The function of the NIL is to facilitate and regulate commercial transactions.
Functions of negotiable instruments
1. It is a substitute for money
2. It is a medium for exchange
3. It is a medium of credit transactions
4. It is a means of making in the payment
Sec 1. Form of Negotiable Instrument – an instrument to be negotiable must conform to the following
requirements:
a. It must be in writing signed by the maker or the drawer
b. It must contain an unconditional promise or order to pay a sum certain in money
c. It must be payable on demand, or at a fixed or determinable future time
d. It must be payable to order or to bearer
e. The drawee must be named or indicated therein with a reasonable certainty.
Note:
1. The maker or the drawer need not to be the one who writes, as long as they will be the one to sign.
2. Signature can be anywhere.
3. Any type of signature is allowed, as long as the maker or drawer intends to be bound by the
instrument.
Sum is considered certain in money when it can be determined on its face or that which can be
computed without resorting to any extrinsic evidence.
At sight vs upon representation:
“at sight” – purpose of which is for it to be presented to the drawee for acceptance.
“upon presentation” – purpose of which is for payment (to persons who are primarily liable).
How is an instrument negotiated? (Sec 30)
Bearer instrument – by mere delivery
Order Instrument – by indorsement and delivery
Blank indorsement – one which does not specify the person who will be receiving the instrument (If it is not
specific as to whom the instrument will be transferred, it is presumed that the intention of the party holing
the instrument was to transfer it to anyone).
NOTE: Once a bearer instrument, always a bearer instrument.
Caltex vs. CA: Caltex was not considered a HDC because the purpose of the delivery of the instrument was for
it to be a guaranty, not for the purpose of negotiating for Caltex to be a holder. (This case tells us that you just
have to look at the face and the language used in the instrument to determine negotiability).
Metrobank vs CA: The treasury warrants are non-negotiable because they are payable out of a particular fund
which sets a condition to the unconditional promise to pay.
Cognovit actionem – you confess on the act alleged. You accept the obligation and admit that there was no
payment made.
Relicta verification – the pleading is being abandoned. A confession of judgment by withdrawal of defense.
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: (COFI)
a. That it is COMPLETE and regular upon its face
b. That he became the holder before ot was OVERDUE, and without any notice that it was 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.
Shelter principle – (Sec 58 second sentence) “But a holder who derives his title through a holder in due
course, and who is not himself a party to any fraud or illegality affecting the instrument, has all the rights of
such former holder in respect of all parties prior to the latter.
Presumption of holder in due course (Sec 59) – Every holder is deemed prima facie to be a holder in due
course. (presumption will not apply when there is any defect in any of the title of the person who negotiated
the instrument, [not necessarily the person from whom he acquired it])
Defects of a negotiable instrument:
1. Insertion of a wrong date (Personal Defense) –
-Sec 13. When date may be insterted – Where an instrument expressed to be payable at a
fixed period after date is issued undated, or where the acceptance of an instrument payable
at a fixed period after sight is undated, any holder may insert therein the true date of issue
or acceptance, and the instrument shall be payable accordingly. The insertion of a wrong
date does not avoid the instrument in the hands of a subsequent holder in due course; but
as to him, the date so inserted is to be regarded as the true date.
Notes: a. The fact that it is undated does not void its negotiability.
b. Insertion of the date is not for purposes of making the instrument negotiable, but
in order to determine its maturity date.
c. insertion of wrong date will not avoid the instrument in the hands of a holder in
due course. Because to him, the date inserted in the instrument is the true date.
d. if instrument is payable on demand: insertion of date is not necessary, hence, in a
instrument payable on demand, there would be no authority granted to insert a
date.
2. Incomplete but delivered instrument (Personal Defense)
Sec. 14. Blanks; when may be filled. - Where the instrument is wanting in any material
particular, the person in possession thereof has a prima facie authority to complete it by
filling up the blanks therein. And a signature on a blank paper delivered by the person
making the signature in order that the paper may be converted into a negotiable
instrument operates as a prima facie authority to fill it up as such for any amount.
A party has authority to fill in the blanks in the instrument when:
1. The instrument is wanting in any material particular
2. Person is in possession of a signature on blank paper intended to
be a negotiable instrument
3. Incomplete AND undelivered (real defense)
Sec. 15. Incomplete instrument not delivered. – Where an incomplete instrument has not been
delivered, it will not, if completed and negotiated without authority, be a valid contract in the
hands of any holder, as against any person whose signature was placed thereon before
delivery.
