LAW ON NEGOTIABLE INSTRUMENTS
REVIEWER FOR PRELIMINARY EXAM
Functions or importance of a negotiable
instrument:
• Substitute for money – takes place of legal
tender
• Medium of exchange – money is used for
exchange or for circulation
• Medium of credit transactions – even if there
is no cash at hand, a bill of exchange or
promissory note can be used
Section 1
Requisites:
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
date or determinable future;
d) 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.
Note:
The maker is for promissory note while drawer is
for bills of exchange. A holder is a person to
whom an instrument is delivered
(it can be the payee).
Promissory note – a written promise to pay a
definite sum of money to another at a definite
time.
Bills of exchange – the drawer orders the drawee
to pay the payee the funds that is in the hands of
the drawee
Applicability of the requisites:
• Subsections (a) to (d) – promissory note
• Subsections (a) to (e) – bills of exchange
• Promissory note – in subsection (b), it must
contain an unconditional promise (e.g., “I
promise to pay…”)
• Bills of exchange – in subsection (b), it must
contain an unconditional order (e.g., “pay to
*name* or order the sum…”)
• Subsection (e) – applicable only to bills of
exchange
a) It must be in writing and signed by the maker
or drawer
• Instrument must be in writing in paper or
print or typewritten.
• Regardless if the material used is leather,
cloth, or any other substitute, it is valid as
long as it is movable in nature.
• Signature can be placed in any part of the
instrument as long as it is clear in what
capacity the person (maker or drawer)
intended to sign. If unclear, he is deemed an
indorser.
• Signature can the full name, surname, initials,
mark or symbol provided that the maker or
drawer intends to be bound by it.
• If the genuineness of the signature is denied,
it is still valid. Evidence must be provided to
counter its validity.
b) Must contain an unconditional promise or
order to pay a sum certain in money
• Unconditional promise – it must not subject
to any condition
• To pay a certain sum in money – must be
payable in legal tender
c) Must be payable on demand, or at a fixed date
or determinable future
• Payable on demand – the payee can demand
anytime the money
• Determinable future – it is certain to happen
anytime in the future (e.g., date of
graduation)
d) Must be payable to order or to bearer
• The phrase “to order” or “to bearer” must
always be present otherwise, it is not
negotiable. It will only be a simple contract.
e) Where the instrument is addressed to a
drawee, he must be named or otherwise
indicated therein with reasonable certainty
• Only applies to bills of exchange.
• Drawee must be indicated with reasonable
certainty even if not named. Trademark or
title or position can be used.
Section 2
Certainty as to sum; what constitutes:
a) With interest;
b) By stated installments;
c) By stated installments, with a provision that
upon default in payment of any installment or
of interest the whole shall be become due;
d) With exchange, whether at a fixed rate or
current rate;
e) With costs of collection or an attorney’s fee,
in case payment shall not be made at
maturity.
Note:
Permissible clauses or provisions do not affect
the negotiability of the instrument.
a) With interest
• When there is a provision for that payment of
interest, it is incidental and does not affect
negotiability.
• Provision for increased or reduced rate if not
paid at maturity or paid before maturity,
respectively, does not affect negotiability
b) By stated installments
• As long as the sum is certain in money in
installment, it is negotiable.
• If there is an acceleration clause, regardless if
not paid, the instrument is still negotiable.
c) By stated installments, with a provision that
upon default in payment of any installment or
of interest the whole shall be become due
• If any installment or interest is not paid as
agreed, the whole shall become due.
• The payee or holder cannot accelerate the
note unless the make fails to pay the
installment.
• Extension clauses are negotiable if the right
is given to the holder.
d) With exchange, whether at a fixed rate or
current rate
• Promise to pay in exchange or in foreign
currency does not affect negotiability as long
as the sum can still be computed or certain.
e) With costs of collection or an attorney’s fee,
in case payment shall not be made at maturity
• If the installment is already due and not paid,
the payee can demand the payment. Expenses
will be shouldered by the maker.
• It is still negotiable since sum is certain.
• Attorney fees will be paid only if instrument
is past its due date.
Section 3
When promise is unconditional:
a) An indication of a particular fund out of
which reimbursement is to be made, or a
particular account be debited with the amount
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 conditional.
Note:
It must be payable in a sum certain in money and
must contain absolute and unconditional
promise.
Promise – can be: payable, to be paid, I agree to
pay, I guarantee to pay, due on demand, etc.
Order to pay – can be: let the bearer, oblige to
pay, etc.
a) An indication of a particular fund out of
which reimbursement is to be made, or a
particular account be debited with the
amount
• The maker or drawer must not acquire the
payment in a specified or particular account
or in a direct source.
• If the fund indicated is from the source of
reimbursement, it is negotiable.
• An instrument which contains a direction to
debit a particular account is negotiable.
b) A statement of the transaction which gives
rise to the instrument
• As long as there is no condition, it is
negotiable.
