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REGULATORY
FRAMEWORK AND LEGAL
ISSUES IN BUSINESS
Module 2 Negotiable Instruments Law
Source: Reviewer on Commercial Law by Sundiang Sr. & Aquino
2TAY2122
Payable on Demand or at a Fixed
or Determinable Future Time
a) Payable on Demand – The instrument should
be paid the moment it is presented for
payment. An instrument is payable on demand
(Sec. 7)
1) When it is so expressed to be payable on
demand, or at sight, or on presentation; or
2) 2) In which no time for payment is expressed;
and
3) 3) 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.

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Payable on Demand or at a Fixed
or Determinable Future Time
b) Payable at a Determinable Future Time – An
instrument is payable at a determinable future
time if it is expressed to be payable. (Sec. 4):
1) At a fixed period after date or sight.
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.

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Payable on Demand or at a Fixed
or Determinable Future Time
c) Acceleration Clauses – The
negotiability of the instrument is
not affected even if it is to be paid
by stated installments, with a
provision that, upon default in
payment of any installment or of
interest, the whole shall become
due (Sec. 2)

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Payable on Demand or at a Fixed
or Determinable Future Time
d) Insecurity Clauses – Provisions in
the contract which allow the
holder to accelerate payment “if
he deems himself insecure.” The
instrument is rendered non-
negotiable.

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Payable on Demand or at a Fixed
or Determinable Future Time

e) Extension Clauses – An instrument

is payable at a definite time if by its
terms it is payable at a definite
time subject to extension at the
option of the holder, or to extension
to a further definite time at the
option of the maker or acceptor or
automatically upon or after a
specified act or event.
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Payable to Order or Bearer
a) An instrument that is payable to a specified
person or entity is not negotiable because the
NIL requires that the instrument must be
payable to order or to bearer.
b) Is a certificate of time deposit wherein it is
stated: “This is to certify that nearer has
deposited xxx, repayable to said depositor”
negotiable? –It is negotiable being payable to
bearer. However, where the Certificates of Time
Deposits (CTD) were delivered, but not
endorsed as security, there is no negotiation; at
most the holder would be a holder for value up
to the extent of his lien under Sec. 27 of the NIL
or a pledge under the Civil Code.
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Payable to Order or Bearer
c) When is an instrument payable to bearer (Sec. 9)
1) When it is expressed to be so payable; or
2) When it is payable to a person named therein or bearer; or
3) When it is payable to the order of a fictitious or non-existing
person, and such fact was known to the person making it
so payable; or
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
NOTE: In No. 3, the payee need not be actually fictitious or non-
existent. It can still be payable to bearer even if the payee
is existing if the maker or drawer does not intend the payee
to have any right over the instrument.

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Payable to Order or Bearer

d) Order Instruments – There are

only 2 ways by which an
instrument can be made payable
to order under Sec. 8 of the NIL.
The instrument can either be
payable to the order of a
specified person or to a
specified person or his order.
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Payable to Order or Bearer
Sec 8 of the NIL likewise identifies the person
who can be designated as payees in an
order instrument – the persons to whose
order the instrument may be made
payable. The instrument may be payable to
the order of:
1) A payee who is not the maker, drawer, or
drawee; or
2) The drawer or maker; or
3) The drawee; or
4) Two or more payees jointly; or
5) One or some of several payees; or
6) The holder of an office for the time being.
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Identification of the Drawee
a) Where the instrument is addressed
to a drawee (meaning in a bill of
exchange), he must be named or
otherwise indicated therein with
reasonable certainty. The holder
must know to whom he should
present it for acceptance and/or
for payment, otherwise, the
purpose of negotiable instrument
as a tool in commercial dealings
will be greatly hampered.
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Identification of the Drawee

b. A bill may be addressed to more

than one drawee jointly, whether
they are partners or not; but no
two or more drawees in the
alternative or in succession (Sec.
128)

