The Negotiable Instruments Law Doubt resolved in favor of negotiability – to

encourage the free circulation of negotiable

Act No. 2031
papers
February 3, 1911

Purpose: facilitate transactions in commercial

paper and to promote free flow of credit
Theory: Negotiable Instruments appear to
belong to the person having them and to no
one else.
Negotiable Instruments Importance
1. Substitute for money
2. Medium of exchange
3. Medium of credit transactions
Negotiable Instruments Characteristics
1. Negotiability – quality to be passed
from hand to hand, so as to give the
holder in due course the right to hold
the instrument and collect the sum
payable for himself free from any
infirmity in the instrument OR defect in
the title of any of the prior parties, or
defenses available to them among
themselves
- One who honestly takes without
knowledge of its theft can hold it
against the world, including the true
owner
2. Accumulation of Secondary Contracts –
Most important feature; once an
instrument is issued, additional parties
can become involved
Contracts vs. Negotiable Instruments
1. Assumability and negotiability – Unlike
contracts, NI’s are NOT IN FORCE UNTIL
IT IS DELIVERED.
2. Negotiability of various types of
commercial paper
3. Rules of law applicable
Commercial papers with limited liability
1. Document of Title – Receipt or order for
the delivery of goods. Although it is
termed “negotiable” when the goods
are deliverable to bearer or order, it is
WITHOUT an unconditional promise or
order to pay a sum certain in money
2. Letter of credit – It is in favor of a
specified person and NOT TO ORDER.
3. Trust Receipt – It is a document of
security pursuant to which a bank
acquires a ‘security interest’ in the
goods under trust receipt.
4. Certificate of stock
5. Pawn Ticket

