NEGOTIABLE INSTRUMENTS LAW

ATTY. EDGARDO Y. PASCUA

Chapter 1

GENERAL CONSIDERATIONS

1. GOVERNING LAW.

The law that governs negotiable instruments in this jurisdiction is Act No.
2031, otherwise known as the “Negotiable Instruments Law”.

Before the Negotiable Instruments Law (NIL, for short) was enacted,
negotiable instruments were governed by Articles 439 to 566 of the Code of
Commerce. However, most of these provisions were impliedly repealed by the
provisions of the NIL., Section 197 of the NIL provides:

Sec. 197.Repeals. – All acts and laws and parts

thereof inconsistent with this Act are hereby repealed.

Since Section 197 results only in implied repeal of inconsistent acts and
laws, there are provisions of the Code of Commerce that are still in force because
there are provisions that are not inconsistent with the NIL. For instance, the
Code of Commerce provisions on crossed checks are still in force because there is
no provision in the NIL that deals with crossed checks. 1

The New Civil Code, Republic Act No. 386, has suppletory effect in case of
deficiency in the provisions of the NIL. In one case, for instance, the Supreme
Court applied suppletorily the provisions of Article 1216 of the New Civil Code
which provides that “the creditor may proceed against any one of the solidary
creditors or some or all of them simultaneously” and that “demand made against
one of them shall not be an obstacle to those which may subsequently be
directed against the others, so long as the debt has not been fully collected.” 2

1.1. APPLICABILITY OF THE NIL.

The provisions of the NIL are not applicable if the instrument involved is
not negotiable.3 Before the provisions of the NIL can come into operation, there
must be a document in existence of the character described in Section 1 of the
law.4

a. When Applicable By Analogy Only.

1
Chan Wan v. Tan Kim, G.R. No. L-15380, September 30, 1960, 109 Phil. 706.
2
Philippine National Bank v. Concepcion Mining Co., Inc., G.R. No. L-16968, July 31, 1962, 5 SCRA 745,
747.
3
Metropolitan Bank & Trust Company v. Court of Appeals, et. al., G.R. No. 88866, February 18, 1991, 194
SCRA 169, 178
4
Kauffman v. Philippine National Bank, G.R. No. 16454, September 21, 1921, 42 Phil. 182
 If at all, the NIL can be applied only by analogy. For instance, the Supreme
Court applied Section 14 of the NIL by analogy in a case involving a Deed of
Assignment of shares of stocks which was signed in blank to facilitate future
assignment of the same shares. The Court observed that the situation is similar
to Section 14 where the blanks in an instrument may be filled out by the holder,
the signing in blank being with the assumed authority to do so. 5

The statutory provisions that apply to negotiable instruments may also be

applied by analogy to modern means of payment. For instance, some of the
provisions on checks were applied to electronic fund transfers because the latter
are similar to checks.6 Making an electronic transfer of funds through a computer
terminal is essentially the same as issuing a check. It was observed that similar to
a check, a wire transfer is a written order to pay, drawn upon a bank containing
an unconditional promise to pay a sum certain in money to the order of the
beneficiary. The only element that is supposed to be missing is the signature of
the maker. It was further observed that: “The check is merely the means used by
the bank to attain the desired objective, i.e., the payment of the money to its
customer. The card serves the same purpose as the check. It is an order of the
bank. Any order to pay which is properly executed by a customer whether it be a
check, card or electronic device, must be recognized as a routine bank function,
when used as here. The relationship between the bank and the customer is the
same. . . “7

2.01. INTERPRETATION OF THE NIL.

The provisions of the Negotiable Instruments Law should be construed “with

reference to the object to be attained. Its words are to be given their natural and
common meaning and the prevailing principles of statutory interpretation are to
be applied. Care should be taken to adhere as closely as possible to the obvious
meaning of the act.”8

3. FUNCTIONS OF NEGOTIABLE INSTRUMENTS.

The two main functions of negotiable instruments are: (1) They serve as
substitute for money; and (2) They serve as credit instruments. However, they
can also be considered proof of the existence of a transaction because they may
state the transaction that gave rise to the issuance of the instrument. In
particular, the functions of a negotiable instrument may be enumerated as
follows:

(1) It is a substitute of money.

(2) It is a medium of exchange.
(3) It is a credit instrument which increases credit circulation.
(4) It increases purchasing power in circulation.
(5) It is proof of transactions.

a. Substitute for Money.

5
Borromeo, et. al. v. Sun, G.R. No. 75908, October 22, 1999, 114 SCAD 616, 317 SCRA 176, 183
6
State v. Warner, 55 Ohio St., 3D 31, 564 N. E. 2D 18 (1990).
7
State v. Warner, ibid., citing, ex rel.Lignoul v. Continental III. Natl. Bank & Trust Co., (1976), US Court of
Appeals, 7th circuit.
8
Crawford, The Negotiable Instruments Law, 1916 Ed., p. 3 hereinafter referred to as “Crawford, p. 3 “
citing Union Trust Co. v. McGinty, 212 Mass 205.
 Negotiable instruments are not mere contracts but are substitutes for
money.9 A negotiable instrument is a medium of exchange; it is a tool that is
used in commercial transaction. This function of negotiable instruments is better
understood in the light of their history which was summarized by Prof. William D.
Hawkland in this wise:

“In primitive times, most men were self-sufficient. They grew their own
food, erected their own shelters, and made their own clothing. In this
‘subsistence’ society there was little need for money or negotiable instruments,
because the minimal trade which existed was carried on by barter, exchanging
goods for goods.”

b. Credit Instrument.

Negotiable instruments are also credit instruments. For Example, if Pedro,

the same manufacturer mentioned above has money to pay for his raw materials
but would like to use his cash to make his store bigger, he may obtain the raw
materials from his supplier, Jose, by signing and delivering a promissory note in
favor of Jose. Therefore, there are more transactions that can be undertaken. In
the case of Pedro, he can buy his raw materials and expand his store at the same
time even if he only has sufficient cash for one activity.

c. Negotiable Instrument as Evidence.

However, negotiable instruments like checks are not only instruments of

credit. They also serve as receipt or evidence for the debtor. For example,
possession of a check by the drawee gives rise to presumption of payment. 10 In
one case, it was explained that a check may be evidence of indebtedness; a
check, the entries of which are in writing, could prove a loan transaction. 11
Hence, even if the drawee is not liable under Batas Pambansa Blg. 22, the check
may be used as proof of the existence of a contract of loan and the accused may
be made to pay the same despite his acquittal. 12 The Supreme Court reiterated
the rule in the case of Pua v. Spouses Lo Bun Tiong13and discussed the weight of a
check as an evidence of a loan.

3.01. NOT LEGAL TENDER.

Negotiable Instruments are not legal tender. Section 52 of the New Central
Bank Act, Republic Act No. 7653, provides that only notes and coins issued by the
Bangko Sentral ng Pilipinas are considered legal tender.

Sec. 52. Legal Tender Power. – All notes and coins issued
by the Banko Sentral shall be fully guaranteed by the
Government of the Republic of the Philippines and shall
be legal tender in the Philippines for all debts, both public
and private: Provided, however, That, unless otherwise
fixed by the Monetary Board, coins shall be legal tender

9
Lozano v. Martinez, 146 SCRA 323
10
Citibank, N.A. v. Sabeniano, October 16, 2006, 504 SCRA 378.
11
Emilia Lim v. Mindanao Wines & Liquor Galleria, G.R. No. 175851, July 4, 2012 citing Gaw v. Chua, G.R.
No. 160855, April 16, 2008, 551 SCRA 505, 519; Pacheco v. Court of Appeals, 377 Phil. 627, 637 (1999) and
Spouses Tan v. Villapaz, 512 Phil. 366, 376 (2005).
12
Emilia Lim v. Mindanao Wines & Liquor Galleria, ibid.
13
G.R. No. 198660, October 23, 2013, 708 SCRA 571 cited in Aguilar v. Luthbringers Credit Cooperative,
G.R. No. 209605, January 12, 2015.
 in amounts not exceeding Fifty pesos (P50.00) for
denominations of Twenty-five centavos (P0.25) and
above, and in amounts not exceeding Twenty pesos
(P20.00) for denominations of Ten centavos (P0.10) or
less.

a. Coins as Legal Tender.

