MODULE

Flexible Learning A.Y. 2020-2021

1
DISTANCE EDUCATION COURSE STUDY GUIDE v.3
Course instructor: Atty. Bebelan A. Madera, CPA, MBA, RCA, MICB
Contact details: FB messenger: Bebelan A. Madera | Email: b.madera@usls.edu.ph | Phone: +63 9179262342
Consultation schedule: MWF 6:30 to 7:30 p.m.
6 hours

Negotiable Instruments Law: Primer

CLAW3: Negotiable Instruments Law: A Primer Module 1 | Page 1

 This module aims to teach the current law and practice
in the field of commerce. As businesses continues to grow, more and
more people transact commercial transactions through negotiable
instruments. Thus, the need to understand commercial instruments
Learning Task 2 and concepts to acquaint and prepare the students in the real-life
scenario involving these transactions.

Learning Outcomes

At the end of this module, you must have:

Discuss Requisites of Negotiability
Discuss the difference between negotiable and non-negotiable instruments
Discuss the difference between negotiable instruments, bills of exchange, and checks
Discuss the difference between a bearer and an order instrument

Read the newspaper clip below:

A promissory note reads as follows: “I promise to pay Gabriela Silangan P1, 000.00 three years after the
unconditional withdrawal of the U.S. of its military bases in the Philippines.” Discuss the negotiability or
non-negotiability of the note above.

Learning Task 1

MP bought a used cellphone from JR. JR preferred cash but MP is a friend so JR accepted MP’s
promissory note for P10,000.00. JR though of converting the note into cash by indorsing it to his brother

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KR. The promissory note is a piece of paper with the following hand-printed notation: “MP WILL PAY
JR TENTHOUSAND PESOS IN PAYMENT FOR HIS CELLPHONE ONE WEEK FROM TODAY”.
Below this notation is MP’s signature with “8/1/00 next to it, indicating the date of the promissory note.
When JR presented MP’s note to KR, the latter said it was not a negotiable instrument under the law and
so could not be a valid cash substitute. JR took the opposite view, insisting on the note’s negotiability.
You are asked to referee . Which of the opposing views is correct? Explain.

A) Basic Concepts

(1) What are negotiable instruments?

(a) They are written contracts for the payment of money; by its form, intended as a substitute
for money and intended to pass from hand to hand, to give the holder in due course the
right to hold the same and collect the sum due.

(2) Characteristics of negotiable instruments:

(a) Negotiability – right of transferee to hold the instrument and collect the sum due
(b) Accumulation of secondary contracts –
instrument is negotiated from person to
person

(3) What are the phases in the life of a

negotiable instrument?
(a) Issuance – first delivery of the instrument, complete in form, to a
person who takes it as a holder (Sec. 191)
(b) Negotiation – transfer of the instrument and title thereof to another person
1. Indorsement with delivery, in case of order instruments.
a. Indorsement – a signature on the instrument by the previous holder thereof with
the intent of transferring title thereto to a subsequent party.
2. Mere delivery, in case of bearer instruments.
(c) Presentment for acceptance in certain bills (Sec. 143)
(d) Acceptance – one completed by delivery and notification (Sec. 191)
(e) Dishonor by non-acceptance
(f) Presentment for payment
(g) Dishonor by non-payment
(h) Notice of dishonor
(i) Protest in certain cases (Sec. 118, 152 and 167)
(j) Discharge (Sec. 51, 119)

(4) What are the differences between negotiable instruments and non-negotiable instruments?
Negotiable instruments Non-negotiable instruments
Contains all the requisites of Sec. 1 of Does not contain all the requisites of
the NIL Sec. 1 of the NIL
Transferred by negotiation Transferred by assignment
Holder in due course may have better Transferee acquires rights only of his
rights than transferor transferor
Prior parties warrant payment Prior parties merely warrant legality
of title
Transferee has right of recourse Transferee has no right of recourse

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 against intermediate parties

(5) What are the differences between negotiable instruments and negotiable documents of title?
Negotiable instruments Negotiable documents of title
Contains all the requisites of Sec. 1 of Does not contain all the requisites of
the NIL Sec. 1 of the NIL
Have right of recourse against No secondary liability of intermediate
intermediate parties who are parties
secondarily liable
Holder in due course may have better Transferee merely steps into the shoes
rights than transferor of transferor
Subject is money Subject is goods
Instrument itself is property of value Instrument is merely evidence of title;
thing of value are the goods
mentioned in the document

(6) What is a promissory note?

(a) It is an unconditional promise to pay in writing 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 bearer. When the note is drawn to maker's own order, it is not
complete until indorsed by him. (Sec. 184, NIL1)
(b) The parties to a promissory note are (1) the maker and the (2) payee.

(7) What is a bill of exchange?

(a) It 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 bearer. (Sec. 126)
(b) The parties to a promissory note are (1) the drawer, (2) the payee and (3) the
drawee/acceptor.

(8) What are the differences between a promissory note and a bill of exchange?
Promissory Note Bill of exchange
Contains an unconditional promise to Contains an unconditional order to
pay pay
Involves two (2) parties Involves three (3) parties
Maker primarily liable Drawer only secondarily liable
Only one presentment needed – for Generally two presentments needed –
payment for acceptance and for payment

(9) What is a check?

(a) It is a bill of exchange drawn on a bank and payable on demand. (Sec. 185)

(10)What are the distinctions between a check and a bill of exchange?

Check Bill of exchange
Always drawn upon a bank or a May or may not be drawn against a
banker bank
Always payable on demand May be payable on demand or at a
fixed or determinable future time
Not necessary that it be presented for Necessary that it be presented for
acceptance acceptance
Drawn on a deposit Not drawn on a deposit
The death of a drawer of a check, The death of the drawer of the

1
All citations refer to the Negotiable Instruments Law (Act No. 2031) unless otherwise stated.

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 with knowledge by the banks, revokes ordinary bill does not revoke the
the authority of the banker to pay authority of the drawee to pay
Must be presented for payment within May be presented for payment within
a reasonable time after its issue (6 a resonable time after its last
months) negotiation

(11)What are the distinctions between a promissory note and a check?

