1
LECTURE NOTES ON REGULATORY FRAMEWORK
AND LEGAL
ISSUES IN BUSINESS
BSA 2104
College of Business Administration
University of the East – Manila
HOW IS NEGOTIABILITY DETERMINED
Negotiability of a instrument is determined
by ascertaining if all the requirements of Section 1
appear on the face of the instrument. The factors
that affect the determination of negotiability of
instruments are:
1) The whole of the instrument shall be
considered;
2) Only what appears on the face of the
instrument shall be considered; and
3) The provisions of the Negotiable
Instruments Law, especially Section 1
thereof shall be applied.
The negotiability is therefore not
determined by looking at a separate document.
Example:
Mr. X issued a check in payment of the price
of a land which he purchased from Mr. Y. The
purchase of the land is covered by a document
entitled Deed of Conditional Sale. The negotiability
of the check will be determined based only on what
is stated in the check itself and not based on the
Deed of Conditional Sale. The sale may be
conditional but the check may be considered
negotiable if all the requirements of Section 1
appear on the check itself.
IT MUST BE IN WRITING SIGNED BY THE
MAKER OR DRAWER.
a. Writings
The writings on the instrument may be
made in any manner because Section 1 of the
Negotiable Instruments Law does not specify the
materials that should be used in writing the
instrument nor the material on which the writing
should be made. Therefore, the writings may be
printed, in ink or in pencil and it may be written in
any material that substitutes paper like cloth,
leather or parchment. Section 191 of the NIL
provides that the word “written” includes printed,
and “writing” includes print.
b. Signature.
The maker must sign the promissory note
and the drawer must sign the bill of exchange. The
signature of the maker or the drawer may be in
their handwriting, printed, engraved, lithographed
or photographed so long as they are adopted as
the signature of the signer. What is important is
that the maker or the drawer used what he affixed
as his own signature for authentication.
For example, the maker Mr. Xavier placed
the letter “X” as his signature in a promissory note.
This can qualify as the signature of Mr. Xavier so
long as he adopted it as his signature. This is true
even if he does not usually sign using the letter “X”
provided that he deliberately used it to
authenticate.
IT MUST CONTAIN AN UNCONDITIONAL
PROMISE OR ORDER TO PAY A SUM CERTAIN IN
MONEY.
a. IT MUST CONTAIN A PROMISE OR AN
ORDER TO PAY
1). A negotiable promissory note contains
a promise to pay -- there is an undertaking made
by the maker to pay the payee or any holder of the
promissory note.
2) A bill of exchange contains an order to
pay – the drawer is commanding the drawee to pay
the payee or the holder.
b. Promise to pay and its equivalent.

1)The word “promise” need not be used in
the instrument as long as words that are equivalent
are used. A “promise” may be implied from the
language used in the instrument. For example, the
following contains a promise although the word
“promise” is not used.
August 8, 2020
“Due X or order P8,000.00 payable
on July 6, 2022.
Sgd. “Y”
2) There is no “promise” if there is a mere
acknowledgement of debt. For example, the
following is not negotiable and a mere
acknowledgement of debt.
Order to pay and its equivalent.
Normally the word “order” does not appear
on a bill of lading. What is important is that a
command is given to the drawee to pay.
b. THE PROMISE OR ORDER MUST BE
UNCONDITIONAL.
The promise or order is not unconditional if
the promise or order is made to depend on a
contingent event. Even if the contingent event will
occur, the instrument is not converted into a
negotiable instrument.
Meaning of condition.
A condition under the Civil Code is a future
and contingent event, or a past event unknown to
the parties, the happening or non-happening of
which will either give rise to an obligation or
extinguish existing obligations. An event is
contingent event if it is not sure to happen.
If a condition is stated in the promissory
note or a bill of exchange, the instrument is not
negotiable. For example, this promissory note is
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conditional because the happening of a contingent
event gives rise to the obligation to pay.
July 20, 2019
I promise to pay Mr. X or
order P20,000.00 on
July 19, 2020 if he will be elected as
Student Council
President of the University of the
East in the year
2020.
“Sgd.
Mr. A”
Stipulations that make promise or order
conditional.
1) An indication of an account or fund out
of which payment shall be made.
2) When payment is made to depend upon
a contingency
Stipulations that do not make the promise
or order conditional
1)An indication of a particular fund out of
which reimbursement is to be made.
2) An indication of a particular account to
be debited with the amount.
3) A statement of the transaction which
gives rise to the instrument.
PAYABLE ON DEMAND OR AT A FIXED OR
DETERMINABLE FUTURE TIME.
a) An instrument may be payable on a
fixed date. For example, an instrument
may be payable on August 5, 2020.
b) An instrument may also be payable on
demand. For example, an instrument

