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Negotiable Instruments Law

Definition
Written contract for the payment of money, by its form and on its face, intended as
substitute for money and intended to pass from hand to hand to give the holder in due
course (HDC) the right to hold the same and collect the sum due.

Instruments are negotiable when they conform to all the requirements prescribed by the
NIL (Act 2031, 03 February 1911).

Although considered as medium for payment of obligations, negotiable instruments are

not legal tender (Sec. 60, New Central Bank Act, R.A. 7653).

Q: Can the delivery of a negotiable instrument discharge an obligation?

A: Settled is the rule that payment must be made in legal tender. A check is not legal tender and,
therefore, cannot constitute a valid tender of payment. 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. 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. (BPI vs. Royeca, 2008, Nachura)

Notes:
(1) Negotiable instruments shall produce the effect of payment only when they have been
encashed or when through the fault of the creditor they have been impaired. (Art. 1249, Civil
Code)
(2) BUT 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.

Chapter 1: FORMS AND INTERPRETATION

REQUISITES OF NEGOTIABILITY
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 (Sec. 1).
Section 184 (defining a promissory note) and Section 126 (defining a bill of exchange) contain the same requisites in Section 1.

IN WRITING AND SIGNED BY THE MAKER OR DRAWER

No person is liable on the instrument whose signature does not appear thereon.
One who signs in a trade or assumed name will be liable to the same extent as if he had
signed in his own name (Sec. 18).

Signature of any party may be made by duly authorized agent; no particular form of appointment
necessary (Sec. 19)
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"In writing" - includes print; written or typed. Section 191 of the NIL provides that the word
written includes printed, and writing includes print.

Reason: Since an instrument is a document, there must be something in written form that can
be transferred from person to person. (Abad)

Signature is binding and may be in ones handwriting, printed, engraved, lithographed or

photographed so long as it is intended or adopted as the signature of the signer or made with his
authority.

It may appear on any part of the instrument. However, if the signature is so placed upon the
instrument that it is not clear in what capacity the person intended to sign, he is deemed an
indorser. (Sec. 17[f])

CONTAINING AN UNCONDITIONAL PROMISE TO PAYOR ORDER TO PAY

An unqualified order or promise to pay is unconditional, 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
(2) 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 (Sec. 3).

Unconditional - The promise or order to pay, to be unconditional, must be unqualified.

- Must not be dependent upon a contingent event that is not certain to happen.
(Abad)

Fact that the condition appearing on the instrument has been fulfilled will not convert it into a
negotiable one (see Sec. 4)

A negotiable instrument is conditional when reference to the fund clearly indicates an intention
that such fund alone should be the source of payment. (Metropolitan Bank vs. CA, 1991)

Indicating a Particular Fund

Fundfor Reimbursement
(1) The drawee pays the payee from his own
funds afterwards.
(2) The drawee pays himself from the
particular fund indicated.
Particular fund indicated is not the direct
source of payment.
(non-negotiable)
There is only one act - drawee pays directly
from the particular fund indicated.
Particular fund indicated is the direct source
of payment.

Order or promise to pay

- As to promissory note: Promise to pay should be express on the face of the
instrument

The word "promise" is not absolutely necessary. Any expression equivalent to a promise is
sufficient.
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Mere acknowledgment of a debt is insufficient

- As to bill of exchange: Order command made by the drawer addressed to the

drawee ordering the latter to pay the payee or the holder a sum certain in
money; the instrument is, by its nature, demanding a right.

Words which are equivalent to an order are sufficient.

A mere request or authority to pay does not constitute an order. Although the mere use of polite
words like "please" does not of itself deprive the instrument of its characteristics as an order, its
language must clearly indicate a demand upon the drawee to pay.

Sum payable must be certain - The sum payable is a sum certain, although it is to be paid:
(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 costs of collection or an attorney's fee, in case payment shall not be made at maturity
(Sec. 2).