Promissory note Check
There are two (2) parties: the maker There are three (3) parties: the drawer,
and the payee the drawee bank and the payee
May be drawn against any person, not Always drawn against a bank
necessarily a bank
May be payable on demand or at a Always payable on demand
fixed or determinable future time
Contains a promise to pay Contains an order to pay

(a) If a check is crossed, this signifies that the check's proceeds shall only be deposited and
not encashed and released to the holder. It adds a layer of security for the drawer in order
to ensure that only the proper party shall receive payment, as the manner of transfering
the funds through bank accounts can be traced through the bank system.
(b) If the drawer to a check would like to secure the payment of the check (in order to avoid
its dishonor and consequent liability under the provisions of B.P. 22 or the Bouncing
Checks Law), he may obtain a certified check. It is a kind of check whose payment is
ensured by the bank, signifying that available funds will cover the amount of the check
upon its presentment to the drawee. Technically, what the drawee actually does is to
purchase a certified check with the drawee bank (by payment of a nominal bank fee) and
depositing the amount of the check with the bank. Such amount will not be credited to the
drawer's account but will be set aside by the bank in a fund, which it will use to
reimburse itself once it has made payment of the certified check.

(12)Other forms of negotiable instruments include (1) certificates of deposits, (2) trade
acceptances, (3) bonds in the nature of promissory notes, (4) drafts which are bills of
exchange drawn by one bank on another, and (5) letters of credit.

(13)What is a trust receipt?

(a) It is a security transaction intended to aid in the financing of importers and retailers who
do not have sufficient funds to finance their transaction and acquire credit except to use
as collateral for the merchandise imported.

B) Requisites of Negotiability

(1) What are the requisites of negotiability?

(a) According to Sec. 1 of the NIL, "(a)n instrument to be negotiable must conform to the
following requirements (Mnemonic - WUPOA):
1. It must be in writing and signed by the maker or drawer;
2. It must contain an unconditional promise or order to pay a sum certain in money;
3. It must be payable on demand or at a fixed or determinable future time;
4. It must be payable to order or bearer; and
5. Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
(b) A promissory note must possess the first four (4) requisites, whereas a bill of exchange
must possess all five (5) requisites.
(c) In order to be negotiable, there must be a writing of some kind, else there would be
nothing to be negotiated or passed from hand to hand. The writing may be in ink, print or
pencil. It may be upon parchment, cloth, leather, or any substitute of paper.
(d) It must be signed by the maker or drawer. It may consist of mere initials or even
numbers, but the holder must prove that what is written is intended as a signature of the

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 person sought to be charged. The signature may appear in any part of the instrument,
whether at the top, middle or bottom or at the margins.
1. Note, however, that 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 only and
not a maker or drawer. (Sec. 17)
2. Where the genuineness of the signature of the maker or drawer is denied, the
signature is nevertheless presumed valid. The maker or drawer must provide some
evidence of the signature's invalidity.
(e) The bill of exchange must contain an order, something more than the mere asking of a
favor.
(f) The sum payable must be in money only. It cannot be made payable in goods, wares, or
merchandise or in property.
1. The promise or order may designate "a particular kind of current money in which
payment is to be made." (Sec. 6[e])
2. The term money properly includes all legal tender.
a. Note, however, that money as used in the law is not necessarily limited to "legal
tender" as defined by law.
(g) A drawee's name may be filled in under Sec. 14.
1. Like the drawee, the payee must be named with reasonable certainty if the instrument
is payable to order (Sec. 8, par. 2)

(2) How is negotiability determined?

(a) It is determined:
1. by the provisions of the NIL, particularly Sec. 1 thereof;
2. by considering the whole instrument;
3. by what appears on the face of the instrument and not elsewhere.
(b) While the writing may be read in the light of surrounding circumstances in order to more
perfectly understood the intent of the parties, yet as they have constituted the writing to
be the only outward expression of their meaning, no other words are to be added to it or
substituted in its stead. The duty of the court in such case is to ascertain not what the
parties may have secretly intended as contradistinguished from what their words express,
but what is the meaning of the words they have used. (Caltex [Phils.], Inc. vs. Court of
Appeals, 212 SCRA 448 [1992].)

(3) For the sum to be deemed certain, the holder must be able to determine from the instrument
itself the amount he is entitled to receive at maturity.
(a) Under Sec. 2, the sum is deemed certain even if it is to be paid:
1. with interest.
a. If the interest rate is not specified, it shall be the legal rate of 6% (Art. 2209, New
Civil Code; see also BSP Circular No. 799-13)
2. in installments.
3. in installments with acceleration clause.
a. An acceleration clause is a provision that upon default in payment of any
installment or of interest, the whole shall become due and demandable.
b. The acceleration must be at the option of the maker and not the holder. If it is the
latter, the instrument is non-negotiable as the sum would not be certain.
4. with exchange, whether at a fixed or current rate.
a. The exchange rate itself must be determinable, otherwise the sum cannot be
made certain.
b. This provision is applicable only to foreign bills (i.e. drawn in one country and
payable in another). It does not apply to inland or domestic bills by virtue of
R.A. No. 8183, which mandates that all monetary obligation must be paid in
Philippine currency which is legal tender in the Philippines.
5. with costs of collection or an attorney's fee, in case payment shall not be made at
maturity.
(b) Until the instrument matures the amount payable is certain, and it may, therefore, take the
place of money; when it becomes overdue, the amount to which the holder is entitled
becomes uncertain but in this case, it has already ceased to perform the office of money.
Hence, anything which only renders the sum payable uncertain after the instrument has
ceased to be a substitute for money but which in no wise affected it before such time,
cannot impair its negotiability.

