Revised Negotiable Instruments Law Annotated MPP

CONCEPTUAL FRAMEWORK
I. Birth/Creation of Negotiable Instruments (sec. 10-29) II. Life (sec.

30-69)
 Negotiability
 Holder in due course
 Parties
III. Death (sec. 70-189)
 Proceedings
 Defenses
 Discharge
ACT NO. 2031
(February 3, 1911)
THE NEGOTIABLE INSTRUMENTS LAW
Introduction
History and Development
The term commercial paper refers to written promises or obligations to pay sums
of money that arise from the use of such instruments as drafts, promissory notes,
checks and trade acceptances. (The most common instruments are checks and
promissory notes.)1 However, the term commercial paper in its broadest sense may
refer to either negotiable or non-negotiable instruments.
During the early part of the Middle Ages, merchants and traders had to carry gold
and silver to pay for the goods they purchased at the various international fairs.
Obviously these precious metals were continually subject to loss or theft through the
perils of travel.2
To eliminate the dangers of this sort, merchants began to deposit their gold and
silver with bankers. When they needed funds to pay for goods they had purchased,
they drew on them by giving the seller a written order addressed to the bank, telling it
to deliver part of the gold or silver to the seller. These orders, called bills of exchange,
were thus substitutes for money. Today, checks and the drafts and promissory notes
that are payable on demand serve this same basic purpose.3
1 Business Law Text and Cases, Second Edition, Howell, Allison, Henley, 1981, page 400 2 Ibid.
3 Ibid. (italics supplied)
The second major purpose of commercial paper is to serve as credit device; this
came about as a logical extension of the initial use of commercial paper. Soon after
bills of exchange became established as substitutes for money, merchants who
wished to purchase goods on credit discovered that sellers were sometimes willing to
accept bills of exchange that were not payable until a stated time in the future such as
ninety days after date. If the seller was satisfied as to the commercial reputation of the
bills drawer (the purchaser), he would take such an instrument (called a time bill or
draft) and wait until the maturity date to collect it. In this way the seller/payee extended
credit to the buyer/drawer.4
Soon thereafter ways were devised by which payees could sell these instruments
to third parties, usually banks, and receive immediate cash in return. Since the banks
would then have to wait for the maturity dates before receiving payment, the payees
would have to sell them the paper at a discount that is, perhaps five or ten percent
less than the face amount. This meant, in effect, that the purchasing banks were
charging the sellers interest in advance as compensation for their role in the
transaction.5
Today, because of the widespread use of time notes and drafts, the credit aspect
of commercial paper is as important to the business community as its substitute for
money aspect.6 For a negotiable instrument to operate practically a
s either a substitute
for cash or a credit device, or both, it is essential that the instrument be easily
transferable without danger of being uncollectible.7
The negotiability of bills of exchange and promissory notes originated in the

customs of merchants. The statute of Anne, which is declaratory of the common law,
established the negotiability of promissory notes.8
Negotiable Instrument; definition
A negotiable instrument is a special contract which on its face is signed by the

maker or drawer, making an unqualified promise or order to pay on demand or at a
fixed or determinable future
4 Ibid, pages 401-402.

5 Ibid.
6 Ibid.
7
Business Law Today, Miller & Jentz, 9th Edition, 2011, page 391
8 Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 1
2
Basic Principles and Jurisprudence on the Negotiable Instruments Law 2nd Edition (2015),
M.P.Piad
time, a sum certain in money, to order or bearer, and when it is addressed to a

drawee, the latter must be named or otherwise indicated therein with reasonable
certainty.
Or simply stated: It is a special contract which complies with the requirements laid
down under Section 1 of the Negotiable Instruments Law.
Purpose for the enactment of the Negotiable Instruments Law
The Negotiable Instruments Law was enacted for the purpose of facilitating, not
hindering or hampering transactions in commercial paper. Thus, the said statute
should not be tampered with haphazardly or lightly. Nor should it be brushed aside in
order to meet the necessities in a single case.9
Functions of a Negotiable Instrument
1. Substitute for money merchants often do not want to carry cash for fear of loss
or theft.
2. Credit device some forms of negotiable instruments extend credit from one
party to another.
3. Recordkeeping device these records are used for financial statements, tax
returns, and the like.
Negotiable Instrument as a substitute for money
The essence of negotiability which characterizes a negotiable paper as a credit

instrument lies in its freedom to circulate freely as a substitute for money.10(Firestone
Tire & Rubber Company of the Philippines vs. Court of Appeals and Luzon
Development Bank, G.R. No. 113236, March 5, 2011, [Quisumbing, J.])
Since a negotiable instrument is only a substitute for money and not money, the
delivery of such an instrument does not, by itself, operate as payment (See. 189, Act
2031 on Neg. Insts.; Art. 1249, Civil Code; Bryan Landon Co. v. American Bank, 7
Phil. 255; Tan Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check,
9 State Investment House, Inc. v. Court of Appeals, 217 SCRA 32 (1993), cited in Osmeña vs. Citibank, March 23, 2004
10 Traders Royal Bank vs. Court of Appeals, 269 SCRA 15, 26 (1997)
3
whether a manager's check or ordinary cheek, is not legal tender, and an offer of a
check in payment of a debt is not a valid tender of payment and may be refused
receipt by the obligee or creditor. Mere delivery of checks does not discharge the
obligation under a judgment. The obligation is not extinguished and remains
suspended until the payment by commercial document is actually realized (Art. 1249,
Civil Code, par. 3).11
2012 Bar Question:
Negotiable instruments are used as substitutes for money, which means
a. that they can be considered legal tender.

b. that when negotiated, they can be used to pay indebtedness.
c. that at all times the delivery of the instrument is equivalent to delivery of the
cash.
d. that at all times negotiation of the instruments requires proper indorsement.
Words of Negotiability
The language of negotiability which characterize a negotiable paper as a credit

instrument is its freedom to circulate as a substitute for money. Hence, 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 (11 Am. Jur. 2d, 32).

As held in Caltex (Philippines), Inc vs. Court of Appeals,12
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 the surrounding circumstance 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
11 Philippine Airlines, Inc. vs. Court of Appeals, G.R. No. L-49188, Jan. 30, 1990, [Gutierrez, J.] 12 G.R. No. 97753,
August 10, 1992, 212 SCRA 448, emphasis ours
4
M.P.Piad
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.
Quasi-Negotiable Instruments
In one case, that of Capco vs. Macaset13 , the Supreme Court had an occasion to
rule that: [c]ertificates of stocks are considered as quasi-negotiable instruments. When
the owner or shareholder of these certificates signs the printed form of sale or
assignment at the back of every stock certificate without filling in the blanks provided
for the name of the transferee as well as for the name of the attorney-in-fact, the said
owner or shareholder, in effect, confers on another all the indicia of ownership of the
said stock certificates. (Campos and Lopez-Campos, Notes and Cases on Negotiable
Instruments Law, 1971 ed., p 605)
The phrase quasi-negotiable has been termed as unhappy one; and certainly it is
far from satisfactory, as it conveys no accurate, well-defined meaning. But still it
described better than any other short-hand expression the nature of those instruments
which, while not negotiable in the sense of the law merchant, are so framed and so
dealt with, as frequently to convey as good a title to the transferee as it they were
negotiable. (Daniel, The Elements of Negotiable Instruments Law, page 27)
Very frequently by application of the principles of estoppels, and to effectuate the

ends of justice and the intention of the parties, the courts decree a better title to the
transferee than actually existed in his transferrer; and the result reached in many
cases is the same as would be reached if the instrument were negotiable.14
Types of Negotiable Instruments.
The Philippine Negotiable Instruments Law was basically lifted from the provisions
of the United Stated Uniform Currency Act, in which Secs. 13-104 thereof specified
four types of instruments (e.g. drafts, checks, certificates of deposit, and notes). In the
Philippine setting, however, Act 2031 (Negotiable Instruments Law) provides for three
(e.g., promissory notes, bills of exchange,
13 G.R. No. 90888, September 13, 1990

14 Railroad Co. v. Howard, 7 Wall. 415
5
checks), noteworthy is the inclusion of Drafts and Certificates of Time Deposit through
the decisions of the Supreme Court interpreting our law on negotiable instruments.
At present, in Philippine jurisdiction, we generally recognize five types of

negotiable instruments, to wit:
Promissory Notes15 1.

Bills of Exchange16 2.
Check17 3.
Draft18 4.
Certificates of Time Deposit19 5.
2002 Bar Question:
A. Define the following: (1) a negotiable promissory note, (2) a bill of

exchange and (3) a check.
B. You are Pedro Cruz. Draft the appropriate contract language for (1) your
negotiable promissory note and (2) your check, each containing the essential
elements of a negotiable instrument.
ANSWER:
A.
(1) Sec. 184, Act. 2031 it 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.
(2) Sec. 126, Act 2031 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 on demand or at a fixed or determinable future time a sum certain in money to
order or to bearer.
(3) Sec. 185, Act 2031 it is a bill of exchange drawn on a bank payable on demand.
B.
(1)
September 1, 2002
15 Sec. 184, Act 2031, Negotiable Instruments Law.

16 Sec. 126, ibid.
17 Sec. 185, ibid.
18 BPI vs. Commissioner of Internal Revenue,
19 Caltex (Philippines), Inc. vs. Court of Appeals, G.R. No. 97753, August 10, 1992.
6
M.P.Piad
I promise to pay Pancho Dela Torre, or order, ONE HUNDRED THOUSAND

PESOS (Php 100,000.00), on December 25, 2002.
(Sgd)
Pedro Cruz
(2)
Bank of the Philippine Islands-Malate, Manila
September 1, 2002
Pay to the order of Pancho Dela Torre, the amount of ONE HUNDRED
THOUSAND PESOS (Php 100,000.00).
(Sgd)
Pedro Cruz
1. What is a Promissory Note?
It 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. (Sec. 184, Negotiable Instruments Law)
In the case of Pentacapital Investment Corporation vs. Makilito B. Mahinay,20

citing Sierra vs. Court of Appeals, 21it was held that:
A promissory note is a solemn acknowledgment of a debt and a formal

commitment to repay it on the date and under the conditions agreed upon
by the borrower and the lender. A person who signs such an instrument is
bound to honor it as a legitimate obligation duly assumed by him through
the signature he affixes thereto as a token of his good faith. If he reneges
on his promise without cause, he forfeits the sympathy and assistance of
this Court and deserves instead its sharp repudiation.
Test to determine a promissory note
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 debtor there may be collected from
the words used a promise to pay it; the instrument may be regarded
20 G.R. No. 171736, July 5, 2010, [Nachura, J.:]

21 G.R. No. 90270, July 24, 1992, 211 SCRA 785, 795
7
as a promissory note. (Jimenez vs. Bucoy, G.R. No. L-10221, February 28, 1958,
[Bengzon, J.])
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 5th,
are held to be promissory notes, significance being given to words of payment as
indicating a promise to pay. (1 Daniel Neg. Inst., see 39 and cases cited [Cowan vs.
Hallack, (Colo.) 13 Pacific Reporter 700, 703) (Supra)
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 Secundump p. 523.)
(supra)
Who are the parties to a Promissory Note?
The maker, he is the person who drafted and issued the promissory note, and
made a promise that upon demand or at a fixed or determinable future time, he will
pay a sum certain in money to order or to bearer to the holder of the instrument or to a
holder in due course.
The payee is the person in whose favor the promissory note was issued.
Intimidation, vitiation of consent in promissory notes
Carmela Brobio Mangahas vs. Eufrocina Brobio G.R. No.

183852, October 20, 2010
NACHURA, J.:
FACTS: On January 10, 2002, Pacifico S. Brobio (Pacifico) died intestate, leaving
three parcels of land. He was survived by his wife, respondent
Eufrocina A. Brobio, and four legitimate and three illegitimate
children; petitioner Carmela Brobio Mangahas is one of the
illegitimate children.
On May 12, 2002, the heirs of the deceased executed a Deed of

Extrajudicial Settlement of Estate of the Late Pacifico Brobio with
Waiver. In the Deed, petitioner and Pacificos other children, in
consideration of their love and affection for
8
M.P.Piad
respondent and the sum of P150,000.00, waived and ceded their
respective shares over the three parcels of land in favor of
respondent. According to petitioner, respondent promised to give
her an additional amount for her share in her fathers estate. Thus,
after the signing of the Deed, petitioner demanded from
respondent the promised additional amount, but respondent
refused to pay, claiming that she had no more money.
A year later, while processing her tax obligations with the Bureau
of Internal Revenue (BIR), respondent was required to submit an
original copy of the Deed. Left with no more original copy of the
Deed, respondent summoned petitioner to her office on May 31,
2003 and asked her to countersign a copy of the Deed. Petitioner
refused to countersign the document, demanding that respondent
first give her the additional amount that she promised. Considering
the value of the three parcels of land (which she claimed to be
worth P20M), petitioner asked for P1M, but respondent begged
her to lower the amount. Petitioner agreed to lower it to
P600,000.00. Because respondent did not have the money at that
time and petitioner refused to countersign the Deed without any
assurance that the amount would be paid, respondent executed a
promissory note. Petitioner agreed to sign the Deed when
respondent signed the promissory note which read
31 May 2003
This is to promise that I will give [a] (sic) Financial Assistance to

CARMELA B. MANGAHAS the amount of P600,000.00 Six
Hundred Thousand only on June 15, 2003.
(SGD)
EUFROCINA A. BROBIO
When the promissory note fell due, respondent failed and refused
to pay despite demand. Petitioner made several more demands
upon
9
respondent but the latter kept on insisting that she had no money.
ISSUES: Was intimidation used to execute the promissory note subject of the
case?
RULING: Contracts are voidable where consent thereto is given through mistake,
violence, intimidation, undue influence, or fraud. In determining
whether consent is vitiated by any of these circumstances, courts
are given a wide latitude in weighing the facts or circumstances in
a given case and in deciding in favor of what they believe actually
occurred, considering the age, physical infirmity, intelligence,
relationship, and conduct of the parties at the time of the execution
of the contract and subsequent thereto, irrespective of whether the
contract is in a public or private writing.
Nowhere is it alleged that mistake, violence, fraud, or intimidation

attended the execution of the promissory note. Still, respondent
insists that she was "forced" into signing the promissory note
because petitioner would not sign the document required by the
BIR. In one case, the Court in characterizing a similar argument
by respondents therein held that such allegation is tantamount to
saying that the other party exerted undue influence upon them.
However, the Court said that the fact that respondents were
"forced" to sign the documents does not amount to vitiated
consent.
There is undue influence when a person takes improper

advantage of his power over the will of another, depriving the latter
of a reasonable freedom of choice. For undue influence to be
present, the influence exerted must have so overpowered or
subjugated the mind of a contracting party as to destroy his free
agency, making him express the will of another rather than his
own.
Respondent may have desperately needed petitioners signature

on the Deed, but there is no showing that she was deprived of free
agency when she signed the promissory note. Being forced into a
situation does not amount to vitiated consent where it is not shown
that the party is
10
M.P.Piad
deprived of free will and choice. Respondent still

had a choice: she could have refused to execute
the promissory note and resorted to judicial means
to obtain petitioners signature. Instead,
respondent chose to execute the promissory note
to obtain petitioners signature, thereby agreeing to
pay the amount demanded by petitioner.
Contrary to the CAs findings, the situation did not

amount to intimidation that vitiated consent. There
is intimidation when one of the contracting
parties is compelled to give his consent by a
reasonable and well-grounded fear of an
imminent and grave evil upon his person or
property, or upon the person or property of his
spouse, descendants, or ascendants.
Certainly, the payment of penalties for delayed
payment of taxes would not qualify as a
"reasonable and well-grounded fear of an
imminent and grave evil." (emphasis supplied)
We join the RTC in holding that courts will not set

aside contracts merely because solicitation,
importunity, argument, persuasion, or appeal to
affection was used to obtain the consent of the
other party. Influence obtained by persuasion or
argument or by appeal to affection is not prohibited
either in law or morals and is not obnoxious even
in courts of equity.
2. Bill of Exchange defined.
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 on demand or at a fixed or determinable future time a sum certain in money to
order or to bearer. (Sec. 126, Negotiable Instruments Law)
In the once celebrated case of Manuel Bastida vs. The Acting Commissioner of
Customs and The Court of Tax Appeals,22
it was held that:
22 G.R. No. L-24011, October 24, 2970, [Castro, J:]

11
[A]s bills exchange they are, fundamentally, negotiable instruments. And
a negotiable instrument "is more like money than a contract right or
chose in action."23 As such, it may be the "subject of conversion (Knight
vs. Seney 290 Ill. 11) or of replevin (Rothwell vs. Taylor 303 Ill. 263.) 24
it
may also be the "subject of sale, like any other goods or wares."25 As the
Tax Court aptly observed, "checks may be bought and sold like a
commodity. As a matter of fact in the United States the deposit of a check
with a bank is considered a sale (Helvering vs. Stein [CA 4] 115 F 2d 468;
Burton vs. United States, 196 US 283, 49 L ed 482) ." Money orders, also
considered as bills of exchange of limited negotiability, possess the same
attributes as other negotiable instruments. Thus, they may, be bought and
sold like checks. (emphasis supplied)
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. (Philippine Bank of Commerce vs. Aruego, G.R. No. L-25836-37, January 31,
1981, [Fernandez, J.]) (emphasis supplied)
Illustrative Case:
Philippine Bank of Commerce vs. Jose M. Aruego G.R. Nos.

