1. WHAT IS A NEGOTIABLE INSTRUMENT?

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. The
instrument must comply with Section 1 of the Negotiable Instruments Law (NIL for short) to be
considered negotiable.

2. REQUISITES OF NEGOTIABILITY

a) 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 bearer; and
e) When the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.

2.01. What negotiation means. The transfer of an instrument from one person to another in
such a manner as to constitute the transferee a holder thereof. A holder is the payee or
indorsee of a bill or note who is in possession of it, or the bearer thereof.
A. Test. One should determine if the instrument, on its face, complies with the
requirements under Section 1 of the NIL. In determining the negotiability of an
instrument, consider the instrument in its entirety and only what appears on its face.
B. When negotiability ends. Section 47 of the NIL provides that "an instrument negotiable
in its origin continues to be negotiable until (1) it has been restrictively indorsed or (2)
discharged by payment or otherwise." Note however, that restrictive indorsement
makes the instrument non-negotiable only if it is the first type – it prevents further
negotiation of the instrument and not the two other types (constitute the indorse the
agent or trustee).

EXAMPLES AND NOTES:

(1) The negotiability of the instrument is not affected if it was issued for an illegal
consideration; hence, an instrument that contains all the requisites under Section 1
of the NIL is still negotiable even if it was issued in payment for killing the political
enemies of the maker or drawer;

(2) Non-acceptance or lack of indorsement does not affect the negotiability of the
instrument;

(3) Marking the instrument non-negotiable does not affect the negotiability of the
instrument;
 A separate written contract that is not mentioned in the instrument does not affect the
negotiability of the instrument even if the separate contract contains conditions.
3. GOVERNING LAW

3.01. CODE OF COMMERCE

In addition to Act No. 2031, otherwise known as the Negotiable Instruments Law (NIL
for short), negotiable instruments are governed by the provisions of the Code of Commerce that
were not impliedly repealed by the NIL. Example: Code of Commerce provisions on crossed
checks are still in force because there is no provision in the NIL that deals with crossed checks.

3.02. The New Civil Code applies suppletorily. Example: Article 1216 of the New Civil Code.

3.03. APPLICABILITY OF THE NIL

a) The provisions of the NIL can be applied only to negotiable instruments. If the
instrument is not negotiable, the pertinent provisions of the Civil Code or pertinent special laws
should apply (GSIS u. CA, 170 SCRA 533 [19891; Kauffman 0. PNB, 42 Phil. 182 [19211).

b) The NIL can be applied, but only by analogy if the instrument is not negotiable if there
is no law that can be applied.

3.04. FOREIGN LAWS. Decisions of the courts in the United States and in England based on the
American Uniform Negotiable Instruments Law and the Bills of Exchange Act of 1882 can be
applied in this jurisdiction because those foreign laws served as bases of NIL.

4. FUNCTIONS
4.01. Functions of Negotiable Instruments (2015 Bar).
a) It operates as a substitute for money.
b) It is a means of creating and transferring credit.
c) It facilitates the sale of goods.
d) It increases the purchasing medium in circulation.
e) It is evidence of contracts (Example: it may be evidence of a contract of loan).

4.02. NOT LEGAL TENDER. Section 52 of the New Central Bank Act (NCBA for short), R.A. No.
7653, provides that only notes and coins issued by the Bangko Sentral ng Pilipinas are
considered legal tender.

a) Section 60 of the same law expressly provides that checks are not legal tender. Section
60 provides that "checks representing demand deposits do not have legal tender power
and their acceptance in the payment of debts, both public and private, is at the option
of the creditor." However, under the same provision, "a check which has been cleared
and credited to the account of the creditor shall be equivalent to delivery to the
creditor of cash in an amount equal to the amount credited to his account."
 b) Even manager's and cashier's checks are notlegal tender; they are not money or cash.
However, they are also considered "good as cash" in practice because the drawer and
the drawee is the same bank; it is therefore backed by the resources of the bank

4.03. COINS AS LEGAL TENDER. Pursuant to Section 52 of R.A. No. 7653 and BSP Circular No.
537, Series of 2006, the maximum amount of coins to be considered as legal tender is
adjusted as follows:

a) One thousand pesos (P1,000.00) for denominations of 1-Peso, 5-Peso and 10-Peso
coins; and
b) One hundred pesos (P100.00) for denominations of 1-centavo, 5-centavo, 10-centavo,
and 25-centavo coins.

