time after the any holder may insert therein the true date of
last negotiation. Otherwise, persons secondarily issue or acceptance, and the instrument shall
liable may be released from the liability. be payable accordingly. The insertion of a
wrong date does not avoid the instrument in
2. Importance of the Date – essential for the the hands of a subsequent holder in due
purpose of determining whether a party has course; but as to him, the date so inserted is to
acted within a reasonable time but not to make be regarded as the true date.
the instrument negotiable.
When date may be inserted
SEC. 12. Antedated and postdated.—The
instrument is not invalid for the reason only 1. Two Cases –
that it is antedated or postdated, provided this
is not done for an illegal or fraudulent
a. Where an instrument is payable at a fixed 2 Steps in Issuance of Negotiable Instrument
period after date but is issued undated.
1. the mechanical act of writing the instrument
b. When an instrument is payable at a fixed completely and in accordance with the
period after sight but the acceptance is requirements of Section 1; and
undated.
2. the delivery of the complete instrument by
2. Date of issue or acceptance to be specified – the maker or the drawer to the payee or
shall be payable accordingly holder with the intention of giving effect to it

3. Application to other cases – Application of Sections 14, 15 and 16

Effect of inserted of wrong date Section 14 – incomplete instrument which has

been delivered by the maker or the drawer to
1. As to holder with knowledge – will avoid the the payee or holder
instrument as to him but not as to a subsequent
holder in due course who may enforce the same Section 15 – incomplete instrument
notwithstanding the improper date undelivered

2. As to subsequent holder in due course – the Section 16 – complete instrument but

insertion of a wrong date constitutes a material undelivered
alteration
Rules where instrument incomplete but
SEC. 14. Blanks; when may be filled.—Where delivered
the instrument is wanting in any material
particular, the person in possession thereof 1. Authority to fill up the blanks – by the holder
has a prima facie authority to complete it by or the person in possession – prima facie
filling up the blanks therein. And a signature authority
on a blank paper delivered by the person a. the law speaks of material particular
making the signature in order that the paper
may be converted into a negotiable instrument b. the authority to complete, however, is not an
operates as a prima facie authority to fill it up authority to later
as such for any amount. In order, however,
2. Authority to put any amount –
that any such instrument when completed
may be enforced against any person who 3. Right against party prior to completion –
became a party thereto prior to its completion,
it must be filled up strictly in accordance with a. If an instrument is incomplete when
the authority given and within a reasonable delivered, the holder has prima facie authority
time. But if any such instrument, after to fill out the blanks thereon.
completion, is negotiated to a holder in due
b. In either case, the presumption is that the
course, it is valid and effectual for all purposes
blank was filled out in accordance with the
in his hands, and he may enforce it as if it had
authority given within a reasonable time.
been filled up strictly in accordance with the
authority given and within a reasonable time.
4. Right of holder in due course – The defense Rules where instrument mechanically
that the instrument had not been filled up in complete
accordance with the authority given and within
a reasonable time is not available as against a 1. Undelivered - every contract on negotiable
holder in due course. instrument even if it is completely written is
incomplete and revocable until its delivery for
SEC. 15. Incomplete instrument not delivered. the purpose of giving it effect
—Where an incomplete instrument has not
been delivered it will not, if completed and a. Delivery – transfer of possession, actual or
negotiated, without authority, be a valid constructive, from one person to another. –
contract in the hands of any holder, as against made either by the maker or drawer or any
any person whose signature was placed authorized person
thereon before delivery. b. Issue – first delivery of instrument, complete
Rules where instrument incomplete and in form, to a person who takes it as holder.
undelivered c. Holder – payee or indorsee or bearer
1. Defense even against a holder in due course In the absence of delivery, the instrument
2. Defense available to parties prior to delivery though complete in all its particulars, there is no
contract.
SEC. 16. Delivery; when effectual: when
presumed.—Every contract on a negotiable 2. Delivered – The place where the instrument
instrument is incomplete and revocable until was written, signed, or dated does not
delivery of the instrument for the purpose of necessarily fix or determine the place where it
giving effect thereto. As between immediate was executed. What if of decision importance
parties, and as regards a remote party other is the delivery thereof.
than a holder in due course, the delivery, in 3. In possession of party other than a holder in
order to be effectual, must be made either by due course – there is a prima facie presumption
or under the authority of the party making, of delivery but subject to rebuttal.
drawing, accepting, or indorsing, as the case
may be; and in such case the delivery may be However, if the instrument is no longer in the
shown to have been conditional, or for a possession of the person who signed it and it is
special purpose only, and not for the purpose complete in the terms, “a valid and intentional
of transferring the property in the instrument. delivery by him is presumed until the contrary is
But where the instrument is in the hands of a proved”
holder in due course, a valid delivery thereof
a. immediate parties – immediate in the sense
by all parties prior to him so as to make them
of having or being held to know of the
liable to him is conclusively presumed. And
conditions or limitations placed upon the
where the instrument is no longer in the
delivery of the instruments. – it contemplates
possession of a party whose signature appears
privity not proximity.
thereon, a valid and intentional delivery by
him is presumed until the contrary is proved.
b. remote – parties who are not in direct (e) Where the instrument is so ambiguous
contractual relation to each other. But if the that there is doubt whether it is a bill or note,
are chargeable, for example, with knowledge or the holder may treat it as either at his election;
notice of any infirmity or defect in the
instrument, they are considered as immediate (f) Where a signature is so placed upon the
parties for the purpose of Section 16. instrument that it is not clear in what capacity
the person making the same intended to sign,
4. Delivered conditionally or for a special he is to be deemed an indorser;
purpose –
(g) Where an instrument containing the words
5. In the hands of a holder in due course – a "I promise to pay" is signed by two or more
valid delivery thereof by all parties to him is persons, they are deemed to be jointly and
conclusively presumed. severally liable thereon.