• For example: “as payment for 10 sacks of
rice”, this is not needed since it is already
presumed thus, it does not affect
negotiability.
Section 4
Determinable future time; constitutes:
a) At a fixed period after date or sight;
b) On or before a fixed or determinable future
time specified therein;
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 contingency is not
negotiable, and the happening of the event does
not cure defect.
Note:
Instrument is payable at all event. Hence, an
instrument that is payable at a contingency is not
negotiable.
a) At a fixed period after date or sight
• Fixed period after date – “30 days from
February 1”
• Fixed period after sight – after the drawee
sees the instrument upon present for
acceptance, the date of maturity is
determined from that date the instrument is
presented to the drawee.
b) On or before a fixed or determinable future
time specified therein
• Refers to the definite time upon or after the
occurrence of an event which is certain to
happen.
• A time can be determined with certainty after
the execution of the instrument.
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
• Specified event must be absolute certain to
happen although the time happening is
unknown (e.g., promise to pay or order
*amount* upon the death of his father)
Section 5
Additional provisions not affecting negotiability:
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.
Note:
General rule, the instrument is non-negotiable if
it contains a promise order to do any act in
addition to the payment of money.
a) Authorizes the sale of collateral securities in
case the instrument be not paid at maturity
• Example: “with a collateral of a laptop…”,
there is security of the instrument making it
negotiable
b) Authorizes a confession of judgment if the
instrument be not paid at maturity
• Debtor waives his right to be heard or to
undergo a trial and admits his liability.
• Liability is admitted without condition
however, in the Philippine Constitution it is
not allowed since there must be due process.
Nevertheless, it is negotiable.
c) Waives the benefit of any law intended for
the advantage or protection of the obligor
• Notice of dishonor – if an instrument is not
paid by the person liable, the holder must give
the notice to the indorser
• If there is no notice of dishonor, the person
cannot be held liable.
d) Gives the holder an election to require
something to be done in lieu of payment of
money
• An exception to subsection (c).
• It will be an exception if the holder has the
option to give the money in any kind or
service.
Section 6
Omissions; seal; particular money:
(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.
a) It is not dated
• The date in a bill or note is not necessary.
Thus, it will affect its negotiability.
• It will be deemed dated upon the issue of the
instrument.
• The holder can only issue the date only if he
knows the true date.
b) Does not specify the value given, or that any
value had been given therefor
• Example: “pay to bearer P10,000”, it is still
negotiable although the value is not
specificied.
c) Does not specify the place where it is drawn
or the place where it is payable
• It does not require a negotiable instrument to
specify the place where it is made or drawn
or where it is payable.
d) Bears a seal
• An instrument bearing a seal is negotiable.
• There is no difference in legal effect between
sealed and unsealed in private writings.
• However, it is advisable to have the
instrument be sealed or be in a public
instrument (notarized).
Section 7
When 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.
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.
Note:
Subsection (a) - an instrument is payable on
demand not only between the immediate parties
but also to subsequent parties.
Subsection (b) – refers only to immediate parties
a) When it is so expressed to be payable on
demand, or at sight, or on presentation
• On demand – promissory note
• At sight – used in bills of exchange, means
that the instrument is payable as soon it is
seen by the party primarily liable
• It is negotiable.
• Presentation of payment – demandable
b) In which no time for payment is expressed
• A note payable at the maker’s convenience
is payable on demand. However, it is an
incomplete instrument.
• An instrument payable to bearer on demand
“if present for payment after 5 months from
the date of issue” is not payable on demand
since it expresses a time for payment.
• If an instrument is overdue, it is negotiable
and payable.
Section 8
When payable to order:
(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.
Note:
Words such as “to the order of”, “or order”,
“or bearer”, and “to bearer” serve” as an
expression of consent by the issuer of the
instrument that the instrument may be
transferred.
If payee or drawee is not named, there is nobody
who could give the order or authority to collect.
If payee is not named or otherwise indicated, it
is not negotiable.
(a) A payee who is not maker, drawer, or drawee
• Not the maker – promise to pay P10,000 to
the order of P
• Not the drawer – pay to the order of P
P10,000
• Not the drawee – pay to the order of P
P10,000
To W
(b) The drawer or maker
• “I promise to pay the order of myself
P10,000”
• A note payable to the order of the maker is
not complete until indorsed by him.
(c) The drawee
• “Pay to order of yourself P10,000
To W”
• Being both the drawee and payee, W can pay
himself on maturity belonging to the drawer
in his possession.
(d) Two or more payees jointly
• “Pay to the order of P and A P10,000”
(e) One or some of several payees
• “Pay to the order of P, A, or B P10,000” or
“Pay to the order of P, A, and B or any of the
two of them”
• Instrument is payable to either one of them,
and the indorsment of anyone is sufficient to
pass title.
(f) The holder of an office for the time being
• “Pay to the order of the Commissioner of
BIR”