Pursuant to the above-quoted Sections 52 of Republic Act No. 7653 and

BSP Circular No. 537, Series of 2006 adjusted the maximum amount of coins to
be considered legal tender as follows:

MAXIMUM AMOUNT DENOMINATIONS

One Thousand Pesos One Peso (P1.00)
(P1,000.00) Five Pesos (P5.00)
Ten Pesos (P10.00)
One Hundred Pesos One Centavo (1 Sentimo)
(P100.00) Five Centavos (5 Sentimo)
Ten Centavos (10 Sentimo)

b. Checks Not Legal Tender.

Section 60 of the New Central Bank Act is categorical with respect to

checks – they are declared to be not legal tender and creditors cannot be
compelled to accept checks in payment of obligations. 14

Sec. 60 Legal Character. – Checks representing

demand deposits do not have legal tender power and
their acceptance in the payment of debts, both public
and private, is at the option of the creditor: Provided,
however, That a check which has been cleared and
credited to the account of the creditor shall be
equivalent to a delivery to the creditor of cash.

Consistently, the Civil Code provides that delivery of negotiable

instruments does not produce the effect of payment. Even if delivery of the
check is accepted by the creditor, obligations are deemed paid only when the
instruments are encashed.15 The rule covers manager’s checks, cashier’s checks
or certified checks.16 A check is not legal tender and therefore cannot constitute
a valid tender of payment. Since a negotiable instrument, like a check, is only a
substitute for money and not money, delivery of such an instrument does not, by
itself, operate as payment. Mere delivery of checks does not discharge the
obligation. The obligation is not extinguished and remains suspended until
payment by commercial document is actually realized. 17

In addition, the creditors can refuse to accept negotiable instruments in

payment of obligation. The creditor can demand payment in cash.

However, applying Section 60 of New Central Bank Act, the obligation to

the creditor is deemed paid if the check has been cleared and credited to his
14
See also Villanueva v. Santos, 67 Phil. 648
15
Article 1249, New Civil Code.
16
Tibajia, Jr. v. Court of Appeals, 223 SCRA 163; Philippine Airlines, Inc. v. Court of Appeals, 181 SCRA 557;
Roman Catholic Bishop of Malolos, Inc. v. IAC, 191 SCRA 411 (1990).
17
Bank of the Philippine Islands v. Spouses Reynaldo and Victoria Royeca, G.R. No. 176664, July 21, 2008.
account. This implies that the creditor deposited the check to his account and
the same was honored or cleared by the drawee bank upon presentment. In this
case, the check is in fact paid and the proceeds are now being kept in the bank
account of the creditor.

c. When Acceptable to Satisfy Obligation.

It is also important to mention that while delivery of checks may not be

considered payment under the Civil Code, delivery of checks may be sufficient in
the exercise of certain rights or privileges. Thus, the Supreme Court ruled in a
number of cases that delivery of checks is sufficient in the exercise of the right to
redemption. The right to redemption is a privilege and is not an ordinary
obligation.18 Hence, Article 1249 does not apply.19

4.01. NEGOTIABILITY.

The characteristics of negotiability allows negotiable instruments to be

transferred from one person to another so as to constitute the transferee a
holder. Such holder can be a holder in due course who is free from personal
defenses. This characteristics of negotiable instrument as a credit instrument
gives it freedom to circulate as a substitute for money. Freedom of negotiability
is the touchstone relating to the protection of holders in due course, and the
freedom of negotiability is the foundation for the protection which the law
throws around a holder in due course.20

4.02. ACCUMULATION OF SECONDARY CONTRACTS.

When negotiable instruments are transferred through negotiation,

secondary contracts are accumulated because the indorsers become secondarily
liable not only to their immediate transferees but also to any holder. Unless they
have valid defenses against the holder or any party, these indorsers are liable to
said holder or whoever may be compelled to pay the instruments.

There is therefore greater “security” because whoever takes the

instrument has greater chances of recovery because more people are liable
under the instrument.

If there is greater probability of payment, people are more likely to accept

negotiable instruments as tools in credit transactions. This is equally true in the
case of checks. In checks, the drawer, by drawing the instrument, not only enters
into a secondary contract to pay the holder but also represents that there are
sufficient funds in the bank to cover the check that he issued.

5. KINDS OF NEGOTIABLE INSTRUMENTS.

There are two basic types of negotiable instruments: a promissory note

and a bill of exchange. The NIL defines promissory notes and bills of exchange as
follows:

Sec. 126. Bill of exchange defined. – A bill of

exchange is an unconditional order in writing addressed
18
Biana v. Gimenez, G.R. No. 132768, September 9, 2005.
19
Fortunato v. Court of Appeals, 196 SCRA 26 (1991).
20
Traders Royal Bank v. Court of Appeals, et. al., G.R. No. 93397, March 3, 1997, 80 SCAD 12, 269 SCRA 15,
26-27.
 by one person to another, signed by the person giving
it, requiring the person to whom it is addressed to pay
on demand or at a fixed or determinable future time a
sum certain in money to order or to bearer.

Sec. 184. Promissory note, defined. – A negotiable

promissory note within the meaning of this Act is an
unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay on
demand, or at a fixed or determinable future time, a
sum certain in money to order or to bearer. Where a
note is drawn to maker’s own order, it is not complete
until indorsed by him.

The common types of bills of exchange and promissory notes are defined
hereunder. However, the enumeration is subject to the caveatthat the
instruments specified herein are not always negotiable. Although they may be or
are usually negotiable, the test is still the presence of the requisites of
negotiability on the face of the instruments. The requisites of negotiability are
discussed in the next chapter of this work.

5.01. BILLS OF EXCHANGE.

Bills of exchange are primarily used for commercial exchange. “In modern
business practice, the primary function of a bill of exchange is to enable a seller
or exporter to obtain cash as soon as possible after the dispatch of the goods, yet
enable the buyer or exporter to defer payment until the goods reach him or later.
Credit can be obtained if the bill is accepted by a bank, upon whom the parties
can rely, and bills can be brought and sold on the discount market.” 21

a. Checks.

The most common form of bill of exchange is a “check” which is defined

under the NIL in this wise:

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.

Checks are used primarily as a tool for the payment of obligations. Banks
serve as intermediaries in effecting satisfaction of obligations through checks.
The distinction between checks and other bills of exchange are as follows:

BILL OF EXCHANGE CHECK

1. The drawee may or may not 1. The drawee is always a bank.
be a bank.
2. It may be payable on 2. It is always payable on
demand, or at a fixed or demand.
determinable future time.
3. It is not necessarily drawn on 3. It is necessary that a check is
a deposit or checking drawn on a deposit or
21
J. Beatson, Alson’s Law of Contract, 27th Edition, p. 467.
 account. checking account.
4. Death of a drawer of a BOE 4. Death of the drawer of a
with the knowledge of the check, with the knowledge by
bank, does not revoke the the bank, revokes the
author of the banker to pay. authority of the banker to pay.

b. Clean and Documentary Bill of Exchange.

Clean Bill of Exchange is a bill to which no document is attached when

presentment for payment or acceptance is made. On the other hand, a
Documentary Bill of Exchange is a bill of exchange to which a document/s is/are
attached when presented for payment or acceptance.

5.02. PROMISSORY NOTES.

a. Bank Certificate.

Another instrument that involves bank is a “certificate of deposit.” A

certificate of deposit is a form of promissory note which is a written
acknowledgment of a bank of its receipt of a certain sum with a promise to repay
the same. A certificate of deposit is defined as a written acknowledgment by a
bank or banker of the receipt of a sum of money on deposit which the bank or
banker promises to pay to the depositor, to the order of the depositor, or to
some other person or his order, whereby the relation of debtor and creditor
between the bank and the depositor is created. 22 The principles governing other
types of bank deposits are applicable to certificates of deposit, as are the rules
governing promissory notes when they contain an unconditional promise to pay a
sum certain of money absolutely.23

b. Bonds and Debentures.

