Negotiable Instruments

Sundiang Aquino Reviewer, 2013 ed.

What is a negotiable instrument?
What is a negotiable instrument?
It is a written contract for the payment of money which is intended as a substitute
for money and passes from one person to another as money, in such a manner as
to give a helder in due course the right to hold the instrument free from defenses
available to prior parties. The instrument must comply with the Section 1 of the
Negotiable Instruments Law (NIL for short) to be considered negotiable.
Requisites of negotiability
Requisites of negotiability.
A. 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 bearer; and
E. When the instrument is addressed to a drawee, he must be named or
otherwise indicated with reasonable certainty.

(WUPOA)
What does negotiation mean?
What does negotiation mean?
The transfer of an instrument from one person to another in such a manner as to
constitute the transferee a holder thereof. A holder is the payee or indorsee of a
bill or note who is in possession of it, or the bearer thereof (Secs. 30 and 191, NIL)
How is negotiability of an instrument determined?
How is negotiability of an instrument determined?
In determining the negotiability of an instrument, consider the instrument in its
entirety and only what appears on its face. It must comply with the requirements
under Section 1 of the NIL (Caltex Phils. v. CA, 212 SCRA 448)
When does negotiability end?
When does negotiability end?
Section 47 of the NIL provides that an instrument negotiable in its origin continues
to be negotiable until:

1. It has been restrictively indorsed; or

2. Discharged by payment or otherwise.

Note however, that restrictive indorsement makes the instrument non-negotiable

only if it is the first type - it prevents further negotiation of the instrument - and not
the two other types (constitute the indorsee the agent or trustee).
Applicability of the NIL
Applicability of the NIL
A. The provisions of the NIL can be applied only to negotiable instruments. If the
instrument is not negotiable , the pertinent provisions of the Civil Code or
pertinent special laws should apply (GSIS v. CA, 170 SCRA 533 [1989];
Kauffman v. PNB, 42 Phil. 182 [1921]).
B. The NIL can be applied but only by analogy if the instrument is not negotiable
if there is no law that can be applied (Borromeo v. Sun, 317 SCRA 176
[1999]).

Decisions of the courts in the United States and in England based on the
American Uniform Negotiable Instruments Law and the Bills of Exchange Act of
1882 can be applied in this jurisdiction because those foreign laws served as
bases of NIL.
What are the functions of a negotiable instrument?
What are the functions of a Negotiable Instrument?
A. It operates as a substitute for money.
B. It is a means of creating and transferring credit.
C. It facilitates the sale of goods.
D. It increases the purchasing medium in circulation.
Is a negotiable instrument LEGAL TENDER?
Is a negotiable instrument LEGAL TENDER?
Section 53 of the NCBA, RA 7653, provides that only notes and coins issued
bythe Banko Sentral ng Pilipinas are considered legal tender.

Section 60 of the same law expressly provides that checks are not legal tender.
Section 60 provides checks representing demand deposits do not have legal
tender power and their acceptance in the payment of debts , both public and
private, is at the option of the creditor: Provided, however, That a check which has
been cleared and credited to the account of the creditor shall be equivalent to the
creditor of cash in an amount equal to the amount credited to his account.
When are coins considered legal tender?
When are coins considered legal tender?
Pursuant to Section 52 of RA 7653 and BSP Circular No. 537, Series of 2006, the
maximum amount of coins to be considered as legal tender is adjusted as follows:

a. One thousand pesos for denominations of 1-Peso, 5-Peso and 10-Peso

coins; and
b. One hundred pesos (P100.00) for denominations of 1-centavo, 5-centavo,
10-centavo, and 25-centavo coins.
What are the two important features of a Negotiable
Instrument?
What are the two important features of a negotiable
instrument?
1. NEGOTIABILITY
2. ACCUMULATION OF SECONDARY CONTRACTS
What is negotiability?
What is negotiability?
It is that attribute or property whereby a bill or note or check may pass from hand
to hand similar to money, so as to give the holder in due course the right to hold
the instrument and to collect the sum payable for himself free from defenses
Explain Accumulation of Secondary Contracts.
Explain Accumulation of Secondary Contracts.
Secondary contracts are picked up and carried along with them as they are
negotiated form one person to another, or in the course of negotiation of a
negotiable instrument, series of juridical ties between the parties thereto arise
either by law or by privity.
What are the kinds of negotiable instruments?
What are the kinds of negotiable instruments?
1. Bill of Exchange
2. Promissory Note
What is a bill of exchange?
What is a bill of exchange?
A bill of exchange 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, NIL).
What is a promissory note?
A negotiable promissory note is an unconditional promise in writing made 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 to bearer. Where a
note is drawn to the makers own order, it is not complete until indorsed by him
(Sec. 184, NIL)
What are the kinds of Bills of Exchange?
What are the kinds of Bills of Exchange?
1. Draft
2. Inland and Foreign Bill
3. Time Draft
4. Sight or Demand Draft
5. Trade acceptance
6. Bankers acceptance
7. Check
What is a draft?
What is a draft?
Used synonymously with bill of exchange although it normally refers to a bill of
exchange used in documentary exchange like letters of credit transactions.
What is an Inland or Foreign Bill?
What is an Inland and Foreign Bill?
An inland bill is a bill which is, or on its face purports to be both drawn and payable
within the Philippines. Any other bill is a foreign bill.
What is a Time Draft?
What is a Time Draft?
Draft that is payable at a fixed date.
What is a sight or demand draft?
What is a Sight or Demand Draft?
Draft that is payable when the holder presents it for payment.
What is a Trade Acceptance?
What is Trade Acceptance?
Bill that is used in contracts of sale where the seller as drawer orders the buyer
(as drawee) to pay sum certain to the same seller (payee).
What is Bankers Acceptance?
What is a Bankers Acceptance?
A time draft across the face of which the drawee has written the word accepted.
What is a Check?
What is a check?
A bill of exchange drawn on a bank payable on demand.
What are the kinds of Promissory Notes?
What are the kinds of Promissory Notes?
1. Certificate of deposit
2. Bonds
3. Debenture
What is a Certificate of Deposit?
What is a Certificate of Deposit?
A form of promissory note which is a written acknowledgment of a bank of its
receipt of a certain sum with a promise to repay the same.
What is a bond?
What is a Bond?
A certificate or evidence of a debt on which the issuing company or governmental
body promises to pay the bondholders a specified amount of interest for a
specified length of time, and to repay the loan on the expiration date.
What is a Debenture?
What is a Debenture?
A promissory note or bond backed by the general credit of a corporation and
usually not secured by a mortgage or lien on any specific property.
When can a bill of exchange be treated as a
promissory note?
When can a bill of exchange be treated as a
promissory note?
Instances when a bill may be treated as a promissory note by the holder (Secs.
17[e] and 130, NIL).

A. The drawer and the drawee are the same person;

B. The drawee is a fictitious person;
C. The drawee has no capacity to contract;
D. The instrument is so ambiguous that there is doubt whether it is a bill or note.
Negotiable Promissory Note v. Bill of Exchange
Negotiable Promissory Note v. Bill of Exchange
Promissory Note Bill of Exchange

- Unconditional Promise - Unconditional Order

- Involves 2 parties - Involves 3 parties
- Maker primarily liable - Drawer secondarily liable
- Only one presentment (for - Generally, 2 presentments:
acceptance and for payment
payment)
Bill of Exchange v. Check
Bill of Exchange vs. Check
ORDINARY BILL OF EXCHANGE CHECK

- Not drawn on a deposit. It is not - It is necessary that a check is drawn

necessary that a drawer of BOE on a deposit. Otherwise, there would
should have funds in the hands of be fraud.
the drawee.
- Death of the drawer of a BOE with - Death of the drawer of a check, with
the knowledge by the bank, revokes
the knowledge of the bank, does
the authority of the banker to pay.
not revoke the authority of the
banker to pay.
- May be presented for payment - Must be presented for payment within
within a reasonable time after its a reasonable time after its issue (Sec.
last negotiation (Sec. 71). 186).
Are the following commercial papers negotiable
instruments under the NIL?
1. A crossed check
2. A trade acceptance
3. A money order
4. A warehouse receipt
5. Pawn ticket
6. Treasury warrant
7. Bill of lading
Crossed check
Usually negotiable as it normally complies with the requirements under Section 1,
NIL, but issued for a special purpose and can be negotiated only once.
Trade Acceptance
Negotiable, it is a Bill of Exchange addressed by the seller of the goods to the
buyer. However, Section 1 must be complied with.
Money Order
Non-negotiable as it is governed by postal rules and regulations which may be
inconsistent with the NIL and it can only be negotiated once.
Warehouse Receipt
Not negotiable under the NIL for the same reason as Bill of Lading
Pawn Ticket
Non-negotiable, it does not represent money but the pawned articles.
Treasury Warrant
Non-negotiable under the NIL, it represents goods, not money.
Bill of Lading
Not negotiable under the NIL, it is an evidence of ownership of goods, not money.
Trust Receipt
Not negotiable under the NIL, it is an evidence of ownership of goods, not money.
Who are the persons involved in an NI?
Who are the persons involved in an NI?
1. Maker
2. Payee
3. Drawer
4. Drawee
5. Acceptor
6. Holder
7. Referee in case of need
Who is the Maker?
Maker
The person who makes a promissory note and promises to pay the amount stated
therein.
Who is the Payee?
Payee
The obligee, that is, the person who, by the terms of the note or the bill, is to
receive payment.
Who is the Drawer?
Drawer
The person who draws the bill of exchange and orders the drawee to pay a sum
certain in money.
Who is the Drawee?
Drawee
The person to whom the order to pay is addressed in a bill of exchange.
Who is the Acceptor?
Acceptor
A drawee who accepts the order to pay made by the drawer. It is only when a
drawee becomes an acceptor tha the is primarily liable.
Who is a Holder?
Holder
The person who is in possession of a bearer instrument or an indorsee of an order
instrument or an indorsee of an order instrument who is in possession thereof. A
holder is the obligee, a person who can enforce payment of the instrument.
Who is a Referee in case of need?
Referee in case of need

A person who may be designated in the instrument as the person who may be
resorted to by the parties in case of dispute.
What are the distinctions between a negotiable
instrument and non-negotiable instrument?
Distinctions between negotiable instruments and
non-negotiable instruments.