Note: A sum is certain if from the face of the instrument it can be determined even if it requires
mathematical computation. (Sundiang and Aquino)

Payable in money
- Capable of being transformed into money, since negotiable instruments are
intended to be substitutes for money

Money as used in the law is not necessarily limited to legal tender as defined by law but
includes any particular kind of current money. (see, Sec. 6(e) and PNB v. Zulueta)
- An agreement to pay in foreign currency is valid. (RA 8183)

Non-negotiable: An instrument which contains an order or promise to do an act in addition to

the payment of money (with the exception of certain acts enumerated in Sec. 5)
- Payable in personal property like merchandise, shares of stock or gold.
- Maker or the person primarily liable has the option to require something to be
done in lieu of payment of money. (Campos)

Negotiable: If the option to require something to be done in lieu of payment of money is with
the holder

PAYABLE ON DEMAND OR AT FIXED OR DETERMINABLE TIME

Purpose: to inform the holder of the instrument of the date when he may enforce payment
thereof.

On demand: An instrument is payable on demand:

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(1) Where it is expressed to be payable on demand, or at sight, or on presentation; or

(2) 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 (Sec. 7).

Note: Holder may call for payment any time; maker has an option to pay at any time, and the
refusal of the holder to accept payment will terminate the running of interest, if any, but the
obligation to pay the note remains.

At a fixed time: Only on the stipulated date, and not before, may the holder demand its payment.
Should he fail to demand payment, the instrument becomes overdue but remains valid and
negotiable. It is merely converted to a demand instrument with respect to the person who issued,
accepted, or indorsed it when overdue. (Sec. 7)

At a determinable future time: 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
(2) On or before a fixed or determinable future time specified therein; or
(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.

An instrument payable upon a contingency is not negotiable, and the happening of the event does
not cure the defect (Sec. 4).

Note: Requires that the maturity of the instrument can be absolutely determined with certainty.
(Abad)

Examples:
At a fixed period after date or sight, e.g., 30 days after date.

On or before a fixed or determinable future time specified therein, e.g., payable on or

before December 1, 2000

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, e.g., payable within 60 days after
the death of Jose

Effect of acceleration provisions: If option (absolute or conditional) to accelerate maturity is on

the maker, still NEGOTIABLE.

If option to accelerate is on the holder and can be exercised only after the happening of a
specified event/act over which he has no control (conditional), still NEGOTIABLE

Note: If option is absolute, non-negotiable.

Insecurity Clauses: Provisions in the contract which allow the holder to accelerate payment if
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he deems himself insecure. The instrument is rendered non-negotiable. (Sundiang and Aquino)

Provisions extending time of payment:

General rule:
Negotiability not affected. Effect is similar with that of an acceleration clause at the
option of the maker.

Exception:
Where a note with a fixed maturity provides that the maker has the option to extend time
of payment until the happening of contingency, the instrument is NOT negotiable. The
time for payment may never come at all.

PAYABLE TO ORDER OR TO BEARER (ASKED IN 1998)

Must contain words of negotiability:
For example:(1) Pay to the order of Juan Cruz, or I promise to pay to the order of Juan
Cruz(2) Pay to Juan Cruz or order, or I promise to pay Juan Cruz or order

Note: Need not follow the language of the law, but any term which clearly indicates an intention
to conform to the legal requirements is sufficient.

Negotiability determined from the face of the instrument: The negotiability or non-
negotiability of an instrument is determined from the face of the instrument itself. Where words
"or bearer" printed on a check are cancelled by the drawer, instrument becomes not negotiable.
(Caltex vs. CA, 1992)

Payable to bearer:
The instrument is payable to bearer:
. (1) When it is expressed to be so payable (I promise to pay the bearer the sum"); or
. (2) When it is payable to a person named therein or bearer ("Pay to A 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 (Pay to John Doe or order"); or
. (4) When the name of the payee does not purport to be the name of any person ("Pay to cash");
or
. (5) When the only or last indorsement is an indorsement in blank (Sec. 9).

Note: May be negotiated by mere delivery

Fictitious payee rule:

It is not necessary that the person referred to in the instrument is really non-existent or fictitious
to make the instrument payable to bearer. The person to whose order the instrument is made
payable may in fact be existing but he is still fictitious or non-existent under Sec. 9(c) of the NIL
if the person making it so payable does not intend to pay the specified persons.

A check drawn payable to the order of cash is a check payable to bearer, and the bank may pay it
to the person presenting it for payment without the drawer's indorsement. (Ang Tek Lian vs. CA,
1950)
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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:
(1) A payee who is not 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.

Where the instrument is payable to order, the payee must be named or otherwise indicated
therein with reasonable certainty (Sec. 8).

