ACT NO.

2031
February 03, 1911

THE NEGOTIABLE INSTRUMENTS LAW

I. FORM AND INTERPRETATION

Section 1. Form of negotiable instruments. - An instrument to be negotiable must

conform to the following requirements:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain
in money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and (e) Where the instrument
is addressed to a drawee, he must be named or otherwise indicated therein
with reasonable certainty.

What are the requisites for a negotiable note?

A Promissory note, to be negotiable, must conform to the following requirements:

1. it must be in writing and signed by the maker;
2. Must contain an unconditional promise to pay a sum certain in money
3. must be payable on demand or at a fixed or determinable future time
4. must be payable to order or bearer

What are the requisites of a negotiable bill?

A bill of exchange, to be negotiable, must conform to the following requirements:

1. in writing and signed by the drawer
2. contain an unconditional; order to pay a sum certain in money
3. payable on demand or at a fixed or determinable future time
4. payable to order or bearer
5. the drawee must be named or otherwise indicated therein with reasonable certainty

What is meant by “in writing” and signed by the maker or drawer?”

Because there would be nothing to negotiate or pass from hand to hand if the instrument
were not in writing, it is essential that it be in writing. The medium in which it is written and
the location in which it is written are not significant. It could be written in ink, print, or
pencil. It can be printed on parchment, cloth, leather, or any other type of paper substitute.
The fact that it is in writing and that it is capable of being transferred or negotiated is
important. It is not possible to negotiate with a note written on a blackboard, for example.
By signing the note, the maker binds himself to be liable for the debt he has created (Sec.
18) It could be the maker's full name, or just his surname, or it could be his signature. It
could be in the form of initials or numbers. However, in cases where the name is not
signed, the holder must demonstrate that what is written is intended to serve as the
signature of the person against whom the charge is sought. For the most part, providing
that it can be demonstrated that the signature was adopted and used by the maker as his
signature, it will suffice. (It should be noted that whoever makes it possible for fraud to be
committed bears the loss.)

What is meant by “an unconditional promise/order to pay a sum certain in money?”

The promise to pay must be on the note itself although it is not necessary to use the
word “promise.” It is enough that
1. equivalent words be used such as “agree”, “will pay”, “shall pay”; or that
2. words implying a promise are contained in the instrument such as “Good to” or
“payable on
demand” (e.g. Good to X or order P10.)

Simply acknowledging a debt is not sufficient, but an acknowledgment followed by the

phrase "to be paid" implies a promise to pay the debt in question. (I acknowledge that I
owe P10, which will be paid on demand.) Furthermore, an instrument that stated "Due X
or order on demand P10" is negotiable because the phrase "to be paid" is implied by the
meaning of the statement, even though it is not explicitly stated. Similarly, the word "order"
does not have to be used in every instance. It is sufficient to use equivalent words or
words that demonstrate the drawer's desire that the money be reimbursed. What must be
remembered is that the BOE is more than a simple request for assistance; it is a legal
instrument that is asserting a legal entitlement. The mere request to pay or authorization
to pay does not suffice in making something negotiable because it gives the decision
whether or not to pay a particular amount of money. The order or promise to pay must
not be subject to any conditions in order to be considered unconditional or absolute ( a
contingent event). If an event is certain to take place, it is neither contingent nor a
condition to take place. According to Article 1179 of the NCC, a condition is defined as
(1) a future and uncertain event; or (2) a past event that is unknown to the parties at the
time of the condition (See also Sec. 3 for further meaning).
 The amount of money to be paid must be determinable (at the time of issue) by
inspection and must be stated plainly on the face of the instrument. The sum is certain
even is mathematical computation is still needed because the amount to be paid is still
ascertainable from the instrument alone without reference to any outside source. (See
also Sec. 2). The payment must be for a sum of money. To be negotiable, the bill or note
must not be payable in goods, wares, property or service nor in bonds, stocks, checks or
foreign bills. The reason for the requirement is that money is the one standard of value in
actual business. Exception to this rule is Sec. 5d. an instrument payable in money or
goods, services et. at the option of the holder. Further, while R.A. 529 requires that the
discharge of obligations be in legal tender of the Philippines the instrument’s negotiability
and validity are not affected by the fact that another currency is stipulated (Sec. 6e) In
such case, the indemnity to be allowed should be expressed in Phil. Currency on the
basis of the current rate of exchange at the time of payment. But, to be negotiable, the
instrument must state the denomination in which it is to be payable.

When is an instrument payable on demand?