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Omission and Provisions that DO
NOT Affect Negotiability
• The validity and negotiable
character of an instrument are not
affected by the fact that (Sec. 6):
1) It is not dated (date of issuance); or
2) Does not specify the value given, or
that any value had been given
thereof:
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Omission and Provisions that DO
NOT Affect Negotiability
3) Does not specify the place where it
is drawn or the place where it is
payable; or
4) Bears a seal; or
5) Designates a particular kind of
current money in which payment is
to be made;
6) Addressed to more than one drawee
jointly. BAREBUSX
Omission and Provisions that DO
NOT Affect Negotiability
• When date may be inserted by holder -
When date is necessary in order to
determine the maturity date of the
instrument.
NOTE: Under Sec. 11 of the NIL, “where the
instrument or an acceptance or any
indorsement there on is dated, such
date is deemed prima facie to be the
true date of the making, drawing,
acceptance, or indorsement, as the
case may be.”
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Omission and Provisions that DO
NOT Affect Negotiability
• Additional Provisions
An instrument is still negotiable even if the following
are present (Sec. 5):
1) Authorizes the sale of collateral securities in
case the instrument be not paid at maturity; or
2) Authorizes a confession of judgment if the
instrument be not paid at maturity.
3) Waives the benefit of any law intended for the
advantage or protection of the obligor; or
4) Gives the holder an election to require
something to be done in lieu of payment of
money.
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Transfer and Negotiation
• If the instrument is negotiable,
transfer thereof can be effected
either through: a) negotiation or b)
assignment.
a) If the instrument is merely assigned,
the transferee does not become a
holder and he merely steps into the
shoes of the transferor. Any
defense available against the
transferor is available against the
transferee.
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Transfer and Negotiation
• Issuance – is the first delivery of
the instrument complete in form to
a person who takes it as a holder
(Sec. 191)
1) Issuance to the payee is negotiation
because the transfer constitutes
the payee the holder of the
instrument. The payee may even be
a holder in due course if he has
acquired the note from another
holder or he has not directly dealt
with the maker thereof. BAREBUSX
Transfer and Negotiation
• Issuance – is the first delivery of
the instrument complete in form
to a person who takes it as a
holder (Sec. 191)
2) Delivery is defined as the transfer
of possession of the instrument
by the maker or drawer with the
intention to transfer title to the
payee and recognize him as
holder thereof. BAREBUSX
Transfer and Negotiation
• Negotiation – An instrument is
negotiated when it is transferred
from one another in such manner
as to constitute the transferee the
holder thereof.
1) If payable to bearer, it is negotiated
by delivery.
2) If payable to order, it is negotiated
by the indorsement of the holder
completed by delivery.
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Transfer and Negotiation
• Bearer Insurance Always a
Bearer Insurance
When an instrument, payable to
bearer, is endorsed specially, it
may nevertheless be further
negotiated by delivery; but any
person indorsing specially is
liable as indorser to only such
holder as make title through his
indorsement. (Sec. 40) BAREBUSX
Transfer and Negotiation
• Incomplete Negotiation of Order Instrument
1) Where the holder of an instrument payable to
his order transfers it for value without indorsing
it, the transfer vests in the transferee such title
as the transferor had therein and the transferee
acquires in addition, the right to have the
indorsement of the transferor. (Sec. 49)
2) For the purpose of determining whether the
transferee is a holder in due course, the
negotiation takes effect as of the time when the
indorsement is actually made (Sec. 49)

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Indorsement
a) Where indorsement should be
placed, 1) on the instrument itself;
or 2) separate piece of paper
attached to the instrument called
“allonge” (Sec. 31)
b) Indorsement must be of the entire
instrument (Sec. 32)
c) Sec. 32 of the NIL disallows
negotiation to two or more
indorsees severally.
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Indorsement
d) Kinds of Indorsement
1) Blank Indorsement – no indorsement
is specified and it is done by affixing
the indorser’s signature.
2) Special Indorsement – designates the
indorsee. “Pay to X.”
NOTE: The holder may convert a blank
indorsement into a special
indorsement bu writing over the
signature of the indorser in blank any
contract consistent with the character
of the indorsement (Sec. 35)
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Indorsement
d) Kinds of Indorsement
3) Qualified Indorsement – qualified indorsement
constitutes the indorser a mere assignor of the
title to the instrument. It may be made by
adding to the indorser’s signature the words
“without recourse” or any words of similar
import. Such an indorsement does not impair
the negotiable character of the instrument.
4) Conditional Indorsement – the party required to
pay the isntrument may disregard the condition
and make payment to the indorsee or his
transferee whether the condition has been
fulfilled or not.

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Indorsement
d) Kinds of Indorsement
5) Restrictive Indorsement (Sec. 36)
i) Prohibits the further negotiation
of the instrument; or
ii) Constitutes the indorsee the
agent of the indorser; or
iii) Vest the title in the indorsee in
trust for or to the use of some
other persons. BAREBUSX
Indorsement
d) Kinds of Indorse
6) Rights of Restrictive Indorsee (Sec. 37)
i) To receive payment of the instrument;
ii) To bring any action thereon that the
indorser could bring;
iii) To transfer his right as such indorsee,
where the form of the indorsement
authorizes him to do so. In case of
transfer, all subsequent indorsees acquire
only the title of the first indorsee under
the restrictive indorsement.

