The Law on Negotiable Instruments

By Hector S. De Leon & Hector M. De Leon, Jr.

The Negotiable Instruments Law

 Act No. 2031, this Act was published in its entirety in the Official Gazette of
March 4, 1911.
 It took effect on June 2, 1911. (SEC 198)
 From Uniform Negotiable Instruments Law of United States
‘
Evolution of Commercial/ Mercantile Transactions
Barter → Precious Stones → Metal → Gold Coins → Money → Negotiable Instruments
→ Credit Cards →Online Negotiation

Purposes why we use Negotiable Instruments

1. Substitute for money
- It is NOT money.

Example: Check
-Manager’s Check – sa manager ka bibili ng check.
Drawer – pipirma si manager
Drawee bank
*Di tatalbo tong check na to kasi iisa si drawer & drawee.
-Personal Check

Philippine Peso – legal tender

(bills & coins) - currency authorized by a government.
- used as payment for obligation.

*Since check is only a substitute, it is also NOT money

= it is also NOT a Legal Tender.
-So pwede ka tumanggi if check ang binabayad sayo.
-Pwede mo rin tanggapin, pero pag tinanggap mo, you entered into
NOVATION (cash → check) kahit hawak mo na yung check hindi ibig
sabihin nun bayad na siya sayo.
*Receipt of check is NOT payment. Payment of obligation is ONLY upon
Encashment.*
 Crossed-check – di mo siya pwede dalhin sa drawee bank, di pwede iencash
- ideposit mo nalang sa account mo and need niya dumaan sa
clearing.
If Hindi Crossed-check – pwede iwalk-in basta may pirma sa likod & 2 valid
IDs presented sa cashier, papalitan yun ni cashier.

2. Increases credit in circulation

Example: Christmas Season. ABC company manufactures goods and they are into
credit sales, collection will be every after 30 days of the sale. When they run out
of financial resources to buy raw materials they can also buy in credit from their
suppliers. Hence, having negotiable instruments increases credit in circulation.

3. To avoid risks

4. For convenience

Three (3) Basis Negotiable Instruments

1. Promissory Note (Sec 184)
*Parties:
a. Maker – gumagawa ng promissory note
- primary liable
- promises to pay the payee
b. Payee – holds the instrument
- has the right to demand the payment
c. Indorser – secondarily liable
d. Indorsee
*Holder – payee/ indorsee & the one who holds the instrument.
Ex: I promise to pay to the order of B the sum of P10,000 Pay to X Pay to Y
on 12-12-2018. Sgd Sgd Sgd
A B X
B as PAYEE
A as MAKER
 May utang si B kay X kaya binigay ni B kay X yung Promissory Note, sabi niya
yun nalang pambayad niya since may utang naman si A kay B, so hindi na si B yung may
hawak ng Promissory Note, INDORSER na si B, hindi na siya Payee. Inutusan ni B na
bayaran ni A si X.
If nahinto kay Y yung promissory note, ang tawag sa kanya ay INDORSEE,
pagdating ng maturity date, pupunta si Y sa party primary liable which is si A, pero may
recourse si Y na pumunta sa parties secondarily liable which are yung indorsers na si B
& X, pipili lang si Y kung sino gusto niyang lapitan.

2. Bill of Exchange (Sec 126)

*Parties:
a. Drawer – addressor
- person who issued the bill
- nag-utos sa drawee
b. Drawee – inutusan ng drawer na magbayad sa payee
- primary liable
c. Payee – has the right to demand payment sa maturity date.
Ex: Pay to the order of B the sum of P10, 000 on 12-12-18
To: C Sgd
A
B as PAYEE C as DRAWEE A as DRAWER
A: Hoy C, bayaran mo si B ng P10,000 sa 12-12-2018 or sinuman utusan niya.
*pupunta si B kay C pag maturity date na kasi si C yung primary liable.

