THIRD OUTLINE – NEGOTIABLE INSTRUMENTS

III. Form and Interpretation of Negotiable Instruments

A. Requisites of Negotiability
1) Of Negotiable Instruments in General
 Section 1. Form of negotiable instruments. — An instrument to be negotiable must conform to the following
requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.
2) Of a Promissory Note
(a) It must be in writing and signed by the maker;
(b) Must contain an unconditional promise to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time; and
(d) Must be payable to order or to bearer.
3) Of a Bill Exchange
(a) It must be in writing and signed by the drawer;
(b) Must contain an unconditional order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) The drawee must be named or otherwise indicated therein with reasonable certainty.
4) Application of the Requisites

B. Meaning of Particular Requisites

1) Unconditional Promise or Order
 Section 3
 Instrument payable absolutely. — It is not enough that there be a promise or order. It must be
unconditional, that is, it must not be subject to any condition or contingency except implied conditions
of presentment protests and notice of dishonor as provided in the law. In other words, the note or bill
must be payable absolutely.
 Reason for requisite. — The fact that the liability is unconditional greatly enhances the ability of the
instrument to circulate freely from one person to another. No one would accept a paper for debt if the
right to recover were not absolute or unconditional in nature. Instruments which are not to be paid until a
condition has happened or been fulfilled would be of little practical value in business.
 Terms not affecting unconditional liability. — The mere indication of the particular fund out of which
reimbursement is to be made, or an indication of particular account to be debited with the amount does
not render a promise or order conditional.
 Note:An instrument payable out of a particular fund is non- negotiable (Sec. 3, par. 2.) as it is
not payable "in any event" because the amount to be paid is made to depend upon the adequacy
or existence of the fund designated. It is to be distinguished from an instrument, merely
containing reference to funds fromwhich reimbursement is to be made. Here, the fund specified
is the direct source of payment and the measure of liability.
 The test of negotiabilityin every case is said to be whether or not the instrument carries the
general personal credit of the maker or drawer. If it does, the instrument is negotiable; if it
carries only the credit of a particular fund, the instrument is non-negotiable.
 Implied promise to pay. — It is not essential that the word "promise" should be used. Any words
equivalent to a promise or assumption of full responsibility for the payment of the note on the face of an
instrument are sufficient to constitute a "promise to pay."
 Bare acknowledgment of indebtedness. — A bare admission or acknowledgement of indebtedness (like
"I.O.U.," "due PI,000.00," "for value received," etc.) alone is not a negotiable instrument as it does
not import an express promise to pay orshow that the parties intend the debt to be paid.
 Use of words of negotiability. — The language used must be such that the written undertaking to pay may
fairly be deduced therefrom. Thus, if words of negotiability or payment are added as indicating a promise
to pay (like "due P or order" or "due P or bearer," or "due P or demand," or "I.O.U. P10,000.00 to be paid
on June 1."), the instrument is negotiable although it contains no express promissory words.
2) Certainty of Sum
 Section 2
  The "sum certain" requirement is met ifthe holder can determine from the instrument itself the amount
he is entitled to receive at maturity.
 This is a requisite for the negotiability of the instrument (Sec. l[b];), to assure clarity and certainty in
determining the value of the instrument.
 The sum is not rendered uncertain by a clause in the instrument that it is to be paid with interest, by
stated installment, with exchange, with costs of collection, or with attorney's fees. Neither is the certainty
of the sum affected by an acceleration provision in an installment note.
 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.
a. Acceleration Due to Default
 With an acceleration clause. — The sum is still certain although payable by stated installments
with an acceleration clause, i.e., a promise that if any installment or interest is not paid as agreed,
the whole shall become due. Such a clause requires full payment of an instrument immediately
upon default on any installment. It does not make an instrument payable upon contingency (and
so non-negotiable) since the time of payment will surely come and the exact value of the
instrument can be ascertained.
b. Attorney’s Fees
 While the law says "costs of collection or an attorney's fee," the word "or" is not material and an
agreement to pay "attorney's fees and all costs of collection" does not impair negotiability,since
the two phrases mean the same thing.
3) In Money
 If the instrument calls for an act other than the payment of money, it is not negotiable because a
negotiable instrument is intended as a substitute for money.
 If an instrument be for a specified sum of money, and also for the payment of something else, the value of
which is not ascertained but depends upon extrinsic evidence, it would not be negotiable.
4) Payable on Demand
 Section 7
 Demand instrument – payable anytime
 payable on demand not only as between the immediate parties but also as to subsequent parties.
 An instrument payable on demand is due and payable immediately after delivery. It is a present debt due
at once.
i. Expressed to be payable on demand.
ii. No time for payment is expressed
iii. Payable on demand as regards the maker. [EXAMPLE:A note dated July 3, 2010 and payable
"thirty days after date" was issued on August 4, 2010 (when it was already overdue).]
iv. Payable on demand as regards the acceptor. [EXAMPLE:A bill payable on July 20,2010 was
accepted by the drawee on July 21,2010.]
v. Payable on demand as regards the indorser. [EXAMPLE:A note payable "thirty days" after July
1,2010 and indorsed on August 1,2010. The indorsement after maturity, in legal effect, creates a
new instrument payable on demand.]
