REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS
NEGOTIABLE INSTRUMENTS LAW
GOVERNING LAWS
- Act No. 2031 or “The Negotiable
Instruments Law” (NIL)
- The Civil Code of the Philippines which
applies suppletorily in cases of
assignment and demand for payment.
- The Code of Commerce which applies
suppletorily to NIL in cases of crossed
checks.
Note: If it applies suppletorily, it would
mean that the provisions of the law will
only be used in the absence of provisions
for such subject matter.
NEGOTIABLE INSTRUMENTS (NI)
- It is a written contract for the payment of
money which is intended as a substitute
for money and passes from one person to
another as money, in such a manner as to
give a holder in due course the right to
hold the instrument free from defenses
available to prior parties (Sundiang Sr. &
Aquino, 2011).
- Section 1 of the NIL, in effect, gives a
definition of a NI. As such, it is an
instrument which possesses all the
elements of negotiability provided in the
said section.
PRINCIPAL CHARACTERISTICS
1. NEGOTIABILITY – The note may pass
from hand to hand similar to money so as
to give the holder in due course (HIDC)
the right to hold the instrument and
collect the sum payable for himself free
from any infirmity in the instrument or
defect in the title of any of the prior
parties or defenses available to them
among themselves.
2. ACCUMULATION OF SECONDARY
CONTRACTS– A characteristic of a NI
where additional parties become
involved as they are transferred from one
person to another.
Q: Are NIs considered as legal tender?
A: Negotiable instruments are neither money
nor legal tender; they are mere substitutes for
money.
NEGOTIABLE INSTRUMENTS LAW 1
Q: Will the issuance of a NI produce the
effect of payment?
A: The delivery of a negotiable instrument
does not by itself produce the effect of
payment.
Q: When will a NI produce the effect of
payment?
A: Negotiable instruments shall produce the
effect of payment when:
1. They have been cashed (Art. 1249,
Civil Code);
2. Through the fault of the creditor, the
NI has been impaired (Art. 1249, Civil
Code); or
3. A check representing a demand
deposit has been cleared and credited
to the account of the creditor (Sec.
60, NCBA).
KINDS OF
NEGOTIABLE
INSTRUMENTS
1. PROMISSORY NOTES (PN) – 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
(NIL, Sec. 184);
2. BILL OF EXCHANGE (BOE) – 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 (NIL, Sec. 126).
3. CHECK – A bill of exchange drawn on a
bank payable on demand (NIL, Sec. 185).
PROMISSORY NOTE
PARTIES TO A PROMISSORY NOTE
1. MAKER – The one who makes the
promise and signs the instrument.
2. PAYEE – The party to whom the promise
is made or the instrument is payable.
REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS

EXAMPLE OF A PROMISSORY NOTE

1. Payable to Order

May 18, 2021

Ilocos Sur

Php10,000.00

For value received, I promise to pay to the order of Matthew the

amount of TEN THOUSAND PESOS (Php10,000.00) on or before
June 30, 2021 at his residence in Vigan City, Ilocos Sur.

(Sgd.) Andy

Q: Who is the maker?

A: Andy since she is the one who one who made the promise to pay the amount
and she was also the one who signed the instrument.

Q: Who is the payee?

A: Matthew since he is the party to whom the promise is made and to whom the
instrument is payable.

2. Payable to Bearer

May 18, 2021

Ilocos Sur

Php10,000.00

Two months after date, I promise to pay Matthew or bearer the

amount of TEN THOUSAND PESOS (Php10,000.00).

(Sgd.) Andy

Q: Who is the maker?

A: Andy since she is the one who made the promise to pay the amount and she
was also the one who signed the instrument.

Q: Who is the payee?

A: Matthew or bearer since he is the party to whom the promise is made and to
whom the instrument is payable.

Note:
- When we say “bearer” it would mean that the instrument is payable to whoever
is in possession of the instrument at the time of maturity.
- So, for example, Matthew indorsed the PN to Jack. If Jack is still in possession
of the PN by July 18, 2021, Jack is the bearer. Since Jack is the bearer, Andy shall
pay the amount of Php10,000.00 to him.