Notes: Without the words "to order" or "to the order of" the instrument is payable only to the
person designated therein and is therefore non-negotiable. (Consolidated Plywood Industries vs.
IFC Leasing, 1987)

For order instruments - negotiation requires delivery and indorsement of the transferor. (Sec. 30)

Where the maker is the payee:

. (1) In effect making himself liable to himself. Thus, the instrument produces no legal effect.
. (2) Will produce legal effects only once the payee-maker indorses the instrument to another
person because such indorsement will then give rise to rights and obligations. (Abad)

IF BILL OF EXCHANGE, DRAWEE MUST BE NAMED OR DESIGNATED WITH

REASONABLE CERTAINTY
. (1) Applies only to bill of exchange
. (2) A bill may be addressed to 2 or more drawees jointly whether they are partners or not, but
not to 2 or more drawees in the alternative or in succession (Sec. 128).

Examples:(1) To Juan Cruz and Jose Reyes negotiable(2) To Juan Cruz or Jose Reyes
not negotiable; no certainty as to drawee

Determination of negotiability:
In determining the negotiability of an instrument, the instrument in its entirety and by what
appears on its face must be considered. It must comply with the requirements of Sec. 1 of the
Negotiable Instruments Law. (Caltex Phils. v. CA, 1992)

The acceptance of a bill of exchange is not important in the determination of its negotiability.
The nature of acceptance is important only on the determination of the kind of liabilities of the
parties involved. (PBCOM vs. Aruego, 1993)
Omissions and Provisions That Do Not Additional Provisions That Do Not Affect
Affect Negotiability Negotiability

(1) Non-dating instrument of the instrument; (1) Authorizes the sale of collateral securities
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(2) Non-specification of value given, or that on default;

any value had been given;
(3) Non-specification of place where it is
drawn or place where it is payable;
(4) Bears a seal
(5) Designation of particular kind of currency
in which payment is to be made. (Sec. 6)
(2) Authorizes confession of judgment on
default;
3) Waives the benefit of law intended to
protect the debtor; or
(4) Allows the creditor the option to require
something in lieu of money. (Sec. 5)
Note: Negotiability is affected when
instrument contains a promise or order to do
any act in addition to the payment of money.

KINDS OF NEGOTIABLE INSTRUMENTS:

A. PROMISSORY NOTE (Sec. 184)
(1) An unconditional promise in writing
(2) Made by one person to another
(3) Signed by the maker
(4) Engaging to pay on demand, or at a fixed or determinable future time
(5) A sum certain in money to order or to bearer
(6) Where a note is drawn to the maker's own order, it is not complete until indorsed by him.

KINDS OF PROMISSORY NOTES

(1) 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.

(2) 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.

(3) 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. (Sundiang and Aquino)

B. BILL OF EXCHANGE (Sec. 126)

(1) An unconditional order inwriting
(2) Addressed by one person to another
(3) Signed by the person giving it
(4) Requiring the person to whom it is addressed to pay on demand or at a fixed or determinable
future time
(5) A sum certain in money to order or to bearer

KINDS OF BILLS OF EXCHANGE

(1) 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.
(2) 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.

(3) Time draft draft that is payable at a fixed date.

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(4) Sight or demand draft payable when the holder presents it for payment.

(5) Trade acceptance 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).

(6) Bankers acceptance a time draft across the face which the drawee has written the word
accepted. (Sundiang and Aquino)

(7) Check - A bill of exchange drawn on a bank payable on demand (Sec. 185). It is the most
common form of bill of exchange.

Instances when a bill of exchange may be treated as a promissory note:

(1) The drawer and the drawee are the same person;
(2) Drawee is a fictitious person;
(3) Drawee does NOT have the capacity to contract (Sec. 130)
(4) Where the bill is drawn on a person who is legally absent;
(5) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the
holder may treat it as either at his election (Sec. 17[e])

PROMISSORY NOTE BILL OF EXCHANGE

Unconditional promise Unconditional order
Involves 2 parties Involves 3 parties
Maker is primarily liable Drawer is only secondarily liable
Only 1 presentments: for payment 2 presentments: for acceptance, and
only for payment.

BILL OF EXCHANGE CHECK

Not necessarilya deposit. The drawee need It is necessary that a check be drawn on a
not be a bank bank deposit. Otherwise, there would be
fraud.