L-25836-37, January 31, 1981
FERNANDEZ, J.:
FACTS: On December 1, 1959, the Philippine Bank of Commerce instituted an

action against Jose M. Aruego Civil Case No. 42066 for the
recovery of the total sum of about P35,000.00 with daily interest
thereon from November 17, 1959 until fully paid and commission
equivalent to 3/8% for every thirty (30) days or fraction thereof plus
attorneys fees equivalent to 10% of the total amount due and
23 Ludwig Teller, Bills and Notes, p. 6 (1948)

24 Ibid., pp. 6-7
25 Ibid., p. 7
12
M.P.Piad
costs. The complaint filed by the Philippine Bank of Commerce

contains Twenty-Two (22) causes of action referring to Twenty-Two
(22) transactions entered into by the said Bank and Aruego on
different dates covering the period from August 28, 1950 to March
14, 1951. The sum sought to be recovered represents the cost of
the printing of World Current Events, a periodical published by the
defendant. To facilitate the payment of the printing the defendant
obtained a credit accommodation from the plaintiff. Thus, for every
printing of the World Current Events, the printer Encal Press and
Photo Engraving, collected the cost of printing by drawing a draft
against the plaintiff, said draft being sent later to the defendant for
acceptance. As an added security for the payment of the amounts
advanced to Encal Press and Photo Engraving, the plaintiff bank
also required the defendant Aruego to execute a trust receipt in
favor of said bank wherein said defendant undertook to hold in trust
for plaintiff the periodicals and to sell the same with the promise to
turn over to the plaintiff the proceeds of the sale of said publication
to answer for the payment of all obligations arising from the draft.
Defendant contends 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.
ISSUE: Is his contention tenable?
RULING: The contention is without merit.

Under the Negotiable Instruments 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 on demand or at a fixed or 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
13
involved, but not in the determination of whether a commercial
paper is a bill of exchange or not.
From the definition, does the bill of exchange operate as an assignment of

funds in the hands of the drawee?
A bill in itself does not operate as an assignment of the funds in the hands of the
drawee available for the payment thereof. (Sec. 127, Negotiable Instruments Law)
Doctrine of Equitable Assignment
The doctrine of equitable assignment is the creature of courts of equity, and the
phrase equitable assignment is used because, by the technicalities of pleadings at
law, no legal assignment can be effectuated.26It is contended that the bill, whether for
the whole of the fund or debt, or only a part, may be evidence to show as
assignment; and that with other circumstances indicating that such was the intention,
will vest in the holder an exclusive claim to the debt or fund, and bind it in the hands of
the drawee after notice.27 The bill for the entire amount of debt or fund should operate
as an equitable assignment thereof.28
Moreover, it may be regarded as a settled doctrine that an order founded upon a

good consideration, given for a specific debt or fund owing by or in the hands of a third
person, operates as, or rather is evidence of, an equitable assignment of the demand
to the holder.29
Who are the parties to a bill of exchange?
The drawer, is the person drawing an instrument making an unconditional order in

writing to the drawee, requiring him to pay on demand or at a fixed or determinable
future time a sum certain in money to order or to bearer.
The drawee, is the person being required by the drawer to pay on demand or at a
fixed or determinable future time a sum certain in money to the payee, or his order, or
to the bearer of the instrument.
The payee, is the person in whose favor the bill of exchange was issued.
26 Bank of Commerce v. Bogy, 44 Mo. 15; Grammel v. Cramer, 55 Mich. 201
27 Daniel on Negotiable Instruments, page 18; Mandeville v. Welch, 5 Whaet. 277; Buckner v. Sayre, 17 B. Monroe, 754, cited in the Elements of
Negotiable Instruments Law, Daniel, page 8 (bold supplied) 28 Supra
29 The Elements of Negotiable Instruments Law, Daniel, page 9
14
M.P.Piad
What is the rule if the Bill of Exchange is addressed to more than one
drawee?
A bill may be addressed to two or more drawees jointly, whether they are partners
of not.
But not to two or more drawees in the alternative or in succession.
Example:
To: Lancelot Borja and/or Margaux Borja

Bo. Obrero, Iloilo City
In the above instance, the drawee is addressed to two or more persons jointly,
whether they are partners or not. Thus, payment of any one of them extinguishes the
entire obligation.
To: Lancelot Borja, and in his incapacity or insolvency, Margaux Borja;
Lancelot Borja, Margaux Borja, or Mizpah Borja in succession.
In the second instance, the bill was addressed to two or more drawees in the
alternative or in succession, such is not allowed under the law.
Bills of exchange are either foreign or inland
Foreign Bill of Exchange when drawn in one State or country, and made payable
in another State or country;30
Inland Bill of Exchange when drawn, and made payable, in the same State or
country.31
Difference between bills and notes
In their original structure, a bill of exchange and a promissory note do not strongly
resemble each other. In a bill, there are three original parties: drawer, drawee, and
payee; in a note only two: maker and payee. In a bill the acceptor is the primary
debtor. In a note the maker is the only debtor. But if the note be transferred to a third
party by the payee, it becomes strikingly similar to a bill.
30 The Elements of Negotiable Instruments Law, Daniel, page 5

31 Ibid
15
The indorser becomes then, as it were, the drawer; the maker, the acceptor; and the
indorsee, the payee.32(The Elements of the Law of Negotiable Instruments, by: John
W. Daniel, 1908)
Bank notes or bank bills
Bank notes or bank bills (as they are equally as often called) are the promissory
notes of incorporated banks, designed to circulate like money, and payable to bearer
on demand.33
The terms bank notes and bank bills are of the like signification, and for the
purposes of interpretation, both in criminal and civil jurisprudence, are equivalent and
interchangeable.34
In form and substance they are promissory notes, and they are governed by very
many of the principles which apply to the negotiable notes of individuals given in the
course of trade. But they are designed to constitute a circulating medium, and this
circumstance imparts to them peculiar characteristics, and essentially varies the rules
which govern promissory notes in general. They have been held not securities for
money, but money itself.35
Chief Characteristics of
Bank Bills
Always payable on demand;36 
 Usually payable to bearer, though sometimes expressed to be payable to a

person named or bearer;37
 A lawful tender in payment of debts, unless objected to because they are not
money.38
Bank Notes
 Are not, legally speaking, money, but in a popular sense are often spoken of as
money, and are conventionally used in its stead with the like effect.39
3. Draft, defined.
32 Daniel on Negotiable Instruments, page 29

33 The Elements of Negotiable Instruments Law, Daniel, page 15 (Bold supplied)
34 Ibid
35 Soutcot v. Watson, 3 Atk. 226; Daniel on Negotiable Instruments, page 1664, ibid
36 Daniel on Negotiable Instruments, page 1666
37 Ibid, page 1665
38 Ibid, page 1672a
39 Ibid, page 1672
16
M.P.Piad
A draft i s a form of a bill of exchange used mainly in transactions between

persons physically remote from each other, an order made by one person, say the
buyer of goods, addressed to a person having in his possession funds of such buyer
ordering the addressee to pay the purchase price to the seller of the goods, and
where the order is made by one bank to another, it is referred to as a bank draft.
(Bank of the Philippine Islands vs. Commission of Internal Revenue, 496 SCRA 601)
In order for a draft to work, one of two general conditions must exist. Either the
drawee must owe the drawer a debt (in which case the drawer is simply telling the
drawee to pay the debt or a portion of it to a third party) or some kind of agreement or
relationship must exist between the parties under which the drawee has consented to
the drawing of the draft upon him or her. If neither of these conditions existed,
obviously the drawee would not obey the order to pay the amount of the draft to the
payee or to any subsequent holder of the instrument.40
A trade acceptance is a draft or bill of exchange drawn by the seller of the goods
on the purchaser of those goods and accepted (signed) by the purchaser. The
purpose of the transaction is to enable the seller to raise money on the paper before
the purchasers obligation matures under the sales contract.41
To illustrate, X corporation has sold goods to Y company. Due to the fact that Y
company still wishes to utilize the cash instead of paying in cash, X corporation
(drawer) draws a trade acceptance on Y company for the purchase of the goods. The
instrument orders Y company to pay the amount due to the order of X corporation on a
particular future time. It is then presented to an officer of Y company who accepts it by
signing the same and returns it to X corporation. The acceptance in effect, would be a
promise of Y company to pay X corporation when the same becomes due. It can now
be negotiated to a third person, say X corporations bank and receives cash
immediately.
Nature of Draft, as distinguished from Bill of Exchange
40 Business Law Text and Cases, Second Edition, Howell, Allison, Henley, 1981, page 402 41 Ibid.
42 G.R. No. L-16106, December 30, 1961
17
,
The case of Republic of the Philippines vs. Philippine National Bank, et al42
laid down a detailed discussion of the nature of Drafts, to wit:
To begin with, we may say that a demand draft is a bill of exchange payable on
demand (Arnd vs. Aylesworth, 145 Iowa 185; Ward vs. City Trust Company, 102
N.Y.S. 50; Bank of Republic vs. Republic State Bank, 42 S.W. 2d, 27). Considered as
a bill of exchange, a draft is said to be, like the former, an open letter of request from,
and an order by, one person on another to pay a sum of money therein mentioned to a
third person, on demand or at a future time therein specified (13 Words and Phrases,
371) . As a matter of fact, the term draft is often used, and is the common term, for all
bills of exchange. And the words draft and bill of exchange are used indiscriminately
(Ennis vs. Coshoctan Nat. Bank, 108 S.E., 811; Hinnermann vs. Rosenback, 39 N.Y.
98, 100, 101; Wilson vs. Bechenau, 48 Supp. 272, 275).
On the other hand, a bill of exchange within the meaning of our Negotiable
Instruments Law (Act No. 2031) does not operate as an assignment of funds in the
hands of the drawee who is not liable on the instrument until he accepts it. This is the
clear import of Section 127. It says: A bill of exchange of itself does not operate as an
assignment of the funds in the hands of the drawee available for the payment thereon
and the drawee is not liable on the bill unless and until he accepts the same. In other
words, in order that a drawee may be liable on the draft and then become
obligated to the payee it is necessary that he first accepts the same. In fact,
our law requires that with regard to drafts or bills of exchange there is need that they
be presented whether for acceptance or for payment within a reasonable time after
their issuance or after their last negotiation thereon as the case may be (Section 71,
Act 2031). Failure to make such presentment will discharge the drawer from liability or
to the extent of the loss caused by the delay (Section 186, Ibid. ) (emphasis supplied)
Since it is admitted that the demand drafts herein involved have not been
presented either for acceptance or for payment, the inevitable consequence is that the
appellee bank never had any chance of accepting or rejecting them. Verily, appellee
bank never became a debtor of the payee concerned and as such the aforesaid drafts
cannot be considered as credits subject to escheat within the meaning of the law.
Demand Draft distinguished from a cashiers or managers check
42 G.R. No. L-16106, December 30, 1961

18
M.P.Piad
In the very same case of Republic of the Philippines vs. Philippine National
Bank, et al, it has been held that: a demand draft is very different from a cashiers or
managers check, contrary to appellants pretense, for it has been held that the latter is
a primary obligation of the bank which issues it and constitutes its written promise to
pay on demand. Thus, a cashiers check has been clearly characterized In Re Bank of
the United States, 277 N.Y.S. 96, 100, as follows:
A cashiers check issued by a bank, however, is not an ordinary draft. The

latter is a bill of exchange payable on demand. It is an order upon a third party
purporting to be drawn upon a deposit of funds. (Drinkall vs. Movious State Bank,
11 N.D. 10, 88 N.W. 724, 57 L.R.A. 341, 95 Am. St. Rep. 693; State vs. Tyler
County State Bank (Tex. Com. App.) 277 S.W. 625, 42 A.L.R. 1347). A cashiers
check is of a very different character. It is the primary obligation of the bank which
issues it (Nissenbaum vs. State, 38 Ga. App. 253, S.E. 776) a nd constituted its
written promise to pay upon demand (Steinmetz vs. Schultz, 59 S.D. 603, 241
N.W. 734)
The following definitions cited by the appellant also confirm this view:
A cashiers check is a check of the banks cashier on his or another bank. It is in

effect a bill of exchange drawn by a bank on itself and accepted in advance by the
act of issuance (10 C.J.S. 409)
A cashiers check issued on request of a depositor is the substantial equivalent of
a certified check and the deposit represented by the check passes to the credit of
the checkholder, who is thereafter a depositor to that amount. (Lummus Cotton
Gin Co. vs. Walker, 70 So. 754, 756, 195 Ala. 552)
A cashiers check, being merely bill of exchange drawn by a bank on itself, and
accepted in advance by the act of issuance, is not subject to countermand by the
payee after indorsement, and has the same legal effects as a certificate deposit or
a certified check. (Walker vs. Sellers, 77 So. 715; 201 Ala. 189)
A demand draft is not therefore of the same category as a cashiers check which
should come within the purview of the law.
19
4. Certificates of Time Deposit; Negotiable Instrument.
A certificate of deposit is a receipt of a bank or banker for a certain sum of money

received upon deposit, and it is generally framed in such a form as to constitute a
promissory note, payable to the depositor, or to the depositor or order, or to bearer.
(The Elements of Negotiable Instruments Law, Daniel, page 16)
In order, however, to be negotiable, a certificate of deposit must possess the

requisite features of certainty in respect to parties, and time and mode of payment and
the same causes which deprive bills and notes of negotiability would affect it in like
manner. (ibid)
Illustrative case:
Caltex (Philippines), Inc. vs. Court of Appeals and Security Bank and
Trust Company
G.R. No. 97753, August 10, 1992
REGALADO, J.:
Facts: On various dates Security Bank and Trust Company (SBTC) issued 280
certificates of time deposit (CTD) in favor of one Angel dela Cruz who
deposited with SBTC the aggregate amount of Php 1,200,000.00. A
sample text of the certificates of time deposit is reproduced below:
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____

This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS: FOUR THOUSAND
ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS Pesos, Philippine Currency, repayable to
said depositor 731 days. after date, upon presentation and surrender of this certificate, with interest at
the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)

---------- -----------
AUTHORIZED SIGNATURES
Angel dela Cruz delivered the said CTDs to Caltex (Philippines) Inc.
(Caltex) in connection with his purchased of fuel products from the
latter. Sometime
20
M.P.Piad
in March 1982, Angel dela Cruz informed SBTC that he lost all the
certificates of time deposit in dispute. On March 25, 1982, Angel dela
Cruz negotiated and obtained loan from defendant bank in the amount
of Php 875,000.00. On the same date, said depositor executed a
notarized Deed of Assignment of Time Deposit stated, among others,
that dela Cruz surrenders to SBTC full control of the indicated time
deposits from and after date of the assignment and further authorizes
said bank to pre-terminate, set-off and apply the said time deposits to
the payment of whatever amount or amounts may be due on the loan
upon its maturity.
Sometime in 1982, plaintiffs agent went to the defendant bank and

presented for verification the CTD declared lost by Angel dela Cruz
alleging that the same were delivered to herein plaintiff as security for
purchases made with Caltex. On November 26 1982, defendant
received a letter from herein plaintiff formally informing it of its
possession of the CTDs in question and of its decision to pre-terminate
the same. Accordingly, defendant bank rejected the plaintiffs demand
and claim for payment of value of the CTDs. In April 1983, the loan in
the amount of Php 875,000.00 with defendant bank matured and fell
due, and the latter set-off and applied the time deposits in question to
the payment of the matured loan.
Plaintiff filed the instant complaint praying that the defendant bank be
ordered to pay it the aggregate value of the certificates of time deposit of
Php 1,120,000.00 plus interest and compounded interest therein at 16%
per annum, moral and exemplary damages as well as attorneys fees.
Trial court rendered its decision dismissing the instant complaint.
Issue: Whether or not the Certificates of Time Deposit are considered as negotiable
instruments?
Ruling: The CTDs in question are negotiable instruments. Section 1 Act No. 2031,
otherwise known as the Negotiable Instruments Law, enumerates the
requisites for an instrument to become negotiable.
21
The CTDs in question undoubtedly meet the requirements of the law for
negotiability. The parties' bone of contention is with regard to requisite
(d) set forth above.
xxx
The documents provide that the amounts deposited shall be repayable

to the depositor. And who, according to the document, is the depositor?
It is the bearer. The documents do not say that the depositor is Angel
dela Cruz and that the amounts deposited are repayable specifically to
him. Rather, the amounts are to be repayable to the bearer of the
documents or, for that matter, whosoever may be the bearer at the time
of presentment.
xxx
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 fact of the instrument itself43. In the construction of a bill or
note, the intention of the parties is to control, if it can be legally
ascertained.44 While the writing may be read in the light of the
surrounding circumstances in order to prove perfectly understanding 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 instead. 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.45
Certificates of Time Deposit; Issued without Valuable Consideration; Not

Covered by the Philippine Deposit Insurance Corporation.
Illustrative Case:
Philippine Deposit Insurance Corporation vs.