SEC. 17. Construction where instrument is Rules of construction in case of ambiguous or

ambiguous.—Where construction. the omission
language of the instrument is ambiguous or
there are omissions therein, the following 1. Sums expressed in words and in figures
rules of construction apply: different – WORDS > FIGURES

(a) Where the sum payable is expressed in 2. Words ambiguous or uncertain – the figures
words and also in figures and there is a control
discrepancy between the two, the sum 3. Date when stipulated interest to run not
denoted by the words is the sum payable; but specified – If no rate of interest is mentioned, it
if the words are ambiguous or uncertain, will draw interest at the legal rate
reference may be had to the figures to fix the
amount; 4. instrument undated – considered dated as of
the date of issuance
(b) Where the instrument provides for the
payment of interest, without specifying the 5. Written and printed words in conflict –
date from which interest is to run, the interest WRITTEN > PRINTED
runs from the date of the instrument, and if
6. Whether instrument bill or note in doubt –
the instrument is undated, from the issue
the holder may treat either at his election
thereof;
7. Capacity in which person signed in doubt –
(c) Where the instrument is not dated, it will
he is to be deemed an indorser
be considered to be dated as of the time it was
issued; a. signature of the maker or drawer usually
affixed at the lower right-hand corner of the
(d) Where there is a conflict between the
instrument. Drawee’s name is usually placed at
written and printed provisions of the
the lower left-hand corner. Holder signs at the
instrument, the written provisions prevail;
back of it.
b. ambiguous location of the signature - the SEC. 19. Signature by agent; authority; how
party who signs is considered as an indorser shown.—The signature of any party may be
who assumes the least liability, and not as a made by a duly authorized agent. No
maker or drawer. particular form of appointment is necessary for
this purpose; and the authority of the agent
8. Instruments signed by two or more persons may be established as in other cases of agency.
– Their liability may be either solidary or joint.
Signing by an authorized agent
“I promise to pay” – Solidary
The authority of the agent may be shown, as in
“We promise to pay” – Jointly other cases of agency, to have been given orally
SEC. 18. Liability of person signing in trade or or in writing subject to the provisions of the
assumed name.— No person is liable on the Statute of Frauds.
instrument whose signature does not appear SEC. 20. Liability of person signing as agent,
thereon, except as herein otherwise expressly and so forth.— Where the instrument
provided. But one who signs in a trade or contains or a person adds to his signature
assumed name will be liable to the same words indicating that he signs for or on behalf
extent as if he had signed in his own name. of a principal, or in a representative capacity,
Persons liable on an instrument he is not liable on the instrument if he was
duly authorized; but the mere addition of
1. General Rule – only persons whose words describing him as an agent, or as filling a
signatures appear on an instrument are liable representative character, without disclosing
thereon. his "principal, does not exempt him from
personal liability.
2. Exceptions –
When agent may escape personal liability
a. Where a person signs in a trade or assumed
name 1. He is duly authorized

b. The principal is liable if a duly authorized 2. He adds words to his signature indicating
agent signs on his own behalf that the signs as an agent, that is, for or on
behalf of a principal, or in a representative
c. In case of forgery, the forgery is liable even if
capacity; and
his signature does not appear on the
instrument. 3. He discloses his principal

d. Where the acceptor makes his acceptance of Disclosing the agent of principal
a bill on a separate paper
If the agent signs a note or bill in his own name
e. Where a person makes a written promise to and discloses no principal, he is personally
accept a bill before it is drawn bound, and evidence to the contrary may not be
admitted to relieve him from personal liability.
Signing in a trade or assumed name