NEGOTIABLE INSTRUMENTS LAW 2

REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS

BILL OF EXCHANGE
PARTIES TO A BILL OF EXCHANGE
1. DRAWER – The person who issues and
draws the bill. The one who gives the
order to pay money to a third party. As
such, the drawer does not pay directly.
2. DRAWEE – The party upon whom the
bill is drawn. The person to whom the
bill is addressed and the one who is
ordered to pay.
3. PAYEE – The party in whose favor the
bill is originally drawn. The one who is
paid.

EXAMPLE OF A BILL OF EXCHANGE

May 18, 2021

Vigan City, Ilocos Sur

To: Jack
Vigan City, Ilocos Sur

Php10,000.00

Thirty days after date, pay to Matthew or order the sum of TEN
THOUSAND PESOS (Php10,000.00).

(Sgd.) Andy

Q: Who is the drawer?

A: Andy since she is the one who issued the bill. Here, Andy is the one ordering the
payment of the Php10,000.00 to Matthew or order.

Q: Who is the drawee?

A: Jack since he is the party upon whom the bill is drawn. He is the one ordered to pay.

Q: Who is the payee?

A: Matthew since he is the one who shall receive the payment of the Php10,000.00.

Q: Will Jack automatically become liable to pay the said amount upon the issuance of the
bill?
A: No. Jack must accept the bill by indicating his willingness to accept responsibility for
the payment of the bill. Once Jack accepts, he becomes an ACCEPTOR.

Q: In the case of a bill, who is the one primarily liable?

A: It is the drawee/acceptor since he is the one who is ordered to pay.

NEGOTIABLE INSTRUMENTS LAW 3

REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS

PROMISSORY NOTE v. BILL OF EXCHANGE

Undertaking
As to number of original
parties
As to liability of parties
As to number of
presentments needed
PROMISSORY NOTE BILL OF EXCHANGE
Promise to pay Order to pay
3 parties (upon acceptance of
2 parties
the drawee)
Maker is primarily liable Drawer is secondarily liable
2 presentments (for
Only 1 presentment (for
acceptance and for payment)
payment) is needed
are generally needed

LIABILITIES OF THE PARTIES

PARTIES FUNCTION LIABILITY

Primarily liable;
cannot limit his
One who makes the liability.
Maker promise and signs the
instrument He is the one
Promissory Note
primarily liable to
pay.
The party to whom
Payee payment is originally
payable.
Secondarily liable,
except when drawee
refused to accept; can
limit his liability by
putting “without
The person who
recourse.”
Drawer issues and draws the
bill.
Secondary liability
would mean that in
case the drawee does
not pay, then, he
pays.
Bill of Exchange
Not liable until he
becomes acceptor.
The party upon
Drawee whom the bill is
Here, the drawee
drawn
must accept the bill
in order to be liable.
The party to whom The party to whom
Payee payment is originally payment is originally
payable. payable.
The acceptor is the
Acceptor drawee who accepts Primarily liable
the bill.