Court of Appeals and John Francis Cotaoco
G.R. No. 118917, December 22, 1997
43 11 Am. Jur. 2d, Bills and Notes, 79.

44 Ibid, 86.
45 Ibid, 87-88.
22
M.P.Piad
KAPUNAN, J:
Petitioner Philippine Deposit Insurance Corporation (PDIC) seeks the reversal of

the decision of the Court of Appeals affirming with modification the decision of the
Regional Trial Court holding petitioner liable for the value of thirteen (13) certificates of
time deposit (CTDs) in the possession of private respondents.
The facts, as found by the Court of Appeals, are as follows:
On September 22, 1983, plaintiffs-appellees invested in money market

placements with the Premiere Financing Corporation (PFC) in the sum of
P10,000.00 each for which they were issued by the PFC corresponding
promissory notes and checks. On the same date (September 22, 1983), John
Francis Cotaoco, for and in behalf of plaintiffs-appellees, went to the PFC to
encash the promissory notes and checks, but the PFC referred him to the Regent
Saving Bank (RSB). Instead of paying the promissory notes and checks, the RSB,
upon agreement of Cotaoco, issued the subject 13 certificates of time deposit with
Nos. 09648 to 09660, inclusive, each stating, among others, that the same
certifies that the bearer thereof has deposited with the RSB the sum of
P10,000.00; that the certificate shall bear 14% interest per annum; that the
certificate is insured up to P15,000.00 with the PDIC; and that the maturity date
thereof is on November 3, 1983 (Exhs. "B", "B-1 to "B-12").
On the aforesaid maturity dated (November 3, 1983), Cotaoco went to the

RSB to encash the said certificates. Thereat, RSB Executive Vice President Jose
M. Damian requested Cotaoco for a deferment or an extension of a few days to
enable the RSB to raise the amount to pay for the same (Exh. "D"). Cotaoco
agreed. Despite said extension, the RSB still failed to pay the value of the
certificates. Instead, RSB advised Cotaoco to file a claim with the PDIC.
Meanwhile, on June 15, 1984, the Monetary Board of the Central Bank issued
Resolution No. 788 (Exh. "2", Records, p. 159) suspending the operations of the
RSB. Eventually, the records of RSB were secured and its deposit liabilities were
eventually determined. On December 7, 1984, the Monetary Board issued
Resolution No. 1496 (Exh. "1") liquidating the RSB. Subsequently, a masterlist or
inventory of the RSB assets and liabilities was prepared. However, the certificates
of
23
time deposit of plaintiffs-appellees were not included in the list on the ground that
the certificates were not funded by the PFC or duly recorded as liabilities of RSB.
On September 4, 1984, plaintiffs-appellees filed with the PDIC their

respective claims for the amount of the certificates (Exhs. "C," "C-1" to "C-12").
Sabina Yu, James Ngkaion, Elaine Ngkaion and Jeffrey Ngkaion, who have
similar claims on their certificates of time deposit with the RSB, likewise filed their
claims with the PDIC. To their dismay, PDIC refused the aforesaid claims on the
ground that the Traders Royal Bank Check No. 299255 dated September 22,
1983 for the amount of P125,846.07 (Exh. "B") issued by PFC for the
aforementioned certificates was returned by the drawee bank for having been
drawn against insufficient funds; and said check was not replaced by the PFC,
resulting in the cancellation of the certificates as indebtedness or liabilities of
RSB.46
Consequently, on March 31, 1987, private respondents filed an action for

collection against PDIC, RSB and the Central Bank.
On September 14, 1987, the trial court, declared the Central Bank in default for
failing to file an answer.
On May 29, 1989, the trial court rendered its decision ordering the defendants
therein to pay plaintiffs, jointly and severally, the amount corresponding to the latter's
certificates of time deposit.
Both PDIC and RSB appealed. The Central Bank, on the other hand, filed a
petition for certiorari, prohibition and mandamus before the Court of Appeals praying
that the writ of execution issued by the trial court against it be set aside.
On February 8, 1995, the Court of Appeals rendered its decision granting the
Central Bank's petition but dismissing the appeals of PDIC and RSB. Hence, this
petition by PDIC assigning the following errors:
I
THE CA ERRED IN HOLDING THAT THE SUBJECT CTDS ARE NEGOTIABLE
INSTRUMENTS
II
THE CA ERRED IN HOLDING THAT THE CTDS WERE ACQUIRED
FOR VALUE AND CONSIDERATION
III
46 Rollo, pp. 30-31.

24
M.P.Piad
THE CA ERRED WHEN IT HELD THAT BECAUSE THE CTDS STATE THAT
THESE WERE INSURED PETITIONER SHOULD BE HELD LIABLE FOR THE
SAME.
We deal jointly with petitioner's first and third assigned errors.
Relying on this Court's ruling in Caltex (Philippines), Inc. v. Court of Appeals and
Security Bank and Trust Company, 47 the Court of Appeals concluded that the subject
CTDs are negotiable. Petitioner, on the other hand, contends that the CTDs are non
negotiable since they do not contain an unconditional promise or order to pay a sum
certain in money nor are they made payable to order or bearer, as required by Section
1 of the Negotiable Instruments Law.
Whether the CTDs in question are negotiable or not is, however, immaterial in the
present case. The Philippine Deposit Insurance Corporation was created by law and,
as such, is governed primarily by the provisions of the special law creating it.48 The
nd, under Republic Act
liability of the PDIC for insured deposits therefore is statutory a
No. 3591,49 as amended, such liability rests upon the existence of deposits with the
insured bank, not on the negotiability or non-negotiability of the certificates evidencing
these deposits.
The authority for this conclusion finds support in decisions by American state
courts applying their respective bank guaranty laws. Invariably, the plaintiffs in these
cases argued that the negotiability of the certificates of deposit in their possession
entitled them to be paid out of the bank guaranty fund, a contention that the courts
uniformly rejected.
argued that:
Thus, the plaintiffs in Fourth Nat. Bank of Wichita v. Wilson50
. . . the court should hold the certificates to be guaranteed because they are
negotiable instruments, and were acquired by the present holders in due course;
otherwise it is said certificates of deposit will be deprived of the quality of
commercial paper. Certificates of deposit have been regarded as the highest form
of collateral. They are of wide currency in
47 212 SCRA 448 (1992).

48 Section 4, Corporation Code.
49 Entitled "An Act Establishing The Philippine Deposit Insurance Corporation, Defining Its Powers And Duties And For Other Purposes."
50 204 Pac. 715 (1992), 110 Kan. 380.
25
the banking and business worlds, and are particularly useful to persons of small
means, because they bear interest, and may be readily cashed; therefore to
deprive them of the benefit of the guaranty fund would be a calamity. . . .
The Supreme Court of Kansas, however, found the plaintiffs' contention to be

without merit, ruling thus:
. . . The argument confuses negotiability of commercial paper with statutory

guaranty of deposits. The guaranty is something extrinsic to all forms of evidence
of bank obligation; and negotiability of instruments has no dependence on
existence or nonexistence of the guaranty.
. . . Whatever the status of the plaintiffs may be as holders in due course under
the Negotiable Instruments Law, they cannot be assignees of a deposit which
was not made, and cannot be entitled to the benefit of a guaranty which did not
come into existence. . . .
In arriving at the above decision, the Kansas Supreme Court relied on its earlier
ruling in American State Bank v. Foster,51
which arose from the same facts as the
Fourth National Bank c ase. There, the Court held:
. . . Even if the plaintiff were to be regarded as an innocent purchaser of the

certificates as negotiable instruments, its situation would be in no wise bettered so
far as relate to a claim against the guaranty fund. The fund protects deposits only.
And if no deposit is made, or no deposit within the protection of the guaranty law,
the transfer of a certificate cannot impose a liability on the fund. . . . where a
certificate of deposit is given under such circumstances that it is not protected by
the guaranty fund, although that fact is not indicated by anything on its face, its
indorsement to an innocent holder cannot confer that quality upon it.
In like fashion did the Supreme Court of Nebraska brush aside a similar
contention in State v. Farmers' Stale Bank: 52

In this contention we think the appellants fail to distinguish between the

liability of the maker of a negotiable instrument, which rests upon the law
pertaining to negotiable paper, and the liability of the guaranty fund, which is
purely statutory. The circumstances under which the guaranty fund may be liable
are entirely apart from the law pertaining to negotiable paper.
51 204 Pac. 709, 110 Kan. 520 (1922).

52 196 N.W. 908, 111 Neb. 117 (1923).
26
M.P.Piad
A holder of a certificate of deposit in a bank who seeks to hold the guaranty fund
liable for its payment must show that the transaction leading up to the issuance of
the certificate was such that the law holds the guaranty fund liable for its payment.
...
The Farmers' State Bank ruling was reiterated by the Nebraska Supreme Court in

State v. Home State Bank of Dunning53 and in State v. Kilgore State Bank.54 The same
ruling was adopted by the Supreme Court of South Dakota in Mildenstein v. Hirning.55
In the case at bar, the Court of Appeals initially found the subject CTDs to be
negotiable. Subsequently, however, respondent court deemed the issue immaterial,
albeit for entirely different reasons.
. . . Besides, whether the certificates are negotiable or not is of no moment. The

fact remains that the certificates categorically state that their bearer [sic] have a
deposit in the RSB; that the same will mature on November 3, 1993; and that the
certificates are insured by PDIC.56
We disagree with respondent court's rationale. The fact that the certificates state
that the certificates are insured by PDIC does not ipso facto make the latter liable for
the same should the contingency insured against arise. As stated earlier, the deposit
liability of PDIC is determined by the provisions of R.A. No. 3519, and statements in
the certificates that the same are insured by PDIC are not binding upon the latter.
. . . The mere fact that a certificate recites on its face that a certain sum has been
deposited, or that officers of the bank may have stated that the deposit is
protected by the guaranty law, does not make the guaranty fund liable for
payment, if in fact a deposit has not been made . . . . The banks have nothing to
do with the guaranty fund as such. It is a fund raised by assessments against all
state banks, administered by officers of the state to protect deposits in banks. . .
.57
We come now to petitioner's second assigned error.
53 201 N.W. 971, 113 Neb. 93 (1925).

54 205 N.W. 297 (1925).
55 207 N.W. 979 (1926).
56 Rollo, p. 38.
57 State v. Farmers' State Bank, supra, note 6.
27
In order that a claim for deposit insurance with the PDIC may prosper, the law
requires that a corresponding deposit be placed in the insured bank. This is implicit
from a reading of the following provisions of R.A. 3519:
Sec. 1. There is hereby created a Philippine Deposit Insurance Corporation . . .

which shall insure, as provided, the deposits o f all banks which are entitled to the
benefits of insurance under this Act . . . . (Emphasis supplied).
xxx xxx xxx

Sec. 10(a) . . .
xxx xxx xxx
(c) Whenever an insured bank shall have been closed on account of insolvency,
payment of the insured deposits in such bank shall be made by the Corporation
as soon as possible . . . .(Emphasis supplied.)
A deposit as defined in Section 3(f) of R.A. No. 3591, may be constituted only if
money or the equivalent of money is received by a bank:
Sec. 3. As used in this Act
(f) The term "deposit" means the unpaid balance of money or its equivalent
received by a bank in the usual course of business and for which it has given or is
obliged to give credit to a commercial, checking, savings, time or thrift account or
which is evidenced by passbook, check and/or certificate of deposit printed or
issued in accordance with Central Bank rules and regulations and other applicable
laws, together with such other obligations of a bank which, consistent with
banking usage and practices, the Board of Directors shall determine and
prescribe by regulations to be deposit liabilities of the Bank . . . . (Emphasis ours.)
Did RSB receive money or its equivalent when it issued the certificates of time
deposit? The Court of Appeals, in resolving who between RSB and PFC issued the
certificates to private respondents, answered this question in the negative. A perusal
of the impugned decision, however, reveals that such finding is grounded entirely on
speculation, and thus, cannot bind this Court:58
58 Cuizon vs. Court of Appeals, G.R. No. 102096, August 22, 1996.
28
M.P.Piad
Equally unimpressive is the contention of PDIC and RSB that the certificates
were issued to PFC which did not acquire the same for value because the check
issued by the latter for the certificates bounced for insufficiency of funds. First,
granting arguendo t hat the certificates were originally issued in favor of PFC, such
issuance could only give rise to the presumption that the amount stated in the
certificates have been deposited to RSB. Had not PFC deposited the amount
stated therein, then RSB would have surely refused to issue the certificates
certifying to such fact. Second, why did not RSB demand that PFC pay the
certificates or file a claim against PFC on the ground that the latter failed to pay
for the value of the certificates? It could very well be that the reason why RSB did
not run after PFC for payment of the value of the certificates was because the
instruments were issued to the latter by RSB for value or were already paid to
RSB by plaintiffs-appellees. Third, if it is true that at the time RSB issued the
certificates to PFC, the instruments were paid for with checks still to be encashed,
then why did not RSB specifically state in the certificates that the validity thereof
hinges on the encashment of said check? Fourth, even if it is true that PFC did not
deposit with or pay the RSB the amount stated in the certificates, the latter is not
be such reason freed from civil liability to plaintiffs-appellees. For, by issuing the
certificates, RSB bound itself to pay the amount stated therein to whoever is the
bearer upon its presentment for encashment. Truly, there is no reason to depart
from the established principle that where a bank issues a certificate of deposit
acknowledging a deposit made with a third person or an officer of the bank, or
with another bank representing it to be the certificate of the bank, upon which
assurance the depositor accepts it, the bank is liable for the amount of the deposit
(Michis, Banks and Banking, Vol. 5A, pp. 48-49, as cited in the Decision on p. 3
thereof).59
Moreover, such finding totally ignores the evidence presented by defendants.