Forms

1. Common - promissory note, bill of

exchange and bank check
- PN: the issuer has promised to pay
- BoE: issuer has ordered 3rd person
to pay
2. Special – Certificate of deposits, bank
notes, due bills, bonds, etc.
CHAPTER 1: Form and Interpretation
S1: Form – To be negotiable, NI’s must conform
to the following requirements
a. In writing and signed by maker or
drawer
Maker – person issuing a PN
Drawer – person issuing a BoE
b. Contain an unconditional promise or
order to pay a sum CERTAIN in money
Unconditional Promise – PN
Unconditional Order - BoE
c. Payable on demand, fixed time or
determinable future time
d. Payable to ORDER or BEARER
A signature is a PRIMA FACIE evidence of the
maker / drawer’s intention to be bound. If the
signature is not clear as to his intention, he is
deemed an INDORSER.
e. If it is addressed to a DRAWEE, he
MUST BE NAMED or indicated with
REASONABLE CERTAINTY (applicable
only to BoE and Checks)
Order which is not addressed to any person
cannot be a bill. A BILL IS AN ORDER.
A promissory note has no drawee
Non-Negotiable
1. Check specified to a specified person (NI
ceases to be negotiable if the
indorsement prohibits the further
negotiation of the instrument)
2. It is merely a simple contract in writing
and is evidence of such intangible rights
3. Cannot be negotiated but it may be
assigned or transferred
Promissory Note – unconditional promise in
writing made by one person to another, signed
by the maker, to pay on demand or at a
fixed/determinable future time, a sum certain in
money to ORDER or BEARER
Maker – One who promises and signs the
instrument
Payee – To whom the promise is made or to
whom it is payable
Holder – Every person to whom an instrument
is delivered
Bill of Exchange – 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 to a third
person (order or bearer)
- Requires, in its inception, at least
three parties (drawer, drawee and
payee)
- Payee: Holder of the instrument /
Sa kanya ibabayad
- Drawer: Person who issues and
draws the order bill. He gives the
order to pay money to a 3rd party,
thus he does not pay directly
- Drawee: The person to whom the
bill is addressed and who is ordered
to pay (in case of a check, the
drawee is a bank)
Characteristics of BoE not found in PN
1. The words ‘pay to’ indicate an
unconditional ORDER instead of a
promise
2. The signed name indicates the drawer
3. The ‘ to juan’ indicates the drawee.
There is no drawee in a PN. He assumes
liability only by writing the word
“accepted” and signing his name on the
face. After signing, he is no longer called
 a drawee but an ‘acceptor’ instead. The
drawer becomes a surety.
4. The words ‘charge the same to the
account of’ means that the amount is to
be charged against the funds of the
drawer. This part may be omitted.
Purpose of BoE
1. Drawer’s funds in hands of drawee
2. Liability of the drawee for non-payment
(A drawee-bank is not liable for its
refusal to pay a check on account of
insufficient funds, but it is liable if there
are sufficient funds)
S2: What constitutes certainty as to sum
If the instrument calls for an act other than
payment of money, it is not negotiable. Why?
Because a negotiable instrument is intended as
a substitute for money
a. With interest
If the instrument provides for the payment of
interest without the said date where interest
will start to run, it shall be computed from the
date of the instrument and if there is no date on
the instrument, the interest shall be computed
from the issue thereof at 12% if no interest rate
is stipulated.
If the interest is usurious, the instrument is still
valid as to principal
b. By stated installments
c. By stated installments with a provision
that upon default in payment, the
whole shall become due
If the NI is to be paid in stated installments, the
amount and the date should be specified
If the obligor is given the right to extend
payment, the interest of the extension must be
specified to keep the instrument negotiable
d. With exchange, whether at a fixed or
current rate (foreign currency)
e. With costs of collection or an attorney’s
fee, in case payment shall not be made
at maturity
S3: Unconditional Promise – An unqualified
order or promise to pay is unconditional
a. An indication of a particular fund out of
which reimbursement is to be made or
a particular account to be debited is
negotiable
But an order or promise to pay out of a
particular fund which payment is to be made is
NN because it depends upon the adequacy of
the fund designated (even if it is adequate). IT IS
TO BE DISTINGUISHED FROM AN INSTRUMENT
REFERENCING TO FUNDS FROM WHICH
REIMBURSEMENT IS TO BE MADE.
The test of negotiability in every case is said to
be whether or not the instrument carries the
general personal credit of the maker or drawer.
If it does, the instrument is negotiable; if it
carries only the CREDIT OF A PARTICULAR
FUND, the instrument is NN
If the language used is ambiguous, courts
usually decide in favor of negotiability
b. A statement of the transaction which
gives rise to the instrument
Mere consideration for origin of transaction
does not affect its negotiability
Terms and conditions contained in another
paper makes the instrument NN. THE
NEGOTIABILITY OF THE INSTRUMENT MUST BE
DETERMNIABLE FROM WHAT APPEARS ON ITS
FACE ALONE AND NOT ELSEWHERE.
PN – must contain an unconditional promise (or
order) to pay
 1. It is not essential that the word
‘promise’ should be used. Any
equivalent word is alright such as
(payable, to be paid, agree to pay,
guaranty to pay, obliges himself to pay,
good for, due on demand etc.) or words
of negotiability such as (due P or
bearer, or due P or demand or IOU to
be paid on June 1, 2019) NO YEAR
MEANS NOT NEGOTIABLE
2. Bare admission or acknowledgement of
debt such as IOU, for value received,
due Php xxx, etc., is not negotiable as
there is no promise to pay nor intention
to be paid