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 (c) If an instrument be for a specified sum of money, and also for the payment of something
else, the value of which is not ascertained but depends upon extrinsic evidence, it would
not be negotiable.

(4) The promise or order to pay must be unconditional, i.e. it is unqualified and not dependent on
any uncertain, contingent event.
(a) Even if the condition or event is very likely to occur, or indeed, even if, in fact, did occur
subsequently, the instrument remains non-negotiable, although it would, of course,
become payable at that time.
(b) However, pursuant to Sec. 3, it may contain:
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.
a. But if the particular fund indicated is to be used for payment of the instrument,
then it is non-negotiable, as payment thereof would be conditioned on the
existence and sufficiency of such fund.
2. a statement of the transaction which gives rise to the instrument.
a. Normally, the words used to this effect is "for value received." Note that it is not
necessary that the transaction be mentioned in the instrument, as the holder is
presumed to hold the instrument for value unless otherwise proved.
b. If the promise or order is "subject to or governed by the terms and conditions of
our contract executed by us on _____," the instrument is not negotiable because
the obligation to pay is burdened with the terms and conditions of another
contract, subjecting recovery on the Instrument to defenses available under the
contract.
(c) In addition, the words used must indicate the obligatory nature of the instrument, and
must indicate a assumption of full responsibility for the payment thereof. A mere promise
implied by law from the existence of an indebtedness, and not from any promissory
language, is not sufficient.
(d) In the case of an order to pay, it must be in the nature of a command or imperative
direction, and, therefore, a mere request which merely asks a favor (like "I request you to
pay," or "I wish you would pay," or "I authorize you to pay," or "I hope you will pay")
supplication, or authority does not constitute an order for it does not import a right to ask
and a duty to obey.

(5) The instrument is payable at a determinable future time if the payment will certainly become
due and payable one time or other, though it may be uncertain when that time will come.
(a) According to Sec. 4, an instrument is payable at a determinable future time if it is
expressed to be payable:
1. At a fixed period after date or sight;
a. After sight means after the instrument is seen by the drawee upon presentment for
acceptance (see Sec. 143[a].), or accepted by the drawee.
2. On or before a fixed or determinable future time specified therein;
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.
a. A common example of the last instance is the death of a person. But, the
condition of a person attaining a certain age, or obtaining a certain degree or
distinction with a reasonable certainty of success, still makes the promise or
order conditional, and therefore the instrument non-negotiable.
(b) An instrument payable upon a contingency is not negotiable, and the happening of the
event does not cure the defect. (Sec. 4, par. 2)
(c) If an instrument is payable "on demand or (at a fixed or determinable future time)", the
payee is given unrestricted power to declare the instrument due at any time before
maturity. The exercise of his right is "not dependent upon nor does it grow out of any act,
promise, or agreement of the maker. In other words, it is a contingency over which the
maker has no control." This uncontrollable option of the payee, it has been held, renders
the note non-negotiable because it renders the time of payment uncertain.
1. However, the instrument is not rendered non-negotiable where the holder's right to
exercise the option depends upon the happening of a specified event or contingency
over which he has no control. (see Sec. 2[c])
(d) A provision in the instrument to the effect that the maker may extend payment from due
date does not affect its negotiability as such instrument is the same as one payable "on or

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 before." The note would become due in any event, although the exact time could not be
determined at the time of its execution. The time at which the note must eventually
become due is, therefore, fixed and certain.
(e) A promise to pay "when able" or "as soon as I can" renders the instrument non-negotiable
because the period to pay is non-determinable.
1. Note that even if we apply Art. 1197 in relation to Art. 1180 of the NCC, the
instrument is still non-negotiable because the period shall be determined by court
action, which imposes a condition upon the instrument for its payment, rendering it
non-negotiable though the period is now made certain.

(6) General rule: If some other act is required other than the payment of money, the instrument is
non-negotiable.
(a) Exceptions:
1. sale of collateral securities if the instrument is not paid at maturity
a. Here, the additional act is to be performed after the date of maturity when the
instrument is no longer negotiable in the full commercial sense, (see Sec. 2[e].)
Until the date of maturity, the promise is to pay money only. A statement that an
instrument is secured by a collateral, in fact, adds to the marketability of the
instrument in commerce as a substitute for money or as a credit instrument.
2. confession of judgment if the instrument is not paid at maturity
a. A confession of judgment enables the holder to obtain a judgment without the
delay usually incident to a law suit, as it eliminates the necessity of a trial. It is a
written statement signed by the defendant, setting forth the basis of liability and
authorizing the entry of judgment thereon.
b. Warrants of attorney to confess judgment (i.e. a written document that gives an
attorney the power to confess judgment against the defendant on a debt),
however, are not authorized nor contemplated by our law. Unless expressly
authorized by statute, they are void "as against public policy because they enlarge
the field for fraud, because under these instruments, the promissor bargains away
his right to a day in court, and because the effect of the instrument is to strike
down the right of appeal accorded by statue." (PNB vs. Manila Oil Refining &
By-Products Co., 43 Phil. 444 [1922].)
c. Note that a confession of judgment should be distinguished from:
i) cognovit actionem – a written confession of action by the defendant
acknowledging his indebtedness to the plaintiff after the action has been
filed. It is valid in our jurisdiction.
ii) relicta verificationem – a confession of judgment by withdrawal of defense.
It is also valid in our jurisdiction. (It is also commonly exercised by filing an
affidavit of desistance.)
3. waiver of benefit granted by law
a. As such, a waiver of notice of dishonor (Sec. 109 and 110), of protest (Sec. 111),
of presentment for payment or demand (Sec. 70), or exemption from attachment
or execution does not destroy the negotiability of an instrument.
4. election of holder to require some other act
a. If the option is with the promissor, the instrument is non- negotiable because the
holder cannot compel him to make payment in money.