may state: “I promise to pay Mr.X or
order P5,000.00 on demand.”
c) An instrument may also be payable at a
determinable future time. For example,
an instrument may be payable “on or
before September 8, 2020.”
PAYABLE TO ORDER OR BEARER
An instrument that is payable to a
specified person or entity is not negotiable
because the NIL requires that the
instrument must be payable to order or to
bearer. For example, this instrument is not
negotiable because it is payable to a
specified person, Mr. X.
July 1, 2008
“I promise to pay Mr. X
P10,000.00 on or before
January 8, 2009”
Sgd. Mr. Y
If the instrument reproduced above
contains a promise to pay “Mr. X or order”
or a promise to pay “to the order of Mr.X”
then the requirement that it is payable to
bearer or to order is complied with.
IDENTIFICATION OF THE DRAWEE
Section 1 of the NIL provides that
“where the instrument is addressed to a
drawee, he must be named or otherwise
indicated therein with reasonable
certainty.” The requirement applies only to
a bill of exchange and not to a promissory
note.
The requirement is imposed because
it is indispensable that any person who will
take the bill of exchange must know the
person who will be primarily responsible
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under the instrument. The purpose of
negotiable instrument as a tool in
commercial dealings will be greatly
hampered if the holder will still have to
guess who is and look for the identity of the
drawee. For example, it is not acceptable to
indicate the drawee as “the person who
always drives a red car going to his office
in the City Hall of Iloilo City.
1.Acceptable Drawees --- Where the
instrument is addressed to two or more
drawees jointly. For example, this is a valid
indication of drawees: “To Mr. X and Mr.
Y.”
2. Not Acceptable Drawees: Where
the instrument is addressed to two or more
drawees in the alternative: For example,
this indication of drawees is not valid: “To
Mr X or Mr. Y.”
3. Not Acceptable Drawees: Where
the instrument is addressed to two or more
drawees in succession, For example, this
indication of drawees is not acceptable: “To
Mr. X or in his absence or failure to pay Mr.
Y.”
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
(a) By stated installments, with a
provision that, upon default in
payment of any interest the
whole shall become due; or
(b) With exchange, whether at a
fixed rate or at the current rate;
or
(c) With costs of collection or an
attorney’s fee, in case payment
shall not be made at maturity.
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The requirement is that the

a. Payable in Money. money to be paid must be a “sum
certain.” A sumis certain within the
contemplation of Section l (b) of the
1) The instrument is still
NIL If the amount that is to be
negotiable even if the amount to be
unconditionally paid by the maker or
paid is expressed in currency that is
drawee can be determined on the
not legal tender so long as it is
face of the instrument. For
expressed in money. For example,
example, the amount to be paid is
an instrument is still negotiable if
not certain if what is payable is “the
the amount to be paid is
balance of the loan that maker must
“US$200.00, United States
still pay with the East West Bank.”
currency.” Although United States
dollars are not legal tender in the It is also not negotiable if
Philippines, they are still money. what is supposed to be paid is a sum
certain plus another undetermined
2) The promise or order to
amount. For example, an
pay in goods is not negotiable. For
instrument is not negotiable if the
example, this is not negotiable: “Pay
promise is “to pay P10,000.00 and
Mr. X or order ten (10) kilos of
the equivalent of the monthly
aluminum.”
allowance that I receive as employee
3) An instrument is not of Apex Corporation” or if the
negotiable if what is to be paid is promise is “to pay P10,000.00 plus
money and/or another thing at the all the profits that the maker’s store
option of the maker or acceptor or will earn in the month of December
anybody who is supposed to pay. 2010.”
For example, an instrument is not
c. Interest.
negotiable if it states: “I promise to
pay to Mr X or bearer P10,000 or to
deliver three sacks of corn. Sgd. Mr. Under Section 2, stipulations
Y” like payment of interest and
payment in installment do not affect
4) However, the instrument
the certainty of the sum to be paid.
is still negotiable if the option
In cases mentioned in Section 2,
belongs to the holder. The holder
there is an unconditional obligation
will choose if he will demand
to pay the principal amount. For
payment of money or delivery of
example, an instrument that states
goods. For example, an instrument
“Pay to the order of Mr. X
is negotiable if it states: “I promise
P20,000.00 with interest at 20% per
to pay Mr. X or bearer P10,000.00 or
anum” is payable in sum certain
to deliver ten sacks of corn at the
because there is an absolute
option of the holder. Sgd. Mr. Y.”
obligation to pay a fixed amount,
P20,000.00. The interest is just an
addition to the sum certain that is
b. Sum Certain
payable.