4. Complete but undelivered (personal)
Sec. 16. Delivery; when effectual; when presumed. - Every contract on a negotiable
instrument is incomplete and revocable until delivery of the instrument for the purpose of
giving effect thereto. As between immediate parties and as regards a remote party other
than a holder in due course, the delivery, in order to be effectual, must be made either by
or under the authority of the party making, drawing, accepting, or indorsing, as the case
may be; and, in such case, the delivery may be shown to have been conditional, or for a
special purpose only, and not for the purpose of transferring the property in the instrument.
There is conclusive presumption of delivery. It cannot be rebutted by any evidence to the
contrary. The issue of non-delivery cannot be raised because it is a personal defense – that
which you cannot raise against a holder in due course.
CONDITIONAL AND SPECIAL DELIVERY
1. For conditional delivery – Conditional delivery is one where there is an authority to
deliver, however, it is subject to a condition.
Example: The maker issued an instrument in favor of A subject to the condition that A
should pass the bar exams.
TN: The condition must not be stated in the negotiable instrument otherwise it will place a
condition on the negotiable instrument making it non-negotiable.
2. For special purpose
Example: M is the maker. He kept it in his drawer. M gave X the authority to give the
instrument to A for safekeeping.
5. Forgery of signature (real defense)
Sec. 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 a 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.
Section 23 only pertains to forgery of the signature.
Thus, if there is alteration in the amount and there is intent to defraud, it cannot be
considered as forgery in relation to Sec 23 but it could be forgery in relation to NIL.
Forgery - Counterfeiting or making alterations to the instrument with the intent to defraud.
Effects:
1. Only the signature is inoperative and NOT the entire instrument
2.
3.
4.
5.
It cuts off the liabilities of the parties prior the forgery
Subsequent parties cannot have the right to retain the instrument
There is no right to discharge therefore
NO right to enforce payment thereof against any parties prior
6. Material alteration (real defense)
Material Alteration is any alteration which changes the liability of the party.
Sec 125. What constitute a material alteration – Any alteration which changes the: (DSTN.MO)
1. The date
2. The sum payable, either principal or interest
3. The time or place of payment
4. The number or the relations of the parties
5. The medium or currency in which payment is to be made
6. Or which adds any other change or addition which alters the effect of the instrument in any
respect, is a material alteration.
7.
Material Alteration is a REAL DEFENSE
This is because you cannot enforce the instrument as it is. Prior parties to the material alteration can
raise it as a defense. They can make payment but it is not the payment based on the amount in the instrument
presented to them. Instead, they can only be demanded to pay the original tenor of the instrument.
MINORITY AS A REAL DEFENSE
General rule: Minority is a real defense but it can only be raised by the minor himself. The holder of the
instrument cannot make the minor liable.
Exception: The minor makes representation to the public that he is of legal age when in truth and in fact, he is
a minor. The minor already committed fraud and cannot be allowed to raise the defense of minority.
__________________________________________________________________________________________
Consideration
An inducement to a contract, that is, the cause, price or impelling influence which induces a
contracting party to enter into a contract.
Any prestation sufficient to support any contract in favor of the party to an instrument, such as a
maker or indorser, and it may consist in giving, doing, or not doing.
Prestation – obligation to give, to do or not to do.
Sec. 24. Presumption of consideration. – 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.
Sec. 25. Value, what constitutes. – 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.
Valuable consideration
Anything which requires a party to give, to do or not to do as a condition for issuing a negotiable instrument.
TN: Love, affection or moral obligation is not a valuable consideration. They are not considered as valuable
consideration enough to support a negotiable instrument. But they can support a simple contract like
donation. However, for the purposes of Negotiable instrument law, they are not valuable considerations.
Sec. 28. Effect of want of consideration. – Absence or failure of consideration is a matter of defense as 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.
This is a personal defense
If ever there is lack of consideration as in the case where the instrument is given freely to the payee,
it can be raised as a defense only against a person not a holder in due course.
NEGOTIATION
SEC. 30. What constitutes negotiation – an instrument is when it is transferred from one another in
such a manner constitute the transferee the holder thereof. It payable to bearer, it is negotiated by delivery; if
payable to order, it is negotiated by indorsement of the holder completed by delivery.
NOTE: delivery must be VOLUNTARY.
Kinds of delivery:
1. Actual
2. Constructive
Delivery is presumed (Sec 16), it can also be conditional.
Indorsement – the act of writing the signature of the indorser at the back of the instrument (g.r: at the back
but can be anywhere)
Sec. 31. Indorsement; how made – The indorsement must be written on the instrument itself or upon a paper
attached thereto. The signature of the indorser, without additional words, is sufficient indorsement.