- Is liable as if he signed his own name

Use of descriptive words without disclosure of however, not incapacitated to transfer certain
principal rights.

The mere addition of descriptive words without b. Minority is not even a personal defense which
disclosing the principal will not relieve the may be set up by parties other than the minor;
signer from personal liability. but it is a real defense available to the minor.

SEC. 21. Signature by procuration; effect of.— c. A minor may be held bound by his signature
A signature by uration. "procuration" operates in an instrument where he is guilty of actual
as notice that the agent has but a limited fraud committed by specifically stating that he
authority to sign, and the principal is bound is of age when, in fact he is not.
only in ease the agent in so signing acted
within the actual limits of his authority. 2. Other incapacitated persons – insane or
demented persons and deaf-mutes who do not
Meaning of procuration know how to write

Procuration – “the act by which a principal Effect if indorsement by a corporation

gives power to another to act in his place as he
could himself.” - Where the corporation has committed
ultra vires acts or acts beyond its
Effect of signature by procuration powers.
- It has been held that a corporation
It gives a warning that the agent has but a is not liable on notes in a suit thereon
limited authority. by an indorsee, where the corporation
The principal is not bound if the agent has is without capacity to make the contract
exceeded the actual limits of his authority. in fulfillment of which they were
executed.
SEC. 22. Effect of indorsement by infant or
corporation.—The indorsement or assignment SEC. 23. Forged signature; effect of.—When a
of the instrument by a corporation or by an signature is forged or made without the
infant passes the property therein, authority of the person whose signature it
notwithstanding that from want of capacity purports to be, it is wholly inoperative, and no
the corporation or infant may incur no liability right to retain the instrument, or to give a
thereon. discharge therefor, or to enforce payment
thereof against any party thereto, can be
Effect of indorsement by incapacitated acquired through or under such signature,
persons. unless the party against whom it is sought to
enforce such right is precluded from setting up
1. Minors – voidable at his instance or at the
the forgery or want of authority.
instance of his guardian
Forgery explained
a. While a minor is not bound by his
indorsement for the lack of capacity, he is, Forgery – counterfeit-making or fraudulent
alteration of any writing, and may consist in
the signing of another’s name or the Exceptions to the general rule
alteration of an instrument in the name,
amount description of the person and the like, 1. If the party against whom it is sought to
enforce such right is precluded from setting up
with intent thereby to defraud.
the forgery or want of authority; and
Application of Section 23 2. Where the forged signature is not necessary
to the holder’s title, in which case the forgery
1. Two Cases – may be disregarded.
a. Where the signature on the instrument is Persons precluded from setting up the defense
affixed by one who does not claim to act as an of forgery
agent and who has no authority to bind the
1. Those who by their acts, silence, or
person whose signature he has forged; and
negligence, are estopped from setting up the
b. Where the signature is affixed by one who defense of forgery; and
purports to be an agent but has no authority to 2. Those who warrant or admit the
bind the alleged principal. genuineness of the signatures in question,
namely:
2. Effect of forged signature – real defense even
against the holder in due course a. indorsers;

3. Proof of forgery – proven with clear and b. acceptors;

convincing evidence c. persons negotiating by delivery

Cases of forgery in general Rights of parties in cases of forged

indorsement
1. Promissory notes -
1. Where note payable to order – the party
a. Forgery of an indorsement on the date; and whose indorsement is forged is not liable to any
holder, even a holder in due course. -
b. Forgery of the maker’s signature inoperative

2. Bills of exchange – - The instrument being payable to order, it can

be negotiated only by indorsement completed
a. Forgery of an indorsement on the bill; and by delivery.