BoE – There must be an unconditional order to
pay by one party to another otherwise, it is NN
1. It is not necessary to use the word
‘order.’ You can also use equivalent
words such as ‘let the bearer’ or
‘Drawee name will much oblige Drawer
name to pay Payee name or order’
Unconditional: Meaning
1. Instrument payable absolutely; not
subject to any condition or contingency
EXCEPT conditions of presentment,
protests and notice of dishonor
2. Even if the condition or event is very
likely to occur, the instrument remains
NN.
S4: Determinable Future Time
1. Instrument payable upon condition or
contingency is NN UNLESS if there is
also a clause that specifies a time or the
condition is 100% sure to happen
2. A note containing a provision that it
may be renewed at maturity is NN
because there is no unconditional
promise to pay at maturity
S5: An instrument which contains an order or
promise to do any act in addition to the
payment of money is not negotiable.
Exceptions:
1. Sale of collateral securities
2. Confession of Judgement- enables the
holder to obtain a judgement without
the delay usually incident to a law suit,
as It eliminates the necessity of trial
3. Waiver of benefit granted by law,
waiver of protest, presentment for
payment or demand or exemption from
attachment or execution
4. Election of holder to require some other
act (because it is as good as an
instrument payable in money) … I
promise to pay P or order 15,000 or an
air conditioner AT THE OPTION OF THE
HOLDER. If the option is with the
promissor, the instrument is NN
because the holder cannot compel him
to make payment in mony
S6: The validity and negotiable character of an
instrument are not affected by the fact that
a. It is not dated
An instrument has no inception until delivery. If
there is a date stated but no such date in the
calendar, the nearest ‘past’ date will be chosen.
The holder may insert the true date. Insertion of
a wrong date, will make the instrument void in
the hands of an innocent 3rd party who may
enforce the instrument.
b. Does not specify the value given, or that
any value has been given therefor
c. Does not specify the place where it is
drawn or the place where it is payable
Where the instrument was dated is the place of
writing. No place of payment means it is
payable at the residence of the maker or place
of business.
 d. Bears a seal: Valid
e. Designates a particular kind of current
money in which payment is to be made
S7: An instrument is payable on demand when
a. It is expressed to be payable on
demand, at sight or on presentation (as
to 3rd parties as well)
b. No time for payment is expressed (only
to involved parties)
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.
On demand, at sight, presentation, on call, at
any time, at such times the payee may require,
at the holder’s convenience may be used.
S8: 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
to the order of –
a. Payee who is not maker, drawer or
drawee
b. Drawer or maker
c. Joint Payees
d. One or more several payees
e. Holder of an office for the time being
Where the instrument is payable to order, the
payee must be named or otherwise indicated
with reasonable certainty. An instrument
payable to a specified person is NN as the order
is limited to paying to one person. Any
subsequent purchaser will not enjoy the
advantages of being a holder, but will merely
step into the shoes of the person and will thus
be open to all defenses available to the previous
holder.
The words ‘to the order of,’ ‘or order’ or ‘ to
Payee name and assigns” are equivalent and
will render the instrument negotiable.
In an order instrument, A SPECIFIED PERSON
MUST ALWAYS BE NAMED BEFORE OR AFTER
THE WORD ‘ORDER.’
S9: The instrument is payable to bearer
Bearer – person in possession of a bill or note
which is payable to bearer
Bearer Instrument – Payable to bearer may be
transferred by delivery without indorsement
and payment in good faith discharges the
instrument. Whoever possesses it is the bearer.
An instrument that FAILS TO QUALIFY AS AN
ORDER IS NEGOTIABLE IF IT IS PAYABLE TO
BEARER.
The instrument is payable to bearer when!
1. Expressed to be payable to bearer
I promise to pay bearer Php 1,000 is a
bearer instrument.
I promise to pay bearer, P Php 1,000 is not a
bearer instrument since the person is specific.
2. Payable to person named therein or
bearer
Pay to P or holder is a bearer instrument
3. Payable to order of a fictitious person
It is not necessarily an order instrument. If
the payee is not the intended recipient of the
instrument, the check is a bearer instrument
4. Payable to order of a non-existing
person
Since indorsement is impossible, the
manifest intention of the drawer is to make
the instrument a bearer paper negotiable
by delivery. An instrument payable to a
person who is already dead is payable to
bearer. The maker or drawer intends that
the payee shall have no right or interest
whatsoever in the instrument so that the
 instrument is, in effect, payable to a non-
entity.
5. Name of payee not name of person
“Pay to cash, cash or order, money, sundries,
payroll, etc.,”
In making an instrument payable to an
impersonal payee, the maker or drawer intends
the same to be payable to bearer.
6. Only indorsement in blank. Mere
signature on the back without
endorsement makes the instrument
payable to bearer.
S10: The instrument need not follow the
language of this act but any terms are sufficient
which clearly indicate an intention to conform
to the requirements thereof.
- Substance over form
- Use of foreign language is alright
- Mere defect in language or
grammatical error does not destroy
negotiability
S11: Where the instrument or an acceptance or
any indorsement is dated, the date is prima
facie true date of the making, drawing,
acceptance or indorsement.
S12: 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 as of the date of delivery.
Ante-dated: When it contains a date earlier