Note: Indorsement certainty of 2 things:
1. The identity of the indorser (as being the payee or true owner)
2. The genuineness of his signature
Indorsement guarantees that the instrument will be duly paid according to the terms thereof.
G.R: indorsement must be of the entire instrument (Sec 32).
XPN: when the instrument is partially paid. (happens when payable by instrument)
Methods of Transferring a NI
1. Issue
2. Negotiation
3. Assignment
REACQUIRER
Section 50. When prior party many negotiate instrument – Where an instrument is negotiated back
to a 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.
G.R: A prior party who reacquires the instrument may further negotiate the same.
XPNs: 1. Where it is payable to the order of a 3rd person, and has been paid by the drawee.
2. Where it was made or accepted for accommodation and has been paid by the party accommodated.
3. Where the instrument is discharged when acquired by a prior party.
Kinds of Indorsement: (Sec 33)
1. Special or in bank
2. Restrictive or qualified
3. Conditional
ACCEPTANCE
Acceptance is the signification by the drawee of his assent to the order of the drawer
Requisites of a valid acceptance
1. Must be in writing
2. Signed by the drawee
3. Must expressly state that the promise shall be performed by payment in money only (and not goods)
4. Delivered to the holder (TN: Before delivery, acceptance may be revoked)
Applicability: only to BOE and not PNs.
By accepting the bill, the drawee admits everything essential to its validity
Promise to accept
Section 135. Promise to accept; when equivalent to acceptance – An unconditional promise in
writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who, upon
the faith thereof, receives the bill for value.
Section 136. Time allowed drawee to accept – The drawee is allowed twenty-four hours after
presentment in which to decide whether or not he will accept the bill; the acceptance, if given, dates as of the
day of presentation.
Section 143. When presentment for acceptance must be made – Presentment for acceptance must be made:
(a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary
in order to fix the maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be presented for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee.
In no other case is presentment for acceptance necessary in order to render any party to the bill liable.
Section 145. Presentment; how made. - Presentment for acceptance must be made by or on behalf of the
holder at a reasonable hour, on a business day and before the bill is overdue, to the drawee or some person
authorized to accept or refuse acceptance on his behalf; and
(a) Where a bill is addressed to two or more drawees who are not partners, presentment must be made to
them all unless one has authority to accept or refuse acceptance for all, in which case presentment may be
made to him only.
(b) Where the drawee is dead, presentment may be made to his personal representative
(c) Where the drawee has been adjudged a bankrupt or an insolvent or has made an assignment for the
benefit of creditors, presentment may be made to him or to his trustee or assignee.
Section 82. When presentment for payment is excused. - Presentment for payment is excused:
(a) Where, after the exercise of reasonable diligence, presentment, as required by this Act, cannot be made;
(b) Where the drawee is a fictitious person;
(c) By waiver of presentment, express or implied.
Section 76. Presentment where principal debtor is dead. - Where the person primarily liable on the
instrument is dead and no place of payment is specified, presentment for payment must be made to his
personal representative, if such there be, and if, with the exercise of reasonable diligence, he can be found.
Section 77. Presentment to persons liable as partners. - Where the persons primarily liable on the instrument
are liable as partners and no place of payment is specified, presentment for payment may be made to any one
of them, even though there has been a dissolution of the firm.
Section 78. Presentment to joint debtors. - Where there are several persons, not partners, primarily liable on
the instrument and no place of payment is specified, presentment must be made to them all.
DISCHARGE OF A NEGOTIABLE INSTRUMENT
Sec. 119. Instrument; how discharged. - A negotiable instrument is discharged:
(a) By payment in due course by or on behalf of the 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 thereof by the 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.
Art. 1231, NCC. Obligations are extinguished:
1. By payment or performance
2. By the loss of the thing due
3. By the condonation or remission of the debt
4. By the confusion or merger of the rights of creditor and debtor
5. By compensation
6. By novation
Effect of unintentional cancellation
This will not discharge the instrument. However, there is a presumption that the cancellation is
intentional. The one claiming that the cancellation is unintentional has the burden of proof.
“Sec. 123. Cancellation; unintentional; burden of proof. - A cancellation made unintentionally
or under a mistake or without the authority of the holder, is inoperative but where an instrument or any
signature thereon appears to have been cancelled, the burden of proof lies on the party who alleges that the
cancellation was made unintentionally or under a mistake or without authority.”
Sec. 120. A person secondarily liable on the instrument is discharged:
(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 holder’s 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 holder’s 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.
NOTICE OF DISHONOR
Bringing, either verbally or in writing, to the knowledge of the drawer or indorser of an instrument,
the fact that a specified negotiable instrument, upon proper proceedings taken, has not been accepted or has
not been paid and that the party notified is expected to pay it.