5. TWO DISTINCTIVE FEATURES OF A NEGOTIABLE INSTRUMENT.

5.01. Negotiability. It is that attribute or property whereby a bill or note or check may pass
from hand to hand similar to money, so as to give the holder in due course the right to hold
the instrument and to collect the sum payable for himself free from defenses.
Accumulation of secondary contracts. Secondary contracts are picked up and carried along
with them as they are negotiated from one person to another, or in the course of
negotiation of a negotiable instrument, a series of juridical ties between the parties thereto
arise either by law or by privity.

6. KINDS OF NEGOTIABLE INSTRUMENTS

6.01. Bill of Exchange. 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, NIL).

6.02. Promissory Note. A negotiable promissory note is an unconditional promise in writing

made by one person to another, signed by the maker, engaging to pay on demand, or at a
fixed or determinable future time, a sum certain in money to order or to bearer. Where a
note is drawn to the maker's own order, it is not complete until indorsed by him (Sec. 184,
NIL).

6.03. Kinds of Bills of Exchange

a) Draft- used synonymously with bill of exchange although it normally refers to a bill of
exchange used in documentary exchange like letters of credit transactions.
b) Inland and Foreign Bill - An inland bill is a bill which is, or on its face purports to be,
both drawn and payable within the Philippines. Any other bill is a foreign bill.
c) Time draft - draft that is payable at a fixed date.
d) Sight or Demand draft - draft that is payable when the holder presents it for payment.
 e) Trade acceptance - bill that is used in contracts of sale where the seller as drawer
orders the buyer (as drawee) to pay a sum certain to the same seller (payee).
f) Banker's acceptance a time draft across the face of which the drawee has written the
word accepted.
g) Check - a bill of exchange drawn on a bank payable on demand.

6.04. Kinds of Promissory Notes

a) Certificate of deposit - a form of promissory note which is a written
acknowledgment of a bank of its receipt of a certain sum with a promise to
repay the same.
b) Bonds - a certificate or evidence of a debt on which the issuing company or
governmental body promises to pay the bondholders a specified amount of
interest for a specified length of time, and to repay the loan on the expiration
date.
c) Debenture - a promissory note or bond backed by the general credit of a
corporation and usually not secured by a mortgage or lien on any specific
property.
6.05. Cases when a Bill of Exchange can be treated as a Promissory Note.

The following are the instances when a bill may be treated as a promissory note
by the holder (Secs. 17[el and 130, NIL; 2015, 2011, 2005, and 1998 Bar):
a) the drawer and the drawee are the same person;
b) the drawee is a fictitious person;
c) the drawee has no capacity to contract
d) the instrument is so ambiguous that there is doubt whether it is a bill or a note.

6.06. A) Negotiable Promissory Note vs. Negotiable Bill of Exchange

PROMISSORY NOTE BILL OF EXCHANGE

Unconditional promise
Involves two parties
Maker primarily liable
Only one presentment (for payment)
Unconditional order
Involves three parties
Drawer secondarily liable
Generally, two presentment: acceptance
and for payment

B) Bill of Exchange vs. Check

ORDINARY BILL OF EXCHANGE CHECK
Not drawn on a deposit. It is not It is necessary that a check is drawn on
necessary that a drawer of a BOE should a
have funds in the hands of the drawee. deposit; there is a bank account.

Death of the drawer of a BOE with the Death of the drawer of a check, with
knowledge of the bank, does not revoke the
the authority of the banker to pay. knowledge by the bank, revokes the
authority of the banker to pay.
 May be presented for payment within a Must be presented for payment within
reasonable time after its last negotiation a
(Sec. 71). reasonable time after its issue (Sec.
186).