b. Forgery of the drawer’s signature, either: 2. Where note payable to bearer – the party
whose indorsement is forged is liable to a
b.1. with acceptance by the drawee; or holder in due course, but not to one who is not a
holder in due course.
b.2. without such acceptance but the
bill is paid by the drawee. 3. Where bill payable to order – the party
whose indorsement is forged is not liable to any
Extent of the effect of forgery holder, even holder in due course. – wholly
inoperative
- Not totally void but only the forged or
unauthorized signature that is declared 4. Where bill payable to bearer – drawee may
debit the drawer’s account
to be inoperative
CHAPTER 2 for value in respect to all parties who become
such prior to that time.
CONSIDERATION
What constitute a holder for value
Sec. 24. Presumption of consideration. - Every
negotiable instrument is deemed prima facie Holder for value – one who is given a valuable
to have been issued for a valuable consideration for the instrument issued or
consideration; and every person whose negotiated to him
signature appears thereon to have become a
party thereto for value. 1. The holder is deemed as such not only as
regards the party to whom value has been given
Meaning of consideration by him but also in respect to all those who
became parties prior to the time when value
- Immediate, direct and essential reason was given.
which induces a party to enter into a
contract. 2. A holder of a negotiable instrument is
presumed to be a holder for value until the
Seller – price contrary be shown by any party who claims
otherwise.
Buyer – object
Sec. 27. When lien on instrument constitutes
Presumption of consideration
holder for value. — Where the holder has a
- it is not necessary, however that lien on the instrument arising either from
consideration be expressly stated in the contract or by implication of law, he is deemed
instrument a holder for value to the extent of his lien.
- Prima facie
Where a holder has lien on instrument
Sec. 25. Value, what constitutes. — Value is
One who has taken a negotiable instrument as
any consideration sufficient to support a
collateral security for a debt has a lien on the
simple contract. An antecedent or pre-existing
instrument.
debt constitutes value; and is deemed such
whether the instrument is payable on demand 1. Amount of instrument more than debt
or at a future time. secured – the pledgee is a holder for value to
the extent of his lien – he can collect the full
Adequacy of consideration
value of the instrument and apply the same to
A valuable consideration need not be adequate. the payment of debt but he must deliver the
It is sufficient if it is a valuable one. surplus to the pledger.

Antecedent or pre-existing debt 2. Amount of instrument less than or the same

as the debt secured – the pledgee is the holder
- Is a valuable consideration for value for the full amount and may,
- The debt may be that of a third person therefore, recover all.
- Discharge of such debt is a valuable
consideration for a negotiable 3. Party liable has defense – the pledgee can
instrument collect on the instrument only to the extent of
the amount of the debt
Sec. 26. What constitutes holder for value. -
Where value has at any time been given for - If the defenses of the party liable on the
the instrument, the holder is deemed a holder instrument are real defenses, then the pledgee
can recover nothing upon the instrument.
Sec. 28. against
Effect of any
want of person
considera not a
tion. - holder in
Absence due
or failure course;
of and
considera partial
tion is a failure of
matter of considera
defense tion is a
as defense
pro tanto,
Meaning of absence or want of consideration

- Personal defense
- A total lack of any valid consideration

whether
for the contract, in consequence of
which the alleged contract must be fail.

Meaning of failure of consideration

the - Failure or refusal of one of the parties

to do, perform or comply with the
consideration agreed upon.

failure is
- Something was agreed upon as
consideration but for some cause, such
agreed consideration failed to
materialize.

an Sec. 29. Liability of accommodation party. - An

accommodation party is one who has signed
the instrument as maker, drawer, acceptor, or

ascertain indorser, without receiving value therefor, and

for the purpose of lending his name to some
other person. Such a person is liable on the

ed and
instrument to a holder for value,
notwithstanding such holder, at the time of
taking the instrument, knew him to be only an
accommodation party.

liquidated Definition of terms

1. Accommodation note or bill – one to which

amount
the accommodation party has put his name,
without consideration, for the purpose of
accommodating some party who is to use it,
and is expected to pay it. In other words, it is a

or loan of one’s credit.

2. Accommodation party – one who has signed

the instrument as maker, drawer, acceptor, or

otherwise
Sec. 28. Effect of want of consideration. -
indorser, without receiving value therefor and
for the purpose of lending his name to another
party.