When instrument considered to be dishonored
1. If it is not accepted when presented for acceptance.
2. If it is not paid when presented for payment at maturity.
3. If presentment is excused or waived and the instrument is past due
and unpaid.
Sec. 89. To whom notice of dishonour must be given. – Except as herein otherwise provided, when a
negotiable instrument has been dishonored by non-acceptance or non-payment, notice of dishonour must be
given to the drawer and each indorser, and any drawer or indorser to whom such notice is not given is
discharged.
Persons who are supposed to give the notice of dishonor
1. Holder or his agent (When the notice of dishonor is received by an agent, such agent
has the option either to: 1. Notify his principal or 2. Directly notify the parties of the instrument.
2. Person who may be compelled to pay the holder
3. Person who, upon taking it up, will have a right of reimbursement
from the party to whom the notice is given
To whom to give notice if:
1. Party is dead (Sec 98) – a. personal representative (if there is)
b. to the last residence or last place of business of the deceased (if none)
2. Partners (Sec 99) – to any of the partners
3. Persons jointly liable (Sec 100) – to each of them (if solidary: to any of them)
4. Notice to bankrupt (Sec 101) – to the party himself or assignee
Sec. 102. Time within which notice must be given. - Notice may be given as soon as the instrument is
dishonored and, unless delay is excused as hereinafter provided, must be given within the time fixed by this
Act. (24 hours)
Sec. 103. Where parties reside in same place. - Where the person giving and the person to receive notice
reside in the same place, notice must be given within the following times:
(a) If given at the place of business of the person to receive notice, it must be given before the close of
business hours on the day following.
(b) If given at his residence, it must be given before the usual hours of rest on the day following.
(c) If sent by mail, it must be deposited in the post office in time to reach him in usual course on the day
following.
Sec. 104. Where parties reside in different places. - Where the person giving and the person to receive notice
reside in different places, the notice must be given within the following times:
(a) If sent by mail, it must be deposited in the post office in time to go by mail the day following the day of
dishonor, or if there be no mail at a convenient hour on last day, by the next mail thereafter.
(b) If given otherwise than through the post office, then within the time that notice would have been received
in due course of mail, if it had been deposited in the post office within the time specified in the last
subdivision.
Sec. 117. Effect of omission to give notice of non-acceptance. - An omission to give notice of dishonor by nonacceptance does not prejudice the rights of a holder in due course subsequent to the omission.
CHECKS
Sec. 185. Check, defined. – A check is a bill of exchange drawn on a bank payable on demand. Except as herein
otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a
check.
Memorandum Check
In the form of an ordinary check, with the word “memorandum,” “memo” or “mem” written across its face,
signifying that the maker or drawer engages to pay the bona fide holder without any condition concerning its
presentment.
The effect of which is that the drawer is primarily liable even if there is a drawee. This is usually given when
you don’t want to pay the check, but you just want to present something to your creditor as a proof of your
good faith. When that check is presented, there are instances that the debtor will require the return of the
check without it being encashed. In fact you don’t need to wait for the maturity of the check to be paid by the
drawer because most likely, it is just used for purposes of exhibition.
Cashier’s Check
It is one which is certified by a bank’s cashier. When it is signed by the cashier, it becomes the absolute
obligation of the bank to pay that check. This type of check is almost like a manager’s check in terms of effect.
It’s just that different persons certify them.
Manager’s Check
It is signed by the manager. It becomes the absolute obligation of the bank to pay it. There is more security
when it is a manager’s check or cashier’s check.
Certified Check
It is one drawn by a depositor upon funds to his credit in a bank which a proper officer of the bank certifies. It
will be paid when duly presented for payment.
Crossed Check
It is one which bears across its face two parallel lines drawn diagonally, usually on the upper left side. It may
be crossed either specially or generally.
A check may be crossed either specially or generally
(a) Crossed specially – the name of a particular bank or company is written or appears between the
parallel line in which the drawee bank must pay the check only upon presentment
(b) Crossed generally – only the words “and Co.” are written between parallel lines or when nothing is
written at all between said lines. The drawee bank must pay the check through the intervention of
some bank or banker.
Important: The difference between the two is that a specially crossed check indicates that the
indicated company must be the owner of the account where the check is to be deposited. If it is
crossed generally, anyone can deposit the check but never encash it.
Stale check
Based on banking practice, a check becomes stale six months reckoned from the date of the check or the
issuance of the check.
- The reckoning period for a post-dated check is the date of the check because it is the only time that
the check is demandable. It would be unfair for the holder if the rule were otherwise. If such were the case
then a check postdated for a year will become stale when it is presented for payment.