Bonds may also partake the nature of negotiable promissory notes. A

bond is defined as a certificate or evidence of a debt on which the issuing
company or government body promises to pay the bondholders a specified
amount of interest for a specified length of time, and to repay the loan on the
expiration date.24

Debenture is a promissory note or bond backed by the general credit of a

corporation and usually not secured by a mortgage or lien on any specific
property.25

5.03. BILLS TREATED AS NOTES.

There are instances when a bill may be treated as a promissory note by

the holder. Thus Section 130 of NIL provides that a bill may be treated as a
promissory note when: (1) the drawer and the drawee are the same person; (2)
the drawee is a fictitious person; and (3) the drawee has no capacity to contract.

22
Far East Bank & Trust Company v. Queremit, G.R. No. 148582, January 16, 2002 cited in Prudential Bank
v. Commissioner of Internal Revenue (CIR), G.R. No. 180390, July 27, 2011; China Banking Corporation v.
CIR, G.R. No. 172359, October 2, 2009; Philippine Banking Corporation v. Commissioner of Internal
Revenue, G.R. No. 170574, January 30, 2009.
23
Far East Bank & Trust Company v. Queremit, supra.
24
Black’s Law Dictionary, 5th Ed., p. 161.
25
Ibid., p. 361.
 In addition, Section 17(e) of the NIL provides that an instrument may be
treated either as a bill or a note at the election of the holder when the
instrument is so ambiguous that there is doubt whether it is a bill or a note.

6. PARTIES TO NEGOTIABLE INSTRUMENTS.

a. Promissory Note.

The original parties in a promissory note are the maker and the payee.
The maker is the person who promises to pay according to the tenor of the note
while the payee is the person who is to receive payment from the maker. An
example of a typical note is provided below (Illustration 1-1) where the maker is
Juan de la Cruz while the payee is X Lending Corporation. A typical certificate of
deposit is likewise reproduced below (1-2) where the maker is XYZ Bank while the
payee is Juan de la Cruz.

1-1: Typical Note.

P20,000.00 Manila, Philippines June 2, 2016 Due: August 1,

2019__________________________after date.

For value received, the undersigned promises to pay to the order of

X LENDING CORPORATION at its office in the City of Manila, Twenty
Thousand Pesos Only (P20,000.00) with interest from date hereof at
the rate of -18- percent per annum.

SIGNATURE: JUAN DE LA CRUZ

1-2: Typical Certificate of Deposit.

XYZ BANK
11111 Matalino Street, Manila
Metro Manila, Philippines
MANILA BRANCH
CERTIFICATE OF DEPOSIT
No. _____________
________________
Rate:____________
Date of Maturity:________________20_____

This is to Certify that Juan de la Cruz has deposited in this Bank the
sum of PESOS:______________(p_________& ___________) Pesos,
Philippine currency, repayable to the order of said depositor 120
days after date, upon presentation and surrender of this certificate,
with interest at the rate of _____ percent per annum from date of
this certificate.

Authorized Bank Officer

Signature

b. Bill of Exchange.
On the other hand, the parties who appear on the face of a bill of
exchange are the drawer, drawee, and the payee. The drawer is the person who
draws the bill and orders the drawee to pay the payee a sum certain in money.
The drawee is the one being commanded to pay the instrument. However, in
reality, the drawee is not a party unless he accepts the bill. If he accepts, the
drawee, now called the acceptor, assents to the order made by the drawer. A
typical bill and a check are reproduced below (1-3) and 1-4). In both examples,
the drawer is Pedro Santos, the drawee is ABC Bank, while the payee is Juana
Santos.

1-3: Typical Bill of Exchange.

CITY OF MANILA

January 15, 2017 P10,000.00

One Hundred Twenty Days after above date PAY TO THE ORDER OF
JUANA SANTOS the amount of Ten Thousand Pesos only
(P10,000.00) Philippine Currency.

VALUE RECEIVED AND DEBIT THE SAME FROM THE ACCOUNT OF

THE DRAWER.

PEDRO SANTOS
Drawer
To: ABC BANK
Makati City

1-4: Typical Check.

Account Name: PEDRO SANTOS No.123456A

Date: January 20, 2017

PAY TO THE ORDER OF JUANA SANTOS P1,000.00

One Thousand Pesos Only PESOS

ABC BANK
Amorsolo Branch (Sgd.) Pedro Santos
Makati City

7. DISTINGUISHED FROM NON-NEGOTIABLE INSTRUMENTS.

The requirements of negotiability are not concerned with the validity of

the instrument. Validity is an issue independent of the issue of negotiability.
Verily, the contract represented by or out of which the negotiable instrument
arose may be invalid, voidable or rescissible or unenforceable but the instrument
may remain negotiable.

In the same manner, a non-negotiable instrument may represent a valid

obligation. It may be an instrument that represents a personal property under
Article 417 of the New Civil Code, that is, an obligation or action for a
demandable sum. Such non-negotiable instrument may be freely transferred and
such transfer is governed by Articles 1624 to 1635 of the New Civil Code on
assignment of credit. If there are no defenses available to any party, there is no
use to distinguish a negotiable instrument from a non-negotiable one.

However, it is equally clear that the basic disadvantage of a non-

negotiable instrument from a negotiable instrument is that there can be no
holder in due course in a non-negotiable instrument. Hence, the transferee of a
non-negotiable instrument is not free from personal defenses. In a non-
negotiable instrument, the title acquired by the transferee is a “derivative title”.
If the title of the transferor is defective (and therefore subject to defenses), the
title of the transferee will also be defective. In a negotiable instrument, the
transferee may acquire more rights. A holder in due course will not merely get a
“derivative title” because he will get a “clean title”, one that is free from
infirmities in the instrument and defects of title of prior transferors.

Chapter 2

NEGOTIABILITY
The requisites of negotiability are provided for under Section 1 of the NIL.
It is the most important provisions of the NIL because the law does not apply if
the instrument does not meet the requisites of negotiability as provided therein.
Section 1 of the NIL provides:

Sec. 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.

1. HOW TO DETERMINE NEGOTIABILITY.

Negotiability of an instrument is determined by ascertaining if all the

requirements of Section 1 appear on the face of the instrument. The process of
determining the negotiability of an instrument was described in Caltex
(Philippines), Inc. v. Court of Appeals, et. al.:26

“On this score, the accepted rule is that the negotiability or non-negotiability of an
instrument is determined from the writing, that is, from the face of the instrument itself. In the
construction of a bill or note, the intention of the parties is to control, if it can be legally
ascertained. While the writing may be read in the light of surrounding circumstances in order to
more perfectly understand the intent and meaning of the parties, yet as they have constituted
the writing to be the only outward and visible expression of their meaning, no other words are
to be added to it or substituted in its stead. The duty of the court in such case is to ascertain,
not what the parties may have secretly intended as contradistinguished from what their words
express, but what is the meaning of the words they have used. What the parties meant must be
determined by what they said.”

a. Factors in Determining Negotiability.

In other words, the factors that affect the determination of negotiability of

instruments are: (1) The whole of the instrument shall be considered; (2) Only

26
G.R. No. 97753, August 10, 1992, 212 SCRA 448, 455.
what appears on the face of the instrument shall be considered; and (3) The
provisions of the NIL, especially Section 1 thereof, shall be applied. 27

The negotiability is therefore not determined by looking at a separate

document. For example, Mr. X issued a check in payment of the price of a land
which he purchased from Mr. Y. The purchase of the land is covered by a
document entitled Deed of Conditional Sale. The negotiability of the check will
be determined based only on what is stated in the check itself and not based on
the Deed of Conditional Sale. The sale may be conditional but the check may be
considered negotiable if all the requirements of Section 1 appear on the check
itself.

b. Acceptance Not a Requisite.