Cardola de Jesus, RSB Deputy Liquidator, testified that RSB received three (3)
checks in consideration for the issuance of several CTDs, including the ones in
dispute. The first check amounted to P159,153.93, the second, P121,665.95, and the
third, P125,846.07 In consideration of the third check, private respondents received
thirteen (13) certificates of deposit with Nos. 09648 to 09660, inclusive, with a value of
P10,000.00 each or a total of P130,000.00. To conform with the value of the third
check,
59 Id., at 39-40.
29
CTD No. 09648 was "chopped," and only the sum of P5,846.07 was credited in favor
of private respondents. The first two checks "made good in the clearing" while the
third was returned for being "drawn against insufficient funds."
The check in question appears on the records as Exhibit "3" (for Regent),60 and is
described in RSB's offer or evidence as "Traders Royal Bank Check No. 292555
dated September 22, 1983 covering the amount or P125,846.07 . . . issued by
Premiere Financing Corporation."61 At the back of said check are the words "Refer to
Drawer,"62indicating that the drawee bank (Traders Royal Bank) refused to pay the
value represented by said check. By reason of the check's dishonor, RSB cancelled
the corresponding as evidence by an RSB "ticket" dated November 4, 1983.63
These pieces of evidence convincingly show that the subject CTDs were indeed
issued without RSB receiving any money therefor. No deposit, as defined in Section 3
(f) of R.A. No. 3591, therefore came into existence. Accordingly, petitioner PDIC
cannot be held liable for value of the certificates of time deposit held by private
respondents.
ACCORDINGLY, the instant petition is hereby GRANTED and the decision of the
Court of Appeals REVERSED. Petitioner is absolved from any liability to private
respondents.
SO ORDERED.
Davide, Jr., Bellosillo and Vitug, JJ., concur.
5. Check defined.
A check is a bill of exchange drawn on a bank payable on demand. (Sec. 185,

Negotiable Instruments Law)
A check is (1) a draft or order (2) upon a bank or banking house, (3) purporting to
be drawn upon a deposit of funds (4) for the payment at all events of a certain sum of
money, (5) to a certain person therein named, or to him or his order, or to bearer, and
(6) payable instantly on demand.64
Except as herein otherwise provided, the provisions of this Act applicable to a bill
of exchange payable on demand apply to a check.
60 Records, p. 161.
61 Id., at 155.
62 Exhibit 3-1 (Regent).
63 Exhibits "5" and "5-A" (Regent); records, p. 163.
64 Blair & Hoge v. Wilson, 28 Gratt. 170; Ridgely Bank v. Patton, 109 Ill, 484, cited in Daniel, page 17
30
M.P.Piad
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 in an amount equal to the amount
credited to his account. (Equitable PCI Bank vs. Ong, 502 SCRA 119)
Check and Inland Bills of Exchange, distinguished
The Supreme Court of the United States, in the leading case of Merchants Bank
v. State Bank, says of checks when contrasted with bills of exchange: Bank checks
are not inland bills of exchange, but have many of the properties of such commercial
paper, and many of the rules of the law merchants are alike applicable to both. Each is
for a specified sum, payable in money in both cases, there is a drawer, a drawee, and
payee. Without acceptance, no action can be maintained by the holder, upon either,
against drawee. The chief points of difference are that (1) a check is always drawn on
a bank or banker; (2) the drawer is not discharged by the laches of the holder in
presentment, unless he can show that he has sustained some injury by the default; (3)
it is not due until payment is demanded, and the statute of limitations runs only from
that time; (4) it is, by its fact, the appropriation of so much money of the drawer, in the
hands of the drawee, to the payment of an admitted liability of the drawer; (5) it is not
necessary that the drawer of a bill s hould have funds in the hands of the drawee a
check in such case would be a fraud.65
65 Merchants’ Bank v. State Bank, 10 Wall. 647, cited in Daniel, page 18 (italics supplied)
31
I. FORM AND INTERPRETATION
Section 1. Form of negotiable instruments. - A

n 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.
Notes:
2014 Bar Question:
Which of the following instruments is negotiable if all the other

requirements of negotiability are met?
(A) A promissory note with promise to pay out of the U.S. Dollar account of the
maker in XYZ Bank
(B) A promissory note which designates the U.S. Dollar currency in which
payment is to be made
(C) A promissory note which contains in addition a promise to paint the portrait of
the bearer
(D) A promissory note made payable to the order of Jose Cruz or Josefa Cruz
2013 Bar Question:
32
M.P.Piad
Antonio issued the following instrument:

August10, 2013
Makati City
P100,000.00
Sixty days after date, I promise to pay Bobby or his designated representative
the sum of ONE HUNDRED THOUSAND PESOS (P100,000.00) from my BPI
Acct. No. 1234 if, by this due date, the sun still sets in the west to usher in the
evening and rises in the east the following morning to welcome the day.
(Sgd.) Antonio Reyes
Explain each requirement of negotiability present or absent in the instrument.

(8%)
ANSWER:
As required under Sec. 1 (a) of the Negotiable Instruments Law, the Instrument is
in writing and signed by the maker Antonio Reyes.
As required in Sec. 1 (b), the instrument does not contain an unconditional

promise or order to pay a sum certain in money. The instrument was made payable
out of a particular fund, that is BPI Account No. 1234, and the fact of payment is upon
the condition that if, by this due date, the sun still sets in the west to usher in the
evening and rises in the east the following morning to welcome the day.
Under Sec. 1 (c), the instrument is made payable upon demand, or on a fixed or
determinable future time, which is sixty days after date.
Under Sec. 1 (d), the instrument is payable to order or bearer, which is payable to
Bobby or his designated representative.
Under Sec. 1 (e), where the instrument is addressed to a drawee, he must be

named or otherwise indicated therein with reasonable certainty, which finds no
applicability if the instrument is a promissory note.
1996 Bar Question:
33
What are the requistes of a negotiable instrument? The requisites of a
negotiable instrument are as follows:
a) It must be in writing and signed by the maker or drawer; b) It must contain an

unconditional promise or order to pay a sum certain in money;
c) It must be payable on demand, or on a fixed or determinable future time;
d) It must be payable to order or to bearer;
e) Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty. (Sec. 1, NIL)
Parties to Negotiable Instruments:
In sum, parties to negotiable instruments may be primary, or secondary or

incidental.
Primary parties are those which are the primary participants to the creation of a
aker, drawer, payee, drawee/acceptor).
negotiable instrument (e.g., m
Secondary or incidental parties are those which came in or become involved only
after the instrument is negotiated or transferred to a third person (e.g., indorsers,
indorsees).
They may also be classified as parties primarily liable and parties secondarily
liable.
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. 192)
Parties to a Promissory Note, include:

a) Maker;
b) Payee
Parties to a Bill of Exchange, include:

a) Drawer;
b) Drawee;
c) Payee
At the onset, it ought to be proper for us to define the terms that the reader would
encounter throughout the entire study of this subject matter, as specified in Section
191 that unless the contract otherwise requires:
34
M.P.Piad
eans an acceptance completed by delivery or notification;

"Acceptance" m
"Action" includes counterclaim and set-off;
"Bank" includes any person or association of persons carrying on the business of

banking, whether incorporated or not;
"Bearer" means the person in possession of a bill or note which is payable to

bearer;
"Bill" means bill of exchange, and "note" means negotiable promissory note;
eans transfer of possession, actual or constructive, from one person

"Delivery" m
to another;
"Holder" means the payee or indorsee of a bill or note who is in possession of it,
or the bearer thereof;
"Indorsement" means an indorsement completed by delivery; "Instrument"
means negotiable instrument;
eans the first delivery of the instrument, complete in form, to a person

"Issue" m
who takes it as a holder;
"Person" includes a body of persons, whether incorporated or not;
eans valuable consideration;

"Value" m
"Written" includes printed, and "writing" includes print.
The law does not require any particular form, either as to a bill of exchange or
promissory note, or other negotiable instrument, and while it would be unwise to
depart from the approved forms in vogue amongst merchants, yet the law respects
substance more than form; and where the intention appears to assume the obligations
which devolve upon drawers and makers of negotiable instruments, it will be enforced,
although not evidenced in the usual commercial form. Thus, an order written under a
note, Please pay the above note, and hold it against me in our settlement, signed by
the drawer and accepted by the drawee, has been held a good bill;66 and so, also, it
has been held that a like order written under an account is a bill of exchange.67 And
35
where an indorsement was made on a bond, ordering the contents to be paid to
order for value received, it was held a good bill.68(Daniel, Elements of the Law of
Negotiable Instruments Law, page 35)
Electronic Messages cannot be considered negotiable instruments
In HSBC v. Commissioner of Internal Revenue,69it was held that electronic

messages cannot be considered negotiable instruments as they lack the feature of
negotiability, which, is the ability to be transferred and that the said electronic message
are mere memoranda of the transaction consisting of the actual debiting of the
[investor-client-payors] local or foreign currency account in the Philippines and entered
as such in the books of account of the local bank, HSBC.70
Must be in Writing
As a substitute for money, a negotiable instrument, similar to money, must be

written or embodied in a medium, in such a way that it could by physically
transferrable from hand to hand similar to that of money. Strictly speaking, there are
no verbal negotiable instruments.
It may be written on any paper, cloth, board, parchment, wood, plastic, so long as
it has a semi-permanent character, so as to manifest the intent of the maker or drawer
to create a negotiable instrument, capable of being negotiated or transferred from one
person to another. Otherwise, if such is incapable of being physically transferred its
negotiable character would be defeated.
[T]his writing can be handwritten, printed, or typewritten, or it can consists of any

other intentional [method of] reduction to tangible form. (Business Law, Howell, p.
412)
For a negotiable instrument to operate practically as either a substitute for cash
or a credit device, or both, it is essential that the instrument can be easily transferable
without danger of being uncollectible. 71

The whole of the bill or note must be expressed in writing. Whether the instrument
be a bill of exchange or a promissory
66 Leonard v. Mason, 1 Wend. 252

67 Hoyt v. Lynch, 2 Sandf. 328
68 Bay v. Frazer, 1 Bay, 66
69 G.R. Nos. 166018 & 167728, June 4, 2014
70 Rollo (G.R. No. 167728), p. 55.
71 Miller & Jentz, Business Law Today, 9th Edition, 2011, page 391
36
M.P.Piad
note, or otherwise, and whether or not it be negotiable, must be determined by its

face, without reference to any other source.72
Signed by the Maker or Drawer
Section 1 requires that the instrument be signed either by the maker or drawer.
This is in line with the provision that No person is liable on the instrument whose
signature does not appear thereon.73 Moreover, a negotiable instrument being
essentially a contract requires that there be consent of the maker or drawer, since
they are the ones who start with the creation and initial delivery of an instrument.
Consent is thus, manifested by their affixing their signature on the instrument.
The term signed means any symbol executed or adopted by a party with [the]
present intention to authenticate a writing. Thus a signing can occur through the use of
ones initials, a rubber stamp, or some other type of signature, such as the mark X, so
long as it is made with the intention of giving assent to the writings terms. (ibid, p. 413)
It does not matter upon what portion of the instrument, the maker or drawer
affixes his name, so that he signs as drawer or maker.74It is not material whether the
writing is in pencil or ink,75 although as matter of permanence and security, ink is, of
course, preferable. And the name may be printed a well as written, though, in such
cases, it cannot prove itself, and must be shown to have been adopted and used by
the party as his signature.76If another sign the name of the party in his presence and at
his request, it is the same as if he did it himself;77 and if another sign the partys name
by verbal or other authority, it is sufficient.78 The full name may be written; and at least
the surname should appear, and generally does. But this is not indispensable the
initials are sufficient,79 and any mark which the party uses to indicate his intention to
bind himself will be as effectual as his signature,80 whether there be a certificate of
witnesses on the instrument or not.81 But, of course, a mark does not prove itself like a
signature,
72 Daniel on Negotiable Instrument, 77; Gibbon v. Scott, 2 Stark, 268

73 Sec. 18, NIL
74 Clason v. Bailey, 14 Johns, 484; Schmidt v. Schmaeller, 45 Mo. 502
75 Reed v. Roark, 14 Tex. 329; Closson v. Stearns, 4 Vt. 11
76 Brown v. Butchers’ Bank, 6 Hill, 443; Schneider v. Norris, 2 Maule & S. 286
77 Sager v. Tupper, 42 Mich. 605

78 Daniel on Negotiable Instruments, page 274, 299
79 Merchants’ Bank v. Spicer, 6 Wend. 443; 1 Parsons on Notes and Bills, 36
80 Lyons v. Holmes, 11 S.C. 429

81 Willoughby v. Moulton, 47 N.H. 205; Shank v. Butach, 28 Ind. 19
37
although it is an adminicle of proof.82 Any peculiarity in it may be shown as evidence
of proof;83 but, unless there be an attesting witness, or one who saw it written, or is
familiar with its characteristics, the plaintiff cannot recover.84 Nor it is necessary that
the substance upon which the instrument is written should be paper parchment, cloth,
leather, or any other substitute for paper will suffice.85(Daniel, Elements of the Law of
Negotiable Instruments, page 35-36)
Electronic messages are not deemed signed
Electronic messages are not signed by the investor-clients as supposed drawers

of a bill of exchange; they do not contain an unconditional order to pay a sum certain in
money as the payment is suppoed 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. Thus, the electronic messages are not nills of exchange. (HSBC v.
Commissioner of Internal Revenue, G.R. Nos. 166018 & 167728, June 4, 2014,
[Leonardo
De Castro, J.:])
Must Contain Unconditional Promise or Order
In perspective, a negotiable instrument operates as an undertaking of a person,

be it a maker, who promises to pay, or a drawer, which in turn, orders another person
to pay on his behalf, that is made without any condition to another person, identified
as the payee, and receiving anything of value in exchange thereof. Vital is the
requirement that the promise or order to pay must be unconditional. Since, a
negotiable instrument is intended as a substitute for money, the payee and the
subsequent holder thereof must be assured that they would be able to receive the
amount indicated on the face of the instrument without any other condition or
additional burden.
If a bill, it must contain a certain direction to pay if a note, a certain promise to

pay. A bill is, in its nature, the demanding of a right, not the mere asking of a favor,
and therefore a supplication made or authority given to pay an amount is not a bill.
(Daniel, Elements of the Law of Negotiable Instruments, page 45)
A promissory note must contain a certain promise to pay. I promise to pay, or

cause to be paid, would suffice, because the undertaking that the payment be made is
definite and certain.86It
82 Hilborn v. Alford, 22 Cal. 482; Flowers v. Billing, 45 Ala. 488

83 George v. Surrey, 1 Moody & M. 516; 2 Parsons on Notes and Bills, 480
84 Thompson on Bills, 30, 31, 33
85 Daniel on Negotiable Instruments, 77
86 Lovell v. Hill, 6 Car. & P. 238; Caviness v. Rushton, 101 Ind. 500
38
M.P.Piad
is said by Story, that it seems that to constitute a good promissory note, there
must be an express promise upon the fact of the instrument to pay the money; for
a mere promise implied by law, founded upon an acknowledged indebtedness, will
not be sufficient.87 But we think the better language is used by Byles, who says: No
precise words of contract are necessary, provided they amount, in legal effect, to a
In other words, if over and above the mere acknowledgment of debt,
promise to pay,88
there may be collected from the words used a promise to pay it, the instrument may be
regarded as a promissory note.89
The instrument must be payable unconditionally and at all events in order to be

negotiable.90 To be unconditional, the payment of the instrument must not be made to
depend upon a future uncertain event, which may, or may not happen.
A promise is unconditional, although it is 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. (Sec. 2, NIL)
And an instrument payable upon a contingency is not negotiable, and the

happening of the event does not cure the defect.91 The contingency implied deprives
the instrument of its negotiable character, as the events named may never happen.92
If the time must certainly come, although the particular day is not mentioned, the
instrument is regarded as negotiable, as the fact of payment is certain.93If the
instrument is payable at, or within a certain time after, a mans death, it is sufficient,
because the event must occur;94 and a promise to pay on demand, after my decease,
$850, signed by the promissory, is a good note, negotiable as any other, and binding
on the promisors estate at his death.95 So a note payable one day after date or at my
death,96 and if the day of payment must come at some time, it
87 Story on Promissory Notes, 14
88 Byles on Bills, 8 (italics supplied)
89 Daniel on Negotiable Instruments, 36; Cowan v. Hallack, 9 Colo. 578
90 Daniel, Elements of the Law of Negotiable Instruments, 46
91 Sec. 4, NIL
93 Daniel on Negotiable Instruments, 43
94 Cooke v. Colehan, 2 Stra. 1217; Conn v. Thornton, 46 Ala. 587; Price v. Jones, 105 Ind. 544. 95 Bristol v. Warner, 19
Conn. 7
96 Conn v. Thornton, 46 Ala. 588
97 Worth v. Case, 42 N.Y. 362
39
has been said that the distance is immaterial.97(Daniel, Elements of the Law of
Negotiable Instruments, page 48)
However, an order or promise to pay out of a particular fund is not unconditional.

