1.

History of Negotiable Instrument

Our law is patterned with very slight modifications after the Uniform Negotiable Instruments Act of the
United States of 1896 drafted by the National Conference of Commissioners on Uniform State Laws.

The Uniform Negotiable Instruments Act has been replaced in part by Article 3 and in part by other
articles of the Uniform Commercial Code. The Code seeks to simplify and modernize the law of
commercial transactions. Each state has adopted part or all of the Code.

Act No. 2031. — Our Negotiable Instruments Law was enacted as Act No. 2031 on February 3,1911. It
took effect 90 days after its publication on March 4,1911 in the Official Gazette of the Philippine Islands
was completed. (Sec. 198.) The Act, therefore, took effect on June 2,1911. Since then, our Congress has
not seen fit to amend any of its provisions.

The Act applies only to negotiable instruments (Arnold vs. Jordan, 215 Ala. 693,112 So. 305.) or to those
instruments which meet the requirements laid down in Section 1 of the law. It is designed to describe
fully the law of negotiable instruments.

2.Definition of Negotiable Instrument

- Written contracts for the payment of money; by its form, intended as a substitute for
money and intended to pass from hand to hand, to give the holder in due course the
right to hold the same and collect the sum due.
- It is an instrument which possesses all the elements of negotiability provided in Section
1 of the Negotiable Instruments Law. It does not cover other types of negotiable
documents involving the sale or transfer of goods

3. Functions

(1) Asa substitute for money. — Although they do not constitute legal tender (Art. 1249, ibid.), and
are not money, they are used as a substitute for money. Its negotiability allows it to pass freely
from hand to hand in the commercial markets and to take the place of money in commercial
transactions free from all personal defenses available against the original owner. A negotiable
instrument is valuable or worthless depending upon the financial ability of the parties to them.
- It is a settled rule that the creditor's possession of the evidence of debt is proof
that the debt has not been discharged by payment. Thus, a negotiable instrument
is only a substitute for money and not money, and the delivery of such an
instrument does not, by itself, operate as payment. G.R. No. 211564

Art. 1249. The payment of debts in money shall be made in the currency stipulated, and if it is
not possible to deliver such currency, then in the currency which is legal tender in the
Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when
through the fault of the creditor they have been impaired.

(2) As a medium of exchange for most commercial transactions. — Negotiable papers, particularly
checks, constitute, at present, the media of exchange for most commercial transactions. They
thus increase the purchasing medium in circulation.
(3) As a medium of credit transactions. — Negotiable instruments also serve as a medium of credit
transactions." A man does not always have property, or valuable property rights which he can
turn into cash at any moment.
(4) Increase purchasing medium in circulation
(5) Evidence of transaction

4. Characteristics

Negotiability. — This is that quality or attribute of a bill or note whereby it may pass from hand to hand
similar to money, so as to give the holder in due course the right to hold the instrument and collect the
sum payable for himself free from any infirmity in the instrument or defect in the title of any of the prior
parties, or defenses available to them among themselves

Accumulation of secondary contracts. — The most important feature of negotiable instruments is the
accumulation of secondary contracts as they are transferred from one person to another. Once an
instrument is issued, additional parties can become involved.

5. Negotiable Instruments vs Non-Negotiable Instruments vs Negotiable

Documents

A non-negotiable instrument is, of course, an instrument which is not negotiable, that is, an instrument
which does not meet the requirements laid down to qualify an instrument as a negotiable one, or an
instrument which in its inception was negotiable but has lost its quality of negotiability.

A typical example is a check payable only to a specified person, as when it reads merely "Pay to Pedro
Cruz/' A negotiable instrument ceases to be negotiable if the indorsement prohibits the further
negotiation of the instrument,

An instrument which is non-negotiable is covered by the general provisions of the Civil Code, not by the
Negotiable Instruments Law. It is merely a simple contract in writing and is evidence of such intangible
rights as may have been created by the assent of the parties.

A non-negotiable instrument may not be negotiated but it may be assigned or transferred, absent an
express prohibition against assignment or transfer written on the face of the instrument. The legal
consequences of negotiation, as distinguished from assignment of a negotiable instrument, are
different. Persons who transfer or assign contractual or non-negotiable rights pass only the rights that
they had.
Where the instrument doesn’t conform with the requirements laid down in Section 1, then it
is not governed by NIL

Negotiation refers to the transfer of the negotiable instrument, by a person to another to make
that person the holder of it. Assignment implies the transfer of rights, by a person to another,
for the purpose of receiving the debt payment

6. Kinds of Negotiable Instruments

The Negotiable Instruments Law deals only with two kinds or types of instruments, namely: (a)
promissory notes or those in which the issuer has promised to pay; and (b) bills of exchange or those in
which the issuer has ordered a third person to pay.
7. Incidents in the life of a negotiable instrument

