THE NEGOTIABLE INSTRUMENTS LAW

INTRODUCTION

I- Historical background

(1) U.S. Uniform Negotiable Instruments Act. — Our law is patterned with very slight modifications
after the Uniform Negotiable Instruments Act of the United States of 1896 drafted by the National Conference of
Commissioners on Uniform State Laws.

(2) U.S. Uniform Commercial Code. — The Uniform Negotiable Instruments Act has been replaced in part by
Article 3 and in part by other articles of the Uniform Commercial Code (U.C.C.) prepared under the auspices of the
National Conference of Commissioners on Uniform State Law and the American Law Institute.

(3) Act No. 2031. — Our Negotiable Instruments Law was enacted as Act No. 2031 on February 3,1911. It took
effect 90 days after its publication on March 4,1911 in the Official Gazette of the Philippine Islands was completed. The
Act, therefore, took effect on June 2,1911. Since then, our Congress has not seen fit to amend any of its provisions

(4) Code of Commerce. — Prior to the passage of Act No. 2031, the law then existing and in force as to negotiable
instruments could be found in Book II of the Code of Commerce, from Articles 443 to 556. All these articles, with the
exception of those on crossed checks, have been repealed.

II- Function and importance of negotiable instruments

1) As a substitute for money

2) As a medium of exchange for most commercial transactions
3) As a medium of credit transactions

Commercial paper, in its broadest sense, refers to written promises or obligations that arise out of commercial
transactions from the use of such instruments as promissory notes and bills of exchange.

Negotiable instrument is an instrument which possesses all the elements of negotiability provided in Section 1
of the Negotiable Instruments Law.

Characteristics or features of negotiable instruments

(1) Negotiability
— This is that quality or attribute of a bill or note whereby it may pass from hand to hand similar to money.

** Where there is doubt, the courts have adopted the policy of resolving in favor of the negotiability of the instrument.
The purpose obviously is to encourage the free circulation of the negotiable papers because of the admittedly
indispensable function they perform in mercantile business transactions in any given country and the world at large.

(2) Accumulation of secondary contracts

— Once an instrument is issued, additional parties can become involved.

A non-negotiable instrument is an instrument which is not negotiable, that is, an instrument which does not
meet the requirements laid down to qualify an instrument as a negotiable one, or an instrument which in its inception
was negotiable but has lost its quality of negotiability.

*An instrument which is non-negotiable is covered by the general provisions of the Civil Code.
*A non-negotiable instrument may not be negotiated but it may be assigned or transferred, absent an express
prohibition against assignment or transfer written on the face of the instrument.

III- Forms of negotiable instruments

Common Forms:
(a) promissory notes or those in which the issuer has promised to pay.

There are originally two parties in a promissory note. The one who makes the promise and signs the instrument is called
the maker and the party to whom the promise is made or the instrument is payable is called the payee. It could be
payable to bearer or payable to order.
(b) bills of exchange or those in which the issuer has ordered a third person to pay.

A bill of exchange requires in its inception at least three parties — the drawer, the drawee, and the payee — to fill the
legal roles involved. The holder of the instrument may be the payee or, when there has been a negotiation thereof, a
party subsequent to the payee.

Special Forms:

1) certificates of deposits
2) bank notes
3) due bills
4) Bonds
5) Drafts
6) trade acceptances
7) banker's acceptances

** 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.

Notes:
- There is no such thing as an oral negotiable instrument.
- Although the signature of the maker or drawer as a general rule is placed at the lower right hand corner of the
instrument, it may appear in any part thereof whether at the top, middle or bottom or at the margin. What is important
is that the signer has intended to adopt the signature on the instrument as his own and to obligate himself for its
payment. However, an unusual signature may limit the acceptability of an instrument.
- 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 and not a maker or a drawer.

Sec. 2. Certainty as to sum; what constitutes. — 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.

Notes:

- The "sum certain" requirement is met if the holder can determine from the instrument itself the amount he is entitled
to receive at maturity.

- 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.
E.g. “To pay PI,000.00 and also all other sums which may be due to him." or "To pay PI,000.00 and the value of four days
labor.”

- The basic test is whether the holder can determine by calculation or computation the amount payable when the
instrument is due.

- If the instrument provides for the payment of interest without stating the date from which interest is to run, it shall be
computed from the date of the instrument, and if the instrument is not dated, from the issue thereof. If there is a
stipulation for the payment of interest but the rate is not specified, it shall be the legal rate of 6%, now 12%.

- If the interest stipulated is usurious, the instrument is still negotiable because the contract remains valid as to the
principal.
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.

Notes:

- an instrument is not negotiable if it contains a promise or order to pay "if X marries" for X may never marry, or "if
certain property is sold" for the property may never be sold, or "if after two years I am still living" for if the maker should
die within two years, no payment is to be made, or "out of the rent which may be collected from my apartment" for the
rent may not be collected. The promise or order to pay is clearly conditional in nature. It constitutes a simple contract
rather than a negotiable paper.

- Even if the condition or event is very likely to occur, or indeed, even if, in fact, did occur subsequently, the Instruments
remains non-negotiable, although it would, of course, become payable at that time.

