CHAPTER 2 – NEGOTIABILITY

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.

1. HOW TO DETERMINE NEGOTIABILITY

- it is determined by ascertaining if all the requirements of Section 1 appear on the Instrument.

FACTORS IN DETERMINING NEGOTIABILITY

(1) the whole of the instrument shall be considered
(2) only what appears on the face of the instrument shall be considered
(3) the provision of NIL especially section 1 shall be applied

ACCEPTANCE NOT A REQUISITE

- acceptance of a BOE is not important in determining its negotiability.
- acceptance is important only in the determination of the kind of liabilities of the parties involved

INDORSEMENT
- the presence of an indorsement does not affect the negotiability of an instrument

if the promissory note that is payable to the order of the maker himself is not yet complete unless it is
indorsed by the maker

-an indorser may prevent further negotiation of the instrument, in which case, subsequent transferees
can no longer be considered.

1.1 RATIONALE FOR FORMALITIES

- the indispensable formalities of negotiable instruments make these instruments effective substitutes
for money and desirable tools for credit transaction.
- although the law usually cares a little about the form of a contract, form in NI is essential for the
security of mercantile transactions.

2. EFFECT OF ESTOPPEL
- It is believed that the parties cannot be considered estopped from claiming the instrument in non-
negotiable. The negotiability of an instrument is determined by law and the parties cannot change what
is provided by law.
3. REQUISITES OF NEGOTIABILITY
- the requisites are provided under Sec 1 of the NIL (5 requisites)

3.1 IT MUST BE IN WRITING SIGNED BY THE MAKER OR DRAWER

- the law requires NI to be in writing otherwise it cannot be effectively substituted for money.
- Electronic messages are not negotiable since it is contrary with Sec 1 of NIL. It is not written and
signed, they do not contain any unconditional order to pay a sum certain in money, and they are not
payable to bearer as it is an order for third parties.

MATERIALS
- Sec 1 does not specify the materials that should be used in writing the instrument.
- writings may be printed, pencil or ink may be used to write, paper can be substituted by cloth, leather
or parchments. What is actually important is that it is in a tangible form.
- sec 191 of NIL defines written and writing as printed and print.

TYPE OF SIGNATURE
- signature - any symbol executed or adopted by a party with present intention to authenticate a writing
- signature may be done in handwriting, printed, engraved, lithographed or photographed so long as
they are adopted as the signature of the signer.
- what is important is that the drawee used his affixed signature as authentication. And there is intention
to bind himself.
- the genuineness of a signature may be proved by persons who witnessed the signing, anybody familiar
with the signature or expert witnesses.

3.2 IT MUST CONTAIN AN UNCONDITIONAL PROMISE OR ORDER TO PAY A SUM CERTAIN IN MONEY

PROMISE OR ORDER TO PAY

- For BOE = order (order of the drawer to the drawee to pay the payee), for PN = promise (promise of
the payer to pay the payee).
- the word promise or order is not required to appear in the instrument to satisfy this second requisite.
Any terms which indicates an intention to conform with this requisite is sufficient enough. Anything,
may it be demand, request or undertaking which amounts to or tantamount to a promise or order is
enough.

- mere acknowledgement is insufficient. It must be acceptance. (Since acknowledgement can become a

promise by merely adding some words)
- Receipts are not negotiable instruments as they are only proof of transaction or indebtedness.
PROMISE OR ORDER TO PAY MUST BE UNCONDITIONAL
- Under Art 1173 and 1181 of the NCC, a condition is a future and uncertain event, or a past event
unknown to the parties wherein the happening and non-happening of which may either give rise or
extinguish an obligation. (Suspensive – give rise, Resolutory – extinguish)
- So in NI, it must be unconditional since if it is conditional, then it is not negotiable.

- the term unconditional is explained under Sec 3 of the NIL

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.

REFERRENCE TO TRANSACTION
- still negotiable, information given must be limited to the issue in connection with a particular
transaction. For its negotiability to be destroyed, it must be burdened with the conditions and
agreements of another transaction. Reference is just a mere recital of the consideration for which the
paper was given. It is a mere mention of the origin of the transaction.

SUBJECT TO TRANSACTION
- if the instrument is restricted by the terms and conditions of another transaction, then its negotiability
will be destroyed. Negotiability is affected at the moment the holder is required to go beyond the
instrument by requiring him to check the terms and conditions of another contract.