8. FORM

- Must be in writing (on any material as long as transferrable. Bawal

tattoo)
- Language must be understood by both parties and intended as
such language.
- Must be signed by maker if PN or drawer if BoE

o
- Must contain unconditional promise or order to pay.

o ORDER vs PROMISE

o Death as a condition
 o To be paid from a specific account

Sec. 2. Certainty as to sum; what constitutes. — The sum payable is a sum certain within the meaning
of this Act, although it is to be paid —
(a) With interest; or
(b) By stated installments; or
(c) By stated installments, with a provision that upon default in payment of any installment or of
interest the whole shall become due; or
(d) With exchange, whether at a fixed rate or at the current rate; or
(e) With costs of collection or an attorney's fee, in case payment shall not be made at maturity.

- The "sum certain" requirement is met if the amount to be paid must be stated
plainly on the face of the instrument or at least, may be ascertained upon its face
by computation, independent of any extrinsic evidence.
 - The basic test is whether the holder can determine by calculation or computation
the amount payable when the instrument is due. But a promissory note giving the
maker the right to ascertain the amount rightly payable thereunder is non-
negotiable.

Holder In Due Course:

Holder not in due course

 Holder through a holder in due course:

Defects of Negotiable Instruments:

Presumption as HDC. If not, then:

Undated Instrument:
Sec. 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 provisions of
subdivision (c) of this section do not apply to a person negotiating public or corporation
securities other than bills and notes.

PARTIES WHO ARE LIABLE

Sec. 192. Persons primarily liable on instrument. – The person "primarily"liable on an
instrument is the person who, by the terms of the instrument, is absolutely required to pay the
same. All other parties are "secondarily" liable.

Sec. 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.

Sec. 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.
Payment By Party Secondarily Liable
Sec. 68. Order in which indorsers are liable. - As respect one another, indorsers are liable prima
facie in the order in which they indorse; but evidence is admissible to show that, as between or
among themselves, they have agreed otherwise. Joint payees or joint indorsees who indorse
are deemed to indorse jointly and severally.

Sec. 70. Effect of want of demand on principal debtor. - Presentment for payment is not
necessary in order to charge the person primarily liable on the instrument; but if the instrument
is, by its terms, payable at a special place, and he is able and willing to pay it there at
maturity, such ability and willingness are equivalent to a tender of payment upon his part. But
except as herein otherwise provided, presentment for payment is necessary in order to charge
the drawer and indorsers.

Sec. 84. Liability of person secondarily liable, when instrument dishonored. - Subject to the
provisions of this Act, when the instrument is dishonored by nonpayment,
an immediate right of recourse to all parties secondarily liable thereon accrues to the holder.

Sec. 89. To whom notice of dishonor must be given. - Except as herein otherwise provided,
when a negotiable instrument has been dishonored by non-acceptance or non-payment, notice
of dishonor must be given to the drawer and to each indorser, and any drawer or indorser to
whom such notice is not given is discharged.

Indorsers
Sec. 63. When a person deemed indorser. - 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.

Sec. 68. Order in which indorsers are liable. - As respect one another, indorsers are liable prima
facie in the order in which they indorse; but evidence is admissible to show that, as between or
among themselves, they have agreed otherwise. Joint payees or joint indorsees who indorse
are deemed to indorse jointly and severally.

General Indorser
Sec. 66. Liability of general indorser. - Every indorser who indorses without qualification,
warrants to all subsequent holders in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the next preceding
section; and
(b) That the instrument is, at the time of his indorsement, valid and subsisting;
And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both, as
the case may be, 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. Indorsers of Bearer Instruments (Sec. 40,
65, 67, NIL)
Sec. 40. Indorsement of instrument payable to bearer. - 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.

Irregular Indorser
Sec. 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 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.

Liability of Agent or Broker (Sec. 19-21, 69, NIL)

Sec. 19. Signature by agent; authority; how shown. – The signature of any party may be made
by a duly
authorized agent. No particular form of appointment is necessary for this purpose; and the
authority of the agent may be established as in other cases of agency.

Sec. 20. Liability of person signing as agent, and so forth. - Where the instrument contains or a
person adds to his signature words indicating that he signs for or on behalf of a principal or in a
representative capacity, he is not liable on the instrument if he was duly authorized; but the
mere addition of words describing him as an agent, or as filling a representative character,
without disclosing his principal, does not exempt him from personal liability.

Sec. 21. Signature by procuration; effect of. – A signature by"procuration" operates as notice
that the agent has but a limited authority to sign, and the principal is bound only in case the
agent in so signing acted within the actual limits of his authority.