(Sec. 2, N.I.L.) In accordance with these principles the negotiable character of the
instrument is destroyed if it be made payable expressly or impliedly out of a particular
fund.98Illustrations: The insertion in an order to pay a certain sum on account of brick
work done on a certain building99 or out of rents,100 or out of my growing substance,101 or
out of a certain claim,102 or out of my part of the estate of A,103 or out of the amount due
on contract.104 On the same principle, receivers
certificates are not regarded as negotiable, although framed with the negotiable words
usual in promissory notes.105(Daniel, Elements of the Law of Negotiable Instruments,
page 50)
An order to pay A, or order, $300.00 or what may be due on my deposit book, is

conditional.106 Therefore, the same is non negotiable.
2011 Bar Question:
A writes a promissory note in favor of his creditor, B. It says: Subject to my

option, I promise to pay B Php1 Million or his order or give Php1 Million worth
of cement or to authorize him to sell my house worth Php1 Million. Signed, A.
Is the note negotiable?
A. No, because the exercise of the option to pay lies with A, the maker and
debtor.
B. No, because it authorizes the sale of collateral securities in case the note is not
paid at maturity.
C. Yes, because the note is really payable to B or his order, the other provisions
being merely optional.
D. Yes, because an election to require something to be done in lieu of payment of
money does not affect negotiability.
To Pay a sum certain in Money
97 Worth v. Case, 42 N.Y. 362

99 Pitman v. Crawford, 3 Gratt. 127
100 J Parsons on Notes and Bills, 43
101 Josselyn v. Lacier, 10 Mod. 294
102 Richardson v. Carpenter, 46 N.Y.661
103 Mills v. Kuykendale, 2 Blckf., 47
104 Hoagland v. Erck, 11 Neb. 580
105 Staunton v. Railroad Co., 31 Fed. 587; McCurdy v. Bowes, 88 Ind.583
106 The Negotiable Instruments Law Annotated, by Joseph Doddridge Brannan, Second Edition 1911, page 3, citing National Sav. Bank v. Cable,
73 Conn. 568 Atl. 428.
40
M.P.Piad
The sum or amount which is promised or ordered to be paid by the maker or

drawer as the case may be must be certain. This would enable to payee or any
subsequent holder to be able to know how much they are going to claim from the
person primarily liable thereon.
Thus, if an instrument is to be a substitute for money and have an equivalent

degree of acceptability, the necessity that the amount be a sum certain i s obvious.
This requirement of certainty is met if the holder can determine from the terms of the
instrument itself the amount he or she is entitled to receive at maturity. (Ibid, Howell,
p. 417)
The amount which the debtor promises or engages to pay must either be stated in
the instrument itself, in figures or words, or must be ascertainable from data
somewhere on the paper. Illustrations: A note to pay a certain sum, and all other sums
which may be due is not negotiable, as the aggregate amount is not capable of
definite ascertainment.107 So, if it be for a certain sum and whatever sum you may
collect of me for C,;108 or if it be for the proceeds of a shipment of goods, value about
£2,000, consigned by me to you;109 or the demands of the sick club in part of
interest;110 or a certain sum, the same to go as set-off;111 or if it be expressed,
deducting all advances and expenses;112 or if it be due for $800 and such additional
premium as may be due on policy No. 218,171.113 But a promise to pay bearer a
certain sum per acre for so many acres as a certain tract contained was held to be
negotiable as soon as the number of acres was indorsed upon it.114(Daniel, Elements
of the Law of Negotiable Instruments, page 51)
It is essential to the negotiability of the bill or note that it purport to be only for the
payment of money. Such at least may be stated to be the general rule, for it any other
agreement of a different character be engrafted upon it, it becomes a special contract
clogged and involved with other matters, and has been deemed to lose thereby its
character as a commercial instrument.115(ibid, page 55)
107 Smith v. Nightinglare, 2 Stark, 375

108 Legro v. Staples, 16 Me. 252; Lime Rock F. & M. Ins. Co. v. Hewitt, 60 Me. 407
109 Jones v. Simpson, 2 B & C, 318
110 Bolton v. Dugdale, 4 B & Ad. 619
111 Clarke v. Percival, 2 B & Ad. 660
112 Cashman v. Haynes, 20 Pick, 132
113 Marret v. Equitable Ins. Co., 54 Me. 537
114 Smith v. Clopton, 4 Tex. 109
115 Fletcher v. Thompson, 55 N.H. 308; Ingham v. Dudley, 60 Iowa 16
41
Payable on Demand or at a Fixed or Determinable Future Time
This requirement recognizes that the holder of an instrument wants to know with
certainty when he or she will be entitled to payment. Any appreciable uncertainty as to
time of payment makes the instrument commercially unacceptable and defeats the
concept that a negotiable instrument is a substitute for money. (Howell, p. 418)
An instrument is payable on demand: (a) when it is so expressed to be payable

on demand, or at sight, or on presentation; or (b) in which no time for payment is
fixed. (Sec. 7, NIL)
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. (ibid)
An instrument may also be payable on a fixed future time, as on its face, the
holder can clearly discern the date and time when the instrument shall become due.
Example: April 8, 2012; or April 3, 2007.
When an instrument is payable at a determinable future time, the holder thereof

would be able to know the date and time when instrument would become due by
referring to a fixed or known future event. Example: 10-days after Christmas this year;
or 15-
days after New Year of next year.
Payable to Order or Bearer; Words of Negotiability
The requirement that an instrument be made payable to Order or Bearer a

re what
we call words of negotiability, this implies that an instrument, provided it complies
with all other requisites of Section 1 of the Negotiable Instruments Law, can be
negotiated or transferred to other persons, in the manner provided for under the law.
Without these so-called words of negotiability, an instrument would not be

negotiable, as on its face it would be intended only to be payable to the person named
therein, thus, preventing it to be further negotiated.
An instrument is payable to Order where it is drawn payable to the order of a

specified person or to him or his order. (Sec. 8, NIL)
It may be drawn payable to the order of116:

42
M.P.Piad
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.117
:
On the other hand, an instrument is payable to Bearer118
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.
2012 Bar Question:
A promissory note which does not have the words "or order" or "or
bearer" will render the promissory note non negotiable, and therefore
A. It will render the maker not liable;

B. The note can still be assigned and the maker made liable; C. The holder can
become holder in due course;
D. The promissory note can just be delivered and the maker will still be liable.
2000 Bar Question:
MP bought a used cellphone from JR. JR preferred cash but MP is a friend so

JR accepted MPs promissory note for P10,000.00. JR thought of converting
the note into cash by
116 Sec. 8, NIL
117 Ibid
118 Sec. 9, NIL
43
endorsing it to his brother KR. The promissory note is a piece of paper with
the following hand-printed notation: MP WILL PAY JR TEN THOUSAND
PESOS IN PAYMENT FOR HIS CELLPHONE 1 WEEK FROM TODAY. Below
this notation MPs signature with 8/1/00 next to it, indicating the date of the
promissory note. When JR presented MPs note to KR, the latter said it was
not a negotiable instrument under the law and so could not be a valid
substitute for cash. JR took the opposite view, insisting on the notes
negotiability. You are asked to referee. Which of the opposing views is
correct? Explain. (3%)
KRs view is correct. The promissory note does not meet the requirements of Sec.
1, Act 2031, which requires that the instrument be payable to bearer or order, therefore
it is non negotiable.
1998 Bar Question:
X makes a promissory note for P10,000.00 payabe to A, a minor, to help him

buy school books. A endorses the note to B for value, who in turn endorses
the note to C. C knows A is a minor. If C sues X on the note, can X set up the
defenses of minority and lack of consideration? (3%)
Yes. The instrument is non-negotiable, the same is not payable to order or bearer
but only payable to A alone. Section 1 (d) of the Negotiable Instruments Law requires
that for an instrument to be negotiable it must be, among others, payable to order or
bearer.
Since the instrument is non-negotiable, C cannot be a holder in due course,

therefore, the defenses of minority and lack of consideration can be availed of.
Drawee must be named or otherwise Indicated therein with reasonable

certainty
It should be noted that the requirement on Sec. 1 (e) applies only if the instrument
is a Bill of Exchange, wherein, the Drawer orders a Drawee to pay the payee or his
Order, or Bearer thereof, in which case, the drawee, who becomes subsequently the
acceptor thereof is the person primarily liable to pay the instrument.
44
M.P.Piad
As for the requirements of a Promissory Note, Sec. 1 (a) to (d) would suffice.
Whether the Bill i s payable on demand or at a fixed or determinable future time,

so long as the holder would be able to know or identify the person to whom he would
be demanding or enforcing payment of the instrument.
The requisite is that the drawee must be Named.
Example:
Pepito Aguilar
1002, Santos Avenue, Sta. Cruz, Manila
Or
Luis Lustriano of Luzurriaga & Associates

Ortigas Center, Pasig City
Drawee may also be Indicated with Reasonable Certainty. Example:
Brgy. Captain
Brgy. Sto Domingo, Laguna
Or
Hon. Municipal Mayor

Municipality of Oton, Iloilo
The instrument can only be negotiable if it complies with Section 1
A document will only become a Negotiable Instrument if it complies with the

requisites of Section 1 of the Negotiable Instruments law, unconditionally and in a
single document.
45
It should be noted that the existence of a negotiable instrument is different on
who is liable on the instrument. The existence of a negotiable instrument is answered
if the paper strictly complies with Section 1 of the Negotiable Instruments Law, liability,
on the other hand may be addressed taking into consideration certain factors, like,
proper negotiation, existence of a consideration, holder in due course, and the like.
Thus, if what we have is a mere innominate contract, without complying with

Section 1 of the said law, then, it may be governed by the Civil Code, or other
pertinent provisions of the Code of Commerce, but it cannot avail of the provisions of
Act 2031.
Distinction between a negotiable and non-negotiable instrument
In the case of Consolidated Plywood Industries, Inc. vs. IFC Leasing and
Acceptance Corp.,119
this Court had the occasion to clearly distinguish between a
negotiable and non-negotiable instrument.
Among others, the instrument in order to be considered negotiable must contain

ust be payable to order or bearer. Under
the so-called words of negotiability i.e. m
Section 8 of the Negotiable Instruments Law, there are only two ways by which an
instrument may be made payable to order. There must always be a specified person
named in the instrument and the bill or note is to be paid to the person designated in
the instrument or to any person to whom he has indorsed and delivered the same.
Without the words or order or to the order of, the instrument is payable only to the
person designated therein and is therefore non-negotiable. 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 defenses available against the latter. (Juanita Salas vs. Court of
Appeals, G.R. No. 76788, January 22, 1990, [Fernan, C.J.:])
In the above-mentioned case of Juanita Salas vs. Court of Appeals, the pertinent
portion of the note reads:
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 or119 149 SCRA 459 (1987).
46
M.P.Piad
order, at its office in San Fernando, Pampanga, the sum of FIFTY EIGHT THOUSAND ONE HUNDRED THIRTY EIGHT &
201/100 ONLY (P58,138.20) Philippine currency, which amount includes interest at 14% per annum b ased on the diminishing
balance, the said principal sum, to be payable, without need of notice or demand, in installments of the amounts following and at
the dates hereinafter set forth, to wit: 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. P_________ monthly for ______ months due and payable on the
______ day of each month starting _____198__ thru and inclusive of _____, 198________ provided that interest at 14% per
annum s hall be added on each unpaid installment from maturity hereof until fully paid.
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 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 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 Feb. 21, 1983; [d] it is payable to
Violago Motor Sales Corporation, or order and as such, [e] the drawee is named or
indicated with certainty. (supra)
The case of Narcisa Buencamino, et. al., vs. Hernandez, et al.120talks about the
negotiability of Government negotiable land certificates, which provide as follows, to
wit:
AMOUNT: P10,000.00
NEGOTIABLE LAND CERTIFICATE
THE GOVERNMENT OF THE REPUBLIC OF
THE PHILIPPINES
is indebted unto the
BEARER
in the sum of TEN THOUSAND PESOS. This certificate is issued in accordance with the120 G.R. No. L-14883, July 31,
1963, [Regals, J.:]
47
provisions of Section 9, Republic Act No. 1400, entitled "AN ACT DEFINING A LAND TENURE
POLICY, PROVIDING FOR AN INSTRUMENTALITY TO CARRY OUT THE POLICY, AND
APPROPRIATING FUNDS FOR ITS IMPLEMENTATION", approved September 9, 1955, and is
due and payable to BEARER on demand and upon presentation at the Central Bank of the Philippines without interest, if
presented for payment within five years from the date of issue; with interest at the rate of 4 per centum per annum, if
presented for payment after five years from the date of issue; with interest at the rate of 4-
½ per centum per annum, if presented for payment after ten years from the date of issue; and, with interest at the rate of
5 per centum per annum, if presented for payment after fifteen years from the date of issue. Both principal and interest
are payable by the Treasurer of the Philippines, through the Central Bank of the Philippines, in legal tender currency of
the Philippines.
This land certificate is part of the total negotiable land certificates issued and limited to the aggregate principal sum of
SIXTY MILLION PESOS a year, to be issued during the first two years from September 9, 1955 when Republic Act No.
1400 was approved, and P30 million each year during the succeeding years, for the purchase of private agricultural
lands for resale at cost to bona-fide tenants or occupants, or, in the case of estates abandoned by the owners for the
last five years, to private individuals who will work the lands themselves and who are qualified to acquire or own lands,
but who do not own more than six hectares of lands in the Philippines.
Manila, Philippines, August 9, 1957.
Encashment of this certificate may not be made until after five (5) years from the date of execution of the Deed of Sale
of Hacienda de Leon, pursuant to the conditions under Paragraph "b" of the Memorandum Agreement executed
between the Land Tenure Administration and the owners of Hacienda de Leon on May 11, 1957, acknowledged before
Marcelo Lagramada, Notary Public for Manila, as Doc. No. 324, Page 66, Book No. 6, Series of 1957.
(Sgd.) JUAN CAÑIZARES
Registrar of the Central
Bank of the Philippines
(Sgd.) CARLOS P. GARCIA

President of the Phil.
(Sgd.) VICENTE GELLA

Treasurer of the Phil.
Date of issue: August 9, 1957
Recorded: Illegible
Examined: Illegible
Under Republic Act No. 1400, the land certificates, as in this case, shall be
payable to bearer upon demand. The one issued, however, were, payable to bearer
only after the lapse of five years from a given period. Obviously then, the requirement
that they should be payable on demand was not met since an instrument payable on
demand is one which is (a) expressed to be payable on demand, or at sight, or on
presentation; or (b) expresses no time for payment (Sec. 7, Negotiable Instruments
Law) , the five
year period within which the certificates could not be encashed was an expression of
the time for the payment contrary to the paragraph (b) of the last law cited.
48
M.P.Piad
In another significant case, that of Consolidated Plywood Industries, Inc., et al vs.

IFC Leasing and Acceptance Corporation121, [ t]he pertinent portion of the note is as
follows:
FOR VALUE RECEIVED, I/we jointly and severally promise to pay to the INDUSTRIAL PRODUCTS MARKETING, the sum of
ONE MILLION NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY NINE PESOS & 71/100 only (P 1,093,789.71),
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. ...
Considering that paragraph (d), Section 1 of the Negotiable Instruments Law

requires that a promissory note must be payable to order or bearer, it cannot be
denied that the promissory note in question is not a negotiable instrument.
The instrument in order to be considered negotiable-i.e. must contain the

so-called word of negotiability, must be payable to order or bearer. These words
serve as an expression of consent that the instrument may be transferred. This
consent is indispensable since a maker assumes greater risk under a negotiable
instrument than under a non-negotiable one
xxx xxx xxx
When instrument is payable to order.
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
xxx xxx xxx
These are the only two ways by which an instrument may be made payable to
order. There must always be a specified person named in the instrument. It means
that the bill or not is to be paid to the person designated in the instrument or to any
person to whom he has indorsed and delivered the same. Without the words or
order o
r to the order of, the instrument is payable only to the person designated
therein and is therefore non-negotiable. 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 defenses available against the latter. (Campos and Campos,
121 G.R. No. 72593, April 30, 1987.