than the true date of its issuance. An
instrument issued on July 30, 2010 but dated
July 15, 2010 is antedated. Post-dated opposite.
S13: Where an instrument expressed to be
payable at a fixed period after date is issued
undated, or where the acceptance of an
instrument payable at a fixed period after sight
is undated, any holder may insert therein the
true date of issue or acceptance, and the
instrument shall be payable accordingly. 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.
When date may be inserted
1. Where an instrument is payable at a
fixed period after date but is issued
undated
2. Where an instrument is payable at a
fixed period after sight but the
acceptance is undated
The insertion of a wrong date in an undated
instrument by one having knowledge (in bad
faith) of the true date of issue or acceptance
will avoid the instrument as to him or any one
claiming under him BUT NOT AS TO
SUBSEQUENT HOLDER IN DUE COURSE. In the
hands of A HOLDER IN DUE COURSE, THE DATE
INSERTED, EVEN IF WRONG, IS TO BE
REGARDED AS THE TRUE DATE.
If P changes the date to hasten the day of
maturity, then the note is avoided insofar as P is
concerned because the instrument is ante-
dated for a fraudulent purpose.
However, if P, indorses the instrument to A who
acquires it in GOOD FAITH FOR VALUE without
notice and before maturity, then A, as a holder
in due course, has the right to enforce payment
based on the date inserted.
S14: 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. And 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. In order,
however that any such instrument when
completed may be enforced 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. But if any such instrument
after completion is negotiated to a holder in
due course, it is valid and effectual for all
purposes in his hands, and he may enforce it as
if it had been filled up strictly in accordance
with the authority given and within a
reasonable time.
S14 – incomplete delivered (Personal Defense)
S15 – incomplete undelivered (Real Defense)
S16 – complete undelivered
2 Classes of Instruments
1. Those in which obvious blanks are left
at the time they are made or indorsed
The one who signs or indorses is liable to bona
fide holders through the doctrine of implied
authority
2. Those which are apparently complete,
containing blanks only because the
written matter does not so fully occupy
the entire paper as to preclude the
insertion of additional words or figures,
or both.
The liability for the amount of the instrument
which has been increased by filling up
unoccupied spaces therein is placed upon the
doctrine of negligence.
INCOMPLETE BUT DELIVERED
1. The holder has authority to fill up the
blanks with any date or amount
2. The instrument may be enforced only
against a party prior to completion of
filled up strictly in accordance with the
authority given and within a reasonable
time.
3. The person who signed his name has
the burden to rebut the presumption
M authorized P to put in the blank 10K.
However, P inserts the sum of 2K and then
indorses the note to A, from A to B, and from B
to C who is NOT A HOLDER IN DUE COURSE. C
can collect nothing because when one or both
requisites are absent the HOLDER NOT IN DUE
COURSE cannot recover.
4. The defense that the instrument had
not been filled up in accordance with
the authority given and within a
reasonable time is not available as
against a holder in due course.
The rule is founded by upon the principle that
where one of two persons must suffer by the
bad faith of another, the loss must fall upon the
one who first reposed confidence and made it
possible for the loss to occur.
S15: Incomplete undelivered instrument will not
be valid in the hands of any holder, as against
any person whose signature was placed thereon
before delivery
1. The fact that an incomplete instrument,
completed without authority, has not
been delivered, IS A DEFENSE EVEN
AGAINST A HOLDER IN DUE COURSE.
Maker must rebut by proof to the
contrary.
2. The invalidity of the above instrument is
only with reference to the parties
whose signatures appear on the
 instrument before and not after
delivery.
M makes a note for 1K with the name of the
payee in blank and keeps it in his drawer. P
steals the note and inserts his name as payee
and then indorses the note to A, A to B, B to C
and C to D, a holder in due course. Can D
enforce the note against M?
No, because the instrument is not valid.
Can the instrument be enforced against P, A, B,
and C?
Yes because as indorsers, the warrant that the
instrument is genuine and in all respects what it
purports to be. The instrument is valid as to
them. In the case of P, he is liable not merely
because he is an indorser but also because he is
the one responsible for the theft and the
completion and negotiation of the instrument.
S16: Every contract on a negotiable instrument
is incomplete and revocable until delivery of the
instrument for the purpose of giving effect. As
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
as the case may be; and in such case the
delivery may be shown to have been
conditional, or for a special purpose only, and
not for the purpose of transferring the
protperty in the instrument. But where the
instrument is in the hands of a holder in due
course, a valid delivery therof by all parties prior
to him so as to make them liable to him is
conclusively presumed. And where the
instrument is no longer in the possession of a
party whose signature appears thereon, a valid
and intentional delivery by him is presumed
until the contrary is proved.
As a general rule, negotiable instruments has no
legal inception or existence, as such, until it has
been delivered in accordance with the purpose
and intent of the parties. No delivery means no
liability, actual or constructive.
“issue” and “delivery” are used interchangeably
Delivery: transfer of possession with intent to