3. Check (Sec 185)

- special kind of Bill of Exchange drawn on a bank payable on demand.
*Parties:
a. Drawer
b. Payee – has the right to demand payment sa maturity date.
c. Drawee bank - primary liable in a negotiable check, pag binigyan
ka ng check (BDO), sa BDO ka pumunta kasi siya yung drawee
bank; pag tumalbog yung check, tsaka ka lang pupunta dun sa
taong nag issue nun which is yung drawer.

*Tumatalbog yung check dahil:

a. Drawn Against Insufficient Funds (DAIF)
b. Account Closed (AC)
c. Signature not the same
 d. Stale Check – pag lumagpas na ang 6 months sa date ng check at di
yun pinresent sa bank for payment. = tanggal na yung liability ng
bank.

SECTION 1
An instrument MUST conform to the following: (WUDOD)
a. Writing signed by Maker - PN
Drawer – Bill/Check
b. Contains Unconditional Promise
To pay sum certain in money
Order
c. Payable on Demand or Fixed or Determinable Future Time
d. Payable to Order or Bearer
e. Addressed to a Drawee
*All of the requirement must be present, if any of these was not met do NOT apply NIL,
apply Law 1 instead.

SECTION 1 (A) It must be in writing & signed by the maker/drawer.

Example 1: Sinulat sa wall yung instrument & sinunod lahat ng requirement sa
section 1. Negotiable ba yung instrument?
-NO.*read Section 30.
Example 2: Tattoo sa likod ng tao.
-Di rin negotiable, kasi di mo naman pwede ariin katawan ng tao.
Example 3: Sinulat sa niyog
-Di rin pwede kasi matutuyo yun, mabubura.
*Object to be transferred MUST LAST.

Negotiable instrument must be signed:

1. Customary Signature
2. Initials
3. Symbol
4. Thumb mark
*2, 3, 4. If the person really intend to be bound by this, the instrument is negotiable.
SECTION 1 (B) Must contain an Unconditional Promise/Order to pay a sum
certain in money.

Period = future & certain

Example: If X dies, If my means permits me to do so, If sun shines tomorrow.
I promise to pay to the order of B the sum of P10,000
If X dies. Sgd
Maker
NEGOTIABLE.

Condition = future & uncertain

Example: If X dies this year (this is a condition bec. we can’t determine when will
a person die.
NOT NEGOTIABLE.

“Sum Certain In Money”

Section 2 (D) With exchange, whether at a fixed/ at the current rate.
Example: 10,000 dollar at 52 pesos per dollar rate.
10,000 dollar at the prevailing rate during the maturity date.
Section 6 (E) Designates a particular kind of current money in which
payment is to be made. (It can be any currency)

*Partly in kind & partly in money = NOT NEGOTIABLE

*Kind/Money
Section5 (D) Gives the holder an election to require something to be done
in lieu of payment of money.
Example: I promise to pay to the order of B the sum of P10,000
or to deliver rice worth P10,000 at his option on
12-12-2018. (this means the holder will choose)
 Section 17 (G) I promise to pay = jointly & severally (SOLIDARY)

SECTION 1 (C) Must be payable on Demand or at a Fixed Date or Determinable

Future Time.
Section 7. 2 instances that instruments are payable on Demand.
a. Where it is expressed to be payable on demand, or at sight, or on
presentation; or
b. In which no time for payment is expressed.
Section 17 (C) When the instrument is NOT dated, it will be considered to
be dated as of the time it was issued.
*In counting days = exclude today, include the last day.

SECTION 1 (E) explained by Section 17 (E) where the instrument is so ambiguous

that there is doubt whether it is a bill/ note, the holder may treat it as either as
his election.

NEGOTIABLE or NOT?
1. I promise to pay B the sum of P10,000.
Answer: NOT NEGOTIABLE. No word “Order” / “Bearer”, it is payment for
specific person.

2. I promise to pay to the order of B…

Inutusan ni B si X. Lumapit si X sa may utang (A).
Sabi ni A kay X, “SI B KA BA?!”
Sabi ni X kay A, “Hindi, pero inutusan ako ni B.”
Answer: NEGOTIABLE.