- An instrument which mentions a particular fund out of which reimbursement is to be made is negotiable because the
order to pay is not rendered conditional. The drawee is not limited to the money in his hands belonging to the drawer.
E.g. "Pay to the order of B PI,000.00 and reimburse yourself from the rentals of my house."

- An instrument payable out of a particular fund is non- negotiable as it is not payable "in any event" because the
amount to be paid is made to depend upon the adequacy or existence of the fund designated. E.g. "Pay to bearer the
sum of PI0,000.00 out of my money in your hands" or "out of my share of the profits."

- The test of negotiability in every case is said to be whether or not the instrument carries the general personal
credit of the maker or drawer. If it does, the instrument is negotiable; if it carries only the credit of a particular fund,
the instrument is non-negotiable.

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.

Notes:

- It is an essential requisite of a negotiable instrument that it must be payable at all events. Hence, an instrument which
is only payable upon a contingency is not negotiable because it does not appear on its face whether or not it will ever be
paid.

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.

Notes:
- As a general rule, the instrument is non-negotiable if it contains a promise or order to do any act in addition to the
payment of money. E.g. I promise to pay P or order P10,000.00 and (or) to deliver a horse."

The following clauses have been held to render non-negotiable the instrument in which they are stipulated:
(a) "and to pay for taxes assessed upon the note or its mortgage security."
(b) "and to keep free from encumbrance property on which the value of collateral pledged for security of the instrument
depends."
(c) "and a promise to insure the property pledged as security."

- (a) Sale of collateral securities.

"I promise to pay P or order the sum of P30,000.00 on November 25,2010 secured by a ring I delivered to him by way of
pledge and which he could sell should I fail to pay him at maturity."

- (b) Confession of judgment. — 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.

EXAMPLE:
"For value received, I promise to pay P or order the sum of P10,000.00 with interest at 15% per annum and I hereby
authorize my attorney-at-law to appear in any court of record after the obligation becomes due and waive the issuing
and service of process and confess a judgment against me in favor of the holder of the note for such amount as may
appear to be unpaid thereon, together with costs of suit and 12% attorney's fees, and thereupon to waive all errors in
any such proceedings and waive all rights of appeal."

- (c) Waiver of benefit granted by law.

"Three months, after date, I promise to pay to the order of P P10,000.00, waiving the benefit of the homestead and all
other statutory exemptions as to the debt evidenced by this note."

- (d) Election of holder to require some other act.

EXAMPLE:
"I promise to pay P or order P15,000.00 or an air conditioner at the option of the holder."

In this case, the holder has the choice. The instrument is, therefore, negotiable as it is as good as an instrument payable
in money.

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 has 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 statue requiring in certain
cases the nature of the consideration to be stated in the instrument.

Notes:

- The date in a bill or note is not necessary. Hence, the omission of the date will not make the instrument non-
negotiable. In such case, the instrument will be considered to be dated as of the time it was issued. An instrument has
no inception until delivery.

- If there is a date stated, but there is no such date in the calendar, the law will deem the nearest date of the month the
date intended. Thus, a note dated September 31 will be construed as to have been intended for September 30.

- There are, however, cases where the date is necessary to determine the date of maturity as:
(a) where said date is tied to the date of issue (e.g.an undated note is "payable thirty days after date"); or
(b) where interest is stipulated for the purpose of determining when the interest is to run; or
(c) in the case of the promissory note, the date of issue, and in the case of the bill of exchange, the date of the last
negotiation thereof, for the purpose of determining whether a party acted within a reasonable time in making
presentment for payment.
- Instruments may be ante-dated or post-dated.

- An instrument is presumed to have been made where it is dated. A note that does not specify the place of payment is
presumed to be payable at the place of residence of the maker. If the place of execution or payment is not stated, it is
presumed to be the maker's or drawer's place of business or his home.

- The law does not require that payment should be made in legal tender. It includes any particular kind of current
money or foreign money which has fixed value in relation to our money. It has been held that an instrument payable in
"currency" or "in current funds" or "current bank notes" constitutes good commercial paper and are really payable in
money.

Section 7: When an Instrument is Payable on Demand

An instrument is payable on demand when it meets any of the following criteria:

1. It is expressly stated to be payable on demand.

o Example: "Pay to bearer on demand ₱20,000."
2. No time for payment is specified.
o If an instrument does not mention a due date, it is presumed to be payable on demand.
3. It is a check.
o By default, a check is always payable on demand, meaning the payee can cash it immediately.

Effect of Payability on Demand:

 The holder can present the instrument for payment immediately.

 There is no maturity date required.

Section 8: When an Instrument is Payable to Order

An instrument is payable to order when it is made payable to a specific person or to his/her order. This
means that the payee must endorse the instrument before transferring it.

Conditions for Payability to Order:

1. It must contain the phrase "to the order of" a specific person.
o Example: "Pay to the order of Maria Santos ₱15,000."
2. If it is payable to a person but does not include “bearer,” it is treated as an order instrument by default.
o Example: "Pay to Juan Dela Cruz."