Death of a drawer of a BOE, with the Death of the drawer of a check, with the
knowledge of the bank, does not revoke the knowledge of the bank, revokes the authority
authority of the drawee to pay. of the banker to pay.

May be presented for within a reasonable Must be presented for payment within
timeafteritslastnegotiation. reasonable payment timeafteritsissue.

May be payable on demand or at a fixed or Always payable on demand

determinablefuture time

COMPLETION AND DELIVERY

Two steps involved in the execution of negotiable instruments
(1) Writing of the instrument completely in accordance with the requisites of negotiability under
Sec. 1.
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(2) Delivery of the instrument by the maker or the drawer to the payee in order to give legal
effect thereto. (Abad)

INSERTION OF DATE (Sec. 13)

Any holder may insert the true date of issue or acceptance of an instrument where:
(1) The instrument is expressed to be payable at a fixed period after date is issued undated; or
(2) The acceptance of an instrument payable at a fixed period after sight is undated.

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.

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. The person to whom an instrument so dated is
delivered acquires the title thereto as of the date of delivery (Sec. 12).

COMPLETION OF BLANKS (Sec. 14)

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.

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.

For such instrument to be enforceable 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.

When subsequently negotiated to a holder in due course (HDC), there is a presumption that such
instrument is filled up strictly in accordance with the authority given and within reasonable time.

INCOMPLETE AND UNDELIVERED INSTRUMENTS

(Sec. 15)
Where an incomplete instrument has not been delivered, it will not be a valid contract in the
hands of any holder, as against any person whose signature was placed thereon before delivery if
completed and negotiated without authority. Non-delivery of an incomplete instrument is a real
defense.

Note: A drawee bank whose negligent custody of the checks, after partial execution, contributed
to its escape, is stopped from raising the real defense under Sec. 15

COMPLETE AND UNDELIVERED INSTRUMENTS

(Sec. 16)
Every contract on a negotiable instrument is incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto.
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Between immediate parties and as regards a remote party other than a holder in due course, the
delivery, in order to be effectual, must be made either by or under the authority of the party
making, drawing, accepting, or indorsing.

When the instrument is in the hands of HDC, a valid delivery thereof by all parties prior to him
so as to make them liable to him is conclusively presumed.

INCOMPLETE AND DELIVERED INSTRUMENTS (Sec. 14)

(1) Holder has prima facie authority to fill up the instrument.
(2) The instrument must be filled up strictly in accordance with the authority given and within
reasonable time
(3) HDC may enforce the instrument as if filled up according to (2) above.

SIGNATURE
General rule:
One whose signature does not appear on the instrument shall not be liable thereon.

Exceptions:
(1) The principal who signs through an agent
(2) The forger
(3) One who indorses in a separate instrument (allonge) OR where an acceptance is written on a
separate paper
(4) One who signs his assumed or trade name
(5) A person negotiating by delivery (as in the case of a bearer instrument) is liable to his
immediate indorsee.

SIGNING IN TRADE NAME

One who signs in a trade or assumed name will be liable to the same extent as if he had signed in
his own name (Sec. 18)

SIGNATURE OF AGENT
Signature of any party may be made by duly authorized agent, established as in ordinary agency.

SIGNATURE PER PROCURATION

Operates as notice that the agent has limited authority to sign, and the principal is bound only in
case the agent in so signing acted within the actual limits of his authority (Sec. 21)

LIABILITY
General rule: Where a person adds to his signature words indicating that he signs on behalf of a
principal, then he is not liable if he was duly authorized.

Exceptions:
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(1) Mere addition of words describing him as an agent without disclosing his principal (Sec. 20)
(2) Where a broker or agent negotiates an instrument without indorsement, he incurs all liabilities
in Sec. 65, unless he discloses name of principal and the fact that he is only acting as an agent.
(Sec. 69)

INDORSEMENT BY MINOR OR CORPORATION

The indorsement or assignment of the instrument by a corporation or by an infant (minor) passes
the property therein, notwithstanding that from want of capacity, the corporation or infant may
incur no liability thereon (Sec. 22).

REAL defense but available only to the incapacitated party (i.e. the minor or the corporation).