5) Determinable Future Time
 Section 4
 Term or Time instrument - payable only upon the arrival of the time for payment
EXAMPLES:
 (1) Payable at a fixed time; "I promise to pay P or order the sum of P10,000.00 on September 10,2010."
Here, the future date specified is a fixed time.
 (2) Payable at a fixed period after date: "Sixty (60) days after date, I promise to pay P or order the sum of
P10,000.00."
The date of maturity may be determined beforehand by counting sixty (60) days from the date of
its issuance.
But an instrument payable "at the earliest possible time after date" is not payable at a definite
time.
 (3) Payable at a fixed period after sight: "Sixty (60) days after sight, pay to the order of P the sum of
P10,000.00."
After sight means after the instrument is seen by the drawee upon presentment for acceptance or
accepted by the drawee. Hence, the date of maturity may be determined beforehand by counting
sixty (60) days from the date it is presented to the drawee.
 (4) Payable on or before a fixed time.
i. "On or before September 10,2010,1 promise to pay P or order P10,000.00."
 ii. "On demand or at the end of the year, I promise to pay P or order P10,000.00."
 (5) Payable on or before a determinable future time: "On or before the start of the next school semester, I
promised to pay P or order P10,000.00."
 (6) Payable on the occurence of a specified event: "I promised to pay P or order the sum of P10,000.00
upon the death of his father.""I promised to pay P or order the sum of P10,000.00 upon the death of his
father."
 (7) Payable after the occurrence of a specified event: "Thirty (30) days after the death of his father, I
promise to pay P or order the sum of P10,000.00”
 Note: But a bill or note payable several days before the occurrence of the specified event is
not negotiable, since the date of maturity of the instrument can only be ascertained after
it has become overdue and, therefore, the time for payment is uncertain.
 Note: Payable "when able," etc.; within reasonable time, NON-NEGOTIABLE
6) Payable to Order
 Section 8
 An instrument is payable to order where it is drawn payable: (1) to the order of a specified or (2) to him or
his order.
 Any subsequent purchaser thereof will not enjoy the advantages of being a holder of a negotiable
instrument but will merely"step into the shoes of the person designated in the instrument” and will thus
be open to all the defenses available against the latter.
 It is not essential, however, that the words "to the order of" or "or order" be used. The words "to P and
assigns," have been held to be equivalent words which will render the instrument negotiable.
EXAMPLES:
 (1) to order of payee who is notthe maker.
"I promise to pay PI,000.00 to the order of P (or to pay P or order PI,000.00).
(Sgd.) M"
 (2) to order of payee who is not the drawer.
"Pay to the order of P P1,000.00.
(Sgd.) R6"
 (3) to order of payee who is not the drawee.
"Pay to the order of P PI,000.00
(Sgd.) R
To W, Manila"
 (4) to order of drawer.
"Pay to the order of myself PI,000.00.
(Sgd.) R
ToW, Manila"
 NOTE: When a depositor wishes to get cash from his bank over the counter, the practice
is to draw a check in the form of "Pay to cash."
 (5) to order of maker.
"I promise to pay to the order of myself PI,000.00.
(Sgd.)M"
 NOTE: But a note payable to the order of the maker is not complete, until indorsed by
him. (Sec. 184.)
 (6) to order of drawee.
"Pay to the order of yourself P1,000.00.
(Sgd.) R
ToW, Manila"
 (7) to order of two or more payees jointly: "Pay to the order of P and A PI,000.00."
 (8) to order of one or some of several payees: "Pay to the order of P, A, or B PI,000.00" or "Pay to the
order of P, A and B, or any of them or any two of them."
 NOTE: In this case, the instrument is payable to either one of them, and the
indorsement of any one is sufficient to pass title.
 (9) to order of holder of an office for the time being: "Pay to the order of the Commissioner of Internal
Revenue" or "Pay to the order of the Treasurer, Philippine National Bank."
7) Payable to Bearer
 Section 9
 Bearer means the person in possession of a bill or note which is payable to bearer.
 An instrument payable to bearer may be transferred by delivery without indorsement.
  Payable to order of a fictitious person. – A fictitious person is meant to be one who, though named or
specified as payee in an instrument, has no right to it because the maker or drawer so intended and it
matters not, therefore, whether the name of the payee used by him be that one living or dead, or one who
never existed.
8) Samples of Negotiable Instruments
9) Rules as to Dates
 If the instrument bears a date, it is presumed that said date is the date when it was made or drawn.
 He who claims that some other date is the true date has the burden to establish such claim.
 Generally, a date is not essential to make an instrument negotiable.
i. When essential:
 (1) Where instrument is payable at a fixed period after date.
 (2) Where instrument is payable at a fixed period after sight or presentment
 an instrument payable on demand need not be dated since it is demandable at any time
 BUT! date of issue of the promissory note or the date of the last negotiation of the bill of exchange is
essential for the purpose of determining whether a party has acted within a reasonable time (see Sec. 144.)
but not to make the instrument negotiable.
 ANTE-DATED and POST-DATED
i. An instrument is ante-dated when it contains a date earlier that the true date of its issuance.
Thus, an instrument issued on July 30,2010 but is dated July 15,2010 is antedated.
ii. An instrument is post-dated when it contains a date later than the true date of its issuance. It is
just the reverse of an antedated instrument. In the example given, if the instrument was issued on
July 15,2010, but bears a date of July 30,2010, it is postdated.
iii. If the ante-dating or post-dating is done for an illegal or fraudulent purpose, the instrument is
rendered invalid.
iv. An example of illegal ante-dating is that done to conceal the charge of usurious interest. An
example of illegal post-dating is to issue a post-dated check in payment of an obligation because
of insufficiency of funds without bona fide intention to cover the amount of the check.