Absence or failure of consideration is a matter a. He usually expects that not he, but the
of defense as against any person not a holder accommodation party, will pay the bill or note
in due course; and partial failure of when it falls due. He actually lends his credit to
consideration is a defense pro tanto, whether the party to whom the accommodation is made.
the failure is an ascertained and liquidated
amount or otherwise. b. He is classified according to the
accommodated party’s status. If the
accommodated party is a maker, for example, Classes of Holders:
he is liable on the instrument to subsequent 1. Holders simply
parties as if he were the maker. 2. Holders for value
3. Accommodated party – is one in whose favor 3. Holders in due course
a person, without receiving value therefor, signs 4. HDC subrogation
an instrument for the purpose of lending his
credit and enabling said party to raise money Ordinary or Mere Holder – a person who
upon it. He impliedly agrees to take up to qualifies as a holder but does not meet all the
instrument at maturity and to indemnify the conditions to qualify as a HDC
accommodation party against the
consequences of non-payment. (1) A holder who is not a holder in due course
but derives his title from a holder in due course
Liability of accommodation party to a holder is given the rights of such prior holder.

1. Absence of consideration not a defense – by (2) The holder of a negotiable instrument is not
clear mandate, makes the accommodation necessarily the owner thereof.
party “liable on the instrument to a holder for
value notwithstanding such holder at the time Right of transferee of unindorsed instrument
of taking the instrument knew him to be only an to sue
accommodation party.”
A transferee of unindorsed instrument is
certainly not a holder.

SEC. 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 and regular upon its

face;

(b) That he became the holder of it before it

was overdue, and without notice that it had
been previously dishonored, if such was the
fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him

he had no notice of any infirmity in the
instrument or defect in the title of the person
negotiating it.
CHAPTER IV.
Note: All 4 conditions must concur
RIGHTS OF THE HOLDER.
Conditions to qualify one holder in due course
SEC. 51. Right of holder to sue; payment.— The
holder of a negotiable instrument may sue (1) Presence of all conditions
thereon in his own name; and payment to him
in due course discharges the instrument.
(2) Status as mere assignee – The holder of a Non-acceptance – refers only to a bill of
non-negotiable instrument (such as a sinple exchange
contract) cannot attain the status of a holder in
due course. Non-payment – can only take place at
the time of maturity, dishonor by non-
(3) Rights of holder in due course/not in due acceptance of a bill may occur ever before the
course date of maturity

Payee as holder in due course (2) Negotiation after maturity or dishonor – may
still be negotiated either by indorsement or by
(1) Contrary view – The holder in due course delivery to the same extent before maturity
must have acquired the instrument through
negotiation and an instrument is issued and not Holder in good faith
negotiated to a payee
(1) Meaning of good faith – honesty in fact in
(2) Affirmative view – A holder in due course is a the transaction concerned – subjective
payee and indorsee who is in possession
- refer only to the good faith of the
Drawee as holder in due course indorsee or transferee

While a payee may be a holder in due course, a (2) Meaning of bad faith – have knowledge of
drawee does not, by paying a bill, become a facts which render it dishonest
holder in due course under this section.
(3) Proof of bad faith – sufficient that such
Instrument complete and regular upon its face knowledge tends to show that there was
something wrong with the transaction
(1) Wanting in any material particular
Holder for value
(2) Alteration apparent on face of instrument
Any consideration sufficient to support a simple
- void contract is value.
Holder before instrument is overdue Holder without notice of infirmity in
instrument or defect of title
(1) Date of instrument - overdue after the date
of maturity (1) Lack of bad faith – In order to constitute
notice, the holder must have had actual or
(a) fixed
chargeable knowledge of the infirmity or defect
(b) payable on demand or must have had acted in bad faith.

(c) payable on occurrence of a specified (2) Bad faith of agent – The agent’s knowledge
event is legally deemed his principal’s knowledge, and
thus, will render the principal not a holder in
(2) Acquisition of instrument after/on date of due course
maturity
SEC. 53. When person not deemed holder in
Holder without notice of dishonor due course.— Where course an instrument
payable on demand is negotiated an
(1) Ways and time of dishonor – either by non- unreasonable length of time after its issue, the
acceptance or non-payment holder is not deemed a holder in due course.
SEC. 54. Notice before full amount paid.— Actual knowledge is usually shown by the
Where the transferee receives notice of any instrument itself.
infirmity in the instrument or defect in the title
of the person negotiating the same before he (1) Mere negligence to make inquiries not
has paid the full amount agreed to be paid sufficient
therefor, he will be deemed a holder in due
(2) Knowledge amounting to bad faith
course only to the extent of the amount
theretofore paid by him. - If the holder had actual knowledge of
suspicious circumstances, coupled with the
Effect of notice before full payment
means of readily informing himself of the facts
(1) No amount has yet been paid – no and he willingly abstained from making
obligation; not entitled to the same protection inquiries, his intentional ignorance may amount
as a holder in due course to bad faith.