Consequently, “acceptance” of a bill of exchange is not important in the

determination of its negotiability. In Philippine Bank of Commerce v. Jose M.
Aruego,28 respondent Aruego signed drafts as drawee-acceptor but late claimed
that he was not liable under the drafts. One of the arguments that he raised was
that the drafts signed by him were not really bills of exchange but mere pieces of
evidence of indebtedness because payments were made before acceptance. The
Supreme Court rejected the argument ruling that:

“This is also without merit. Under the Negotiable Instrument Law, a bill of exchange is
an unconditional order in writing addressed by one person to another, signed by the person
giving it, requiring the person to whom it is addressed to pay or demand or at a fixed
determinable future time a sum certain in money to order or to bearer. As long as a commercial
paper conforms with the definition of a bill of exchange, that paper is considered a bill of
exchange. The nature of acceptance is important only in the determination of the kind of
liabilities of the parties involved, but not in the determination of whether a commercial paper is
a bill of exchange or not.”

CASE:

1. Determine if the following instrument is negotiable (assume that all the blanks were duly
filled):

“PROMISSORY NOTE
(MONTHLY)

“P58,138.20
San Fernando, Pampanga, Philippines
Feb. 11, 1980

“For value received, i/We jointly and severally, promise to pay Violago Motor Sales
Corporation or order, at its office in San Fernando, Pampanga, the sum of FIFTY-EIGHT
THOUSAND ONE HUNDRED THIRTY EIGHT & 20/100 ONLY (P58,138.20) Philippine Currency,
which amount includes interest at 14% per annum based on the diminishing balance, the said
principal sum, to be payable, without need of notice or demand, in instalments of the amounts
following and at the dates hereinafter set forth, to wit: P1,614,95 months for ‘36’ monthly due
and payable on the 21st day of each month starting March 21, 1980 thru and inclusive of
February 21, 1983. P________ monthly for ____________________month due and payable on
the __________________________ day of each months starting ________________,
___________________198________ thru and inclusive of _______, 198______ provided that
interest at 14% per annum shall be added on each unpaid instalment from maturity hereof until
fully paid.

27
Simeon M. Gopenco, Commercial Law Bar Reviewer, 1959 Ed., p. 8, hereinafter referred to as
“Gopenco”.
28
G.R. Nos. L-25836-38, January 31, 1981, 102 SCRA 530.
 xxx xxx xxx

“Maker: Co-Maker:
(SIGNED) JUANITA SALAS ______________________
Address:
__________________________ ______________________

“WITNESSES
SIGNED: ILLEGIBLE SIGNED: ILLEGIBLE
TAN# TAN #

“PAY TO THE ORDER OF

FILINVEST FINANCE AND LEASING CORPORATION

“VIOLAGO MOTOR SALES CORPORATION

By: (SIGNED) GENEVEVA V. BALTAZAR
Cash Manager”

A: The instrument is negotiable. “A careful study of the questioned promissory

note shows that it is a negotiable instrument, having complied with the requisites under the law
as follows: [a] it is in writing and signed by the maker Juanita Salas; [b] it contains an
unconditional promise to pay the amount of P58,138,20; [c] it is payable at a fixed or
determinable future time which is “P1,614.95 monthly for 36 months due and payable on the
21st day of each month starting March 21, 1980 thru and inclusive of February 21, 1983”; [d] it is
payable to Violago Motor Sales Corporation, or order and as such. (Salas v. Hon. Court of
Appeals, et. al., G.R. No. 76788, January 22, 1990, 181 SCRA 296)

2. EFFECT OF ESTOPPEL.

If an instrument does not contain all the requisites of negotiability

specified in Section 1 of the NIL, can the instrument still be considered negotiable
as between the parties on the basis of estoppel? The Supreme Court took the
affirmative stance in Banco de Oro Savings & Mortgage Bank v. Equitable
Banking Corporation, et. al.29In the said case, the petitioner bank claimed that the
Philippine Clearing House Corporation (PCHC for short) did not have jurisdiction
over the controversy involved because the instrument that was the subject
matter of the case was not negotiable. The High Court ruled that the PCHC had
jurisdiction over the case because its Articles of Incorporation does not
distinguish if the check involved is negotiable or non-negotiable. Furthermore,
the Supreme Court ruled that the check may even be treated as negotiable
because the petitioner was estopped from raising the defense of non-
negotiability. The Supreme Court ruled:

“Moreover, petitioner is estopped from raising the defense of non-negotiability of the

checks in question. It stamped its guarantee on the back of the checks and subsequently
presented these checks for clearing and it was on the basis of these endorsements by the
petitioner that the proceeds were credited in its clearing account.

The petitioner by its own acts and representation can not now deny liability because it
assumed the liabilities of an endorser by stamping its guarantee at the back of the checks.

The petitioner having stamped its guarantee of “all prior endorsements and/or lack of
endorsements”(Exhs.A-2 to F-2) is now estopped from claiming that the checks under
consideration are not negotiable instruments. The checks were accepted for deposit by the
petitioner stamping thereon its guarantee, in order that it can clear the said checks with the
respondent bank. By such deliberate and positive attitude of the petitioner it has for all legal

29
G.R. No.L-74917, January 20, 1988, 157 SCRA 188.
intents and purposes treated the said checks as negotiable instruments and accordingly
assumed the warranty of the endorser when it stamped its guarantee of prior endorsements at
the back of the checks. It led the said respondent to believe that it was acting as endorser of the
checks and on the strength of this guarantee said respondent cleared the checks in question and
credited the account of the petitioner. Petitioner is now barred from taking an opposite posture
by claiming that the disputed checks are not negotiable instrument.”

It is believed, however, that the ruling in the above-entitled case is not

sound. It is believed that the parties cannot be considered estopped from
claiming that the instrument is non-negotiable. The negotiability of the
instrument is determined by law and the parties cannot change what is provided
by law. In the Banco de Oro case, it was not even necessary to use estoppel in
rejecting the argument of the plaintiff because the Supreme Court already ruled
that the jurisdiction of the PCHC also includes cases involving non-negotiable
instruments.

3. THE REQUISITES OF NEGOTIABILITY.

3.01. IT MUST BE IN WRITING SIGNED BY THE MAKER OR DRAWER.

The law requires a negotiable instrument to be in writing. Where it

otherwise, the instrument cannot effectively substitute money. Historical
reasons likewise account for the requirement that the instrument be in writing. 30

(1) Electronic Messages.

Thus, electronic messages instructing the bank to debit the depositor’s

account are not negotiable. In one case, the electronic messages were received
by bank from its investor-clients abroad instructing the former to debit the
latter’s local and foreign currency accounts and to pay the purchase price of
shares of stock or investment in securities. The Court ruled that the electronic
messages are not negotiable bills of exchange under Section 1 of the Negotiable
Instruments Law. The electronic messages are not signed by the investor-clients;
they do not contain an unconditional order to pay a sum certain in money as the
payment is supposed to come from a specific fund or account of the investor-
clients; and, they are not payable to order or bearer but to a specifically
designated third party.31

a. Materials.

Section 1 of the NIL does not specify the materials that should be used in
writing the instrument nor the material on which the writing should be made.
Hence, the writings may be printed, in ink or in pencil and it may be written in
any material that substitutes paper like cloth, leather or parchment. Section 191
of the NIL provides that the word “’written’ includes printed, and ‘writing’
includes print.”

b. Type of Signature.

With respect to the signature of the maker or the drawer, the rule is that
the signature may be in one’s handwriting, printed, engraved, lithographed or
photographed so long as they are adopted as the signature of the signer. 32 What
30
Hawkland, p.9.
31
The Hongkong and Shanghai Bank Corp. v. Commissioner of Internal Revenue, G.R. No. 166018, June 4,
2014.
32
William E. Britton, Bills & Notes, 2nd Ed., p. 22, hereinafter referred to as “Britton.”
is important is that the maker or drawer used what he affixed as his own
signature for authentication. The same rule is adopted in the Uniform
Commercial Code in the United States. The said Code defines signature as “any
symbol executed or adopted by a party with present intention to authenticate a
writing.”33 This is consistent with cases decided under the Uniform Negotiable
Instruments Law to the effect that “one may become a party to a paper by any
mark or designation he chooses to adapt, provided, it be used as a substitution
for his name, and he intend to bind himself.”34

Under present rules on evidence, the signature may be established by the

person who witnessed the signing thereof or by anybody familiar with the
signature. Expert witnesses may also be presented to prove that the signature is
genuine.