Sec. 69. Liability of an agent or broker. - Where a broker or other agent negotiates an
instrument without indorsement, he incurs all the liabilities prescribed by Section Sixty-five of
this Act, unless he discloses the name of his principal and the fact that he is acting only as
agent.
DEFENSES
• Either real or personal defenses

Real Defenses:

1. Minority and ultra vires acts (Sec. 22, NIL)

Sec. 22. Effect of indorsement by infant or corporation.- The indorsement or assignment
of the instrument by a corporation or by an infant passes the property therein, notwithstanding
that from want of capacity, the corporation or infant may incur no liability thereon.

Defense of Minority not Total - Article 1341. A mere expression of an opinion does not
signify fraud, unless made by an expert and the other party has relied on the former's special
knowledge.

2. Non-Delivery of an Incomplete Instrument

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.

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. But where the instrument is in the hands of a holder in due course, a valid
delivery thereof by all parties prior to him so as to make them liable to him is
conclusively presumed. And where the instrument is no longer in the possession of a
party whose signature appears thereon, a valid and intentional delivery by him is
presumed until the contrary is proved.

3. Forgery and Want of Authority; Cut-off Rule

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.
(1) Forgery of Maker’s Signature
(2) Of Indorser’s Signature
(3) Of Drawer’s Signature
(4) Forgery of Bearer Instrument

Material Alteration [partial defense]

Sec. 124. Alteration of instrument; effect of. - Where a negotiable instrument is materially
altered without the assent of all parties liable thereon, it is avoided, except as against a party
who has himself made, authorized, or assented to the alteration and subsequent indorsers. But
when an instrument has been materially altered and is in the hands of a holder in due course
not a party to the alteration, he may enforce payment thereof according to its original tenor.

Sec. 125. What constitutes a material alteration. – Any alteration which changes:
(a) The date;
(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number or the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of payment is specified, or any other
change or addition which alters the effect of the instrument in any respect, is a material
alteration.

Alteration of negotiable instrument a crime

Article 172. Falsification by private individual and use of falsified documents. - The penalty of
prision correccional in its medium and maximum periods and a fine of not more than P5,000
pesos shall be imposed upon:
(1) Any private individual who shall commit any of the falsifications enumerated in the next
preceding article in any public or official document or letter of exchange or any other kind of
commercial document; and
(2) Any person who, to the damage of a third party, or with the intent to cause such damage,
shall in any private document commit any of the acts of falsification enumerated in the next
preceding article.
(3) Any person who shall knowingly introduce in evidence in any judicial proceeding or to the
damage of another or who, with the intent to cause such damage, shall use any of the false
documents embraced in the next preceding article, or in any of the foregoing subdivisions of
this article, shall be punished by the penalty next lower in degree.
 4. Extinctive Prescription
5. Illegality
6. Fraud in factum

Personal Defenses:

1. Ante-dating or post-dating (Sec. 12, NIL)

Sec. 12. Ante-dated and post-dated. - The instrument is not invalid for the reason only that it is
ante-dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The
person to whom an instrument so dated is delivered acquires the title thereto as of the date of
delivery.

2. Insertion of Wrong Date (Sec. 13, NIL)

Sec. 13. When date may be inserted. - 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.

3. Filling up Blanks Beyond Authority (Sec. 14, NIL)

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. In order, however, that any such
instrument when completed may be enforced against any person who became a party thereto
 prior to its completion, it must be filled up strictly in accordance with the authority given and
within a reasonable time. But if any such instrument, after completion, is negotiated to a holder
in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it
had been filled up strictly in accordance with the authority given and within a reasonable time.

4. Absence or Failure of Consideration

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.

5. Simple Fraud, Duress, Intimidation,

6. Force or Fear, Illegality of
7. Consideration, Breach of Faith

Sec. 55. When title defective. - The title of a person who negotiates an instrument is defective
within the meaning of this Act when he obtained the 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 breach of faith, or under such circumstances as amount to a fraud.

Sec. 56. What constitutes notice of defect. – To constitutes notice of an infirmity in the
instrument or defect in the title of the person negotiating the same, the person to whom it is
negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such
facts that his action in taking the instrument amounted to bad faith.

Sec. 57. Rights of holder in due course. - A holder in due course holds the instrument free from
any defect of title of prior parties, and free from defenses available to prior parties among
themselves, and may enforce payment of the instrument for the full amount thereof against all
parties liable thereon.

8. Want of Delivery of Complete Instrument

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. But where the instrument is in the hands
of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them
liable to him is conclusively presumed. And where the instrument is no longer in the possession
of a party whose signature appears thereon, a valid and intentional delivery by him is presumed
until the contrary is proved.

9. Fraud in Inducement
CONSIDERATION:
FAILURE OF CONSIDERATION:
ENFORCEMENT OF LIABILITY