NEGOTIABLE INSTRUMENTS LAW 4

REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS
REQUISITES OF
NEGOTIABILITY
SECTION 1. FORM OF NEGOTIABLE
INSTRUMENTS.
- An instrument to be negotiable must
conform to the following requirements:
1. It must be in writing and signed by
the maker or drawer;
2. Must contain an unconditional
promise or order to pay a sum
certain in money;
3. Must be payable on demand, or at a
fixed or determinable future time;
4. Must be payable to order or to
bearer; and
5. Where the instrument is addressed
to a drawee, he must be named or
otherwise indicated therein with
reasonable certainty.
IT MUST BE IN WRITING
- It must be reduced in writing or in
tangible form.
- The negotiability or non-negotiability of
an instrument is determined from the
writing on the face of the instrument
itself.
THE INSTRUMENT MUST BE SIGNED
BY THE MAKER OR DRAWER
- It is placed at the lower right-hand
corner of the instrument.
- Nonetheless, it may appear in any part of
the instrument whether at the top,
middle or bottom or at the margin.
- Where a signature is so placed upon the
instrument that it is not clear in what
capacity the person making the same
intended to sign, he is to be deemed an
indorser. [Sec. 17 (f), NIL].
- The signature is valid and binding as long
as it appears that a person intended to
make the instrument his own.
- The signature is prima facie evidence of a
person’s intention to be bound as either
maker or drawer.
UNCONDITIONAL PROMISE OR
ORDER TO PAY
- Section 3, NIL
- The word “promise” or “order” need not
appear in the instrument to satisfy the
requirements of Section 1(b).
NEGOTIABLE INSTRUMENTS LAW 5
- Any words equivalent to a promise or
assumption of full responsibility is
sufficient.
- An unqualified order or promise to pay is
unconditional within the meaning of this
Act though coupled with:
1. 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
EXAMPLES:
“I promise to pay Matthew or order the sum
of Php10,000.00 out of my salary in the
government.”
“I promise to pay Matthew or order the sum
of Php10,000.00 to be debited with his
current account with me.”
2. A statement of the transaction which
gives rise to the instrument.
EXAMPLES:
“I promise to pay Matthew or order the sum
of Php300,000.00 being the price of a car this
day sold and delivered to me.”
Note: An order or promise to pay out
of a particular fund is not
unconditional.
SUM PAYABLE MUST BE CERTAIN
- Section 2, NIL
- This is to assure clarity and certainty in
determining the value of the instrument.
- The sum payable is a sum certain,
although it is to be paid:
1. With interest;
“I promise to pay Matthew or order the sum
of Php10,000.00 with interest at 18% per
annum from date until paid.”
2. By stated installments;
Note: Payment by installment is
certain if the dates of each
installment are fixed and the amount
to be paid for each installment is
stated.
3. By stated installments, with a
provision that, upon default in
REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS
payment of any installment or of
interest, the whole shall become due;
or
Note:
- This involves an acceleration
clause.
- Acceleration clause is a
provision, that upon default in
payment of any installment or
interest, the whole shall become
due.
- Negotiability of an instrument
with an acceleration clause,
depends on who has the option
to exercise the same.
- If the option to accelerate the
maturity is on the maker,
whether such option is absolute
or conditional – NEGOTIABLE.
- Where acceleration is at the
option of the holder and can only
be exercised upon the happening
of the specified event –
NEGOTIABLE
- Where the holder’s right to
accelerate is unconditional, the
time of payment is rendered
uncertain – NOT NEGOTIABLE
4. With exchange, whether at a fixed
rate or at the current rate; or
“I promise to pay Matthew or order the sum
of $1,000.00 with exchange at the current
rate.”
5. With costs of collection or an
attorney's fee, in case payment shall
not be made at maturity.
“I promise to pay Matthew or order the sum
of Php10,000.00 on or before June 30, 2021
with 12% attorney’s fees and costs of
collection if not paid at maturity.”
Q: Discuss the negotiability or non-
negotiability:
“Manila, June 3, 1993
P10,000.00
For value received, I promise to pay Sergio Dee or
order the sum of P10,000.00 in five (5) installments,
with the first installment payable on October 5, 1993
NEGOTIABLE INSTRUMENTS LAW 6
and the other installments on or before the fifth day of
the succeeding month or thereafter.
(Sgd.) Lito Villa” (1993 Bar Exam)
A: The instrument is negotiable because it
complied with the requirements provided by
Section 1. The fact that it is payable in
installments does not make the instrument
non-negotiable as long as the dates of each
installment is fixed or at least determinable
and the amount to be paid for each
installment is stated.
MUST BE PAYABLE IN MONEY
- The “money” referred into may be our
legal tender or foreign currency.