FORGERY
- Counterfeit making or fraudulent alteration of any writing,which may consist of:
(1) Signingofanothersnamewithintenttodefraud; OR
(2) Alteration of an instrument in the name, amount, name of payee, etc. with intent to
defraud.

Rules on Forgery

General rule:
When a signature is forged or made without the authority of the person, only the forged signature
(not the instrument itself and the other genuine signatures) is wholly inoperative

Effects:
(1) No right to retain the instrument
(2) No right to give a discharge therefor
(3) No right to enforce payment thereof against any party thereto can be acquired through or
under such signature

Exception: The party against whom it is sought to be enforced is precluded from setting up the
forgery or want of authority as a defense (Sec. 23).

PERSONS PRECLUDED FROM SETTING UP DEFENSE OF FORGERY:

1. Those who warrant or admit the genuineness of the signature in question. This includes
indorsers, persons negotiating by delivery and acceptors.
2. Those who, by their acts, silence, or negligence, are estopped from setting up the defense of
forgery.

ACCEPTANCE AND PAYMENT UNDER MISTAKE

(1) When the drawee accepts or pays a forged instrument
A bank is bound to know the signatures of its depositors. If a bank pays a forged check it must be
considered as making the payment out of its own funds and cannot charge the account of the
depositor whose signature was forged. (PNB vs. Quimpo, 1988)
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A bank is liable, irrespective of its good faith, in paying a forged check. (Samsung vs. Far East
Bank, 2004)

(2) Extensions of Price vs. Neal doctrineDoctrine:

As between equally innocent persons, the drawee who pays money on a check or draft the
signature on which was forged CANNOT recover the money from the one who received it. The
drawee is bound to know the signature of its depositor.

Notes: The bar to recovery is extended to overdrafts and stop payment orders.
(a) Overdraft occurs when a check is issued for an amount more than what the drawer has
in deposit with the drawee bank.

Rule: The drawee who pays the holder of the bill cannot recover from the holder what he
paid under mistake

(b) Stop Payment Order is one issued by the drawer of a check countermanding his first
order to the drawee bank to pay the check.

Rule: The drawee bank is bound to follow the order, provided it is received prior to its
certification or payment of the check.

(3) Effects of Negligence of Depositor

If such negligence was the proximate cause of the loss, the drawee-bank is NOT liable

It is the duty of the depositor/drawer to carefully examine banks statements, cancelled checks,
his check stubs, and other pertinent records within a reasonable time and to report any errors
without unreasonable delay.

If a drawer/depositors negligence and delay should cause a bank to honor a forged check,
drawer cannot later complain should bank refuse to re-credit his account.

WHEN DRAWEE MAY RECOVER FROM DRAWER

. (1) Where the instrument is originally a bearer instrument, because the indorsement can be
disregarded as being unnecessary to the holders title
. (2) Indorsement forged by an employee or agent of the drawer
. (3) If due to the drawers negligence/delay, the forgery is not discovered until it is too late for
the bank to recover from the holder or the forger

WHEN DRAWEE MAY NOT RECOVER FROM HOLDER

. (1) Where the instrument is originally a bearer instrument, because the indorsement can be
disregarded as being unnecessary to the holders title
. (2) If drawee fails to act promptly, if he delays in informing the holder whom he paid

BETWEEN DRAWEE BANK AND COLLECTING BANK

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Collecting bank is only liable for forged indorsements and not forgeries of the drawer or makers
signature (PNB v CA, 1968).

The collecting bank or last indorser generally suffers the loss because it has the duty to ascertain
the genuineness of all prior indorsements considering that the act of presenting the check for
payment to the drawee is an assertion that the party making the presentment had done its duty to
ascertain the genuineness of the indorsements (BPI v CA, 1992).

In presenting the checks for clearing, the collecting agent made an express guarantee on the
validity of all the prior endorsements.

The drawee bank is not similarly situated as the collecting bank because the former makes no
warranty as to the genuineness of any indorsement. The drawee banks duty is but to verify the
genuineness of the drawers signature and not of the indorsement because only the drawer is its
client.

Notes: However, where the negligence of the drawee bank is the proximate cause of the
collecting banks payment of a check with a forged indorsement, the drawee bank may be held
liable to the collecting bank.

When both are guilty of negligence, the degree of negligence of each will be weighed in
considering the amount of loss which each should bear (BPI v CA, 1992).