SOURCE OF PAYMENT OR ACCOUNT TO BE DEBITTED

TEST: does the instrument carry the general credit of the drawer or maker, or only the credit of a
particular fund?

FUND FOR REIMBURSEMENT PARTICULAR PAYMENT OF FUND

drawee pays from his own funds then afterwards
drawee pay himself from the particular fund
indicated
Particular fund indicated is not the direct source
of payment but the source of reimbursement
Indication in the instrument does not affect the
unconditional nature of the promise or order
this stipulation does not affect the negotiability
of the instrument
the drawee pays directly from the particular
indicated fund. The fund must be sufficient
enough to cover payment.
Particular fund indicated is the direct source of
payment
Indication in the instrument makes the promise
or order conditional
This stipulation renders the instrument non-
negotiable
PAYABLE IN SUM CERTAIN IN MONEY
- Money – it includes whatever is lawfully and actually used currently in buying and selling which has the
value amounting to legal tender.
- Money is not equivalent to legal tender
- an instrument is still negotiable although the amount to be paid Is expressed in currency that is not
legal tender so long as it is expressed in money. (Other currency are allowed since it is a money)
- Diamonds or golds are not allowed (they hold a lot of value but still they are not money)

OPTION OF THE HOLDER

- alternative payment must be at the option of the holder and not provided by the maker.

Sec. 5. Additional provisions not affecting negotiability. - An instrument which contains an order or
promise to do any act in addition to the payment of money is not negotiable. But the negotiable
character of an instrument otherwise negotiable is not affected by a provision which:

(d) gives the holder an election to require something to be done in lieu of payment of money.

SUM CERTAIN
- the amount that is to be unconditionally paid by the maker or drawee. It must be determinable or
capable to be determined. (It can also include those mentioned under Sec 2)

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:

(a) with interest; or

(b) 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.

INTERESTS
- No interest is due unless there is a stipulation to that effect.
- Interest may be due from a certain time
- Legal interest - 6%

INSTALLMENT PAYMENTS
- if the amount or date on each installments is uncertain, then it will affect the negotiability
(1) date of each installment payment must be fixed or at least determinable
(2) the amount to be paid for each installment shall be mentioned
WITH EXCHANGE
- Exchange – is an accident to bills for the transmission of money from place to place
- payment through exchange does not affect the negotiability. It must be equivalent in value and
payment in exchange must not be uncertain.

3.3 PAYABLE ON DEMAND OR AT A FIXED OR DETERMINABLE FUTURE TIME

- if the maturity date of an instrument is uncertain, then it is not negotiable.

PAYABLE ON DEMAND
- As provided under Section 7 of NIL, the person liable may be required to pay at any time that the
holder may request so if either there is an express agreement which is payable on demand or in which
no time of payment is expressed.

Sec. 7. When payable on demand. - An instrument is payable on demand:

(a) When it is so expressed to be payable on demand, or at sight, or on presentation; or

(b) In which no time for payment is expressed.

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.

PAYABLE AT DETERMINABLE FUTURE

- the instrument is payable at a determinable future if, though no date is fixed, the exact date of
maturity is capable of being determined.

Sec. 4. Determinable future time; what constitutes. - An instrument is payable at a determinable

future time, within the meaning of this Act, which is expressed to be payable:

(a) At a fixed period after date or sight; or

(b) On or before a fixed or determinable future time specified therein; or

(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.

An instrument payable upon a contingency is not negotiable, and the happening of the event does not
cure the defect

ACCELERATION CLAUSE
- any act or omission stipulated on which the happening will accelerate the obligation or make it due
demandable (non-payment or default of payment)
INSECURITY CLAUSE
- provisions or clauses in contract which allow the holder to accelerate payment if he becomes insecure.
- the holder can demand payment any time if he doubts that the maker will not be able to pay in time.
- non-negotiable. Since the holder whims will prevail even without the fault or control of maker

EXTENSION CLAUSE
- provision or clause that provides for an extension of the maturity date of an instrument
- No provision under NIL. Subsection 3-109(1)(d) of the Uniform Commercial Code of United States is
the accepted rule.

COST OF COLLECTION AND ATTY FEES

- agreement between the maker and holder that in case the payee or holder will be forced to file a
collection case due to non-payment, the drawer (through the drawee) will shoulder the legal expenses
incurred by the holder.
- equivalent to 10% of any amount due on note as cost for legal expenses.