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Negotiation by Prior Party
* Where an instrument is negotiated
back to a prior party, such party
may reissue and further negotiate
the same. But he is not entitled to
enforce payment thereof against
any intervening party to whom he
was personally liable (Sec. 50).
However, he may strike out the
intervening indorsements because
they are not necessary for his title
and he is liable to them because of
his initial indorsement. (Sec. 48)
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HOLDER
The payee or indorsee of a bill or
note who is in possession of it or
the bearer thereof (Sec. 191). In
other words, the payee or
indorsee is the holder of an
order instrument while the payee
of the bearer is the holder of
bearer instrument.
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HOLDER
Requisites – A holder in due course is a holder who
has taken the instrument under the following
conditions:
1) That it is complete and regular upon its face;
2) That he became the holder of it before it was
overdue, and without notice that it has been
previously dishonored, if such was the fact;
3) That he took it in good faith and for value;
4) That at the time it was negotiated to him, he
had no notice of any infirmity in the instrument
or defect in the title of the person negotiating it;

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HOLDER
Requisites:
a) 1) Even a holder not in due
course may sue thereon in his
own name and payment to him
in due course discharges the
instrument. (Sec. 51) The only
disadvantage of a holder not in
due course is that the
instrument is subject to
defenses as if it were negotiable.
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HOLDER
Requisites:
a) 2) A payee can be a holder in due course.
Sec 191 defines “holder” as the payee or
indorsee of a bill or note, who is in
possession of it, or the bearer thereof.
Hence, the word “holder” in the first
clause of Sec. 52 and in the second
subsection thereof “may be replaced by
the definition in Sec. 191 so as to read a
holder in due course is a payee or an
indorsee in possession, etc.”
This applies even to crossed checks where the
payee was not involved in the transaction.
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HOLDER
Requisites:
b) Demand Instruments – Where an instrument
payable oemand is negotiated after an
unreasonable length of time after its
issue, the holder is not deemed a holder in
due course (Sec. 53)
1) What can be considered “unreasonable” is
relative. Sec 193 of the NIL provides that
“in determining what is reasonable time”
or an “unreasonable time,” regard is to be
had in the nature of the instrument, the
usage of trade or business (if any) with
respect to such instruments, and the facts
of the particular case”
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HOLDER
Requisites:
c) Notice of Infirmity and Defect – Infirmity in the
instrument means any irregularity in the
instrument. Thus, notice of an alteration which
is apparent is notice of an infirmity in the
instrument. Notice of forgery in the maker or
the drawer’s signature is also notice of infirmity
in the instrument. On the other hand, a title of a
prior party is defective when he obtained the
instrument, or any signature thereto, by fraud,
duress, or force and fear, or other unlawful
means, or for an illegal consideration, or when
he negotiates it in breach of faith, or under
such circumstances as amount to a fraud. (Sec.
57)

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HOLDER
Requisites:
d) NOTE: A person who takes a crossed
check without making further
inquiries is not a holder in due
course. The act of crossing a check
serves as warning to the holder
that the check has been issued for
a definite purpose so that he must
inquire if he has received the check
pursuant to that purpose. BAREBUSX
HOLDER
Requisites:
e) Holder for Value – a consideration
sufficient to support a simple contract.
These include antecedent debts and
lien on the instrument.
1) The holder is a holder for value only to
the extent that the consideration
agreed upon has been paid, delivered,
or performed. Non performance of the
obligation will give rise to partial or full
defense of failure of consideration as
the case may be.
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HOLDER
Requisites:
e) Holder for Value
2) Where the transferee receivs notice
of any infirmity in the instrument or
defect in the title of the person
negotiating the same before he has
paid the full amount agreed to be
paid therefor, he will be deemed a
holder in due course only to the
extent of the amount paid thereor
by him.
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HOLDER
Requisites:
e) Holder for Value 3) As regards an accommodation
party, the fourth condition, lack of notice of any
infirmity in the instrument or defect in title of
the persons negotiating it, it has no application.
However, the inapplicability of the fourth
requisite is limited to notice of absence of
consideration, that is, notice of the fact that the
party is a mere accommodation party who did
not receive any consideration on the
instrument. If the holder has notice of other
infirmity in the instrument or defect in title of
the persons negotiating the instrument, then
the holders is subject to personal defenses.

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