In accordance with Sec. 7, a note is payable on demand:

1. When it is so expressed to be payable on demand or at sight or on presentation;

2. when no time for payment is expressed;
3. when an instrument is issued, accepted or indorsed when overdue- as to the party
so issuing, accepting or indorsing, it is payable on demand.

When is an instrument payable at a fixed or determinable future time?

It is payable at a fixed time when a date is specified. But where the date is given
as “Dec. 5,” it is not fixed because the time of payment is not determinable as the year
is not given.

In accordance with Sec. 4, an instrument is payable at a determinable future time

when it is expressed to be payable-
1. at a fixed period “after date or sight; or
2. on or before a fixed or determinable future time specified therein; or
3. on or at a fixed period after the occurrence of a specified event which is certain to
happen though the time of happening be uncertain.
When is an instrument payable to order? To bearer?

In accordance with Sec. 9b, an instrument is payable to bearer when

1. it is expressed to be so payable;
2. it is payable to a specified person or bearer;
3. it is payable to the order of a fictitious or non-existing person and this fact is known
to the maker or drawer;
4. when the name of the payee does not purport to be the name of any person;
5. when the only or last indorsement is an indorsement in blank
It is not important that the words “order” or “bearer” be used. It is sufficient that words
of similar import are put in its place. (e.g., Pay to B or assigns or “assignees” or “holder”
or “possessor”). A note payable to the order or bearer is payable to order and such
instrument may be negotiated only by bearer’s indorsement. (The bearer is the payee.)

When is the indication of the drawee’s name sufficient?

To satisfy this requirement, only the name of the person on whose behalf a bill is
drawn must be printed on the face of the instrument. The instrument would not be
negotiable if this were not the case. However, pursuant to Section 14, the drawee's
name may be omitted and the blanks filled in under implied authority in the same
manner as any other blank. (REMEMBER: Section 14 refers to the incomplete but
delivered instruments, and that the authority to complete them must be in strict
accordance with the authority granted in that section.) Another advantage of accepting
the instrument is that it can be negotiable without the need for a designation to be
provided by the drawee.

Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum certain
within the meaning of this Act, although it is to be paid:
1. with interest; or
2. by stated installments; or
(c) by stated installments, with a provision that, upon default in payment
of any installment 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.
What is the rule regarding the sum payable being definite and certain?

Since a NI is a device intended to take the place of money, it is therefore essential

that it represents a fixed amount of money. The amount of money must be determinable
by inspection and must be stated plainly on the face/ body of the instrument.

When can it be said that the sum is certain despite the stipulation of interest?

Because the amount due can be easily calculated given the interest rate, the
stipulation of interest does not imply that the amount to be paid is inherently uncertain.
Given a certain amount of certainty in the principal sum, determining the amount due
becomes a matter of mathematical computation that can be determined solely by looking
at the face of the instrument. As a result, in cases where interest is stipulated but not
specified (as to rate), the note is still negotiable, and the rate is understood to be the legal
rate, which in the case of loans or forbearance of money is 12 percent.

What is an escalation clause? A de-escalation clause?

An escalation clause is a stipulation in an agreement pertaining to a loan or forbearance

of money, goods or credits providing that the rate of interest agreed upon may be
increased in the event that the applicable maximum rate of interest, is increased by law
or by the Monetary Board. De-escalation clause is stipulation in the agreement that the
rate of interest agreed upon shall be reduced if the maximum rate of interest is decreased
by law or by the Monetary Board. The escalation clause is valid if there is also a de-
escalation clause in the agreement.

What are the requirements as regards payment of installments?

1. The amount of installment must be stated – (the sum payable for each
installment must not be uncertain. It can be ascertainable.)
2. The maturity date of each installment must be fixed or determinable.

What is the rule on acceleration clause?

An instrument, which is to be paid in, stated installment is not rendered non-negotiable

despite a provision that upon default of any installment or of interest, the whole amount
shall become due. Such is called an acceleration clause because it hastens the payment
of the whole note. The failure to pay any installment renders the balance of the amount
immediately due and demandable. An acceleration clause does not make the instrument
payable upon a contingency (thus, non-negotiable) since payment is surely to be made
and its time of payment is surely come. In a sense, it is deemed to be payable on or
before a fixed or determinable
future time specified therein (sec.4b)

What is the rule on provisions for exchange?