PROBLEM SOLVING:

1. Juan Cruz borrowed P1,000.00 from Pedro Santos as evidenced by a

promissory note executed by X as maker. All other requisites of
negotiability are present in the note except that Juan Cruz did not affix his
usual signature thereon. As Juan was ailing at that time, he was only able
to put “X” in the blank space meant for the signature of the maker. Is the
requisite that the instrument must be signed by the maker complied with?

2. A promissory note states as follows: “, Cecilia W. Donohue after date

August 10, 2002 promises to pay to the order of Richard Donohue thirteen
thousand and seventy pesos for value received with interest at 6% per
annum.” The note was on a printed form, and the words underscored
above were in the handwriting of Mrs. Donohue. No signature appears at
any other place on the note. Is the note signed by the maker?

3.02. IT MUST CONTAIN AN UNCONDITIONAL PROMISE TO PAY A SUM

CERTAIN IN MONEY.

a. Promise or Order to Pay.

A negotiable promissory note contains a promise to pay while a bill of

exchange contains an order to pay. The promise in a promissory note is the
undertaking made by the maker to pay a sum certain in money to the payee of
the holder. The “order” in a bill is a command made by the drawer addressed to
the drawee ordering the latter to pay the payee or the holder a sum certain in
money.

(1) Equivalent Words.

The word “promise” or “order” need not appear in the instrument to

satisfy the requirements of Section 1(b) of the NIL. In fact, the word “order” does
not normally appear to signify the command of the drawer. Words that are
equivalent to the word “promise” may be used in a promissory note. The rule is
consistent with the provisions of Section 10 of the NIL which provides that “the
instrument need not follow the language of this Act, but any terms are sufficient
which clearly indicate an intention to conform to the requirements hereof.”

33
Section 1-2001 (39).
34
Baker v. Denning, 8 Adol. & Ellis 94 & Brown v. Butcher’s & Drover’s Bank, cited in Crawford, pp. 11-12.
 (2) Mere Acknowledgment Not Sufficient.

Mere acknowledgment of a debt is insufficient. The Supreme Court

explained in Pacifica Jimenez v. Dr. Jose Bucoy:35

“An acknowledgment may become a promise by the addition of words by which a

promise of payment is naturally implied, such as, ‘payable’, ‘payable on a given day’, ‘payable
on demand’, ‘paid. . . when called for’, . . .(10 Corpus Juris Secundum, p. 523)

“To constitute a good promissory note, no precise words of contract are necessary,
provided they amount, in legal effect, to a promise to pay. In other words, if over and above
the mere acknowledgment of the debt there may be collected from the words used a promise
to pay it, the instrument may be regarded as a promissory note. 1 Daniel, Neg. Inst. Sec. 36 et
seq.; Byles, Bills, 10, 11, and cases cited. . . ‘Due A. B. $325, payable on demand,’ or, ‘I
acknowledge myself to be indebted to A in $109, to be paid on demand, for value received,’ or,
‘I.O.U. $85 to be paid on May 5 th,’ are held to be promissory notes, significance being given to
words of payment as indicating a promise to pay.’ Daniel Neg. Inst. Sec. 39, and cases cited.
(Crown vs. Hallack, [Colo.] 13 Pacific Reporter 700, 703)”

(3) Receipts.

The requirement of the NIL that an order or promise must be present is

not, therefore, complied with if the document is a mere receipt. Thus, a cash
disbursement voucher is not a negotiable instrument because it is nothing more
than a receipt evidencing payment by borrowers of the loans previously
extended to them.36 In the same manner, a withdrawal slip addressed to a
drawee bank that is needed for the withdrawal of funds from a bank account is
not negotiable.37

b. Promise or Order to Pay Must be Unconditional.

(1) Condition under the New Civil Code.

Under Articles 1173 and 11811 of the New Civil Code, a condition is a
future and uncertain event, or a past event unknown to the parties, the
happening (positive) or non-happening (negative) of which may either give rise to
an obligation or may extinguish existing ones. The condition is suspensive if the
happening or non-happening of the event will give rise to an obligation; the
condition is resolutory if the happening or non-happening of the event will
extinguish existing obligations.
The negotiability of the instrument is destroyed if the same, on its face,
contains either a resolutory or suspensive condition. Thus, a promissory note is
not negotiable if the maker promises to pay the payee or his order if the City of
Manila becomes an independent republic. The promise in the said note is
conditional.

(2) Section 3, NIL.

Section 3 of the NIL deals with the requirement under Section 1(b) that the
promise or order stated in the instrument must be unconditional. Section 3
provides:

35
G.R. No. L-10221, February 28, 1958, 103 Phil. 40, 43-44.
36
People of the Philippines v. Francisco, CA-G.R. Nos. 05130-05141-CR, August 23, 1966; Velayo’sDigest,
1966-C Supplemental, pp. 73-74.
37
Firestone Tire & Rubber Company of the Philippines v. Court of Appeals and Luzon Development Bank,
G.R. No. 113236, March 5, 2001, 145 SCAD 127.
 Sec. 3. When promise is unconditional. – An unqualified
order or promise to pay is unconditional within the
meaning of this Act though coupled with –
(a) An indication of a particular fund out of which
reimbursement is to be made or a particular
account to be debited with the amount; or

(b) A statement of the transaction which gives rise to

the instrument. But an order or promise to pay
out of a particular fund is not unconditional.

Thus, under Section 3 of the Negotiable Instrument Law, the following

stipulations in the instrument make the promise or order conditional: 1) An
indication of an account or fund out of which payment shall be made; 38 and 2)
When payment is made to depend upon a contingency. 39

On the other hand, the following stipulations do not make the promise or
order conditional: 1) An indication of a particular fund out of which
reimbursement is to be made; 2) An indication of a particular account to be
debited with the amount; and 3) A statement of the transaction which gives rise
to the instrument.40

(3) Subject to Transaction.

However, if the instrument is restricted by the terms and conditions of

another transaction, contract or agreement, by incorporating the agreement or a
portion thereof as part of the other, the said instrument in non-negotiable.
Consequently, a note that is “subject to” the provisions of another contract or
document is not negotiable. A note is also not negotiable under the same
principle if the amount is payable “as set forth in that certain agreement dated
March 12, 2004”41

(4) Account to be Debited or Source of Payment.

The negotiability of the instrument is affected if what is specified is the

account or fund out of which payment is to be made. Hence, the instrument is
not negotiable if it states: “Pay to the order of Juan de la Cruz P10,000.00 out of
my account with you.” This instrument is conditional because the obligation to
pay is subject to the condition that the funds in the account are sufficient. The
order to pay is not absolute because no payment will be made if the amount in
the account is less than P10,000.00. consequently, a note is also not negotiable if
it contains the following words: “This note is given in payment of merchandize
and is to be liquidated by payments received on account of sale of such
merchandize.”42 The test that should be applied is this: Does the instrument carry
the general credit of the drawer or maker, or only the credit of a particular fund? 43

If the instrument specifies the account from which payment is to be

debited, the instrument is still negotiable. The promise or order to pay is still
unconditional. For example, the instrument is still negotiable (assuming all the
38
Section 3, NIL.
39
Section 4, NIL.
40
Supra.
41
Salomonsky v. Kelly, 349 S.E. 2d 358 (1986).
42
Glendora Bank v. Davis, 204 Cal. 220, 267 Psc. 311.
43
Sulpicio Guevarra, Handbook of Commercial Law, 10th Ed., p. 354, hereinafter referred to as “Guevarra”
other requirements are present) if it states: “Pay to the order of Juan de la Cruz
P10,000.00 and debit the same from my account.” The order is still unconditional
because what is reflected is an absolute obligation to pay the amount of
P10,000.00. the specified account is only the source of reimbursement after
payment. If the funds in the account are insufficient, there would still be an
obligation to pay the payee although the drawee may not be fully reimbursed.

EXAMPLES:

1. This is not negotiable because the bill is subject to or restricted by the agreement.

January 3, 2017

“Pay to X or order P1,000.00 on or before January 5, 2019 subject to the

terms and conditions of the Contract of Sale executed by the parties.”