(7) Under Sec. 6, the validity or negotiability of an instrument is not affected by the fact that:
(a) it is not dated;
1. An undated instrument shall be deemed dated as of the time it is issued. (Sec. 17[c]).
An instrument has no inception until delivery. (Sec. 191, par. 6)
2. The date of issue or acceptance may be inserted in accordance with Sec. 13: (1)
where the instrument is expressed to be payable at a fixed period after date; or (2)
where the acceptance of an instrument payable at a fixed period after sight is undated.
a. The insertion of a. wrong date in an undated instrument by one having
knowledge 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 a subsequent holder in due
course who may enforce the same notwithstanding the improper date. In the
hands of a holder in due course, the date inserted, even if wrong, is to be
regarded as the true date.

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 3. If the interest is stipulated without specifying the date from which interest is to run, it
shall run from the date of the instrument, and if the instrument is undated, from the
date of issue thereof (Sec. 17[b]).
4. For the purpose of determining whether a party acted within a reasonable time in
making presentment for payment:
a. a promissory note requires a date of issue to be indicated therein (Sec. 70, 71)
b. a bill of exchange requires a date of the last negotiation thereof (Ibid., also Sec.
144)
5. Instruments may be ante-dated or post-dated. (Sec. 12)
a. Ante-dating or post-dating an instrument does not render it invalid or non-
negotiable by that fact alone, provided this is not done for an illegal or fraudulent
purpose. It may be negotiated before or after the date given as long as it is not
negotiated after its maturity.
(b) does not specify the value given, or that any value has been given therefor;
1. Consideration is presumed though it may not be stated. (Sec. 24; see Art. 1354, NCC)
2. This is not to say that consideration in connection with a negotiable instrument is not
essential. The law refers to the wording of the instrument not the lack of supporting
consideration which if proved will relieve the maker of the obligation to pay when
presented for payment by the payee himself.
(c) does not specify the place where it is drawn or the place where it is payable;
1. In such a case, Sec. 73 applies. Thus, payment may be made:
a. where the person to make payment resides, if his address is given in the
instrument;
b. in his usual place of business is, if there is no address given for the person;
c. wherever he may be found or at his last known place of business or residence, in
any other case.
(d) bears a seal;
1. There is no difference in legal effect between sealed and unsealed private writings in
our jurisdiction.
2. It is advisable, however, to have a bill or note appear in a public instrument so that it
will be included among the preferred credits with respect to other property of the
debtor. (see Art. 2244[4], NCC)
(e) designates a particular kind of current money in which payment is to be made.
1. The instrument is still negotiable although it is payable in foreign money which is not
current in the Philippines if the obligation may be discharged in pesos of equivalent
amount.

(8) When is an instrument payable on demand?

(a) If the instrument is not yet due, as regards all parties, immediate or subsequent, the
instrument is payable on demand if:
1. it is expressed to be payable on demand, or at sight, or on presentation; or
2. there is no time for payment expressed.
(b) If the instrument is overdue and it is thus issued, accepted or indorsed, as regards
immediate parties – in particular, the person issuing, accepting or indorsing the
instrument – it is payable on demand.
1. The reason here is because between immediate parties there is no difference between
a holder in due course and a person not a holder in due course. (See Sec. 52)
2. An overdue instrument is necessarily a demand paper. A holder has an immediate
right of payment for the money promised or ordered to be paid.

(9) When is an instrument payable to order?

(a) It is payable to order where it is drawn payable to the order of a specified person or to
him or his order. (Sec. 8) As such, it may be made payable to the order of:
1. a payee who is not the maker, drawer or drawee;
2. the drawer or maker;
3. the drawee;
4. two or more payees jointly;
a. in case of indorsement, both payees must indorse the instrument, unless (1) they
are partners or (2) the one indorsing has authority to indorse for the others. (Sec.
41)
5. one or more of several payees;

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 a. indorsement by any of the payees is sufficient in this case.
6. the holder of an office for the time being.
(b) Note that if the instrument is payable to order, the payee must be named or otherwise
indicated therein with reasonable certainty.
1. If there is no payee, there is nobody who could give the order or authority to collect.
In other words, there would be nobody who could indorse the instrument (see Secs.
30, 9[c].) and, therefore, there is no point considering it negotiable.
2. The trade name of the payee may be used.

(10)When is an instrument payable to bearer?

(a) It 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;
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;
a. The word "fictitious" is not limited to a person having no real existence, as
otherwise the word "non-existing" would have been sufficient without more. A
fictitious person is meant to be one who, though named or specified as payee in
an instrument, has no right to it because the maker or drawer so intended and it
matters not, therefore, whether the name of the payee used by him be that one
living or dead, or one who never existed.
b. If the payee is not the intended recipient of the proteeds of the instrument, the
payee is considered a "fictitious" payee and the check is a bearer instrument. In a
fictitious-payee situation, the drawee-bank, in the absence of bad faith or gross
negligence, is absolved from liability and the drawer of the check bears the loss.
This rule protects the depositary bank and assigns the loss to the drawer of the
check who was in a better position to prevent the loss in the first place.
(Philippine National Bank v. Rodriguez, 566 SCRA 513 [2008].)
4. when the name of the payee does not purport to be the name of any person;
a. In making an instrument payable to an impersonal payee, the maker or drawer
intends the same to be payable to bearer. Like the fictitious payee bearer
instrument, the indorsement of this bearer instrument by the payee is impossible.
5. when the only or last indorsement is an indorsement in blank.
a. An indorsement in blank is one where the indorser merely signs his name without
indicating the name of the indorsee.
b. Essentially, what this does is to convert an order instrument into a bearer one.