Exchange is defined to be the difference in value of the same amount of money in different
countries. The exchange may be at the (1) current rate, or at a (2) fixed rate indicated
therein. Such provision does not render the instrument nonnegotiable because while the
rate of exchange is not always the same and while it is technically true that resort must
be had to extrinsic evidence to ascertain what it is, yet the current rate of exchange
between 2 places at a particular date is a matter of common commercial knowledge, or
at least easily ascertained by any one so that the parties can always, without difficulty,
ascertain the exact amount necessary to discharge the paper. It must be remembered
that this provision applies only to instruments drawn in one country and payable in
another. Where an instrument is drawn in one country and payable in the same country,
there can be no exchange, so a provision for payment of exchange may be disregarded.

Why doesn’t a stipulation for attorney’s fees render the sum uncertain?

Although such a stipulation will make the sum payable after maturity uncertain, it will not
affect the certainty of the sum payable at maturity and, therefore will not affect the
negotiability of the instrument in which it is stipulated. The purpose of the stipulation is
not to give the lender a larger compensation for the loan than the law allows, but to
safeguard the lender against future loss or damage by being compelled to retain counsel
to institute judicial proceedings to collect his debt. The provision refers only to reasonable
attorney’s fees.

What is the effect of negotiable after the note is overdue?

After the date of maturity, the instrument will no longer be negotiable in the full commercial
sense, that is, in the sense that any transferee acquiring it would not be a holder in due
course, as he acquires the instrument after it is overdue. Since the transferee would not
be a holder in due course (HIDC), he would hold the instrument subject to the defenses
as if it were non-negotiable.
Sec. 3. When promise is unconditional. - An unqualified order or promise to pay is
unconditional within the meaning of this Act though coupled with:
(a) An indication of a particular fund out of which reimbursement is to be
made or a particular account to be debited with the amount; or

(b) A statement of the transaction which gives rise to the instrument.

But an order or promise to pay out of a particular fund is not unconditional.

What is the difference between par A. and the last par. of sec 3.?

In the first instance, the specific fund that has been identified is not the direct
source of payment. It is only a source of reimbursement in this case. The payment of the
instrument is not conditional on the availability or sufficiency of funds in the specified
account at the time of payment. This is a two-part transaction: First, the drawee pays the
payee from his own funds, and then the drawee pays himself from the funds specified.
The order or promise to pay is contingent on the drawer's or the maker's general credit
standing. In the second scenario, the specific fund that has been identified is the direct
source of payment. This transaction involves only one act, which is that the drawee pays
directly from the fund that has been designated. Accordingly, the payment is contingent
on the availability of sufficient funds in the account indicated. However, because payment
is conditional, the funds indicated may or may not be sufficient to render the instrument
non-negotiable, resulting in the instrument becoming non-negotiable.

For example, in the first case, you pay B or order P10 and then reimburse yourself out of
the money you have in your possession.
In the second instance, either pay B or order P10 to be paid out of my portion of the
estate.

However, where the amount payable is to be paid out of a specific fund, but
payment is not restricted to that fund alone, negotiability is not lost. For example, I could
pay B or order P10 out of the monthly rental due from A and have it secured to be paid
from my BPI bank account. A similar situation exists when the instrument specifies a
specific account that will be debited with the amount. In this case, the instrument remains
unconditional and negotiable. Specifically, the instrument in this case is to be paid first,
and then the account in question will be debited. The payment is not contingent on the
existence of sufficient funds in the account to be debited. Pay to B, or order P10 and
charge the same amount to my account, for example.
What is a statement of transaction?

Instruments are not issued unless and until a transaction on which they are based
has occurred. The statement of transaction is the reason for the issuance of the
instrument, as well as the simple fact that it was issued in the first place. If it is stated in
the instrument, the promise or order will not be deemed conditional. For example, pay to
B or order P10 for the payment of a debt are both acceptable.

However, if the promise or order is made subject to the terms and conditions of the
transaction as stated, the instrument is deemed to be non-negotiable and cannot be
changed. Furthermore, it would be in violation of the rule that the negotiability of an
instrument (whether or not there is an unqualified order or promise) must be determined
solely from the document itself and not from any other source. For example, I promise to
pay B or place an order for P10 in accordance with the terms of the contract between A
and C. A mortgage does not normally affect the negotiability of an instrument because it
is secured by a mortgage in most cases. However, if such a provision is included in the
note, it will make the amount of the note uncertain, and if such provisions become part of
the note, even if they are not included in the note itself, the instrument is rendered non-
negotiable as a result. The note becomes non-negotiable when it is not only secured by
a mortgage but also subject to the mortgage's terms and conditions, as described above.

ZPG & ASSOCIATES