Sgd. Mr. Y
To: Mr. Z

2. This is negotiable because there is only reference to the transaction that gave rise to
the obligation.

January 16, 2016

“Pay to X or order P1,000.00 on or before January 5, 2019. This bill is being

executed by virtue of the Contract of Sale executed by the parties.”

Sgd. Mr. Y
To: Mr. Z

3. This is not negotiable because the note is subject to or restricted by the mortgage.

February 21, 2017

I promise to pay to X or order P1,000.00 on or before January 5, 2019. This

Note is secured by a chattel mortgage and is subject to the terms and
conditions thereof.

Sgd. Mr. Y

4. The order to pay is not absolute because it is subject to the condition that the
account of Jose Santos with Pedro Cruz is sufficient to pay P10,000.00.

January 1, 2017

Pay to the order of Juan de la Cruz P10,000.00 out of my account with you.

Sgd. Jose Santos

To: Pedro Cruz.

5. This example is negotiable because there is an absolute obligation to pay.

Reimbursement will be made only after payment.

Jan. 20, 2017

Pay to the order of Juan de la Cruz P10,000.00 and reimburse yourself

from my account with you.

Sgd. Jose Santos

To: Pedro Cruz.
 6. This example is negotiable because there is an absolute obligation to pay. The
debiting of the account occurs after payment. There will be payment ahead of the
act of debiting the account. Even if the account is not sufficient, payment should
still be made.

January 1, 2017

Pay to the order of Juan de la Cruz P10,000.00 and debit from my account
with you.

Sgd. Jose Santos

To: Pedro Cruz.

PROBLEM SOLVING:

1. Is a postal money order negotiable?

2. A treasury warrant was issued by Mr. PA in his capacity as disbursing

officer of the Food Administration, a government instrumentality. The
warrant states that it is “payable for additional cash advances for the Food
Program campaign in La Union” and the amount stated therein is “payable
from the appropriation for food administration.” The warrant is now in the
hands of Mr. BA who claims to be a holder in due course. Can BA be
considered a holder in due course of a negotiable instrument?

3. A bookstore received five postal money orders totalling P1,000.00 as part

of sales receipts, and deposited the same with a bank. A day after, the
bank tried to clear them with the Bureau of Posts. It turned out, however,
that the postal money orders were irregularly issued thereby prompting
the Bureau of Posts to serve notice upon all banks not to pay orders if
presented for payment. The Bureau of Posts further informed the bank
that the amount of P1,000.00 had been deducted from the bank’s clearing
account for the same amount. A complaint was filed by the bookstore
against the Bureau of Posts and the bank for the recovery of the sum of
P1,000.00 which however, was dismissed by the trial court. The bookstore
appealed contending that postal money orders are negotiable instruments
and that their nature could not have been affected by the notice sent by
the Bureau of Posts to the banks. How would you resolve the
controversy?

4. State if the following documents/instruments are negotiable: a) Letters of

Credit; b) Certificate of Stocks; c) Bill of Lading; d) Warehouse Receipt; and
e) Aval.

c. Payable in Sum Certain in Money.

(1) Money.

The word money has been defined in one case as:

“Money is a generic and comprehensive term. It is not a synonym of coin. It includes

coin, but it is not confined to it. It includes whatever is lawfully and actually current in buying
and selling, of the value and as the equivalent of coin. By universal consent, under the sanction
of all courts everywhere, or almost everywhere, bank notes lawfully issued, actually current at
par in lieu of coin, are money. The common term paper money is in a legal sense quite as
accurate as the term coined money.”44

Money contemplated in Section 1(b) is not equivalent to “legal tender.” An

instrument is still negotiable although the amount to be paid is expressed in
currency that is not legal tender so long as it is expressed in money. 45 Thus, an
instrument that is payable in Yen or dollars is still negotiable as it is also payable
in money. The rule is the logical conclusion from the provisions of Section 6(e) of
the NIL which states that the negotiability is not affected even if the instrument
designates the particular kind of money in which payments is to be made.

Payment cannot therefore be through gold ingots or diamond even if

delivery of these precious stones in payment of obligations is prevalent in the
market. There is even no compliance with the law if the obligator like the maker
is given the option to deliver something in lieu of money. Section 5 of the NIL
provides:

(2) Option of Holder.

Sec. 5. Additional provisions not affecting

negotiability. – An instrument which contains an order
or promise to do any act in addition to the payment of
money is not negotiable. But the negotiable character
of an instrument otherwise negotiable is not affected by
a provision which –
xxx
(d) Gives the holder an election to require
something to be done in lieu of payment of money.

Under the above-quoted provision, an instrument that states that the

maker promises “to deliver P1,000.00 or one sack of sugar” is not negotiable. If
the option to choose either P1,000.00 or one sack of sugar belongs to the holder,
the instrument is still negotiable. The difference if the option belongs to the
holder is that in this case there is an absolute obligation to pay the sum certain in
money. The maker may be compelled to pay P1,000.00. if the choice belongs to
the maker, he is not absolutely required to deliver money because he can satisfy
his obligation by delivering one sack of sugar.

EXAMPLES:

1) The promise or order to pay in goods is not negotiable. For example, this is not
negotiable: “Pay Mr. X or order ten (10) kilos of aluminium.”

2) An instrument is not negotiable if what is to be paid is money and/or another thing at

the option of the maker or acceptor or anybody who is supposed to pay. For example,
an instrument is not negotiable if it states: “I promise to pay to Mr. X or bearer
P1,000.00 or to deliver one sack of corn. Sgd Mr. Y”

3) However, the instrument is still negotiable if the option belongs to the holder. The
holder will choose if he will demand payment of money or delivery goods. For example,

44
Klanber v. Biggerstaff, (1979) 47 Wis. 551, 3 N.W. 357, 24 BLJ, cited in Henry J. Bailey, The Law of bank
Checks, 1962 Ed., p. 44, hereinafter referred to as “Bailey.” It should be noted that the banks referred to
by Bailey are banks that basically perform the function of a central bank, that is, money function through
which they are allowed by law to issue paper money.
45
Philippine National Bank v. Zulueta, G.R. No. L-7271, August 30, 1957, 101 Phil, 1071, 1075.
 an instrument is negotiable if it states: “I promise to pay Mr. X or bearer P1,000.00 or to
deliver one sack of corn at the option of the holder. Sgd. Mr. Y.”

(3) Sum Certain.

A sum is certain within the contemplation of Section 1(b) of the NIL if the
amount that is to be unconditionally paid by the maker or drawee can be
determined on the face of the instrument. The certainty of the sum is not
affected if the exact amount can be determined after mathematical computation.
However, the computation should be made on the basis of what is stated in the
instrument. This is true for instance where only the quantity per unit of goods
purchased as well as the price per unit is specified (500 kilograms at P50.00 per
kilograms). All that is required is the mechanical computation to arrive at the
exact amount.

For example, the amount to be paid is not certain if what is payable is “the
balance of the loan that maker must still pay with XXX Bank.” It is also not
negotiable if what is supposed to be paid is the sum certain plus another
undetermined amount. For example, an instrument is not negotiable if the
promise is “to pay P1,000.00 and the equivalent of the monthly allowance that i
receive as employee of ABC Corporation” or if the promise is “to pay P1,000.00
plus all the profits that the maker’s bakery will earn in the month of December,
2017.”

Section 2 of the NIL likewise specifies provisions that do not affect the
negotiability of the instrument. Section 2 provides:

Sec. 2. What constitutes certainty as to sum. – 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.

(4) Interest.

For the same reason, the sum payable is still certain and the negotiability
of the instrument is not affected whether or not the stipulation in the interest is a
fixed or no rate of interest is fixed. It should be recalled that no interest is due
unless there is a stipulation to that effect. For example, an instrument that states
“Pay to the order of Mr. X P2,000.00 with interest of 20% per annum” is payable
in sum certain because there is an absolute obligation to pay a fixed amount,
P2,000.00. The interest is just an addition to the sum certain that is payable.
 However, the agreement may just state that interest is due from a certain
time. In which case, legal interest shall be imposed. Under present regulations,
the legal interest is now uniform; the interest for loan or forbearance of money,
goods or credit is now 6%.46

(5) Installment Payments.