3. I promise to pay B/Bearer…

Sabi ni A, “SI B KA BA?!”
Sabi nung may hawak, “Ako may hawak, bayaran mo ako”
Answer: NEGOTIABLE
 4. I promise to pay B/ his agent
Answer: NOT NEGOTIABLE. Knowledge of agent is knowledge of principal,
meaning agent & principal is only one person.

5. I promise to pay bearer B

Answer: NOT NEGOTIABLE. Descriptive words yung bearer dito.

6. I promise to pay bearer.

Answer: NEGOTIABLE

7. I promise to pay B/holder

Answer: NEGOTIABLE. Sabi sa Section 10, pwede daw ibang language.

*2 words of negotiability = “ORDER” & “BEARER”*

SECTION 2
Certainty as to sum.
a. With interest; or
b. By stated instalments; or
c. By stated instalments with a provision that, upon default in payment of any
instalment or of interest, the whole shall become due; or
d. With exchange, whether at a fixed rate or at the current rate; or
e. With costs of collection or an attorney’s fee, in case payment shall not be made at
maturity.

SECTION 3
When promise is Unconditional.
Example 1: Pay to the order of B the sum of P10,000 & reimburse
it out of the sale of my car. Sgd
To: Drawee Drawer
 NEGOTIABLE, kasi naassure na nabayaran si Payee (B), di
nakadepende sa availability ng sale of car.
Example 2: Pay to the order of B P10,000 out of the sale of my
car. (this is a condition)
NOT NEGOTIABLE, because it is out of particular fund.
SECTION 4 (in relation to SEC 1 c)
Determinable Future Time
Section 4 (C) the instrument is NEGOTIABLE if it is AFTER/UPON the
happening. Example: After/Upon death = NEGOTIABLE.
Before death = NOT NEGOTIABLE.

SECTION 6
Ommissions; seal; particular money.
(Kahit omitted yung mga nakastate sa section 6 = VALID parin yung instrument)
Section 6 (B) explained by Section 24 Presumption of Consideration, meaning
kaya ka nag-iissue ng pambayad kasi may nabenefit ka na pabalik.

PAYABLE TO ORDER OR BEARER

NEGOTIABLE
1. I promise to pay to the order of B
2. I promise to pay B or bearer
3. I promise to B or order
4. I promise to pay to the order or bearer
5. I promise to pay B or holder
NON-NEGOTIABLE
1. I promise to pay B
2. I promise to pay B and his agent
3. I promise to pay bearer B
4. I promise to pay bearer
SECTION 7: When is an instrument payable on demand
1. When it is expressed that it is payable on demand, or on sight or on presentation
2. In which no time of payment is expressed

SECTION 8: An instrument may be drawn payable to the order of:

1. A payee who is not a maker, drawer or drawee
2. The drawer or maker
3. The drawee
4. Two or more payees jointly- Ex. I promise to pay to the order of B or C
5. One or more several payees- Ex. I promise to pay to the order of B and C
6. The holder of an office for the time being- Floating promise provision of the NIL
Example:

I promise to pay to the order of Y, cashier of

UE- Cal a sum of 20000 on Dec. 14, 2018.
SGD: Student

Scenario: Before Dec. 14, 2018, nag-switch ng position si X, cashier ng UE-Mnl at

Y, cashier ng UE-Cal. Dapat bang magbayad si student kay X kahit walang indorsement
from Y?
Answer: YES, because according to SECTION 42, the real payee is the position
not the person.
SECTION 9: An instrument is payable to bearer-
1. When it is expressed to be so payable
2. When it is payable to a person named therein or bearer- Ex. I promise to pay B or
bearer
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
Ex. I promise to pay to the order of Cardo Dalisay.
*If the payee is not Cardo Dalisay and the maker does not know any person
named Cardo Dalisay, then it is a BEARER instrument
*If the payee is Cardo Dalisay, then it is an ORDER instrument
4. When the name of the payee does not purport to be the name of any person
Ex. I promise to pay to the order of cash
5. When the only and last indorsement is an indorsement in blank.
SECTION 10: Terms, when sufficient
The instrument need not follow the language of the NIL but any terms are sufficient
which clearly indicate an intention to conform to the instruments.
INSTEAD OF WE CAN USE

 I promise I bind myself

 On demand On call
 Bearer Holder
*Using IOU makes the instrument non-negotiable, because it is just a mere
recognition of debt.