d. Installment Payments.
“Stated installments”
mentioned in Section 2 paragraph C
means that two (2) things must be
present:
1) the dates of each
installment must be fixed
or at least determinable;
and
2) the amount to be paid for
each installment must
also be stated or at least
determinable.
Examples:
1.This instrument is payable
in stated installments because the
amount of each installment is fixed
(P2,000.00) and the dates of each
installments are also fixed
(December 5, 2020, January 5, 2021,
February 5, 2021 and March 5,
2021),
2. The instrument is not
payable in stated installment. Both
the amount of each installment and
the dates of each installments are
not fixed and the instrument is not
negotiable. For example: “I promise
to pay Mr. X or order P8,000.00 in
installment every month starting
September. Sgd. Y”
e. Acceleration Clauses.
Section 2 of the NIL provides
that the certainty of the amount to
be paid is not affected if it is to be
paid “by stated installments, with a
provision that upon default in
payment of any installment or of
interest, the whole shall become
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due.” When there is an
accelerationclause, payment can be
demanded earlier than the original
date fixed. What is contemplated in
this provision is a typical
acceleration clause where the cause
of the acceleration is an act
attributable to the person who is
supposed to pay that is, his non-
payment.
f. Payable with Exchange.
As already pointed out
earlier that the negotiable
instrument can be payable in foreign
currency. In such type of negotiable
instrument, the maker or the drawer
may provide for the exchange rate.
For instance, although the amount
stated may be in United States
currency, actual payment may be in
Philippine currency. Hence, it is
necessary to place the exchange rate
in order to know the exact amount
to be paid in Pesos. In such a case
the negotiability of the instrument is
not affected because the principal
sum is still certain.
g. With cost of collection and
attorney’s fees
The sum is still certain
because the principal amount is still
certain in case the payeeor any
holder will be forced to file a
collection casein courtif there is non-
payment.
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.
a. Promise or Order to Pay Must
be Unconditional.
1. Condition under the New
Civil Code.
Under Articles 1173 and 1181 of the
New Civil Code, a condition is a future and
uncertain event, or a past event unknown
to the parties, the happening (positive) or
non-happening (negative) of which may
either give rise to an obligation or may
extinguish existing ones. The condition is
suspensive if the happening or non-
happening of the event will give rise to an
obligation; the condition is resolutory if
the happening or non-happening of the
event will extinguish existing obligations.
The negotiability of the instrument is
destroyed if the same, on its face, contains
either a resolutory or suspensive condition.
2. Reference to Transaction.
Section 3 makes it clear that the
statement of the transaction that gave rise
to the obligation covered by the note or the
bill does not destroy the negotiability of the
instrument. However, if the transaction
restricts the instrument or subjects the
instrument to its terms and condition, the
instrument is rendered non-negotiable.
1. Definition of terms and phrases
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Bill of Exchange - it 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.
Consideration – is the cause, price
or impelling influence which induces a
contracting party to enter into the contract.
Delivery (Sec. 192) - it is the
transfer of possession of the instrument
whether actual or constructive, from one
person to another, with intent to transfer
title to the instrument. Before delivery, the
instrument is inoperative and revocable.
Even if the instrument is already properly
indorsed but if it is not yet delivered, the
indorser still has the right to revoke the
instrument.
Drawer - the person giving the
order to pay, he draws or makes the
instrument. He is the issuer of a bill of
exchange.
Drawee or Acceptor - the person to
whom the instrument is addressed and who
signifies his acceptance to the order of the
drawer to pay a sum certain in money. He
is called the ACCEPTOR upon his acceptance
of the instrument.
Good faith - it means that the
person taking the instrument has acted with
due honesty with regards to the rights of
the parties liable on the instrument; that at
the time he took it, he has no knowledge of
any defect or infirmity of the instrument.
Indorsement - it is the act of a
payee, drawee, accommodation indorser or
holder of a bill, note, check or other
negotiable instrument, in writing his name
upon the back of the same, with or without