(2) An amount has been paid – he can be (3) Effect of notice of defect
considered a holder in due course only to the
SEC. 57. Rights of holder in due course.— A
extent of the amount theretofore paid by him
holder in due course holds the instrument free
SEC. 55. When title defective.— The title of a from any defect of title of prior parties, and
person who negotiates an instrument is free from defenses available to prior parties
defective within the meaning of this Act when among themselves and may enforce payment
he obtained the instrument, or any signature of the instrument for the full amount thereof
thereto, by fraud, duress, or force and fear, or against all parties liable thereon.
other unlawful means, or for an illegal
Rights of a holder in due course
consideration, or when he negotiates it in
breach of faith, or under such circumstances as (1) He may sue on the instrument in his own
amount to a fraud. name
When title of a person defective (2) He may receive payment and if the payment
is in due course, the instrument is discharged
(1) in the acquisition – instrument or signature
by fraud, duress, or force or fear or other (3) He holds the instrument free from any defect
unlawful means, ore for illegal consideration of title of prior parties
(2) in the negotiation – instrument in a breach (4) He holds the instrument free from defenses
of faith, or under such circumstances as amount available to prior parties among themselves;
of fraud and
SEC. 56. What constitutes notice of defect.— (5) He may enforce payment of the instrument
To constitute notice of an infirmity in. the for the full amount thereof against all parties
instrument or defect in the title of the person liable thereon.
negotiating the same, the person to whom it is
negotiated must have had actual knowledge of Real defenses available against a holder in due
the infirmity or defect, or knowledge of such course
facts that his action in taking the instrument
amounted to had faith. - The defenses referred to in Section 57
that cannot be set up against a holder
What constitutes notice of infirmity or defect in due course are so called “personal
defense”.
 - Real defenses, which attach to the - they challenge the validity of the instrument
instrument itself, would be available itself
against all persons even as against a
holder in due course. - it is only unenforceable against the party
- A holder not a holder in due course entitled to set up the defense
acquires the instrument subject to all
(2) Personal defense – available to prior parties
defenses, whether personal or real,
among themselves but which are not good
because he is treated as mere assignee
against a holder in due course
of a non-negotiable paper.
- affects only the validity of the agreement
SEC. 58. When subject to original defenses.
— In the hands of any holder other than a Examples of defenses
holder in due course, a negotiable
instrument is subject to the same defenses 1. Real defense
as if it were nonnegotiable. But a holder
who derives his title through a holder in (a) Incapacity
due course, and who is not himself a party
(b) Illegality of contract when declared
to any fraud or illegality affecting the
by law
instrument, has all the rights of such
former holder in respect of all parties prior (c) Want of delivery of incomplete
to the latter. instrument
Immediate, remote, and prior parties (d) Forgery
M P (e) Want of authority, apparent and real
A (f) Duress, force and fear
B (g) Fraud in factum or fraud in esse
contractus
Immediate – M & P ; P & A ; A & B
- "Fraud in factum" and "fraud in esse
Remote – M & B
contractus" are both legal terms
Prior To B – M, P and A referring to a type of fraud that occurs
during the formation of a contract, but
Meaning of defense "fraud in factum" specifically relates to
a situation where a party is completely
- grounds or reasons pleaded or offered unaware of the nature of the document
by the defendant in a case, showing they are signing due to a
why a plaintiff, as a matter of law or misrepresentation, while "fraud in esse
fact, should not be given the relief he contractus" is a broader term
seeks. encompassing any significant deception
that occurs during the contract's
Kinds of defenses
execution, including fraud in factum.
(1) Real defense – assertable against all parties,
(h) Fraudulent alteration by holder
both immediate and remote, including HDC or
holder through the latter (i) Prescription
 (j) Other infirmities appearing on the 1. Fraud in the execution or fraud in factum – a
face of the instrument person, without negligence, has signed and
instrument – real defense
(k) Discharge at or after maturity
2. Fraud in inducement or simple fraud – relates
2. Personal defense to the quality, quantity, value, or character of
the consideration of the instrument
(a) Filling of wrong date
Rights of holder not in due course
(b) Filling up the blanks not in
accordance with the authority given and within (1) He may sue on the instrument in his own
reasonable time name
(c) Want of delivery of complete (2) He may receive payment and if the payment
instrument is in due course, the instrument is discharged
(d) Absence or failure of consideration (3) He is entitled to the instrument but holds it
subject to the same defenses as if it were non-
(e) Simple fraud or fraud in inducement
negotiable; and
(f) Acquisition of instrument (not
(4) He has all the rights of the holder in due
signature) by duress, or force and fear
course from whom he derives his title in respect
(g) Acquisition of instrument by of all parties prior to such holder, provided he is
unlawful means not himself a party to any fraud or illegality
affecting the instrument.
(h) Acquisition of instrument for an
illegal consideration Rights of purchaser from a holder in due
course
(i) Negotiation in breach of faith
(1) Rights of a mere transferee
(j) Negotiation under circumstances
that amount to fraud (2) Rights of transferee from a holder in due
course
(k) Innocent alteration or spoliation
SEC. 59. Who deemed holder in due course.—
Spoliation is an alteration made Every holder is deemed prima facie to be a
by a stranger to an instrument. holder in due course; but when it shown that
the title of any person who has negotiated the
(l) set-off between immediate parties instrument was defective, the burden is on the
holder to prove that he or some person under
(m) Discharge by payment or
whom he claims acquired the title as holder in
renunciation or release before maturity
due course. But the last-mentioned rule does
(n) Discharge of party secondarily liable not apply in favor of a party who became
by discharge of prior party bound on the instrument prior to the
acquisition of such defective title.
(o) Want of authority of the agent who
has apparent authority When holder presumed a holder in due course