C) Abnormalities/Deficiencies in the Instrument

(1) What are the steps in the issuance of a negotiable instrument?

(a) There are two (2) steps involved in the issuance of every negotiable instrument, namely:
1. the mechanical act of writing the instrument completely and in accordance with the
requirements of Sec. 1; and
2. the delivery of the instrument by the maker or drawer to the payee or holder with the
intention of giving effect to it.
(b) Such instrument, complete and delivered, is negotiable and may be enforced accordingly

(2) A subsequent holder in due course (see Sec. 52) is not affected by the following deficiencies:
(a) Incomplete but delivered instrument (Sec. 14)
(b) Complete but undelivered instrument (Sec. 16)
(c) Complete and delivered instrument issued without consideration or a consideration
consisting of a promise which was not fulfilled (Sec. 28)
1. In all three cases above, the deficiency creates a mere personal defense which does
not affect the title of the holder in due course.

(3) A subsequent holder in due course is affected by the following abnormality/deficiency:

(a) Incomplete and undelivered instrument (Sec. 15)
(b) The maker or drawer's signature is forged (Sec. 23)

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 1. This time, the above circumstances create a real defense which is available against all
parties to the instrument, including a holder in due course. 2

(4) To what kind of incomplete instruments does Sec. 14 apply?

(a) When considering Sec. 14, it is important to bear in mind the distinction between two
classes of instruments:
1. Those in which obvious blanks are left at the time they are made or indorsed, of such
a character as manifestly to indicate that the instruments are incomplete until such
blanks shall be filled up;
a. One who signs or indorses such an instrument is liable to bona fide holders
thereof on the doctrine of implied authority. (National Exchange Bank v. Lester,
194 N.Y. 464)
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.
a. 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. (Ibid.)
(b) Sec. 14 applies only to instruments which are (1) wanting in any material particular, or
(2) where only a signature on a blank paper is delivered. If the instrument as it originally
appears is already complete on its face, Sec. 14 does not apply, and any person or holder
who introduces other matters into the instrument thereby increasing liability therefor shall
be himself liable for it except if he acted with authority.

(5) What is a material particular?

(a) It may be defined as any particular proper to be inserted in a negotiable instrument to
make it complete. (Linthlicum v. Bagby, 102 Atl 997)
1. The word "material," as used in Section 14, is not synonymous with "necessary" so as
to restrict the right of filling a blank to something essential to a complete negotiable
instrument. (Johnson v. Hoover, 117 N.W. 277.)
2. The authority to complete is not an authority to alter. (Sec. 124)
(b) The power to fill in the blanks extends to every incomplete feature of the instrument.
(c) A signature on a blank paper delivered in order that it may be converted into a negotiable
instrument operates as a prima facie authority to fill it up as such for any amount.

(6) Prior to completion, may an incomplete instrument be enforced against any party thereto?
(a) The instrument as such may only be enforced if:
1. filled up strictly in accordance with the authority given; and
2. within a reasonable time.
(b) If an instrument is incomplete when delivered, the holder has prima facie authority to fill
up the blanks thereon. If a blank paper is delivered by the person making the signature,
the holder has prima facie authority to fill it up for any amount if the person making the
signature intended to convert it into a negotiable instrument. In either case, the
presumption is that the blank was filled up in accordance with the authority given and
within a reasonable time. (Sec. 193)
(c) The person who signed his name has the burden to rebut the presumption of agency by
contrary proof of want of authority, or proving that the authority granted was exceeded.
Such "reasonable time" for filling up the instrument is to be reckoned from the time of the
issuance of the instrument because the interest involved is that of the issuer, and not from
the time of each successive negotiation.
(d) 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 HIDC. It raises merely a
personal defense.

(7) If an instrument is incomplete and undelivered, may it be enforced against any party if
completed and negotiated?
(a) The answer should be qualified in accordance with Sec. 15. The fact that the instrument
is undelivered is crucial – if the deficiency is filled up without authority, it operates as a
real defense available even against a HIDC. (Sec. 58)

2
For brevity, a holder in due course shall be referred to hereinafter as HIDC.

CLAW3: Negotiable Instruments Law: A Primer Module 1 | Page 11

 (b) Note that there is still a presumption of delivery as far as a HIDC is concerned. The
maker or drawer should rebut such presumption in order to escape liability.
(c) The invalidity of the above instrument is only with reference to the parties whose
signatures appear on the instrument before and not after delivery.
1. Therefore, an indorser to the instrument who negotiated the same after the instrument
has been apparently completed and delivered is liable therefor. The defense
abovementioned is not available to them as against any subsequent party.

(8) If an instrument is complete but undelivered, may it be enforced against any party thereto?
(a) Every contract on a negotiable instrument is incomplete and revocable until delivery of
the instrument for the purpose of giving effect thereto. (Sec. 16)
(b) If the instrument, complete in its terms, is in the hands of a subsequent party:
1. A valid and intentional delivery is presumed until the contrary is proved.
2. If he is a HIDC, a valid delivery thereof by all parties prior to him so as to make them
liable is conclusively presumed.
a. But in a case, for example, where there was no actual delivery to anyone for any
purpose by the maker of a promissory note who was a victim of theft or robbery
committed in his house and there was nothing to show any fault or negligence on
his part, it would be unreasonable to hold him liable even to an innocent holder
for value. A note in the hands of the maker, albeit complete, is, in law, but a
blank piece of paper. Its wrongful seizure cannot create against his will a valid
contract where none existed before.
3. If they are immediate parties and/or the subsequent party is not a HIDC, 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 property in the instrument.
a. The phrase immediate parties, as used in this section, has a broader meaning than
its literal signification. It "refers to those who are 'immediate' in the sense of
having or being held to know of the conditions or limitations placed upon the
delivery of the instrument." In other words, it contemplates privity not proximity,
(see Sec. 58)
b. Remote parties are parties who are not in direct contractual relation to each other,
(see Sec. 58) But if they are chargeable, for example, with knowledge or notice
of any infirmities in the instrument or defect in the title of the person negotiating
the same (see Sec. 56), they will be considered as immediate parties for purposes
of Sec. 16.
(c) The place where the instrument was written, signed, or dated does not necessarily fix or
determine the place where it was executed. What is of decisive importance is the delivery
thereof. The delivery of the instrument is the final act essential to its consummation as an
obligation. (People v. Yaibut, 76 SCRA 624 [1977]; Lim v. Court of Appeals, 251 SCRA
408 [1995])
(d) A brief summary of the rules above follows:
1. If the instrument is incomplete and undelivered, it is invalid even against a HIDC for
want of delivery. There is however a prima facie presumption of delivery if it is in
the hands of a HIDC, which may be rebutted by proof of non-delivery.
2. If an instrument is incomplete but delivered (i.e. in the possession of another), there
is a prima facie authority to complete it by the holder thereof. If it is wrongfully
completed, it is nonetheless enforceable if delivered to a HIDC.
3. If an instrument is complete but undelivered, it is not enforceable at all. If found in
the possession of another, there is a prima facie presumption of delivery. If he is a
HIDC, the presumption becomes conclusive