49
Notes and Selected Cases on Negotiable Instruments Law, Third Editions, page
38) . (Emphasis supplied)
Therefore, considering that the subject promissory note is not a negotiable
instrument, it follows that the respondent can never be a holder in due course but
remains a mere assignee of the note in question. Thus, the petitioner may raise
against the respondent all defenses available to it as against the seller
assignor Industrial Products Marketing.
Treasury warrant; not a Negotiable Instrument
Treasury warrants do not fall within the purview of the Negotiable Instruments
Law. Treasury warrants are payable from a particular appropriation of an order
payable out of a particular fund, and is not unconditional.
Postal Money Orders; not a Negotiable Instrument
It is not disputed that our postal statues were patterned after statutes in force in
the United States. For this reason, ours are generally construed in accordance with
the construction given in the United Stated to their own postal statutes, in the absence
of any special reason justifying a departure from this policy or practice. The weight of
authority in the United States is that postal money orders are not negotiable
instruments (Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers National Bank,
30 Fed. 912), the reason behind this rule being that, in establishing and operating a
postal money order system, the government is not engaging in commercial
transactions but merely exercises a governmental power for the public benefit.
(Philippine Education Co., Inc., vs. Soriano, G.R. No. L-22405, June 30, 1971,
[Dizon, J.])
It is to be noted in this connection that some of the restrictions imposed upon

money orders by postal laws and regulations are inconsistent with the character of
negotiable instruments. For instance, such laws and regulations usually provide for
not more than one endorsement; payment of money orders may be withheld under a
variety of circumstances. (49 C.J. 1153, supra)
Central Bank Certificate of Indebtedness (CBCI); not a Negotiable Instrument
In the case of Traders Royal Bank vs. Court of Appeals, Filriters Guaranty
Assurance Corporation and Central Bank of the Philippines122, it was held that: the
subject CBCI is not a
50
M.P.Piad
negotiable instrument in the absence of words of negotiability within the meaning of

the negotiable instruments law (Act 2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx

The Central Bank of the Philippines (the Bank) for value received, hereby promises to
pay bearer, of if this Certificate of indebtedness be registered, to FILRITERS
GUARANTY ASSURANCE CORPORATION, the registered owner hereof, the
principal sum of FIVE HUNDRED THOUSAND PESOS.
xxx xxx xxx
Properly understood, a certificate of indebtedness pertains to certificates for the

creation and maintenance of a permanent improvement revolving fund, is similar to a
bond (82 Minn. 202). Being equivalent to a bond, it is properly understood as
acknowledgment of an obligation to pay a fixed sum of money, it is usually used for
the purpose of long term loans.
Problem:
What is the nature and characteristic of a NOW account? Is it Negotiable

within the ambit of the Negotiable Instruments Law?
Negotiable Orders of Withdrawals (NOW Accounts) is defined as savings

accounts from which funds may be withdrawn by means of negotiable orders of
withdrawal. They shall be kept and maintained separately from the regular savings
deposits subject to withdrawal through the presentation of withdrawal slips and
passbooks. Only natural persons shall be eligible to maintain NOW Accounts. The
authority to offer NOW Accounts shall be granted only to thrift banks that meet the
requirements laid down by the Central Bank Regulations.
They are not negotiable within the provisions of the Negotiable Instruments Law
because of certain limits and restrictions, to wit:
(a.) The order of withdrawal shall be payable only to a specific

person, natural or juridical, and
122 G.R. No. 93397, March 3, 1997, [Torres, J.]

51
not to bearer nor to the order of a specified person;
Only the payee can encash this order of withdrawal with drawee bank, or deposit
it in his account with the drawee bank or with any other bank.
When is an instrument considered to be complete? When is it incomplete?
An instrument is complete if it complies with the requirements of Section 1 of the

Negotiable Instruments Law, embodied in a single document or medium, and that
there must be no other conditions imposed for its validity or compliance.
An instrument is incomplete if it lacks any material particular essential for its

completion.
Essentials of a Bill or Note123
To be a negotiable bill of exchange or promissory note, the instrument must have

the following essential characteristics:
a) The bill must contain an order

b) The note must contain a promise
c) The order or promise must be unconditional
d) It must be an absolute order or promise for the payment of money alone
e) The amount of money must be certain
f ) The time of payment must be a time certain to arrive g) The
instrument must be specific as to all its parties h) The instrument must
be delivered
1997 Bar Question:
Can a bill of exchange or a promissory note qualify as a negotiable

instrument if
a) It is not dated; or
b)The day and the month, but not the year of its maturity, is given; or
c) It is payable to cash; or
52
M.P.Piad
d) It names two alternative drawees.
ANSWERS:
a) Yes, it can still qualify as a negotiable instrument. Date is not essential to the
existence of a negotiable instrument. Section 6 (a) of the NIL states that the
validity and negotiable character of an instrument are not affected by the
fact that it is not dated.
b) Yes, it can still qualify as a negotiable instrument. An instrument is payable on

demand in which no time for payment is expressed. (Sec. 7 (b) NIL).
c) Yes, the instrument is payable to bearer when it is payable to the order of a

fictitious or non-existing person. (Sec. 9 (c) NIL)
d) It would depend, if the bill is addressed to two or more drawees jointly,

instrument is negotiable; but if it is addressed to two or more drawees in
the alternative or succession, it is not negotiable. (Sec. 128, NIL)
What are the effects if the instrument is incomplete?
Strictly speaking, we do not have any negotiable instrument. An instrument only

comes within the purview of the Negotiable Instruments Law if it complies with the
requisites of Section 1 of the Negotiable Instruments Law, in the absence thereof, we
only have a private document or contract, in which the Negotiable Instruments Law
has no application.
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
53
(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.
Notes:
When sum is considered certain
The sum becomes certain if the maker, drawee, or holder of the instrument would
be able to discern with exact certainty how much would he pay or collect, as the case
may be, on the value of the negotiable instrument.
With Interest
The sum is considered certain although coupled with the payment of interest. It
should be borne in mind that the payment of the interest is only in addition to the
principal sum to be paid, thus, the sum payable is still certain.
Example:
P30,000.00 plus 2% monthly interest; or

Pay 10% of P100,000.00
By stated installments
Though coupled with payment in stated installments, the sum is still considered
certain. The main reason is that said installment, is only a mode of payment of the
main obligation, certainly entire sum due or payable could still be identified.
Example:
Promise to pay bearer P10,000.00 in 2 equal installments; or Promise to pay

bearer five installments of P2,000.00 each.
By stated installments, with a provision that, upon default in payment of any

installment or of interest, the whole shall become due
54
M.P.Piad
This is similar to payment by stated installments as previously mentioned, but this

one contains an acceleration clause, where, default in the payment of any installment
or of interest, the whole sum or amount becomes due.
In Acceleration Clauses: Instruments due at a fixed future date sometimes have

clauses providing that the date of maturity shall be moved ahead if a specified event
occurs prior to the stated due date. An instrument issued this year with a maturity date
[of] two years hence might contain, for example, either of these acceleration clauses:
(1) This instrument shall become immediately due and payable upon the makers (or
acceptors) bankruptcy; or (2) for a note payable in monthly installments: If any
instrument is not paid when due, the entire instrument is due and demandable.
(Howell, p. 421)
With exchange, whether at a fixed rate or at the current rate
The sum is still certain, though it is made coupled with exchange whether fixed
rate or at current rate. In this instance, a reasonable prudent person would still be able
to determine the sum payable.
Example:
Pay to bearer an amount equivalent to $100.00; or Pay to bearer an amount

equivalent to the prevailing rate of $100.00; or
Pay to bearer an amount equivalent to $100.00 at an exchange rate of Php 43.50
per dollar.
With costs of collection or an attorney's fee, in case payment shall not be

made at maturity
This would be self-explanatory. Again the most important thing to take into
consideration is whether or not the holder would be able to determine the amount due,
despite the additional cost of collection or attorneys fee.
The attorneys fee is due if the unpaid note is placed in the hands of an attorney
for collection, although no suit is brought. A stipulation in a mortgage securing the
note for fees in case of suit on the mortgage securing the note for fees in case of suit
on the mortgage is cumulative and not restrictive of the provision of the note.
(Brannan, page 5, citing, Morrison v. Ornbaun, 30 Mont. 111, 75 Pac. 953)
55
A provision in a promissory note for attorneys fees if collected by attorney, or if suit
is brought on this note, is a promise to pay attorneys fees for collection only after
dishonor, and does not impair the negotiability of the note. (Ibid, citing First Natl. Bank
of Shawano v. Miller, 139 Wis. 126, 120 N.W. 820, S.C. sec. 104)
Likewise, [a] provision in a note for an attorneys fee, but leaving blank the amount
thereof, amounts to a promise to pay a reasonable sum as an attorneys fee, and does
not render the note non-negotiable. Where the plaintiff employed an attorney, it is
sufficient to show what is a reasonable fee, and it is not necessary to prove an
express agreement as to fees, or that plaintiff paid the attorney before the suit.
(Brannan, page 6, citing McCormick v. Swem (Utah) 102 Pac. 626)
Example:
For value received, I promise to pay David Lancelot, or order, the amount of Php 100,000.00, ten days after sight. It is
understood that an amount equivalent to the cost of collection would be made payable in addition to the principal amount, and an
amount equivalent to Twenty-Five Per Cent (25%) of the amount due as Attorney’s Fees, should there be default in the payment
after demand.
(sgd)
Abigail Margaux
In the case of H.R. Andreas vs. B.A. Green124, the promissory note was worded
as follows:
P15,000.00 MANILA, P. I
Aug. 19th, 1921
On or before the 19th day of November, 1921, or on thirty (30) days written demand notice, for value received, I promise to pay to
Harry Bridge, at Manila, P.I., the sum of fifteen thousand pesos (P15,000) with interest thereon at the rate of twelve per cent
(12%) per annum. If not paid when due after thirty days written demand notice, this note shall bear interest at the rate of 12 per
cent per annum until paid; and a further sum equal to 10 per cent of the total amount due as and for expenses of collection for
attorney's fees whether actually incurred or not and in addition to all costs as provided for in the Code of Civil Procedure.
This note is secured by real-estate mortgage of even date.
(Sgd.) B. A. GREEN
The Supreme Court in the above-mentioned case held that: [s]tipulations in

negotiable instruments for the payment of collection and attorneys fees are not
forbidden by lay in this jurisdiction. x x x The purpose of a stipulation in a note for a
reasonable attorneys fees is not to give the lender a larger compensation for the loan
than the law allows, but is to safeguard the lender against future loss or damage by
being compelled to retain counsel to institute judicial proceedings to collect his debt.
124 G.R. No. L-24322, December 16, 1925

56
M.P.Piad
2012 Bar Question:
X issued a promissory note which states, "I promise to pay Y or order

Php100,000.00 or one (1) unit Volvo Sedan." Which statement is most
accurate?
a. The promissory note is negotiable because the forms of payment are clearly
stated.
b. The promissory note is non-negotiable because the option as to which form of
payment is with the maker. c. The promissory note is an invalid instrument
because there is more than one form of payment.
d. The promissory note can be negotiated by way of delivery.
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
Notes:
When is promise to pay unconditional?
A promise to pay is unconditional if no other requirement or qualification or

condition is needed for its payment.
Moreover, an unqualified order or promise to pay is unconditional, though coupled

with:
57
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.
An indication of a particular fund out of which reimbursement is to be made

or a particular account to be debited with the amount
In this instance, the promise or order to pay is still unconditional because

payment is not premised upon any condition, or subject to the availability of funds of a
particular account. The holder of the instrument is assured that he be paid upon
presentment of the instrument. It should be taken into consideration that the law uses
the word reimbursement, which implies that payment is to be advanced by the person
primarily liable and merely reimburse the same from a particular account. Thus,
regardless of the availability of funds in that account, the holder receives payment.
Example:
To: Maria Santos

1020 Licauco Drive, Ortigas Center, Pasig
This 26thday of October 2011
Please pay, Mario Delos Santos, or order, P10,000.00 five (5) days after sight, and reimburse said amount from my
savings account with PSBank account number 01-092837-99.
(sgd)
Jose Santos
An order drawn by the X company directing payment of a certain sum, on account
of contract between you (the drawee) and the X Company held negotiable, the words
on account of not having the same effect as out of the proceeds of. (Brannan, page 6,
citing First Nat. Bank v. Lightner, 74 Kans. 736, 88 Pac. 59, 8 L.R.A. (N.S.) 231, 118
Am. St. Rep. 353)
An order to pay on or before a fixed day and charge the same to the $1,800
payment, is not conditional. (Ibid, citing Shepard v. Abbott, 179 Mass. 300, 60 N.E.
782)
A bill of exchange is not made non-negotiable because it contains the words

charge to my account and credit according to a registered letter I have addressed to
you. These words do not mean according to the conditions mentioned in the letter, but
58
M.P.Piad
merely charge my account and credit according to the letter. (Ibid, citing In re Boyse,
33 Ch. Div. 612)
A statement of the transaction which gives rise to the instrument
Though an instrument may contain the reason for the issuance thereof, it does
not in any way impose a condition upon the payment of the instrument. What is
important is that the statement of transactions must not be made as the condition for
payment of the instrument.
Example:
As payment for the 10 crates of apple, I promise to pay Mario Santos, or his order, Php 100,000.00 five (5) days after sight.
(sgd)
Maria Delos Santos
Note that in the example above, the statement of the transaction which gave rise
to the instrument did not render the instrument conditional, thus, the same is
negotiable.
However, if in the same example, the 10 crates of apple were not delivered to
Maria, but she had already parted with her promissory note, will that make the
instrument non-negotiable?
The answer is no, it should be remembered that an instrument is negotiable the

moment it complies with Section 1 of the negotiable instruments law. However, if the
question pertains to Marias liability on the promissory note, then we have a different
answer, which will be later on discussed in the succeeding pages of this work.
It should be remembered that the existence of a negotiable instrument differs

from the question of who? is liable on the negotiable instrument. The former merely
requires compliance with Section 1 of the law, while the latter takes into consideration
other aspects of liability, e.g., h older in due course, not a holder in due course,
transfer or negotiation, etc.
What about if the order or promise is to pay out of a particular fund, is it still
unconditional?
No. An order or promise to pay out of a particular fund is not unconditional. (Sec.
3, Negotiable Instruments Law) It is
59
conditional because from the phrase itself, pay out of a particular fund, makes the
payment of the instrument dependent upon the available funds on the account, thus,
the same is conditional, therefore, non-negotiable. It is of no moment if there are
indeed actual available funds on the account, what matters is what is the implication of
the written words on the face of the paper.
Treasury warrants, which, by their nature are payable out of particular funds which
are the subject of appropriations for which these treasury warrants were issued are
non-negotiable, simply because the repayment of which is dependent upon the
availability of a particular fund.
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.
Notes:
What constitutes a determinable future time?
An instrument to be negotiable must be made either payable on a fixed date or at

a determinable future time, the latter phrase means a period of time which could be
determined with reference to another particular time, or event which is certain to
happen though the time of happening is uncertain.
Fixed period after date or sight
This refers to a fixed or definite time after seeing, or accepting the instrument, or
on the date specified on the instrument.
Example:
Ten days after sight; or

Ten days after date of the instrument
60
M.P.Piad
On or before a fixed or determinable future time specified therein
This provision is self-explanatory.
Example:
Pay bearer P1,000.00 on or before January 9, 2012 Pay bearer P1,000.00

on or before Christmas day of 2012
If the instrument is made payable upon a contingency, is it negotiable? What

if the contingency occurred?
An instrument payable upon a contingency is not negotiable, and the happening

of the event does not cure the defect. (Sec. 4, Negotiable Instruments Law)
What is a contingency?
Contingency refers to future uncertain events, or past events unknown to parties,

or circumstances which may or may not happen.
Example:
I promise to pay bearer, or order, P1,000.00 after passing the bar exams.
Pay bearer, P500.00 to buy umbrella when it rains on December 25, 2011.
Notes, payable at a certain time, but secured by a mortgage executed as part of

the same transaction, and reciting that the whole debt shall be due in case of sale or
removal of the property by the mortgagor without the consent of the mortgagee, or in
case the mortgagee deems himself insecure, are uncertain as to time and amount of
payment and are therefore not negotiable. (Brannan, page 8, citing Iowa Nat. Bank v.
Carter (Iowa), 123 N.W. 237, S.C. secs. 25, 26)
Reason for the rule
As a substitute for money, payment of the negotiable instrument must never be

subject to any uncertainties, or contingency, to do so would create a situation where
the holder of
61
the instrument could not enforce payment on the person primarily liable by reason of
the event or contingency upon which an obligation to pay would arise never occurred.
This, entirely defeats the purpose for the creation of the negotiable instrument.
2011 Bar Question:
A promissory note states, on its face: I, X, promise to pay Y the amount of
Php 5,000.00 five days after completion of the on-going construction of my
house. Signed, X. Is the note negotiable?
A. Yes, since it is payable at a fixed period after the occurrence of a specified

event.
B. No, since it is payable at a fixed period after the occurrence of an event which
may not happen.
C. Yes, since it is payable at a fixed period or determinable future time.
D. No, since it should be payable at a fixed period before the occurrence of a
specified event.
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:
(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.
Notes:
If an act is imposed in addition to the order or promise to pay a sum certain in

money, is the instrument still negotiable?
62
M.P.Piad
No. An instrument which contains an order or promise to do any act in addition to

the payment of money is not negotiable. (Sec. 5, Negotiable Instruments Law)
This would impose additional burden to the person primarily liable on the
instrument.
2011 Bar Question:
B borrowed Php1 million from L and offered to him his BMW car worth Php1
Million as collateral. B then executed a promissory note that reads: I, B,
promise to pay L or bearer the amount of Php1 Million and to keep my BMW
car (loan collateral) free from any other encumbrance. Signed, B. Is this note
negotiable?
A. Yes, since it is payable to bearer.