Fraud in factum and fraud in inducement (1) Proof of being a holder

distinguished
(2) Burden of proof on holder where indorser’s LIABILITIES OF PARTIES
title defective
SEC. 60. Liability of maker.— The maker of a
A person who acquires title from a prior negotiable instrument by making it engages
holder in due course is referred to as holder that he will pay it according to its tenor, and
through a holder in due course or HDC admits the existence of the payee and his then
subrogation. capacity to indorse.

(3) Exception (to no. 2) – the holder has no Classification of parties according to liability
burden of proving that he is a holder in due
course in favor of a party who become bound Liability – the obligation of a party to a
on the instrument prior to the acquisition of negotiable instrument to pay the same
such defective title according to its terms

Primarily liable:

a. the maker of a promissory note

b. the acceptor of a bill of exchange

c. the certifier of a check

Secondarily (conditionally) liable:

a. the drawer of a bill

b. the indorser of a note or a bill

Not liable:

a. the drawee until he accepts the instrument in

which case he becomes an acceptor

Note: A person becomes a party to an

instrument by signing his name thereon, The
general rule is that no person is liable on an
instrument unless his signature appears
thereon.

Primary party and secondary party

distinguished

Person primarily liable – absolutely required to

pay the same

All other parties are secondarily liable.

CHAPTER 5 Primarily Liable Secondarily Liable

Unconditional bound – Conditional bound – SEC. 61. Liability of drawer.— The drawer by
absolutely required to face only potential drawing the instru-ment admits the existence
pay the instrument secondary liability on of the payee and his then capacity to indorse;
upon its maturity the instrument and engages that on due presentment the
Undertakes in instrument will be accepted or paid, or both,
condition: according to its tenor, and that if it be
(a) due presentment dishonored, and the necessary proceedings on
for payment or dishonor be duly taken, he will pay the amount
acceptance to the thereof to the holder, or to any subsequent
primary party indorser who may be compelled to pay it. But
(b) dishonor by such the drawer may insert in the instrument an
party express stipulation negativing or limiting his
(c) taking of own liability to the holder.
proceedings re-
acquired by law after
dishonor
Liable in the reserve
order in which they
signed the instrument

Liability of maker

Maker – applies only to the promissory note

It includes accommodation maker and surety

who signs as maker.

(1) Liability of maker unconditional

a. He engages to pay the note

b. He remains fully liable

c. Due presentment for payment and due to

dishonor are not necessary for the purpose of
charging the maker with liability

(2) Admission of maker

a. the payee must exist

b. the payee must have the capacity to contract

(3) Presumption arising from signature – a

person placing his name on the face of a note is
prima facie a maker and liable as such.