transfer title
Issue: first delivery of the instrument, complete
in form, to a person who takes it as holder
Holder: payee or indorsee of a bill or note who
is in possession of it, or the bearer thereof. If
the instrument is no longer in the possession of
the person who signed it and it is complete in
its terms, “a valid and intentional delivery by
him is presumed until the contrary is proved.”
A note in the hands of the maker, albeit
complete is but a blank piece of paper. Its
wrongful seizure cannot create against his will a
valid contract where none existed before
S17: Ambiguous Instrument
a. When sum payable in words and figures
are different, the one in words is
correct
b. Where there is no date specified when
interest runs, the interest runs from the
date of issue
c. Where there is no date, the date is
considered the time of its issuance
d. Where there is conflict between written
and printed provisions, the written
provisions prevail
e. Where the instrument cannot be
identified as a bill or a note, THE
HOLDER MAY TREAT IT AS EITHER AT
HIS ELECTION
 f. Where a signature is placed such that
his intentions are not clear, he is
deemed to be an indorser
g. Where an instrument containing the
words “I promise to pay” is signed by
two or more persons, they are deemed
solidarily liable. “We promise to pay” is
deemed jointly liable
S18: No person is liable on the instrument
whose signature does not appear thereon,
except as herein otherwise expressly provided.
But one who signs in a trade assumed name will
be liable to the same extent as if he had signed
in his own name.
Exceptions
1. Person signs in a trade or assumed
name
2. Principal is liable if a duly authorized
agent signs on his own behalf
3. In case of forgery, the forger is liable
even if he has no signature
4. Where the acceptor makes his
acceptance of a bill on a separate paper
5. Where a person makes a written
promise to accept a bill before it is
drawn
S19: The signature of any party may be made by
a duly authorized agent. No particular form of
appointment is necessary for this purpose and
the authority of the agent may be established
as in other cases of agency. (authority given
orally or in writing but if it is in writing, it is
enforceable as to 3rd persons)
S20: Where the instrument contains or a person
adds to his signature words indicating that he
signs for or on behalf of a principal, or in a
representative capacity, he is not liable on the
instrument if he was duly authorized; but the
mere addition of words describing him as an
agent, or as filling a representative character,
without disclosing his principal, does not
exempt him from personal liability
When agent may escape personal liability
1. He is duly authorized
2. He adds words to his signature
indicating that he signs as an agent
3. He discloses his principal
Agent is personally bound when he signs his
own name but discloses no principal. The mere
addition of descriptive words without disclosing
the principal will not relieve the signer from
personal liability.
S21: A signature by procuration operates as
notice that the agent has but a 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
Procuration: act by which a principal gives
power to another to act in his place as he could
himself (per pro, per proc, P.P. or PP.)
S22: The indorsement or assignment of the
instrument by a corporation or by an infant
passes the property, the corporation or infant
may INCUR NO LIABILITY
Indorsement by incapacitated persons
1. Minors – voidable. He is not
incapacitated to transfer certain rights.
REAL DEFENSE hence he may disaffirm
and recover the instrument from a
holder in due course.
M issues a negotiable promissory note payable
to the order of P, a minor. P indorses the
instrument to A.
M becomes liable to A because the indorsement
by P passes title to A. But if M cannot pay and a
sues P, the latter may raise the defense of
minority to escape from liability. P may even
disaffirm his indorsement and recover the 2. Where the forged signature is not
instrument from A. necessary to the holder’s title in which
case the forgery may be disregarded
If A gives it to B and B is a HOLDER IN DUE
(bearer instruments)
COURSE, P cannot set aside the negotiation. P
can rescind his indorsement before the Persons precluded from setting up the defense
instrument is negotiated to a party who of forgery
qualifies as a holder in due course.
1. Those who by their acts, silence, or
negligence are estopped from setting
up the defense of forgery
HOWEVER, a minor may be held bound by his
2. Those who warrant or admit the
signature in an instrument where he is guilty of
genuineness of the signatures in
actual fraud committed by specifically stating
question (indorsers, acceptors and
that he is of age when, in fact, he is not.
persons negotiating by delivery
Other incapacitated persons has a REAL
A party precluded from raising defense of
DEFENSE that is available even against a holder
forgery such as by reason of negligence may still
in due course.
recover damages under provisions on quasi-
A corporation is not liable on notes in a suit by delicts
an indorsee, where the corporation is without
capacity to make the contract in fulfillment of
which they were executed. One who deals with
the officers or agents of a corporation is bound
to know their powers and the extent of their
authority.

S23: When a signature is forged, it is wholly

inoperative UNLESS the party against whom it is
sought to enforce such right is precluded from
setting up the forgery or want of authority.

A person whose signature was forged as maker,

drawer, payee or indorsee CANNOT BE HELD
LIABLE BY ANYONE. It is a real defense.

The proof of burden lies on the party alleging

forgery and cannot be presumed.

Exceptions:

1. If the party against whom it is sought to

enforce such right is precluded from
setting up the forgery or want of
authority