CLAW3: Negotiable Instruments Law: A Primer Module 1 | Page 12

LEARNING TASK 3

Perla bought a motor car payable in installments from Automatic Company for P250, 000.00 with a
P50,000.00 down payment. She executed a promissory note for the balance which reads:

For value received, I promise to pay Automotive Company or order at its office in Legaspi City, the sum
of P200,000.00 with interest at 12% per annum, payable in equal installments of P20,000.00 for ten (10)
months starting 21 October 2002.
Manila, 21 September 2002

SGD Perla

Pay to the order of Reliable Finance Corp. Automotive Company

By:
(Sgd.) Manager

Because Perla defaulted in the payment of her installments, RFC initiated a case against her for the sum
of money. Perla argued that the promissory note is merely an assignment of credit, a non-negotiable
instrument open to all defenses available to the assignor and, therefore, RFC is NOT a holder in due
course.

Is the promissory note a mere assignment of credit? Or a negotiable instrument? Why?

LEARNING TASK 4

Choose the best answer from the choices given:

1.Give the instrument listed herein which is not negotiable as it is beyond the scope of the
Negotiable Instruments Law:

A. Certificate of Deposit
B. Due Bill
C. Post-Office Money Order
D. Trade Acceptance

2.Under the Negotiable Instruments Law, a certificate of stock is not negotiable instrument
because it lacks the requisites of:

A. The instrument must be in writing and signed by the maker or drawer.

B. It must contain an unconditional promise or order to pay a sum certain in money.
C. It must be payable on demand, or at a fixed or determinable future time.
D. It must be payable to order or bearer.

3. This negotiable instrument is always drawn against a bank.

CLAW3: Negotiable Instruments Law: A Primer Module 1 | Page 13

A. Bill of Exchange
B. Check
C. Due Bill
D. Promissory Note

4. Which of the following instruments is not payable to bearer?

A. “Pay to the order of bearer P1,000.00.

To:X Sgd.A”

B. “Pay to the bearer the sum of P1,000.00.

To:X Sgd.”A”

C. “Pay to B or bearer the sum of P1,000.00.

To:X Sgd.”A”

D. “Pay to Cash the sum of P1,000.00.

To:X Sgd.”A”

5. Which of the following instruments is not negotiable for the reason that the instrument is not
payable at a determinable future time.

A .“On the death of X, I promise to pay to the order of B P1,000.00.

Sgd.”A”

B. “On or before October 30, 2009, I promise to pay B or his order P1,000.00.
Sgd.”A”

C. “Sixty days after sight, I promise to pay to the order of B P1,000.00.

Sgd.”A”

D. “Ten days before the death of X, I promise to pay B or his order P1,000.00.
Sgd.”A”

6. An instrument is considered payable on demand:

A. When no time of payment is expressed.

B. When payable to order.
C. When the last endorsement is in blank.
D. When the last endorsement is restricted.

7. This negotiable instrument is always drawn against a bank:

A. Bill of exchange
B. Check
C. Due bill
D. Promissory note

8. This instrument is negotiable:

A. “I promise to pay P20,000.00” (Signed: Jose Santos).

B. “Pay Pedro Torres or order P20,000.00 if he marries Maria Perez”.(Sgd: Santos)
C. “Good to Mario Cruz or order P20,000.00”. (Sgd: Jose Santos).
D. “I promise to pay Oscar Perez or order 20 cavans of IR Rice in January, 2010”
(Sgd:Jose Santos)

CLAW3: Negotiable Instruments Law: A Primer Module 1 | Page 14

9. When there are three (3) parties, the drawer, the payee and the drawee, the instrument is a:

A. Promissory note
B. Certificate of indebtedness
C. Bank Check
D. Bill of exchange

10. A bill of exchange may be treated and considered a promissory note:

A. When the drawer and the drawee are the same person.
B. When the drawee is fictitious.
C. When the instrument is ambiguous.
D. All of the above.

11. Which of the following instruments is not negotiable?

A. “I agree to pay to the order of A, P30,000.00.” (Sgd. X)

B. “Good to A or order, P30,000.00.” (Sgd. X)
C. “I promise to pay A or order P30,000.00 on June 30.” (Sgd.X)
D. “I promise to pay to A or order P5,000.00.” (Sgd.X)

12. The promise or order is conditional, hence non-negotiable.

A. “I promise to pay to B or order P20,000.00.” (Sgd.Y)

B. “Pay to B or order P20,000.00.” (Addressed to Z, signed by Y)
C. “Pay to B or order P20,000.00 and reimburse yourself out of my money in your possession.”
(Addressed to Z signed, by Y)
D. “Pay to B or order P20,000.00 out of my money in your possession .” (Addressed to Z,
signed by Y)

13. An instrument is payable on demand:

A. When payable to order.

B. When the last endorsement is in blank.
C. When no time of payment is expressed.
D. When payable within a period of time.