Sec. 186. Within what time a check must be presented. - A check must be presented for payment within a
reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss
caused by the delay.
Sec. 187. Certification of check; effect of. – Where a check is certified by the bank on which it is drawn, the
certification is equivalent to an acceptance.
Effect of Certification of a Check : The certification is equivalent to an acceptance. The certification
has the effect of setting aside a fund of the drawer.
Sec. 189. When check operates as an assignment. - A check of itself does not operate as an assignment of any
part of the funds to the credit of the drawer with the bank, and the bank is not liable to the holder unless and
until it accepts or certifies the check.
GR: A check does not operate as an assignment of funds to the credit of the drawer. Issuance of the
check does not mean that there is already a fund set aside to pay the amount in the check.
Exception: Certified check
BP 22
Section 1. Checks without sufficient funds. - Any person who makes or draws and issues any check to apply on
account or for value, knowing at the time of issue that he does not have sufficient funds in or credit
with the drawee bank for the payment of such check in full upon its presentment, which check is subsequently
dishonored by the drawee bank for insufficiency of funds or credit or would have been dishonored for the
same reason had not the drawer, without any valid reason, ordered the bank to stop payment, shall be
punished by imprisonment of not less than thirty days but not more than one (1) year or by a fine of not less
than but not more than double the amount of the check which fine shall in no case exceed Two Hundred
Thousand Pesos, or both such fine and imprisonment at the discretion of the court.
The same penalty shall be imposed upon any person who, having sufficient funds in or credit with the drawee
bank when he makes or draws and issues a check, shall fail to keep sufficient funds or to maintain a credit to
cover the full amount of the check if presented within a period of ninety (90) days from the date appearing
thereon, for which reason it is dishonored by the drawee bank.
Where the check is drawn by a corporation, company or entity, the person or persons who actually signed the
check in behalf of such drawer shall be liable under this Act.
Gravamen of the offense
It is the act of issuing a worthless check or a check that is dishonored upon its presentment for
payment and not the non-payment of the obligation that is being punished.
Presumption of knowledge of insufficiency of funds (Sec 2)
B.P. No. 22 creates a presumption juris tantum that the element of prima facie evidence of knowledge of
insufficient funds exists.
There is presumption of knowledge of insufficiency on the part of the drawer or maker because knowledge is a
state of mind. It would be very difficult to prove that such person has knowledge.
Requisites for the presumption to arise
1. The check is presented within 90 days from the date of the check.
2. The drawer or maker of the check receives notice that such check has not been paid by the drawee; and
TN: “Receives notice” means that it is not enough that the notice was “given,” you must make sure that it was
“received.”
3. The drawer or maker of the check fails to pay the holder of the check the amount due thereon, or to make
arrangements for its payment in five (5) working days after receiving notice that such check has not been paid
by the drawee.
Prima facie presumption does not arise in case of failure to present check for payment within 90 days
If you present the check for payment beyond 90 days, issuer can still be held liable but knowledge will not be
presumed. The three requisites are only necessary for the presumption to apply.
Presumption cannot arise if no notice of dishonor is sent to drawer or maker or no proof as when such notice
is received (Sec 3)
Generally, in case of failure to give notice of dishonor, drawer is discharged from liability. But under BP 22,
drawer is still liable.
Period of notice
The notice is important because it is the period from where the 5 days grace period to settle shall be counted.
SC Opinion: If there is no notice, grace period will not begin to run.
Novation Theory
Previously dishonored check is replaced by another check
This means that there is already a change of obligation. What governs the parties now is the new check
recently issued and no longer the previously dishonored check.
Novation theory is not applicable if the check which was used to replace the previous check was also
worthless. In fact, there are two worthless checks now so the issuer can held liable for 2 counts of violation of
BP 22.
Effect of subsequent payment before case is filed
The subsequent payment by the drawer of the check after criminal liability had already attached or
incurred, can affect only his civil, not criminal, liability.
Subsequent payment of the check will not exonerate the issuer from liability if such subsequent
payment was made after the lapse of 5 days from receipt of the notice of dishonor.
GR: Payment made after 5 days from receipt of notice will not exonerate issuer from criminal liability.
XPN: Purpose and spirit of the law, if the issuer of the check offers to make payment, then no one is
actually prejudiced by the worthless check because the check is indeed paid, though belatedly.
Pres Period: 4 years
-The running of the prescriptive period should be tolled upon the institution of proceedings against
the guilty person. The filing of complaint even merely for purposes of preliminary investigation interrupts
period of prescription.