“Stated installments” mentioned in Section 2, paragraph (c) means that:

(1) the dates of each installment must be fixed or at least determinable, and (2)
the amount to be paid for each instalment.

Thus, the negotiability will be affected if the instrument merely states that
the total amount shall be paid in five installments without stating when each
installment should be paid and how much should be paid and how much should
be paid. The amount to be paid for each installment will be uncertain and there
is no certainty when payment will be made. Nevertheless, an instrument
complies with the requirement if it states that the maker promises to pay “to the
order of Mr. X P10,000.00 in equal monthly installment starting from January 5,
2004 and every month thereafter until fully paid.” In this last example, the
amount of each installment and the date of payment thereof are determinable.

3.03. PAYABLE ON DEMAND OR AT A FIXED OR DETERMINABLE FUTURE

TIME.

An instrument is not negotiable if the maturity date of an instrument is

uncertain. Certainty of the maturity date, as well as the unconditional nature of
the obligation, is required because of its effect in commercial transactions. It was
observed that:

“Both conditional promises and uncertain maturity dates in promissory notes are
offensive to the concept of negotiability because they militate against a low discount rate by
involving the holder with the administrative burden and risk of assessing contingencies. The
burden and the risk are of the same kind, whether the contingency is concerned with facts and
events which render the obligation uncertain, facts and events which render the maturity date
uncertain, or facts and events which render both the obligation and the maturity date uncertain.
In all these cases, it is the conditioning facts and events which must be assessed with the
discounter running the risk of proper assessment.” 47

a. Payable on Demand.

When an instrument is payable on demand, the persons liable may be

required to pay at any time that the holder may so request. The instrument
should be paid the amount it is presented for payment. Section 7 of the NIL
provides:

Sec. 7. When payable on demand. – An instrument

is payable on demand:

(a) When it is so expressed to be payable on

demand, or at sight, or on presentation; or

46
BSP Circular No. 799, Series of 2013, July 1, 2013; BSP modified the previous legal of 12% for loans or
forbearance of money, goods or credit.
47
Hawkland, p. 52.
 (b) In which no time for payment is expressed.

Where an instrument is issued, accepted, or

indorsed when overdue, it is, as regards the person so
issuing, accepting, or indorsing it, payable on demand.

b. Payable at Determinable Future.

The instrument is payable at a determinable future if, though no date is

fixed, the exact date of maturity is capable of being determined. Section 4 of the
NIL enumerates the instruments that are considered payable at a determinable
future time:

Sec. 4. Determinable future time; what constitutes.

– An instrument is payable at a determinable future
time, within the meaning of this Act, which is expressed
to be payable:

(a) At a fixed period after date or sight; or

(b) On or before a fixed or determinable future

time specified therein; or

(c) On or at a fixed period after the occurrence of a

specified event which is certain to happen,
though the time of happening be uncertain.

An instrument payable upon a contingency is not

negotiable, and the happening of the event does not
cure the defect.

(1) Acceleration Clauses.

Section 2 of the NIL provides that the certainty of the amount to be paid is
not affected if it is to be paid “by stated installments, with a provision that, upon
default in payment of any installment or of interest, the whole shall become
due.” What is contemplated in this provision is a typical acceleration clause.

An example of an instrument that is subject to an acceleration clause is

provided below (2-1). In the acceleration clause in the example below, the non-
payment of any installment is the circumstance that triggers the acceleration of
the maturity date of the entire balance. The act or omission of the maker makes
the acceleration clause operate – non-payment of any installment.

2-1: Promissory Note with Acceleration Clause.

Amount P10,000.00 December 1, 2016

I promise to pay to the order of Mr. GC the amount of

P10,000.00 in five (5) equal monthly installments. The first
installment shall be paid on January 1, 2017 and the rest shall be
paid on the first day of the succeeding month and every month
thereafter until fully paid. Non-payment of any of the installment
 shall make the entire amount due and demandable.

(Sgd.) MG
Maker

a. Distinctions.

INSTRUMENTS PAYABLE TO INSTRUMENTS PAYABLE

ORDER
1. The payee must be
named or indicated with
reasonable certainty
(Section 8, last, par.).
2. This is negotiated by
indorsement coupled
with delivery (Section
30).
3. Instruments originally
payable to order can be
converted into a bearer
instrument into a bearer
instrument through blank
indorsement.
TO BEARER
1. The payee need not be
indicated, it is enough
that it is expressed to be
so payable to bearer
(Section 9[a]).
2. This is negotiated by
delivery (Section 30).
3. Instrument originally
payable to bearer
cannot be converted
into order instruments.
A bearer instrument is
always a bearer
instrument and can be
negotiated by mere
delivery even is specially
indorsed.

PROBLEM SOLVING:

1. Determine if the following instrument is negotiable: “FOR VALUE

RECEIVED, I/we jointly and severally promise to pay to the ITM
Corporation, the sum of ONE MILLION NINET THREE THOUSAND SEVEN
HUNDRED EIGHTY-NINE PESOS & 71/100 only (P1,093,789.71), Philippine
Currency, the said principal sum, to be payable in 24 monthly installments
starting July 15, 1978 and every 15th of the month thereafter until fully
paid. . .”

2. A promissory note reads as follows: “I promise to pay Gabriela Silangan

P100.00 three (3) years after the unconditional withdrawal of the U.S. of
its military bases in the Philippines.” Discuss the negotiability or non-
negotiability of the above note. Discuss the effect of each of the following
upon the note’s negotiability: no date is given the places where drawn and
where payable are not stated.

3. X bought a jeep from Reliable Motors Company for a consideration of

P50,000.00. He paid P25,000.00 in cash and executed the following
promissory note on the balance:

September 1, 1989

I promise to pay the sum of P25,000.00 to Reliable Motors Company on or

before December 1, 1989.
 (Sgd.) X

Is the promissory note a Negotiable Instrument?

Section 9 of the NIL provides that an instrument is payable to bearer in the

following instances:

Sec. 9. When payable to bearer. – The instrument

is payable to bearer –
(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein

or bearer; or

(c) When it is payable to the order of a fictitious or

non-existing person, and such fact was known
to the person making it so payable; or

(d) When the name of the payee does not support

to be the name of any person; or

(e) When the only or last indorsement is an

indorsement in blank.

An instrument is a bearer instrument under Section 9, (a) and (b) if it

states: “I promise to pay to bearer on or before June 2, 2020 P10,000.00” or “I
promise to pay Mr. Juan de la Cruz or bearer P10,000.00 on or before June 2,
2020.” An instrument is payable to bearer within the contemplation of Section
9(d) if the amount is payable “to the order of cash” or “to the order of sundries.”

(1) Burden of Proof under the Fictitious Payee Rule.

It should be noted that the burden of proving that the instrument is

payable to a fictitious payee rests on the person making such allegation. If there
is an allegation that the check is payable to the order of a fictitious payee, the
subject check is presumed to be an order instruments and it is up to the person
making the contrary allegation to prove otherwise. There must be proof of the
requisite condition of a fictitious-payee situation – that the maker of the check
intended for the payee to have no interest in the transaction. 48

If there is no proof that the checks are payable to fictitious payee, the
drawee bank can accept the check even without the indorsement of the payee.
The instrument can be negotiated by mere delivery because the instrument is
considered a bearer instrument.

(2) Bad Faith Exception to Fictitious Payee Rule.

There is a commercial bad faith exception to the fictitious-payee rule. A

showing of commercial bad faith on the part of the drawee bank, or any
transferee of the check for that matter, will work to strip it of this defense. The
48
Ibid.
exception will cause it to bear the loss. Commercial bad faith is present if the
transferee of the check acts dishonestly, and is a party to the fraudulent scheme.
A transferee’s lapse of wary vigilance, disregard or suspicious circumstances
which might have well induced a prudent banker to investigate and other
permutations of negligence are not relevant considerations. The Court cited
Section 3-405 of the Uniform Commercial Code which provides that there is a
“commercial bad faith applicable when the transferee “acts dishonestly – where
it has actual knowledge of facts and circumstances that amount to bad faith, thus
itself becoming a participant in a fraudulent scheme.