further or qualifying words, whereby the
property named in the instrument is
assigned and transferred to another.
Holder - he is the payee or the
indorsee of a bill of exchange, who is in
possession of the instrument, or the bearer
thereof. The person who has legally
acquired possession of the instrument by
indorsement or delivery and who is entitled
to receive payment thereof.
Holder for value (Sec. 26) - he is
one who has given a valuable consideration
(quantifiable) for the instrument issued or
negotiated to him. The holder is deemed a
holder for value in respect to all parties who
become such prior to that time when the
value was given.
Holder in Due Course (HDC) - a
person is a HDC if he has taken the
instrument: (a) complete and regular upon
its face; (b) before it was overdue; (c) he
took it in good faith and for value; and (d)
he has no notice of any defect in the title of
the person negotiating it. A payee may be a
HDC. A holder does not become a HDC of
an instrument by purchase of it at a judicial
sale or by taking it under legal process, or
by acquiring it in taking over an estate, or
by purchasing it as part of a bulk transaction
not in regular course of business of the
transferor.
Immediate parties - are those with
privity to one another, they are aware of
the conditions and limitations placed upon
the instrument they need not be physically
closed to the maker/drawer but is
considered immediate by reason of his
knowledge of the conditions or limitations
placed upon the delivery of the instrument.
Remote parties – are those not in direct
contractual relations to each other and are
not aware of the restrictions and limitations
placed on the instrument.
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Indorser - is a person who being
the payee or holder of a negotiable
instrument writes his name on the back
thereof usually for the purpose of
transferring it to another party.
Indorsee - the person to whom a
negotiable instrument, promissory note, bill
of lading, etc. is assigned by indorsement.
Issue - the first delivery of the
instrument complete in form to a person
who takes it as a holder.
Infirmity - refers to a thing(s) that
are wrong with the instrument itsef.
Maker – he is the person issuing a
promissory note.
Negotiable Instruments - these
are written security instruments that can be
transferred by indorsement plus delivery or
delivery only. It is a written contract that
calls for the payment of money only. It
must be delivered to have any legal effect
between the immediate parties. It is a
contract between the maker/drawer and
the payee.
Negotiation - it is the transfer of a
negotiable instrument from one person to
another vesting legal ownership to the
latter and giving the new owner the right to
demand payment of the face amount of the
instrument, along with any interest that
may be due.
Order - a designation of the person
to whom a bill of exchange or negotiable
promissory note is to be paid. It is a
direction to pay and must be more than an
authorization or request.
Party primarily liable - the person
who, by the terms of the instrument is
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absolutely required to pay the same upon
its maturity because he is unconditionally
bound. (Maker, acceptor/drawee upon
acceptance and certifier of a check).
Party secondarily liable - the
person who undertakes to pay the
instrument only after certain conditions
have been fulfilled. Such as: due
presentment for payment; dishonor of
instrument by party primarily liable and
complying with the requirements of law.
(Drawer and indorser)
Payee - person to whom the
instrument is drawn or payable or who will
receive the stated amount of money on the
instrument.
Promissory note (Sec. 184) - 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.
The principal functions or important
characteristics of a negotiable instrument
are the following:
A) Negotiability;
B) Accumulation of secondary
contracts as it is negotiated from
one person to another.
3. Requisites for the negotiability of a
promissory note (Sec. 1).
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
at a fixed or determinable
future time; and
d) It must be payable to order or to
bearer.

Unconditional promise - it is a
promise that is not limited or affected by
any condition.

Warranty - a promise that a

proposition of facts are truly as they are
represented to be and that they will remain
to subject to any specified limitations.

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2. The law that governs negotiable

instruments and the principal features or
important characteristics of a negotiable
instrument.

The law that governs Negotiable

Instruments is the Negotiable Instruments
Law or Act No. 2031 which took effect on
June 2, 1911.