C. Rules on Interpretation of Instruments

 (Section 17, Act 2031)
1) Sums expressed in words and in figures different. — When there is a discrepancy between the sum
expressed in words and the sum expressed in figures, the former controls.
2) Words ambiguous or uncertain. — Words outweigh figures. However, when the words are ambiguous or
uncertain, reference may be had to the figures to determine the true amount.
3) Date when stipulated interest to run not specified. — If the date when the stipulated interest is to run is
not specified, theinterest runs from the date of the instrument or if undated, from the date of issue.
4) Instrument undated. — An undated instrument is considered dated as of the date of its issue.
 NOTE: Issue means the first delivery of the instrument complete in form, to a person who takes
it as holder.
5) Written and printed provisions in conflict. — In case of conflict between the written and printed
provisions, the former prevail.
6) Whether instrument bill or note in doubt. — In case of doubt as to whether an instrument is a bill or note,
the holder may treat either at his election.
7) Capacity in which person signed in doubt.—In case of doubt as to what capacity the person making the
instrument intended to sign, he is to be deemed an indorser.
 Signature of maker: lower right-hand
 Drawee’s name: lower left-hand
 The holder negotiates the instrument by signing on the back thereof.
 Section 17(f) applies only when there is 'doubt due to the ambiguous location of the signature.
 One who signed in the place of the maker's name is not an indorser.
 (Section [17]g, Negotiable Instruments Law; Article 1216, Civil Code)
1) Instrument signed by two or more persons. — An instrument with the words "I promise to pay" signed by
two or more persons gives rise to solidary liability.
 Anyone of the signers may be held liable for the whole amount of the instrument. The reason is
that each of them is deemed to utter the words "I promise to pay."
 "I, we, or either or us promise to pay." – SOLIDARY LIABILITY
 "we promise to pay" – JOINT LIABILITY ONLY