- An instrument is still negotiable
although the amount to be paid is
expressed in currency that is not legal
tender so long as it is expressed in money.
Q: What is the effect if a bill or note is
payable other than in money?
A: As a general rule, the instrument is
non-negotiable if it contains a promise or
order to do any act in addition to the
payment of money.
- EXC: Negotiability is not affected if
the note contains an additional
provision which:
1. authorizes the sale of collateral
securities in case the instrument
be not paid at maturity; or
“I promise to pay Matthew or order the
sum of Php30,000.00 on June 30, 2021
secured by a ring I delivered to him by
way of pledge and which he could sell
should I fail to pay him at maturity.”
2. authorizes a confession of
judgment if the instrument be not
paid at maturity; or
3. waives the benefit of any law
intended for the advantage or
protection of the obligor; or
4. gives the holder an election to
require something to be done in
lieu of payment of money. (Sec. 5,
NIL)
PAYABLE ON DEMAND
- Section 7, NIL
- The holder may call for payment any
time.
REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS
- Likewise, the maker may also pay any
time and the refusal of the holder to
accept payment shall stop the running of
interest should there be any, but
obligation to pay the note subsist.
- An instrument is payable on demand:
1. When it is so expressed to be payable
on demand, or at sight, or on
presentation; or
“I promise to pay to bearer on demand
Php10,000.00.”
2. In which no time for payment is
expressed.
“Pay to Matthew or order Php10,000.00.”
Note: 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.
PAYABLE AT A FIXED TIME
- A term or time instrument is payable only
upon the arrival of the time for payment.
“I promise to pay Matthew or order the sum of
Php10,000.00 on June 30, 2021.”
PAYABLE AT A DETERMINABLE
FUTURE TIME
- Section 4, NIL
- An instrument is payable at a
determinable future time which is
expressed to be payable:
1. At a fixed period after date or sight;
or
“Sixty days after date, I promise to pay
Matthew or order the sum of Php10,000.00.”
“Sixty days after sight, I promise to pay
Matthew or order the sum of Php10,000.00.”
2. On or before a fixed or determinable
future time specified therein; or
“On or before June 30, 2021, I promise to pay
Matthew or order the sum of Php10,000.00.”
“On or before the start of the next school
semester, I promise to pay Matthew or order
the sum of Php10,000.00.”
NEGOTIABLE INSTRUMENTS LAW 7
3. 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.
- A bill or note payable several days
before the occurrence of the
specified event is not negotiable,
since the date of maturity of the
instrument can only be
ascertained after it has become
overdue.
“I promise to pay Matthew or order the sum
of Php10,000.00 upon the death of his
father.”
“Thirty days after the death of his father, I
promise to pay Matthew or order the sum of
Php10,000.00.”
Note:
- An instrument payable upon a
contingency is not negotiable,
and the happening of the event
does not cure the defect.
- “Pay to the order of Matthew the sum of
Php10,000.00 upon his reaching of the
age of majority.”
- Here, the bill is not negotiable
because the order is conditional.
- Matthew may die before reaching
the age of maturity, as such, the
bill will never mature.
PAYABLE TO ORDER
- Section 8, NIL
- The words “to the order of,” “or order,”
“or bearer,” and “to the bearer” are
standardized words of negotiability.
- These words serve as an expression of
consent that the instrument may be
transferred to whoever the payee orders,
allowing further negotiation.
- 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:
1. A payee who is not the maker,
drawer, or drawee; or
2. The drawer or maker; or
3. The drawee; or
4. Two or more payees jointly; or
5. One or some of several payees; or
6. The holder of an office for the time
being.
REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS

Note: Where the instrument is

payable to order, the payee must be
named or otherwise indicated therein
with reasonable certainty.

PAYABLE TO BEARER
- Section 9, NIL
- Bearer is the one in possession of a bill or
note which is payable to bearer.
- The instrument is payable to bearer:
1. When it is expressed to be so
payable; or

“I promise to pay to bearer the sum of

Php10,000.00.”

2. When it is payable to a person named

therein or bearer; or

“I promise to pay Matthew or bearer the sum

of Php10,000.00.”

3. 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

“I promise to pay John Doe the sum of

Php10,000.00.”

“I promise to pay to the order of the King of

the Pacific Ocean the sum of Php10,000.00.”

4. When the name of the payee does not

purport to be the name of any person;
or

“Pay to cash.”
“Pay to cash or order.”
“Pay to money.”
“Pay to payroll.”

5. When the only or last indorsement is

an indorsement in blank.

NEGOTIABLE INSTRUMENTS LAW 8