3.4 PAYABLE TO ORDER OR BEARER

- instruments that are payable to specified persons are not negotiable since the NIL requires that the
instrument shall be payable to order or bearer. (Term order or bearer must be included)

INSTRUMENTS PAYABLE TO ORDER INSTRUMENTS PAYABLE TO BEARER

The payee must be named or indicated with
reasonable certainty
This is negotiated by indorsement coupled with
delivery
Instruments originally payable to order can be
converted into a bearer instrument through blank
indorsement
The payee need not to be indicated. It is enough
that it is expressed to be so payable to bearer
This is negotiated by delivery
Instruments originally payable to bearer cannot
be converted into order instruments. A bearer
instrument is always a better instrument and can
be negotiated by mere delivery even if specially
indorsed
BEARER INSTRUMENTS
- person who is in possession of an instrument payable to bearer is the holder
- person in possession can demand payment from the persons who are liable
- negotiated by mere delivery

Sec. 9. When payable to bearer. - The instrument is payable to bearer:

(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein or bearer; or

(c) 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
(d) When the name of the payee does not purport to be the name of any person; or

FICTITIOUS PAYEE RULE

- an instrument is a bearer instrument if it is payable to the order of fictitious or non-existing person and
such fact is known to the person making it payable.
- not necessarily fictitious or non-existent. Could be existing but unknown to the knowledge of the
maker and not intend to be the payee.
- bank is absolved from any liability, the drawer bear the losses. Since one cannot expect a fictitious
person to negotiate.

-burden of proof rest to the one making the allegation

- Bad faith can free the drawer from liability. If there is commercial bad faith on the part of the drawee.
If it acts dishonestly and part of a fraudulent scheme.

ORDER INSTRUMENTS
- Under Section 8 of NIL. An order instruments can be payable to order when the instrument is drawn
payable to order of a specified order or to him or his order (There must be “order” or “to the order of”)

Sec. 8. When payable to order. - 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 payable to the order of:

(a) A payee who is not maker, drawer, or drawee; or

(b) The drawer or maker; or

(c) The drawee; or

(d) Two or more payees jointly; or

(e) One or some of several payees; or

(f) The holder of an office for the time being.

Where the instrument is payable to order, the payee must be named or otherwise indicated therein
with reasonable certainty
3.5 IDENTIFICATION OF THE DRAWEE
- drawee must be named or identified with certainty. This only applies to BOE. (If there is uncertainty as
to where to collect the payment, then it would defeat the purpose of NI which is to provide a
convenient commercial transactions)

TWO OR MORE DRAWEES

- it is allowed as long as they are jointly and not serve as alternatives.

OPTION TO TREAT AS PROMISSORY NOTE

-Sec 130 of NIL provides that, when in a bill, the drawer and drawee are the same person or the drawee
is either a fictitious person or those incapacitated to contract, then the holder may treat the instrument
in his option on whether it is a BOE or PN.

CASHIERS CHECKS OR MANAGERS CHECKS

- The drawee is the drawer himself. The instrument is in effect of a promissory note executed by drawer.

4. OMISSIONS AND PROVISIONS THAT DO NOT AFFECT NEGOTIABILITY

4.1 OMISSIONS
- Sec 6 of the NIL provides for the omissions that do not affect negotiability

Sec. 6. Omissions; seal; particular money. - The validity and negotiable character of an instrument are
not affected by the fact that:

(a) it is not dated; or

(b) does not specify the value given, or that any value had been given therefor; or

(c) does not specify the place where it is drawn or the place where it is payable; or

(d) bears a seal; or

(e) designates a particular kind of current money in which payment is to be made.

But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the
consideration to be stated in the instrument.

- undated instruments are still negotiable since it will be considered to be dated on the time it was
issued by virtue of Sec 17(c) of the NIL.

INSERTION OF DATE
- there are cases where the date of the instruments is necessary. A date can be inserted in the
instrument under Sec 13 of the NIL
- date is necessary to determine the maturity date of the instrument
Sec. 13. When date may be inserted. - 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

PRESUMPTION AS TO DATE
Sec. 11. Date, presumption as to. - Where the instrument or an acceptance or any indorsement
thereon is dated, such date is deemed prima facie to be the true date of the making, drawing,
acceptance, or indorsement, as the case may be

EFFECT OF ANTE-DATING OR POST-DATING

- As provided by Sec 12 of the NIL, the instruments will not be invalid provided that it is not done for
illegal or fraudulent purposes.
- Ante-dating = if the date is earlier than the true date
- Post-dating = if the date is after the true date

Sec. 12. Ante-dated and post-dated. - 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 thereto as of the date of delivery.