14. Which of the following is not necessary in order to make an instrument negotiable?

A. It must be in writing and signed by the maker.

B. It must contain an unconditional promise or order to pay a sum certain in money.
C. It must be payable on demand or at a fixed future time.
D. It must be payable only to a specific person.

15. An instrument is payable on demand:

A. When no time of payment is fixed.

B. When last endorsement is in blank.
C. When the payee is blank.
D. When payable to order.

16. The following is not negotiable:

A. “Pay to C or order, P20,000.00 with exchange at 2.5%.

To: Z Sgd:”M”

B. “Pay to order of C within 6 months from date, the sum of P20,000.00 with interest at 12% per
annum.

CLAW3: Negotiable Instruments Law: A Primer Module 1 | Page 15

 To:Z Sgd:”M”

C. “Pay to C or bearer P20,000.00 6 months after date. If not paid on due date, I agree to pay
collection and Attorney’s fees.
To:Z Sgd:”M”

D. “Pay to C or order P20,000 in installment.

To:Z Sgd:”M”

17. This party is with primary liability:

A. Maker
B. Drawer
C. Indorser
D. None of the three.

18. If an instrument conforms to the following:

1. It must be in writing and signed by the maker or drawer.

2. It must contain an unconditional promise or order to pay a sum certain in money.
3. It must be payable on demand or at a fixed or determinable future time, and
4. It must be payable to order or to bearer, the instrument is a

A. Check
B. Promissory note
C. Bill of exchange
D. Draft

19. Which of the following instruments is negotiable?

A. “Good to Jose Paz or order, P20,000.00.” (Sgd: Pedro Go)

B. “I hereby authorize you to pay Jose Paz or order, P20,000.00 worth in sugar.”
(Sgd: Pedro Go)
C. “I promise to pay Jose Paz or order P20,000 worth in sugar.” (Sgd: Pedro Go)
D. “I promise to pay Jose Paz or order P20,000 on May 25.” (Sgd: Pedro Go)

20. Which of the following is necessary requirement in order to make an instrument negotiable?

A. It must be in writing and signed by the maker.

B. It must be payable on demand or at a fixed future time.
C. It must contain an unconditional promise to pay a sum certain in money.
D. All of the three(3) above.

21. A promissory note as distinguished from a bill of exchange.

A. It contains an unconditional order.

B. The one who issues it is primarily liable.
C. The one who issues it is secondarily liable.
D. There are three (3) parties, the drawer, the payee and the drawee.

22. Which one of the following instruments is negotiable?

A. “I promise to pay C or order P20,000.00 if he will pass the CPA examination in October, 2010.”
(Sgd.D)
B. “I promise to pay C or order P20,000.00 in four (4) installment.” (Sgd:D)
C. “I promise to pay C or order P20,000.00 60 days after the death of his father.” (Sgd.D)
D. “I promise to pay C P20,000.00.” (Sgd:D)

CLAW3: Negotiable Instruments Law: A Primer Module 1 | Page 16

23. Which one of the following instruments is non-negotiable?

A. “Pay to C or order P20,000.00 out of my money in your possession.” (Addressed to A, signed by

D)
B. “Pay to C or order P20,000.00 and reimburse yourself out of my money in your possession.”
(Addressed to A, signed by D)
C. “I promise to pay C or order P20,000.00.”(Sgd.D)
D. “Pay to C or order P20,000.00.” (Addressed to A, signed D)

24. An instrument is rendered non-negotiable if:

A. There is an indication of a particular fund out of which reimbursement is to be made.

B. There is an indication of a particular account to be debited with the amount.
C. The instrument is payable out of a particular fund.
D. Answer not given.

25. This is a promissory note: “We promise to pay Dada, Tina and Kate the sum of P18,000.00.” (Signed)
Jing, Baby and Gail.

A. Gail is obliged to pay Kate P6,000.00.

B. Gail is obliged to pay Kate P2,000.00.
C. Gail is obliged to pay Kate P12,000.00.
D. Gail is obliged to pay Dada, Tina and Kate P18,000.00.

26. “I promise to pay the bearer, Juan dela Cruz the sum of P20,000.00.”(Signed)Joe Perez. The
promissory note is:

A. Negotiable promissory note payable on demand.

B. Negotiable promissory note payable to order.
C. Negotiable promissory note payable to bearer.
D. Non negotiable.

27. Which of the following is non-negotiable?

A. I bind myself to pay B or bearer P10,000. (Sgd.) A.

B. I acknowledged being indebted to B in the amount of P10,000.00. (Sgd.)A.
C. I promise to pay to the order B P10,000. (Sgd)A.
D. I agree to pay to B or order P10,000 on demand. (Sgd)A.

28. Manila
P20,000.00 June 1, 2010

For value received, We promise to pay to the order of Sanrio Lumber Co. at Manila, P20,000.00.

Sanrio Furniture Mfg. Corp.

Sgd. Pedro Sanrio
Sgd. Helen Sanrio

Statement 1. Pedro and Helen are not liable personally because they have disclosed their
principal.
Statement 2. Pedro and Helen are not liable personally because by using the word “WE”
on the body of the instrument, they have indicated that they are signing for
and on behalf of Sanrio Mfg. Corp.