SECTION 11: Date, presumption as to

Where an 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.

SECTION 12: ANTEDATED AND POSTDATED

The instrument is NOT INVALID for the reason only that it is antedated or postdated,
provided it is not done for an illegal or fraudulent purpose. The person to whom an
instrument so dated is delivered, acquires the title as of the DATE OF DELIVERY.
ANTEDATED- date earlier than the date of issuance or date of instrument
POSTDATED- date later than the date of issuance or date of instrument

SECTION 17: Construction where instrument is so ambiguous

1. Where the sum payable is expressed in words and also in figures and there is a
discrepancy between the two, the sum denoted in words is the sum
payable; but if the words are so ambiguous or uncertain, reference may be had
to the figure to fix the amount.
Ex.
I promise to pay to the order of B the sum of
Eleven thousand pesos (P 1100) on December
14, 2018.
SGD: A
 *In the above example, the words eleven thousand pesos shall prevail.

I promise to pay to the order of B the sum of

Fifteen Hundred Pesos (P 1500) on December
14, 2018.
SGD: A

*In this case, the P 1500 shall prevail because the words are ambiguous and
uncertain.
2. Where the instrument provides for the payment of interest, without specifying
the date from which the interest is to run, the interest runs from the date of
instrument and if the instrument is undated, from the date of issue.

3. Where there is not dated, it will be considered dated as of the time it was
issued.

4. Where there is a conflict between the written provision and the printed provision,
written provisions prevail.

Ex. Computerized- 100, 000 pesos

Written- 1, 000 pesos- THIS WILL PREVAIL

5. Where the instrument is so ambiguous that there is doubt whether it is a bill or a

note, the holder may treat it as either at his election.

Ex.

I promise to pay to the order of B the sum of

Fifteen Thousand Pesos (P 15000) on December
14, 2018.

Addressed to C
SGD: A
6. Where the 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 deemed an
indorser.

Ex. *SIGNATURE *SIGNATURE

I promise to pay to the order of B the sum of
Fifteen Thousand Pesos (P 15000) on December
14, 2018.
SGD: A
*SIGNATURE

*DEEMED AN INDORSER

I promise to pay to the order of B the sum of

Fifteen Thousand Pesos (P 15000) on December
14, 2018.
* SIGNATURE SGD: A

*DEEMED A CO-MAKER

7. Where the instrument containing the words “I promise to pay” is signed by two or
more persons, they are deemed to be jointly and severally liable thereon.
- SOLIDARITY, meaning, the payee can collect the whole amount to any of the
two makers, even if one of them is absent.
SECTION 30: What constitutes negotiation
An instrument is negotiated when it is transferred by one person to another in such
manner as to constitute the transferee, the holder thereof. If payable to bearer, it is
negotiated by delivery; if payable to order, it is negotiated by indorsement of
holder completed by delivery.
SECTION 18: Liability of a person signing in trade or assumed name
General rule: Only person whose signature appear on an instrument are liable
thereon.
Exceptions: (a) Where a person signs in a trade name or assumed name.
(b) The principal is liable if a duly authorized agent signs on his own
behalf.
(c) The forger is liable even if his signature does not appear on the
instrument.
(d) Where the acceptor makes his acceptance of a bill on a separate paper.
(e) Where a person makes a written promise to accept a bill before it is
drawn.
SECTION 19 and 20: Agent and Principal
An agent will not be held personally liable if he follows the following requisites in
making an instrument:
- Act within the scope of authority
- Disclose the name of the principal
SECTION 21: Signature by procuration; effect of
The agent has a limited authority to sign.
Other terms for per procuration: “per proc.”, “P.P.”, or ‘pp.”
SECTION 22: Effect of indorsement of infant or corporation
Infant under NIL are minors, in which they:
- Can validly transfer title
- Cannot be held personally liable
Example: I promise to pay totoy Lucas P10,000 on 12-12-2018.
Signed by: Atty Cruz
Pay to W
Signed by: totoy Lucas
*Pumunta si W kay Atty Cruz
Atty Cruz: Wala kang (W) karapatang maningil sakin, kasi kay totoy Lucas mo lang
nakuha yung title mo.
IS THIS CORRECT? N O. even if totoy Lucas is a minor he can validly transfer title and
is not personally liable. Totoy Lucas can set up the defense of minority.