- Delivery is required. The title can be acquired as to the delivery date.

- Absence of place drawn or place on where it is payable will not affect the negotiability of an instrument

4.2 ADDITIONAL PROVISIONS

-Sec 5 provides for the Addition al provisions which does not affect negotiability

Sec. 5. Additional provisions not affecting negotiability. - An instrument which contains an order or
promise to do any act in addition to the payment of money is not negotiable. But the negotiable
character of an instrument otherwise negotiable is not affected by a provision which:

(a) authorizes the sale of collateral securities in case the instrument be not paid at maturity; or

(b) authorizes a confession of judgment if the instrument be not paid at maturity; or

(c) waives the benefit of any law intended for the advantage or protection of the obligor; or

(d) gives the holder an election to require something to be done in lieu of payment of money.

But nothing in this section shall validate any provision or stipulation otherwise illegal.

COLLATERAL
- if an obligation is secured by a collateral, then it is not considered as conditional. What is only
prohibited is that it shall not be subject to the provisions of a separate contract.

CONFESSION OF JUDGEMENT
- stipulation allowing confession of judgement does not affect the negotiability of an instrument. It is
considered as void for being contrary to public policy.

Cognovit Actionem – written confession by defendant acknowledging his indebtedness to the plaintiff.
Relicta Verifacationem – confession of judgement by withdrawal of the defense.

WAIVER BY OBLIGOR
- waiver of the obligor of the benefit of any law for his advantage or protection does not affect the
negotiability of the instrument.
- can be express or implied.
- can waive all the provision under NIL that he could benefit.

CHAPTER 3 – INTERPRETATION OF INSTRUMENTS

RULES THAT APPLY IN CASE OF AMBIGUITY

- In case of Ambiguity, the provision of Section 17 of the NIL will apply.

Sec. 17. Construction where instrument is ambiguous. - Where the language of the instrument is
ambiguous or there are omissions therein, the following rules of construction apply:

(a) Where the sum payable is expressed in words and also in figures and there is a discrepancy
between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous
or uncertain, reference may be had to the figures to fix the amount;

(b) Where the instrument provides for the payment of interest, without specifying the date from
which interest is to run, the interest runs from the date of the instrument, and if the instrument is
undated, from the issue thereof;

(c) Where the instrument is not dated, it will be considered to be dated as of the time it was issued;

(d) Where there is a conflict between the written and printed provisions of the instrument, the written
provisions prevail;

(e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder
may treat it as either at his election;

(f) Where a signature is so placed upon the instrument that it is not clear in what capacity the person
making the same intended to sign, he is to be deemed an indorser;

(g) Where an instrument containing the word "I promise to pay" is signed by two or more persons,
they are deemed to be jointly and severally liable thereon
(a) if the sum denoted by words is the sum payable. If words are uncertain, then rely on the figures.
(b) interest shall start at the date of the instrument.
(c) if the instrument is not dated, it will be considered as dated at the time it was issued
(d) presumed that the written version represents the real intention of the person writing it.
(e) it is upon the election of the holder to treat it at his option whether a BOE or PN.
(f) signature of person must indicate on what capacity they are signing. If there is doubt then indorser.
(g) if there are two obligors or debtors, then their liability may be jointly or solidary

MARGINAL NOTES
- not covered. Since the figures in the margin of a bill or a note are regarded simply as memorandum or
abridgement for convenience or reference. It forms no part of the instrument so it shall be disregarded.

JOINT OBLIGATION
- obligation or debt is only restricted to their proportionate share. Liability is limited for his/her part only
and not to the whole amount.

JOINT AND SEVERAL OBLIGATIONS (SOLIDARY) (1207)

- all the persons are bound ang can be made liable and to comply with the entire obligation. Any one can
be pursued for the collection of the entire obligation.

OTHER RULES
- if there is ambiguity. The ambiguity should be construed against the party who caused the ambiguity.
- between two innocent persons, one must suffer the consequence of a breach of trust. The one who
made it possible by act of confidence must bear the loss.
- NIL was enacted for the purpose of facilitating and not hindering transactions in commercial paper.
Hence, it shall not be tampered with haphazardly or lightly nor brushed aside in order to meet the
necessities of a single case.