Effect of Being Payable to Order:

 The payee must endorse the instrument to transfer ownership.

 It provides greater control over who can receive payment.

Section 9: When an Instrument is Payable to Bearer

An instrument is considered payable to bearer when it does not specify a particular payee or allows
unrestricted transferability. The law identifies five instances where this applies:

1. Expressly payable to bearer – The instrument explicitly states that it is payable to "bearer" or "cash."
o Example: "Pay to bearer the sum of ₱10,000."
2. Payable to a named person or bearer – If the instrument names a payee but also includes the term "or
bearer," it is still treated as payable to bearer.
o Example: "Pay to Juan dela Cruz or bearer."
3. Payable to a fictitious or non-existent person – If the instrument is payable to a person who does not
exist or is fictitious, it is treated as a bearer instrument.
o Example: A company issues a check payable to a fake name.
4. Payee’s name is left blank – When the payee's name is not written, it becomes a bearer instrument.
 o Example: "Pay to __________ (blank)."
5. Issued in a form that makes it payable to cash – If the instrument is worded in a way that does not
specify a payee, it is payable to bearer.
o Example: "Pay to cash ₱5,000."

Effect of Being Payable to Bearer:

A bearer instrument can be transferred by mere delivery without requiring endorsement, making it highly negotiable.

Section 10: TERM USED

Substance criterion of negotiability.

It is advisable in most cases to conform to the forms prescribed by law in order to avoid uncertainty. However,
it is not required to use the exact words of the law.

 Clear intention of the parties. — The substance of the transaction rather that its form is the criterion of
negotiability.
 Use of foreign language. —An instrument may be negotiable though written in a foreign language,
 Mere defect in language or grammatical error. — This does not destroy negotiability Thus, the words
"himself order" may be construed as "himself or order."

Section 11: Date.

Presumption as to date.
(1) Date of Instrument, acceptance, or any indorsement. — If the instrument bears a date, it
is presumed that said date is the date when it was made or drawn.
(2) (2) Evidence of a different date. — He who claims that some other date is the true date
has the burden to establish such claim.

Section 12: Ante-Dating and Post-Dating

An instrument may be:

 Ante-dated – Issued with an earlier date than its actual creation.

 Post-dated – Issued with a future date, meaning it cannot be cashed until that date.

Both are allowed unless used for fraudulent purposes.

An example of illegal ante-dating is to conceal the charge of usurious interest.

An example of illegal post-dating is to issue a post-dated check in payment of an obligation because of

insufficiency of funds without bona fide intention to cover the amount of the check.

Section 13: When date may be inserted.

 Two cases. —This section which authorizes the holder to put a date on an instrument,
refers to two cases, namely:
 where an instrument is payable at a fixed period after date but is issued undated;
and
 where an instrument is payable at a fixed period after sight but the acceptance is
undated.
 Date of issue or acceptance to be specified. — A holder may insert the true date of issue
or acceptance, determining when the instrument is payable. Specifying the date is
essential to establish the maturity date; without it, the due date remains uncertain.
 Application to other cases — Undated demand instruments are due immediately, so this
rule does not apply. For bills payable after sight, the issue date isn’t needed, but the
acceptance date must be inserted to determine maturity.
Effect of insertion of wrong date
If someone knowingly inserts a wrong date in an undated instrument, it invalidates the instrument for them and
those claiming under them. However, a holder in due course can enforce it, and the inserted date is considered
valid.
Section 14: Incomplete but delivered instruments.

The section describes three important aspects:

1. Incomplete Instruments and Authority to Complete

o If an instrument is missing a material detail (e.g., amount, date, payee), the holder has the prima facie authority to
complete it.
o A person signing a blank paper and handing it over authorizes the receiver to convert it into a negotiable
instrument.
2. Conditions for Enforcing the Instrument
o The instrument must be completed strictly according to the authority given.
o It must be filled up within a reasonable time.
o If these conditions are not met, parties who signed before completion may not be liable.
3. Protection of a Holder in Due Course
o Even if the instrument was not completed correctly, a holder in due course (a person who obtains the instrument
in good faith and for value) can still enforce it.
o The instrument is valid and effective in the hands of a holder in due course.

Example 1: Valid Completion

 A issues a promissory note to B but leaves the amount blank.

 A verbally authorizes B to fill in ₱10,000.
 B fills in ₱10,000 and presents it to A for payment.
 Since B acted within his authority, A must pay.

Example 2: Unauthorized Completion

 A signs a blank check and gives it to B, asking him to fill it with ₱5,000.
 B, however, fills in ₱50,000 instead.
 If A can prove that B exceeded his authority, A may refuse to pay.

Example 3: Protection of a Holder in Due Course

 Using the previous scenario, if B negotiates the ₱50,000 check to C, and C is a holder in due course, A must pay C.
 C is protected because he obtained the check in good faith.

5. Importance of Section 14

 Protects persons who issue incomplete instruments by setting limits on their completion.
 Encourages caution when signing blank instruments.
 Ensures smooth negotiability while protecting holders in due course.
 Balances the rights of issuers and third-party holders.