SECTION 24: Presumption of Consideration

In relation to Section 6. (please see page 8 of this document)

SECTION 25: Value; what constitutes

Value is any consideration sufficient to support a simple contract.
Consideration must be VALID (lawful & legal)
Example: mistress – unlawful/ invalid relationship
Mother and daughter – lawful/valid

SECTION 28: Effect of want of consideration

(Midterms pa raw)

SECTION 29: Liability of accommodation party

Characteristics of Accommodation Party :
1. Person signed as maker, drawer, acceptor, or indorser
2. Without receiving value therefor
3. For the purpose of lending his name

*Acceptor = Drawee

Example: I promise to pay to the order of Toyota Balintawak the sum of

P650, 000 on December 24, 2018.

Addressed to: Signed by:

Dr. Emman Atty. Cruz

Acccommodation party/ Accommodated party

accommodation acceptor (REAL DEBTOR)
 Note: acceptor helps the maker, pinahiram niya yung name niya at wala
siyang natanggap na consideration.

SEC 119 (B) states that if the accommodated party pays for the instrument that
means it is already discharged. (bayad na)

Example: B1 went to Baguio to meet his friend B2

B1 negotiated with a supplier, but this supplier did not let B1 to buy on credit
because of its poor credit records. Hence, B1 asked for B2’s help by lending his
name for B1’s credit transaction. With B2’s acceptance of B1’s offer, this made B2
an accommodation party/ acceptor; B1 as accommodated party which is
the real debtor.
Scenario 1: nagbigay ng lagay si B1 kay B2 amounting P20,000
Answer: B2 is still an accommodation acceptor, because the value received is not
from the said transaction.

Scenario 2: if B2 received payment that is part of object of the instrument.

Answer: B2 is NOT an accommodation party anymore, because he received value
therefor.

SECTION 23: Forged signature, effect

Forgery is the counterfeit-making/ fraudulent alteration of any writing… with the
intent to defraud.
If one signature is being forged:
1. The instrument is wholly inoperative
2. Has no right to demand payment
3. Has no right to retain/ hold the instrument.

SECTION 52: What constitutes a holder in due course (COGI)

a. Instrument is Complete & regular upon its face.
b. Before he became the holder thereof, it is NOT Overdue, he has no knowledge
that is has been previously dishonoured, if such was the fact.
c. That he took it in Good faith & for value.
d. That he has no notice of Infirmity in the instrument/ defect in the person
negotiating it.
NOTE: Before applying the rules under Sections 14, 15 & 16 under the NIL, make sure
that the signature of the person who issued the instrument is GENUINE.
If not, apply the rule under Section 23.

SECTION 14: Incomplete but Delivered Instrument

Holder in due course ba? Magkano masisingil?

YES Whatever amount appears in the
instrument is the true amount.
NO Yung totoong utang lang nung
maker.

SECTION 15: Incomplete and Undelivered instrument

Holder in due course ba? Magkano masisingil?
YES WALA
NO WALA

SECTION 16: Complete but Undelivered instrument

Holder in due course ba? Magkano masisingil?
YES Amount stated in the instrument
NO WALA