6.07. Are the following commercial papers negotiable instruments under the NIL
1) a crossed check
2) a trade acceptance
3) a money order
4) a warehouse receipt
5) pawn ticket
6) treasury warrant
7) bill of lading
8) trust receipt
9) cash disbursement voucher
10) aval
11) letters of credit

a) Crossed check – usually negotiable as it normally complies with the requirements

under section 1 of the NIL but issued for a special purpose and can be negotiated
only once.
b) Trade acceptance – negotiable , it is a bill of exchange addressed by the seller of the
goods to the buyer. However, Section 1 must be complied with.
c) Postal Money Order – non-negotiable as it is governed by postal rules and
regulations which may be inconsistent with the NIL, and it can only be negotiated
once.
d) Warehouse receipt – not negotiable instrument under the NIL, it represents goods,
not money.
e) Pawn Ticket – non-negotiable, it does not represent money but the pawned articles.
f) Treasury Warrant – non-negotiable being payable out of a particular fund.
g) Bill of Lading – not negotiable instrument under the NIL, as it represents goods, not
money.
h) Trust Receipt - not negotiable under the NIL; it is an evidence of security interest of
the entrustee over the goods.
i) Cash disbursement voucher - not negotiable under the NIL because it is nothing
more than a receipt evidencing the payment.
j) Aval - not negotiable; it is a guarantee for the payment of drafts provided for under
Articles 486 and 487 of the Code of Commerce.
 k) Letters of Credit - not negotiable; by nature, it is payable to a specified beneficiary
and payment by the issuing bank is subject to the condition that the beneficiary
submit the required documents

6.08. Electronic Messages. Electronic messages received by banks from its investor clients as
instruction in managing the client's peso and foreign currency accounts are not negotiable
instruments under the NIL. The 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 supposed to come from a specific fund or
account of the investor-clients; and, they are not payable to order or bearer but to a
specifically designated third party. Thus, the electronic messages are not bills of exchange
(Hongkong and
a) The same electronic messages are also not "acceptances" because they did not
constitute the written and signed manifestation of H Bank to a drawer's order to pay
money.

7. PERSONS INVOLVED
a) Maker - the person who makes a promissory note and promises to pay the amount stated
therein.
b) Payee - the obligee, that is, the person who, by the terms of the note or the bill, is to receive
payment.
c) Drawer - the person who draws the bill of exchange and orders the drawee to pay a sum
certain in money.
d) Drawee - the person to whom the order to pay is addressed in a bill of exchange.
e) Acceptor - a drawee who accepts the order to pay made by the drawer. It is only when a
drawee becomes an acceptor that he is primarily liable.
f) Holder - the person who is in possession of a bearer instrument or an indorse of an order
instrument who is in possession thereof. A holder is the obligee, a person who can enforce
payment of the instrument.
g) Referee in case of need a person who may be designated in the instrument as the person
who may be resorted to by the parties in case of dispute.

8. DISTINCTIONS

8.01. Distinctions between Negotiable Instruments and Non-Negotiable Instruments may be

stated as follows:
a) Only negotiable instruments are governed by the NIL. If an instrument is not
negotiable, the NIL does not apply. Application of the NIL to non- negotiable
instruments is only by analogy.
b) Negotiable instruments can be transferred by negotiation or by assignment. Non-
negotiable instruments can be transferred only by assignment.
c) The transferee of a non-negotiable instrument can never be a holder in due course but
remains to be an assignee. A transferee of a negotiable instrument can be a holder in
due course if all the requirements under section 52 of the NIL are complied.
 d) Since the transferee of a non-negotiable instrument cannot be a holder in due course,
all defenses available to prior parties may be raised against the last transferee.

8.02. Distinguish Negotiability from Assignability

a) Assignability pertains to contracts in general, negotiability pertains to negotiable
instruments.
b) One who takes an instrument by assignment takes the instrument subject to the
defenses obtaining among the original parties, whereas a person, who takes the
instrument by negotiation, takes it free from personal defenses available among the
parties.

9. REQUISITES OF NEGOTIABILITY

Section 1. Form of negotiable instruments. – An instrument to be negotiable must

conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer.
(b) Must contain an unconditional promise or order to pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.

9.01. IN WRITING AND SIGNED BY THE MAKER OR DRAWER

a) Must be in writing - 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) Signed by the maker or drawer – the signature may be in one’s handwriting, printed,
engraved, lithographed, or photographed, so long as they are adopted as the signature of
the signer. What is important is that the maker or the drawer used what he affixed to an
instrument as his own signature for authentication.