In the United States, the “fictitious payee rule” had been used to
counteract the effect of forged indorsements on the right of the holder to
enforce payment against the drawer of the maker. It has been observed that the
“fictitious payee rule” has developed as an important exception to the traditional
rule that a forged indorsement in a check is inoperative and that a bank paying a
check bearing a forged indorsement may not charge the payment against the
drawer. The fictitious payee rule is often applied in instances where an
embezzling employee who has check signing authority draws checks to the order
of payees (real or non-existent persons) who are intended by the employee to
have no interest. The reasoning is the act of the agent is the act of the drawer
(principal). The rule thus removes the group of cases involving a dishonest
employee from the traditional “forged indorsement doctrine” and imposes the
loss on the employer who hires and fails to properly control the dishonest agent,
rather than on banks which collect and pay checks with forged indorsement. 49

Sec. 8. When payable to order. – The instrument is

payable to order where it is drawn payable to the order
of a specified person or to him or his order. It may be
drawn payable to the order of:

(a) A payee who is not maker, drawer, or drawee;

or

(b) The drawer or maker; or

(c) The drawee; or

(d) Two or more payees jointly; or

(e) One or some of several payees; or

(f) The holder of an office for the time being.

Where the instrument is payable to order, the

payee must be named or otherwise indicated therein
with reasonable certainty.

c. Payable to the Order of Bearer.

49
Bailey, pp. 536-537, citing Northlon v. City Bank Company (CA. Va. 1923) 294 Fed. 839.
 There are two views regarding the nature of instruments that states that it
is “payable to the order of the bearer.” Prof. Simplicio Guevarra believed that
the same is a bearer instrument. He explains that an order instrument is one that
is “payable to the order of a specified person” or “payable to a specified person
of his order.” The view is that there must always be a specified person named in
the instrument and the instrument must always be paid to the person designated
in the instrument or to any person whom he has indorsed and delivered the
same.50 Hence, an instrument payable “to the order of bearer” is not an order
instrument because it is neither payable to the order of a specified person or to
him or his order.51 However, an instrument payable “to the order of RE or bearer”
is payable to order.

(3) Effect of Ante-dating or Post-dating.

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 to the date of delivery.

An instrument is postdated if the date appearing on the instrument is a

date after the true date. An ante-dated instrument is one which indicates a date
that is earlier than the true date.

For example, Mr. A, as maker, prepared and signed a promissory note on

January 1, 2016. However, the date appearing on the instrument is January 1,
2017 as in the example below. In this example, Mr. A postdated the instrument
when he signed it on January 1, 2016.

January 1, 2017

I promise to pay Mr. X or order, the sum of P100.00 on January

15, 2019 with interest from date at 20% per annum.

Sgd: Mr. A

On the other hand, if Mr. A really prepared and signed the instrument on
April 10, 2016 but he purposely wrote January 10, 2015 to make it appear that he
prepared and signed the instrument on January 10, 2015, then the instrument is
said to have been ante-dated. In other words, the date appearing in the
instrument, January 10, 2015 is not the true date and such date is a date before
(ante) the correct date, April 10, 2016.

(4) Delivery is Required.

The second sentence of Section 12 of the NIL provides that the peson to
whom an instrument so dated is delivered acquires title thereto as of the date of
delivery. This provision was involved in San Miguel Corporation v. Puzon, Jr., 52
50
Salas v. Hon. Court of Appeals, et. al., G.R. No. 76788, January 22, 1980.
51
Guevarra, p. 356.
52
G.R. No. 167568, September 22, 2010.
where post-dated checks were delivered to the petitioner in accordance with the
policy to require its dealers to issue post-dated checks to cover future
receivables. According to the Court, title to the check did not transfer to the
petitioner. There was no delivery for the purpose of transferring title.

b. Value given.

It is expressly provided for in Section 3(b) of the NIL that a statement of

the transaction that gave rise to the obligation covered by the instrument will not
affect its negotiability. The opposite situation results in the same conclusion, that
is, the absence of a statement of the transaction that give rise to the obligation
does not affect the negotiability of the instrument.

Similarly, the instrument need not state that the maker or the drawer
received any value or anything in exchange for the preparation and issuance of
the instrument. Section 24 provides that consideration for the instrument is
presumed. In other words, even if there is no statement in the instrument that
value has been given, it is presumed that value was given for its issuance. For
example, in the two preceding examples, there is no indication that the value has
been given to Mr. Y for drawing the bill of exchange. This does not affect the
negotiability of the instrument and the presence of value or consideration is
presumed.

c. Place of Issuance or it is Payable.

There are instruments that do not indicate the place where they are
drawn nor the place where they are payable. They are still negotiable even in the
absence of such indication.

However, it should be noted that Section 73 of the NIL already provides for
the rules on the proper place of presentment for payment where no place is
specified. On the other hand, Section 75 of the NIL covers a situation where it is
payable at a bank.

4.2. ADDITIONAL PROVISIONS.

Sec. 5. Additional provisions not affecting

negotiability. – An instrument which contains an order
or promise to do any act in addition to the payment of
money is not negotiable. But the negotiable character
of an instrument otherwise negotiable is not affected by
a provisions which:

(a) Authorizes the sale of collateral securities in

case the instrument be not paid at maturity; or

(b) Authorizes a confession of judgment if the

instrument be not paid at maturity; or

(c) Waives the benefit of any law intended for the

advantage or protection of the obligor; or

(d) Gives the holder an election to require

 something to be done in lieu of payment of
money.

But nothing in this section shall validate any

provision or stipulation otherwise illegal.

5. SUMMARY OF RULES ON NEGOTIABILITY.

REQUISITE SUMMARY OF RULES

It must be in writing. 1. It can be written in any material which is
more or less permanent and readily
transferable. It can be on paper, parchment,
etc.

2. Writing can be printed, hand written or

It must be signed by the maker
or drawer.
It must contain a promise or an
order.
typewritten or any other manner.
1. The signature can be in any form
(handwritten, mark, rubber stamp, word,
mark, etc.) so long as it is adopted as a
signature and authenticates the instrument.
1. The words promise or order need not be used
so long as equivalent words are present.

2. Mere acknowledgment is not sufficient

promise.
The promise or order must be 1. The promise or order to pay should not be
unconditional. subject to a future and uncertain event.

2. The instrument cannot be subject to or

restricted by another agreement or
document (e.g., sale or mortgage).

3. An instrument which states that payment out

of a particular fund is conditional.

4. The instrument is not conditional if there is

indication of the account to be debited or out
of which reimbursement is to be made.
Sum certain. 1. The amount to be paid may be a fixed
amount or one that is determinable on the
face of the instrument.

2. The following do not affect the certainty of

sum: a) stipulation on payable interest, or
attorney’s fees; b) payable in instalments; c)
payable in instalments with an acceleration
clause.
Money. 1. What should be paid need not be legal
tender.

2. Payment cannot be in goods.

3. There can be an option to pay money or

Payable on demand or at a
fixed or determinable future
time.
deliver goods provided that the choice is with
the holder.
An instrument is payable on demand if:
1. it is so expressed to be payable on demand,
or at sight, or on presentation; or

2. no time for payment is expressed.

Payable to bearer or order. 1. There are two ways to make an order
instrument: (a) make it payable “to the order

If addressed to a drawee, he
must be named or indicated
with reasonable certainty.
of a specified person; or (b) make it payable
“to specified person or his order.”
2. An instrument is payable to bearer if: (a)
When it is expressed to be so payable; or (b)
When it is payable to a person named therein
or bearer; or (c) When it is payable to the
order of a fictitious or non-existing person,
and such fact was known to the person
making it so payable; or (d) When the name
of the payee does not purport to be the name
of any person; or (e) When the only or last
indorsement is an indorsement in blank.
It can be addressed to two or more drawee jointly.
It cannot be addressed to two or more drawees in the
alternative.
It cannot be addressed to two or more drawees in
succession.