B. Yes, since it contains an unconditional promise to pay a sum certain in money.
C. No, since the promise to just pay a sum of money is unclear.
D. No, since it contains a promise to do an act in addition to the payment of
money.
2002 Bar Question:
Which of the following stipulations or features of a promissory note (PN)

affect or do not affect its negotiability, assuming that the PN is otherwise
negotiable? Indicate your answer by writing the paragraph number of the
stipulation or feature of the PN as shown below and your corresponding
answer, either Affected or Not affected. Explain. (5%)
(1) The date of the PN is February 30, 2002.

(2) The PN bears interest payable on the last day of each calendar quarter
at a rate equal to five percent (5%) above the then prevailing 91-day Treasury
Bill rate as published at the beginning of such calendar quarter.
(3) The PN gives the maker the option to make payment either in money or
in quantity of palay of equivalent value.
63
(4) The PN gives the holder the option either to require payment in money
or to require the maker to serve as the bodyguard or escort of the holder for
30 days.
ANSWER:
(1) Not affected; Sec. 12, Negotiable Instruments Law, 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. Thus, date is not essential for its negotiability.
(2) Not affected; Sec. 2, Act 2031, the sum payable payable is a sum certain
within the meaning of this Act, although it is to be paid with installments, or with
exchange, whether at a fixed rate or at the current rate.
(3) Affected; it makes the payment of the instrument conditional by giving the
maker an option to pay in money or other palay.
(4) Not Affected; Sec. 5 (d), Act 2031, the negotiable character of an instrument
otherwise negotiable is not affected by a provision which gives the holder an election
to require something to be done in lieu of payment of money.
What may be some provisions added to the instrument which would not affect
its negotiability?
The negotiable character of an instrument otherwise negotiable is not affected by

a provision which:
a. Authorizes the sale of collateral securities in case the instrument is 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.
Authorization of sale of collateral securities in case the instrument be not

paid at maturity
A note, reciting that the title to property for which it is given shall remain in the
payee, and that he shall have the right to
64
M.P.Piad
declare the money due and take possession of the property whenever he may deem
himself insecure, even before the maturity of the note, is not negotiable. (Brannan,
page 9, citing Kimpton v. Studebaker Bros. Co., 14 Idaho, 552, 94 Pac. 1039, 125
Am. St. Rep. 185)
Warrants of Attorney to Confess Judgment
In the case of Philippine National Bank vs. Manila Oil Refining & By-Products
the written instrument read as follows:
Company, Inc.125
RENEWAL.
P61,000.00
MANILA, P.I., May 8, 1920.
On demand after date we promise to pay to the order of the Philippine National Bank sixty-one thousand only pesos at Philippine
National Bank, Manila, P.I.
Without defalcation, value received; and to hereby authorize any attorney in the Philippine Islands, in case this note be not paid at
maturity, to appear in my name and confess judgment for the above sum with interest, cost of suit and attorney's fees of ten (10)
per cent for collection, a release of all errors and waiver of all rights to inquisition and appeal, and to the benefit of all laws
exempting property, real or personal, from levy or sale. Value received. No. ____ Due ____
MANILA OIL REFINING & BY-PRODUCTS CO., INC.,

(Sgd.) VICENTE SOTELO,
Manager.
MANILA OIL REFINING & BY-PRODUCTS CO., INC.,

(Sgd.) RAFAEL LOPEZ,
Treasurer
The question raised in reference to the aforementioned Promissory Note

concerns the validity of one of its provisions whereby in case the same is not paid at
maturity, the maker authorizes any attorney to appear and confess judgment thereon
for the principal amount, with interest, costs, and attorneys fees, and waives all errors,
rights to inquisition, and appeal, and all property exceptions.
125 G.R. No. L-18103, June 8, 1922, [Malcom, J.:].
65
The attorney for the appellee contends that the Negotiable Instruments Law (Act
No 2031) expressly recognizes judgment notes, and that they are enforcible under the
regular procedure. The Negotiable Instruments Law, in Section 5, provides that The
negotiable character of an instrument otherwise negotiable is not affected by a
provision which. . . (b) Authorizes a confession of judgment if the instrument be not
paid at maturity. We do not believe, however, that his provision of law can be taken to
sanction judgments by confession, because it is a portion of a uniform law which
merely provides that, in jurisdiction where judgment notes are recognized, such
clauses shall not affect the negotiable character of the instrument. Moreover, the same
section of the Negotiable Instruments Law concludes with these words. But nothing in
this section shall validate any provision or otherwise illegal.
Judgments by confession as appeared at common law were considered an

amicable, easy, and cheap way to settle and secure debts. They are a quick remedy
and serve to save the courts time. They also save the time and money of the litigants
and the government the expenses that a long litigation entails. In one sense,
instruments of this character may be considered as special agreements, with power to
enter up judgments on them, binding the parties to the result as they themselves
viewed it.
On the other hand, there are disadvantages to the commercial world which
outweigh the considerations just mentioned. Such warrants of attorney are void as
against public policy, because they enlarge the field of fraud, because under these
instruments the promissory bargains away his right to a day in court, and because the
effect of the instrument is to strike down the right of appeal accorded by statute. The
recognition of such a form of obligation would bring about a complete reorganization of
commercial customs and practices, with reference to short-term obligations. It can
readily be seen that judgment notes, instead of resulting to the advantage of
commercial life in the Philippines might be the source of abuse and oppression, and
make the court involuntary parties thereto.
We are of the opinion that warrants of attorney to confess judgment are not
authorized nor contemplated by our law. We are further of the opinion that provisions
in notes authorizing attorneys to appear and confess judgments against makers
should not be recognized in this jurisdiction by implication and should only be
considered as valid when given express legislative sanction. (supra)
66
M.P.Piad
In the Memoranda of Amici Curiae in the case of PNB, Professor Jose A. Espiritu,
of the University of the Philippines, states:
1. Confession of judgment has been defined as a voluntary submission to the

jurisdiction of the court, giving consent and without the service of process, what
could otherwise be obtained by summons and complaint, and other formal
proceedings, an acknowledgment of indebtedness, upon which it is contemplated
that a judgment may and will be rendered.
(8 Cyc., pp. 563, 564)
2. As to the general effects of confession of judgment, the following statements

may be mentioned: A warrant to confess judgment does not destroy the
negotiability of the note. Such a note is commonly called a judgment note.
Decisions to the contrary in the Stated where the Negotiable Instruments Law is
now in force are abrogated thereby, since it expressly provides that the negotiable
character of an instrument otherwise negotiable is not affected by a provision which
authorizes a confession of judgment, if the instrument is not paid at maturity.
However, this statutory provision does not apply to stipulations for the confession of
judgment prior to maturity.
(8 C.J., p. 128, sec. 222)
3. Nature of Requisites. A judgment may be rendered upon the confession of

defendant, either in an action regularly commenced against him by the issuance
and service of process, in which case the confession may be made by his
attorney of record, or, without the institution of a suit, upon a confession by
defendant in person or by his attorney in fact. It implies something more than a
mere admission of a debt to plaintiff, in addition, it is defendants consent that a
3 cyc., 699)
judgment shall be entered against him .. (2
4. Statutory Provisions, Statutes regulating the confession of judgments without

action, or otherwise than according to the course of the common law, are strictly
construed, and a strict compliance with their provisions must be shown in order to
sustain the validity of the judgment. (Chapin vs. Tompson, 20 Cla., 681) And this
applies also to statutory restriction upon the right to confess judgment, as that
authority to confess judgment shall not be given in the same instrument which
contains the promise or obligation to pay the debt, or that such confession shall
not be authorized by any instrument executed prior to suit brought. (23 Cyc., 699,
700)
67
5. Warrant or Power of Attorney Validity and Necessity. A judgment by confession
may be entered upon a written authority, called a warrant or letter of attorney, by
which the debtor empowers an attorney to enter an appearance for him, waive
process, and confess judgment against him for a designated sum, except where
this method of proceeding is prohibited by statute. The warrant as the basis of
judgment is generally required to be placed on file in the clerks office, and no
judgment can be so entered until it is so filed. (23 Cyc., 703)
6. Requisites and Sufficiency. A warrant or power of attorney to confess judgment

should be in writing and should conform to the requirements of the statute in force
at the time of its execution, although in the absence of specific authority directions
it is sufficient, without much regard to its form, if it contains the essential of a good
power and clearly states its purpose. It must be signed by the person against
3 Cyc., 704)
whom the judgment is to be entered .. (2
Illegal provisions or stipulations
Nothing in this section (Sec. 5) shall validate any provision or stipulation

otherwise illegal.
Sec. 6. Omissions; seal; particular money. - The validity and negotiable

character of an instrument are not affected by the fact that:
(a) It is not dated; or
(b) Does not specify the value given, or that any value had been given
therefor; or
(c) Does not specify the place where it is drawn or the place where it is
payable; or
(d) Bears a seal; or
(e) Designates a particular kind of current money in which payment is to

be made.
But nothing in this section shall alter or repeal any statute requiring in certain
cases the nature of the consideration to be stated in the instrument.
68
M.P.Piad
Notes:
This provision thus rejects the possible view that such omissions cause an
instrument to be incomplete and therefore non negotiable.126 These Omissions does
not in any way affect the validity and negotiable character of an instrument so long as
the same adheres with the requirements of Sec. 1.
Undated instrument
Negotiability of an instrument is not affected by an omission of the date. Sec. 7

(b) of the N.I.L. provides that where no time for payment is expressed on the face of
the instrument, the same shall be presumed to be payable on demand.
Also, Sec. 11, makes a presumption on instrument dates, where the instrument or
an acceptance or any indorsement thereon is dated, such date is deemed prima facie
to be the true date of the making, drawing, acceptance or indorsement, as the case
may be.
Moreover, Sec. 12, N.I.L. also recognizes that an instrument is not invalid by
reason only that it is post-dated or ante-dated, so long as it is not done for an illegal or
fraudulent purpose. Subsequently, Sec. 13 thereof also declares that a proper date
may be inserted on an undated instrument.
Thus, date is not an essential requirement for the validity or negotiability of a Bill
or Note.
No mention of the value given in exchange of the Bill of Note
The validity and negotiability of a Bill or Note is not affected by the mere fact that
the instrument does not specify the value given, or that any value had been given
therefor.127 This is because the law presumes that every negotiable instrument is
deemed prima facie t o have been issued for a valuable consideration; and every
person whose signature appears thereon to have become a party thereto for value.128
Designation of a particular kind of current money in which payment is made
126 Business Law, Second Edition, Rate A. Howell, 1981, p. 425

127 Sec. 6 (b), N.I.L.
128 Sec. 24, N.I.L.
69
Note that the law makes mention of a current money, referring to a particular
currency. Thus, [a] check payable in current funds is not payable in money and is not
negotiable. (Brannan, page 9, citing Dille v. White, 132 Iowa, 327, 109 N.W. 909, 10
L.R.A. (N.S.) 510, following former Iowa cases, but not citing the N.I.L. S.C. sec. 65,
emphasis supplied)
Payment in current money i s different from current funds, in as much as the latter
implies that payment of the instrument is premised upon the availability of the current
fund, eventually making it conditional.
2012 Bar Question:
X issued a promissory note which states "I promise to pay Y or bearer the
amount of HK$50,000 on or before December 30, 2013." Is the promissory
note negotiable?
a. No, the promissory note becomes invalid because the amount is in foreign
currency.
b. Yes, the promissory note is negotiable even though the amount is stated in
foreign currency.
c. No, the promissory note is not negotiable because the amount is in foreign
currency.
d. Yes, the promissory note is negotiable because the Hong Kong dollar is a
known foreign currency in the Philippines.
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
(b) In which no time for payment is expressed.

regards the person so issuing, accepting, or indorsing it, payable on demand.
Notes:
When note is expressed to be payable on demand
A note payable on demand after date is a demand note, and presentment need
not be made the day after date, but only within a reasonable time to hold an indorser.
(Brannan, page 11, citing Hardon v. Dixon, 77 App. Div. 241, 78 N.Y.S. 106) , holding
that
70
M.P.Piad
the Statute of Limitations did not begin to run on such a note until the day after its
date, said to have no application. (Ibid, citing Schlesinger v. Schultz, 110 App. Div.
356, 96 N.Y.S. 383, S.C. secs. 71, 73)
What would be the effect if the instrument is dated and was issued, accepted,
or indorsed when already overdue?

regards the person so issuing, accepting, or indorsing it, payable in demand. (Sec. 7,
Negotiable Instruments Law)
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 with reasonable certainty.
Notes:
Pay to ---- order means pay to my order, and a bill so reading and indorsed by the
drawer is a valid bill of exchange. (Brannan, page 12, citing Chamberlain v. Youn
[1893], 2 Q.B. 206)
An order means any form of words implying a right on the part of the drawer to
command, and a corresponding duty on the part of the drawee to make, the payment
specified.129
71
The order to pay must be distinguished from a mere request to pay
Prof. Norton said: [o]ur purpose here is to illustrate the difference between a
mandatory form of words directing payment and a mere request. The theory of a bill
of exchange is that the drawer has funds in the hands of the drawee, which he
orders or directs to be delivered or paid over to the payee or indorsee of the
bill. Hence, where the instrument is so written as to show that the drawee has or
attempts to exercise no right to order the money paid, it is not a bill of exchange. To
determine whether or not the instrument is so written is, of course, a question purely of
the construction of the instrument. Parol evidence cannot be admitted, since, if the bill
is to operate as money, the instrument must be pronounced to be a bill or not
according to its face. The point to be determined is whether the terms of the
instrument, on the one hand, leave compliance or refusal optional, or, on the other
hand, amount to an imperative direction. In the former case it is a mere request; in the
latter it is a demand, with which the drawee must in common honesty comply, and
amount to the order which is a necessary constituent of a bill of
exchange.130(emphasis supplied)
The payee must be indicated therein with reasonable certainty
In the case of Equitable Banking Corporation vs. Intermediate Appellate Court131,

the subject check reads:
Pay to the EQUITABLE BANKING CORPORATION Order of A/C OF CASVILLE ENTERPRISES, INC.
The said check was declared by the Supreme Court to be equivocal and patently
ambiguous. x x x the payee ceased to be indicated with reasonable certainty in
contravention of Section 8 of the Negotiable Instruments Law.132 As worded, it could
be accepted as deposit to the account of the party named after the symbols A/C or
payable to the Bank as trustee, or as an agent, for Casville Enterprises, Inc., with the
latter being the ultimate beneficiary.
Sec. 9. When payable to bearer. - The instrument is payable to bearer:
130 Id., footnotes omitted.