9.02. IT MUST CONTAIN AN UNCONDITIONAL PROMISE OR ORDER TO PAY A SUM CERTAIN IN

MONEY

a) Promise or Order to Pay

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

1) The word “promise” or “order” need not appear in the instrument to satisfy
the requirements of Section 1(b) of the NIL. Examples: (1) “An
 acknowledgment may become a promise by the addition of words by which
a promise of payment is naturally implied, such as, ‘payable,’ ‘payable ona
given day,’ ‘payable on demand,’ ‘paid ... when called for’;
2) '"'Due A.B. or order Php 10,000.00, payable on demand, or, 'I acknowledge
myself to be indebted to the order of A in Php 10,000.00, to be paid on
demand, for value received, I.O.U. Php 10,000.00 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"
3) However, mere acknowledgement of debt is not a negotiable instrument.
Example: This is to certify that the bearer has deposited in this bank the sum
of P4,000.00 only repayable to the depositor 200 days after date.
4) If there are two or more makers and the instrument states that "I promise
to pay the liability of the makers is solidary. The liability is joint if it states
"We promise to pay . . .".

b) Promise or Order to Pay Must be Unconditional

An unqualified order or promise to pay is unconditional within the meaning of

NIL 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 (after payment); or A statement
of the transaction which gives rise to the instrument. Examples: (1) An instrument
is still negotiable if it contains the following: "per contract of sale dated January 1,
2003" (2) An instrument is not negotiable if it is "subject to" a contract like loan or
mortgage.

c) Conditional

(1) An order or promise to pay out of a particular fund; Examples: (1) A promise is
conditional if it is payable "from my inheritance which I will get after the death of
my father”;It is also conditional if the sum certain is payable from a specified bank
account.
(2) An instrument payable upon a contingency (the happening of the event does not
cure the defect); Example: An instrument is not negotiable if payment will be made
if the payee "will pass the bar examinations"
d) Indication of a Particular Fund for Payment vs. Fund for Reimbursement
Fund for Reimbursement Indicating Particular Fund

A. A. There is only one act - the drawee

(1) The drawee pays the payee from pays directly from the particular fund
his (the drawee's) own funds. indicated.

(2) After paying the payee, the

drawee pays himself from the
 particular fund indicated.

B. Particular fund indicated is not the B. Particular fund indicated is the direct
direct source of payment. source of payment.

9.03. PAYABLE IN A SUM CERTAIN IN MONEY

a) Money need not be “legal tender.” An instrument is still negotiable although the
amount to be paid is expressed in currency that not legal tender, so long as it is
expressed. Example: An instrument that is payable in Yen is still negotiable if the
other requisites are present.

b) If the obligor, like the maker, is given the option to deliver something in lieu of
money, the instrument is not negotiable (Sec. 5, NIL).
Examples: The following are not negotiable:
(1) A note where the maker "promises to deliver P100,000.00 or “Volvo Sedan"
at his option;
(2) A note where a maker promises to pay the bearer the amount of PhP1
Million and to keep his BMW free from any other encumbrances.
(3) A note which states that the maker also promises to pay the portrait of the
bearer.

c) If the instrument gives the holder an election to require something to be done in

lieu of payment of money, the instrument is still negotiable (Sec. 5[d]).
Example: Where the maker promises to pay P1,000.00 or a sack of rice at the option
of the holder.

d) A sum is certain within the contemplation of Section 1(b) of the NIL if the amount
that is to be unconditionally paid by the maker or drawee can be determined on the
face of the instrument even if it requires mathematical computation.

e) The sum payable is a sum certain within the meaning of this act, although it is to be
paid (Sec. 2, NIL):
(1) With interest; or
(2) By stated installments; or
(3) By stated installments, with a provision that, upon default in payment of
any installment or of interest, the whole shall become due; or
(4) With exchange, whether at a fixed rate or at the current rate; or
(5) With cost of collection or an attorney’s fee, in case payment shall not be
made at maturity.

f) Stated Installments. The dates of each installment must be fixed, or at least

determinable and the amount to be paid for each installment must be stated.
 Example: The instrument is not negotiable if "payable in five (5) installments in the
amount of P1,000.00 per installment" without stating the dates of each installment.

g) Discrepancy. If there is discrepancy between the sum payable in words and in

figures, the sum in words prevail except if the words are ambiguous or uncertain
(Sec. 17[a], NIL).