A. True; False
B. False; True
C. Both statements are true.
D. Both statements are false

CLAW3: Negotiable Instruments Law: A Primer Module 1 | Page 17

29. A bill of exchange drawn on a bank and payable on demand.

A. Bond C. Check
B. Due bill D. Certificate of deposit

30. Where in a bill the drawer and the drawee are the same person or where the drawee is a fictitious
person, or a person not having capacity to contract, the holder at his option may treat the instrument as

A. Dishonored
B. Bill of exchange
C. Promissory note
D. Either Bill of exchange or a Promissory note

31. The instrument is payable to order when

A. The name of the payee does not purport to be the name of any person.
B. The only or last indorsement is an indorsement in blank.
C. Drawn payable to the order of a specified person or to him or his order.
D. Payable to the order of fictitious or non-existing person, and such fact was known
to the person making it so payable.

32. An instrument is payable at a determinable future time, which is expressed to be payable, except

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.
D. Upon a contingency and the contingency actually happens.

33. One is not negotiable.

A. A promise to pay to the order of B P10,000 with 12% interest thereon where the period from
which interest is to be counted is not specified.
B. A promises to pay to the order of B P10,000 in four monthly installments beginning June 12,
2009 with a provision that if A defaults in the payment of any installment, the entire balance
including the unpaid installment shall become due and demandable.
C. A promise to pay to the order of B the sum of US$1,000 payable in pesos at the rate of exchange
prevailing on January 1, 2010.
D. A promises to pay to the order of B P10,000 with an agreement to pay attorney’s fees and costs
of collection.

34. The promise is conditional rendering the instrument non-negotiable.

A. An indication of a particular fund out of which reimbursement is to be made.

B. An indication of a particular account to be debited with the amount.
C. A statement of the transaction which gives rise to the instrument.
D. An order or promise to pay out of a particular fund

35. Which is not negotiable?

A. Pay to B or order P10,000 thirty days after sight. Sgd. A to C

B. I promise to pay B or order P10,000 on or before March 1, 2010. Sgd. A
C. I promise topay B or order P10,000 within 20 days after the death of C. Sgd. A
D. Pay to B or order P10,000 within 10 days if he marries D on June 12, 2010. Sgd. A to C

36. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein
with reasonable certainty. This requirement is applicable to

CLAW3: Negotiable Instruments Law: A Primer Module 1 | Page 18

A. Promissory notes, if negotiable
B. Promissory notes, if not negotiable
C. Bills of exchange and promissory notes
D. Bills of exchange and but not promissory notes

37. Which of the following is not a feature of a negotiable instrument?

A. As substitute for money.

B. Accumulation of secondary contracts.
C. It increases credit accumulation.
D. Represents title of goods.

Learning Task 5

1.An instrument is considered payable on demand:

A. When no time of payment is expressed
B. When payable to order
C. When the last endorsement is in blank
D. When the last endorsement is restricted

2. This negotiable instrument is always drawn against a bank:

A. Bill of exchange
B. Check
C. Due bill
D. Promissory note

3.When there are three (3) parties, the drawer, the payee & the drawee, the instrument is a:
A. Promissory note
B. Certificate of indebtedness
C. Bank check
D, Bill of exchange

4. A bill exchange may be treated and considered a promissory note:

A. When the drawer and the drawee are the same person
B. When the drawee is fictitious
C. When the instrument is ambiguous
D. All of the above

5.An instrument is payable on demand:

A. when payable to order
B. when the last endorsement is in blank
C. when no time of payment is expressed
D. when within a period of time

6.Which of the following is not necessary in order to make an instrument negotiable?

A. It must be writing and signed by the maker
B. It must be contain an unconditional promise or order to pay a sum certain in money
C. It must be payable on demand or at a fixed future time
D. It must be payable only to a specific person

CLAW3: Negotiable Instruments Law: A Primer Module 1 | Page 19

7. This party is with primary liability:
A. Maker
B. Drawer
C. Indorser
D. None of the three

8. An indorser of a note or a bill is

A. Secondary liable
B. Tertiary liable
C. Primary liable
D. Not liable

9. An endorsement where the indorser adds the phrase “without recourse” is called:
A. Blank indorsement
B. Restrictive indorsement
C. Qualified indorsement
D. Conditional indorsement

10. An instrument is rendered non-negotiable if:

A. There is an indication of a particular fund out of which reimbursement is to be made
B. There is an indication of a particular account to be debited with the amount
C. The instrument is payable out of a particular fund
D. Answer not given

11. M makes a promissory note for P2, 000.00 payable to the order of P.P negotiates the note to A who
with the consent of P raises the amount to P20, 000.00 and thereafter indorses it to B. B to C and C to D
who is not a holder in due courses. In this case:
A. B can recover P2, 000.00 as against M.
B. P and A are liable to D for P20, 000.00
C. B and C are not liable to D
D. Answer not given

12. The following are instances when a bank may refuse to pay checks drawn against it, except one:
A. If there is a “stop payment” issued by the drawer
B. When the bank receives notice of the drawer’s death
C. If the drawer’s deposit is insufficient
D. If the drawer is insolvent

13. The following are functions of a negotiable instrument. Choose the exception.
A. It increase purchasing power in circulation
B. As legal tender
C. As substitute for money
D. It increases credit circulation

14. X obtains the signature of Y for autograph purpose. X write a negotiable promissory note above Y’s
signature. The note was validly negotiated to Z who is a holder in due course. What kind of defense can
Y avail against Z?
A. Personal defense

CLAW3: Negotiable Instruments Law: A Primer Module 1 | Page 20

B. Real defense
C. Equitable defense
D. Qualified defense

15. Which of the following is not a personal defense?

A. Absence of consideration.
B. Forgery of a signature.
C. Nondelivery of a complete instrument.
D. Failure of consideration.

Rubric in checking the activity Task:

LE4

References

1. Business Law Review – Notes and Materials Compiled by Atty. Glen V. Ardoña, CPA
2. Bar Exam Questions
3. Official Gazette
4. Reviewer on Commercial Law, 2014 Ed. By: Jose Sundiang, Sr. and Timoteo B. Aquino

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