131 G.R. No. 74451, May 25, 1988
132 Section 8, Negotiable Instruments Law
72
M.P.Piad
(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.
Notes:
When the payee of the check is not intended to be the true recipient of its
proceeds
As a rule, when the payee is fictitious or not intended to be the true recipient of the
proceeds, the check is considered as a BEARER instrument.
The distinction between bearer and order instruments lies in their manner of
negotiation. Under Section 30 of the NIL, an order instrument requires an indorsement
from the payee or holder before it may be validly negotiated. A bearer instrument, on
the other hand, does not require an indorsement to be validly negotiated. It is
negotiable by delivery. (Philippine National Bank vs. Erlando T. Rodriguez and Norma
Rodriguez, G.R. No. 170325, September 26, 2008, Reyes, R.T., J.] )
When instrument is payable to the order of a fictitious or non existing person
A check that is payable to a specified payee is an order instrument. However,

under Section 9 (c) of the NIL, a check payable to a specified payee may nevertheless
be considered as a bearer instrument if it is payable to the order of a fictitious or
non-existing person, and such fact is known to the person making it so payable. Thus,
checks issued to Prinsipe Abante or Si Malakas at si Maganda, who are well-known
characters in Philippine mythology, are bearer instruments because the named
73
payees are fictitious and non-existent. (Philippine National Bank vs. Erlando T.
Rodriguez and Norma Rodriguez, supra)
Term Fictitious as used under Section 9 (c)
We have yet to discuss a broader meaning of the item fictitious as used in the NIL.
It is for this reason that we look somewhere for guidance. Court rulings in the United
States are a logical starting point since our law on negotiable instruments was directly
lifted from the Uniform Negotiable Instruments Law of the United States.133
A review of the US jurisprudence yields that an actual existing and living payee
may also be fictitious if the maker of the check did not intent for the payee to receive
the proceeds of the check. This usually occurs when the maker places a name of an
existing payee on the check for convenience or to cover up an illegal activity.134 Thus, a
check made expressly payable to a non
fictitious and existing person is not necessarily an order instrument. If the payee is not
the intended recipient of the proceeds of the check, the payee is considered a fictitious
payee and the check is a bearer instrument. (Philippine National Bank vs. Erlando T.
Rodriguez and Norma Rodriguez, supra)
FICTITIOUS-PAYEE RULE; Who is liable under it; exceptions.
When a person making the check so payable did not intent for the specified payee
to have any part in the transaction, the payee is considered as fictitious payee.
(Mueller & Martin vs. Liberty Insurance Bank). Fictitious-payee rule extends protection
even to non-bank transferee of the checks. (Getty Petroleum Corp. vs. American
Express Travel Related Services Company, Inc, 90 NY 2d 322 (1997), citing the
Uniform Commercial Code, Sec. 3-405)
In a fictitious-payee situation, the drawee bank is absolved from liability and the
drawer bears the loss. When faced with a check payable to a fictitious payee, it is
treated as a bearer instrument that can be negotiated by delivery. The underlying
theory is that one cannot expect a fictitious payee to negotiate the check by placing
his indorsement thereon. And since the maker knew this limitation, he must have
intended for the instrument to be negotiated by mere delivery. Thus, in case of
controversy, the drawer of the check will bear the loss. This rule is justified for
otherwise, it will be most convenient for the maker who desires to
133 Campos, J.C., Jr. and Lopez-Campos, M.C., Notes and Selected Cases on Negotiable Instruments Law (1994), 5th ed, pp.8-9
134 Bourne v. Maryland Casualty, 192 SE 605 (1937); Norton v. City Bank & Trust Co., 294 F.839 (1923); United States v. Chase Nat. Bank, 250 F.
105 (1918)
74
M.P.Piad
escape payment of the check to always deny the validity of the indrosement. This
despite the fact that the fictitious payee was purposely named without any intention
that the payee should receive the proceeds of the check.135(Philippine National Bank
vs. Erlando T. Rodriguez and Norma Rodriguez, supra)
The rule protects the depositary bank and assigns the loss to the drawer of the
check who was in a better position to prevent the loss in the first place. (Getty
Petroleum Corp. vs. American Express Travel Related Services Company, Inc.)
However, 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 its defense. The exception will cause it
to bear the loss. Commercial bad faith is present if the transferee of the checks acts
dishonestly, and is a party to the fraudulent scheme. (Philippine National Bank vs.
Erlando T. Rodriguez, et al, G.R. No. 170325, September 26, 2008 [Reyes, R.T., J.])
The payee in an order instrument was not properly identified with reasonable
certainty
Where the instrument is payable to order, the payee must be named or otherwise
indicated therein with reasonable certainty, otherwise, it would be considered as a
bearer instrument.
Check made payable to cash, deemed payable to bearer
Under the Negotiable Instruments Law, this type of check was payable to tge
bearer and could be negotiated by mere delivery without the need of an
indorsement.136(People v. Wagas, G.R. No. 157943, Sept. 4, 2013, [Bersamin, J.:])
Knowledge of the drawer of the fictitious and non-existing character of the

payee controls
135 Mueller & Martin v. Liberty Insurance Bank, 187 Ky. 44, 218 SW 465 (1920)
136
See, Sec. 9 and Sec. 30, Negotiable Instruments Law
75
A requested a bank to draw a draft to the order of C Bros., an existing firm who
were ignorant of the transaction. A indorsed the draft in the name of C Bros., and the
indorsee collected it from the drawee. Held, that the knowledge of the drawer of the
fictitious or non-existing character of the payee controls, not the knowledge of the
person at whose request the draft is drawn. That the draft was not payable to bearer
and that the drawee could recover the money from the indorsee. (Brannan, pages
13-14, citing, Seaboard Nat. Bank v. Bank of America, 193 N.Y. 26, 85 N.E. 829;
Jordan Marsh Co. v. Nat. Shawmut Bank, 201 Mass. 397, 87 N.E. 740 accord, italics
supplied)
Illustrative cases:
A clerk had a power of attorney to draw checks on his employers bank account.
The clerk fraudulently drew checks to X, an existing person, but who had no interest in
the checks and was not intended by the clerk to receive them. The clerk indorsed the
name of X and negotiated the checks for his own purposes, and the drawee bank paid
them in good faith. Held, that the payee was a fictitious person within the section, that
the checks were payable to bearer and that the payment by the bank was rightful.
(Brannan, page 14, citing Snyder v. Corn Exch. Nat. Bank, 221 Pa. 599, 70 Atl. 876,
S.C. sec. 124)
The name of the drawer was forged to checks made payable to real persons. It
did not appear who the forger was, but he knew that the payees would never have any
interest in the checks. The drawee bank paid the checks to defendant, a holder in due
course, on the forged indorsement of the payee. Held, that the payees were fictitious,
that the checks were payable to bearer, and that the drawer could not recover the
money from defendant. (Ibid, citing Trust Company of America v. Hamilton Bank, 127
App. Div. 515, 112 N.Y. Supp. 84)
An instrument knowingly made payable to the order of a fictitious or non-existing

person is negotiable without indorsement, but to recover upon the instrument as
payable to bearer, it must be shown that the maker had knowledge of the fiction, and if
the plaintiff declares only upon the instrument as payable to order, it is not necessary
to decide whether there is evidence of such knowledge, as the issue is not open. (Ibid,
citing Boles v. Harding, 201 Mass. 103, 87 N.E. 481)
A bill payable to a real person not intended by the drawer to have any interest in it
is payable to a fictitious person, and is to be treated as payable to bearer, and the
acceptors ignorance of the
76
M.P.Piad
fiction is immaterial. (Ibid, citing Bank of England v. Vagliano [1891], A.C. 107)
The drawers ignorance that the payee is non-existing is also immaterial. (Ibid,
citing Clutton v. Attenborough [1897], A.C. 9). But if the payee is a real person
intended by the drawer to be the payee, he is not a fictitious person, and the drawer is
not liable to one claiming under a forged indorsement of the payees name, although
the payee really had no interest in the instrument. (Brannan, page 15, citing Bank of
England v. Vagliano and Clutton v. Attenborough, distinguished. Vinden v. Huges
[1905], 1 K.B. 795; North & South Wales Bank v. Macbeth [1908], App. Cas. 137)
When the only or last indorsement is an indorsement in blank
A promissory note indorsed in blank by the payee is payable to bearer. (Brannan,

page 16, citing Mass. Nat. Bank v. Snow, 187 Mass. 159, 72 N.E. 959, S.C. secs. 16,
56, 124, 191; Unaka Nat. Bank v. Butler, 113 Tenn. 574, 83 S.W. 655 (a check), S.C.
sec. 56)
The indorsement in blank of a non-negotiable promissory note does not make it

negotiable, and the indorser is liable only as an assignor. (Ibid, citing Wettlaufer v.
Baxter (Ky.), 125 S.W. 741)
2012 Bar Question:
Which phrase best completes the statement -- A check which is payable

to bearer is a bearer instrument and:
a. negotiation can be made by delivery only;

b. negotiation must be by written indorsement;
c. negotiation must be by specific indorsement;
d. negotiation must be by indorsement and delivery.
X delivered a check issued by him and payable to the order of CASH to Y

in payment for certain obligations incurred by X in favor of Y. Y then delivered
the check to Z in payment for certain obligations. Which statement is most
accurate?
a. Z can encash the check even though Y did not indorse the check.
77
b. Z cannot encash the check for lacking in proper endorsement.
c. Y is the only one liable because he was the one who delivered the check to Z.
d. The negotiation is not valid because the check is an instrument payable to
order.
Sec. 10. Terms, when sufficient. - 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.
Notes:
Substantial compliance with the requirements of negotiability
The law does not require that the Bill or Note have to literally follow the language
of the Negotiable Instruments Law, it is enough that looking at the face of the
instrument, substantial compliance from Sec. 1 of the said law can be inferred.
Illustrative case:
A certificate of deposit reciting that X has deposited in the Y bank three thousand
dollars to the credit of himself, payable in current funds on return to this certificate
properly indorsed on July 1, 1909 is a negotiable instrument under the N.I.L.
(Brannan, page 16, citing, Forest v. Safety Banking & Trust Co. (E.D. Pa.), 174 Fed.
345)
Sec. 11. Date, presumption as to. - Where the instrument or an acceptance or

any indorsement thereon is dated, such date is deemed prima facie to be the
true date of the making, drawing, acceptance, or indorsement, as the case
may be.
Notes:
A Date in a bill or note is not essential to its validity

The date of an instrument is not necessary to it in law, that its absence avoids the
instrument. It is not an essential characteristic of the instrument, as other qualities are
characteristic of the instrument or of its negotiability. For this reason the date may be
supplied by parol, the date of delivery being the day of date; or it may be antedated or
postdated, or, if the date be left blank, all parties are deemed to consent that the
holder may fill up the blank with a date. Legally speaking, the
78
M.P.Piad
chief importance of a date is that it is presumptive evidence of the time of its actual
execution, a presumption, however, which may be contradicted by parol evidence.137
Sec. 12. Ante-dated and post-dated. - T

he 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.
Notes:
An indorsee of a post-dated check is not put upon inquiry merely because of its
negotiation prior to its date. (Brannan, page 17, citing Albert v. Hoffman, 64 Misc.
Rep. 87; 117 N.Y. Supp. 1043, S.C. sec. 25)
A post-dated check is not invalid, any may be properly stamped as a bill payable
on demand. (Ibid, citing, Royal Bank v. Tottenham, [1894] 2 Q.B. 715; Hitchcock v.
Edwards, 60 L.T. Rep. 636)
A post-dated check is not irregular x x x so as to charge the holder with equities.

(Ibid)
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.
Notes:
If the instrument is issued undated, is it a negotiable instrument?
Yes.
137 Handbook of the Laws of Bills and Notes, Charles P. Norton, Third Edition, 1900, p. 72, footnotes ommitted
79
Where
a. an instrument expressed to be payable at a fixed date is issued undated or
b. where the acceptance of an instrument payable at a fixed period after sight is
undated
Then any holder may insert therein the true date of issue or acceptance,
and the instrument shall be paid accordingly. (Sec. 13, Negotiable
Instruments Law)
The validity and negotiable character of an instrument is not affected by

the fact that it is not dated. (Sec. 5, Negotiable Instruments Law)
What if a wrong date was inserted by the holder?
The insertion of a wrong date does not avoid the instrument in the hands of a
subsequent holder in due course but it is as to him, the date so inserted is to be
regarded as the true date. (Sec. 13, Negotiable Instruments Law)
Illustrative case:
An undated note, payable four months after date, was delivered to the payee by
an accommodation indorser on December 1st. The payee, without authority, filled in
the date December 30th. Held, that in the absence of other authority the payee could
only fill in the blank with the date of issue and that the indorser was discharged.
(Brannan, page 17, citing Bank of Houston v. Day, (Mo. App.), 122 S.W. 756)
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.
80

Revised Negotiable Instruments Law Annotated MPP

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Revised Negotiable Instruments Law Annotated MPP

Uploaded by

Copyright:

Available Formats

CONCEPTUAL FRAMEWORK

I. ​Birth/Creation of Negotiable Instruments (sec. 10-29) ​II. ​Life (sec.

ACT NO. 2031

THE NEGOTIABLE INSTRUMENTS LAW

The negotiability of bills of exchange and promissory notes originated in the

Negotiable Instrument; definition

A negotiable instrument is a special contract which on its face is signed by the

4 Ibid, pages 401-402.

time, a sum certain in money, to order or bearer, and when it is addressed to a

Purpose for the enactment of the Negotiable Instruments Law

Functions of a Negotiable Instrument

Negotiable Instrument as a substitute for money

The essence of negotiability which characterizes a negotiable paper as a credit

2012 Bar Question:

Negotiable instruments are used as substitutes for money, which means ​

a. that they can be considered legal tender.

The language of negotiability which characterize a negotiable paper as a credit

The accepted rule is that the negotiability or non negotiability of an

Very frequently by application of the principles of estoppels, and to effectuate the

13 G.R. No. 90888, September 13, 1990

At present, in Philippine jurisdiction, we generally recognize five types of

Promissory Notes​15 ​1.

2002 Bar Question:

A. Define the following: (1) a negotiable promissory note, (2) a bill of

15 Sec. 184, Act 2031, Negotiable Instruments Law.

I promise to pay Pancho Dela Torre, or order, ONE HUNDRED THOUSAND

1. What is a Promissory Note?

It is an unconditional promise in writing made by one person to another, signed by

In the case of ​Pentacapital Investment Corporation vs. Makilito B. Mahinay,​20

A promissory note is a solemn acknowledgment of a debt and a formal

Test to determine a promissory note

To constitute a good promissory note, no precise words of contract are

20 G.R. No. 171736, July 5, 2010, [Nachura, J.:]

Due A. B. $325, payable on demand,​​ ​or ​I acknowledge myself to be indebted to A

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

Who are the parties to a Promissory Note?

Intimidation, vitiation of consent in promissory notes

Carmela Brobio Mangahas vs. Eufrocina Brobio G.R. No.

On May 12, 2002, the heirs of the deceased executed a Deed of

This is to promise that I will give [a] (sic) Financial Assistance to

Nowhere is it alleged that mistake, violence, fraud, or intimidation

There is undue influence when a person takes improper

Respondent may have desperately needed petitioner​s signature

deprived of free will and choice. Respondent still

Contrary to the CA​s findings, the situation did not

We join the RTC in holding that courts will not set

2. Bill of Exchange defined.

A Bill of Exchange is an unconditional order in writing addressed by one person to

22 G.R. No. L-24011, October 24, 2970, [Castro, J:]

As long as a commercial paper conforms with the definition of a bill of exchange,

Philippine Bank of Commerce vs. Jose M. Aruego G.R. Nos.

FACTS: ​On December 1, 1959, the Philippine Bank of Commerce instituted an

23 Ludwig Teller, Bills and Notes, p. 6 (1948)

costs. The complaint filed by the Philippine Bank of Commerce

ISSUE: ​Is his contention tenable?

RULING: ​The contention is without merit.

From the definition, does the bill of exchange operate as an assignment of

Doctrine of Equitable Assignment

Moreover, it may be regarded as a settled doctrine that an order founded upon a

Who are the parties to a bill of exchange?

The drawer, is the person drawing an instrument making an unconditional order in

But not to two or more drawees in the alternative or in succession.

To: Lancelot Borja and/or Margaux Borja

I. Birth/Creation of Negotiable Instruments (sec. 10-29) II. Life (sec.

Negotiable instruments are used as substitutes for money, which means

Promissory Notes15 1.

In the case of Pentacapital Investment Corporation vs. Makilito B. Mahinay,20

Due A. B. $325, payable on demand, or I acknowledge myself to be indebted to A

Respondent may have desperately needed petitioners signature

Contrary to the CAs findings, the situation did not

FACTS: On December 1, 1959, the Philippine Bank of Commerce instituted an

ISSUE: Is his contention tenable?

RULING: The contention is without merit.

Chief Characteristics of

 Usually payable to bearer, though sometimes expressed to be payable to a

A draft i s a form of a bill of exchange used mainly in transactions between

Demand Draft distinguished from a cashiers or managers check

A cashiers check issued by a bank, however, is not an ordinary draft. The

A cashiers check is a check of the banks cashier on his or another bank. It is in

Sometime in 1982, plaintiffs agent went to the defendant bank and

Sec. 3. As used in this Act

A check is a bill of exchange drawn on a bank payable on demand. (Sec. 185,

Section 1. Form of negotiable instruments. - A

eans an acceptance completed by delivery or notification;