9.04. PAYABLE ON DEMAND OR AT A FIXED OR DETERMINABLE FUTURE TIME

a) Payable on Demand
The instrument should be paid the moment it is presented for payment. An
instrument is payable on demand (Sec. 7, NIL):
1) When it is so expressed to be payable on demand, or at sight, or on
presentation; or
2) In which no time for payment is expressed; and
3) Where an instrument is issued, accepted, or indorsed when overdue, it is, as
regards the person so issuing, accepting, or indorsing it, payable on
demand.
b) Payable at a Determinable Future Time
An instrument is payable at a determinable future time if it is expressed to be
payable (Sec. 4,NIL):
1) At a fixed period after date or sight. Example: "twenty days after date."
2) On or before a fixed or determinable future time specified therein. Example:
"payable on or before Jan. 5, 2006.
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. Examples:
(1) An instrument is negotiable if it is "payable within five (5) days from
death of Mr. X" (2013 Bar); (2) An instrument is not negotiable if it is
"payable five days after the completion of the house of the maker" because
the completion is uncertain.

Note: An instrument is not negotiable if the day and month is given but
not the year of its maturity; this is not a determinable future time

c) Acceleration Clauses.
The negotiability of the instrument is not affected even if it is to be paid by
stated installments, with a provision that, upon default in payment of any installment
or of interest, the whole shall become due (Sec. 2, NIL).

d) Insecurity Clauses
Provisions in the contract which allow the holder to accelerate payment "if he
deems himself insecure." The instrument is rendered non-negotiable.

e) Extension Clauses
 An instrument is payable at a definite time if by its terms it is payable at a
definite time subject to extension at the option of the holder, or to extension to a
further definite time at the option of the maker or acceptor or automatically upon
or after a specified act or event.

Example: An instrument is still negotiable if it is payable "two (2) years from

date subject to extension for another one (1) year at the option of the maker.”

9.05. PAYABLE TO ORDER OR BEARER

a) 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.
b) When is an instrument payable to bearer (Sec. 9,NIL)
1) When it is expressed to be so payable; or
2) When it is payable to a person named therein or bearer; or
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
4) When the name of the payee does not purport to be the name of any person
(Example: "pay to cash"); or
5) When the only or last indorsement is an indorsement in blank.

Note: In No. 3, the payee need not be actually fictitious or non-existent.

It can still be payable to bearer even if the payee is existing, if the maker or
drawer does not intend the payee to have any right over the instrument.

c) Order Instruments
There are only two (2) ways by which an instrument can be made payable to
order under Section 8 of the NIL. The instrument can either be payable to the order
of a specified person (i.e., "pay to the order of Juan De La Cruz") or to a specified
person or his order ("pay to Juan De La Cruz or order").

Section 8 of the NIL likewise identifies the persons who can be designated as
payees in an order instrument the persons to whose order the instrument may be
made payable. The instrument may be 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.

9.06. IDENTIFICATION OF THE DRAWEE

a) Where the instrument is addressed to a drawee (meaning in a bill of exchange), he
must be named or otherwise indicated therein with reasonable certainty. The holder
 must know to whom he should present it for acceptance and/or for payment,
otherwise, the purpose of negotiable instrument as a tool in commercial dealings will
be greatly hampered.
b) A bill may be addressed to more than one drawee jointly, whether they are partners or
not; but not to two or more drawees in the alternative or in succession (Sec. 128, NIL).
Example: An instrument may be addressed "to Juan De La Cruz and Pedro Santos" but
not "to Juan De La Cruz or Pedro Santos".

10. OMISSIONS AND PROVISIONS THAT DO NOT AFFECT NEGOTIABILITY

10.01. The validity and negotiable character of an instrument are not affected by the fact that
(Sec. 6, NIL)

1) It is not dated (date of issuance); or

2) Does not specify the value given, or that any value had been given therefor; or
3) Does not specify the place where it is drawn or the place where it is payable; or
4) Bears a seal; or
5) Designates a particular kind of current money in which payment is to be made;
6) Addressed to more than one drawee jointly.

10.02. When date may be inserted by holder. When date is necessary in order to determine
the maturity date of the instrument. Examples: (1) where an instrument expressed to be
payable at a fixed period after date is issued undated; (2) where the acceptance of an
instrument payable at a fixed period after sight is undated.

Note: Under Section 11 of the NIL, "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."

10.03. Additional provisions

An instrument is still negotiable even if the following are present (Sec. 5, NIL):
1) Authorizes the sale of collateral securities in case the instrument be not paid at
maturity; or
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.