A. Only negotiable instruments are governed by the NIL. If an instrument is not

negotiable, the NIL does not apply. Application of the NIL to non-negotiable
instruments is only by analogy.
Distinctions between negotiable instruments and
non-negotiable instruments.

B. Negotiable instruments can be transferred by negotiation or by assignment.

Non-negotiable instruments can be transferred only by assignment.
Distinctions between negotiable instruments and
non-negotiable instruments.

C. The transferee of a non-negotiable instrument can never be a holder in due

course but remains to be an assignee. A transferee of a non-negotiable instrument
can never be a holder in due course but remains to be an assignee. A transferee
of a negotiable instrument can be a holder in due course if all the requirements
under Section 52 of the NIL are complied with.
Distinctions between negotiable instruments and
non-negotiable instruments.

D. Since the transferee of a non-negotiable instrument cannot be a holder in due

course, all defenses available to prior parties may be raised against the last
transferee.
Distinguish Negotiability from Assignability
Distinguish Negotiability from Assignability
a. Assignability pertains to contracts in general, negotiability pertains to
negotiable instruments.
b. One who takes an instrument by assignment takes the instrument subject to
the defenses obtaining amount the original parties, whereas a person, who
takes the instrument by negotiation, takes it free from personal defenses
available among the parties.
What are the requisites of 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.
IN WRITING AND SIGNED BY THE MAKER OR
DRAWER

What constitutes must be in writing and signed by

the maker or drawer?
Must be in writing
May be printed, in ink or in pencil, and it may be written in any material that
substitutes paper like cloth, leather, or parchment. Section 191 of the NIL provides
that the word written includes printed, and writing includes print.
Signed by the maker or drawer
The signature may be in ones handwriting, printed, engraved, lithographed, or
photographed so long as they are adopted as the signature of the signer. What is
important is that the maker or the drawer used what he affixed as his own
signature for authentication.
PROBLEM Page 15
Juan Cruz borrowed P1,000.00 from Pedro Santos as evidenced by a promissory
note executed by X as maker. All other requisites of negotiability are present in the
note except that Juan Cruz did not affix his usual signature thereon. As Juan was
ailing at that time, he was only able to put X in the blank space meant for the
signature of the maker. Is the requisite that the instrument must be signed by the
maker complied with?
Answer Page 15
Yes. The letter X is sufficient to comply with the requirement that the instrument
must be signed by the maker. It appears from the problem that such letter was
adopted by Juan Cruz with the intent to authenticate the instrument. It is not
necessary that the signature is the usual signature of the maker.
IT MUST CONTAIN AN UNCONDITIONAL
PROMISE OR ORDER TO PAY A SUM CERTAIN
IN MONEY

Promise or Order to Pay

Promise or Order to Pay
The promise in a promissory note is the undertaking made by the maker to pay a
sum certain in money to the payee or the holder. The order in a bill is a
command made by the drawer addressed to the drawee ordering the latter to pay
the payee or the holder a sum certain in money.
The Promise or Order to Pay
The word promise or order need not appear in the instrument to satisfy the
requirements of Section 1(b) of the NIL. Examples: (1) An acknowledgment may
become a promise by the addition of words by which a promise of payment is
naturally implied, such as, payable, payable on a given day, payable on
demand, paid when called for;
The Promise or Order to Pay
Due A.B. Or order US$325, payable on demand, or, I acknowledge myself to be
indebted to the order of A in US$109, to be paid on demand, for value received,
or, I.O.U. US$85 to be paid on May 5th, are held to be promissory notes,
significance being given to words of payment as indicating a promise to pay.
(Jimenez v. Bucoy, 103 Phil. 40 [1958]).
Promise or Order to Pay Must be Unconditional
Promise or Order to Pay Must be Unconditional
An unqualified order or promise to pay is unconditional within the meaning of NIL
though coupled with:

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; or
2) A statement of the transaction which gives rise to the instrument. Example:
An instrument that contains the following, per contract of sale dated Jan. 1,
2003.
What is Conditional?
Conditional
1. An order or promise to pay out of a particular fund;
2. An instrument payable upon a contingency (the happening of the event does
not cure the defect).
Indication of a Particular Fund for Payment vs. Fund
for Reimbursement
Indication of a particular Fund for Payment vs. Fund
for Reimbursement
FUND FOR REIMBURSEMENT INDICATING PARTICULAR FUND

A. 1. The drawee pays the payee A. There is only one act - the
form his own funds afterwards. drawee pays directly from the
particular fund indicated.
2. The drawee pays himself
from the particular fund
indicated.

B. Particular fund indicated is not B. Particular fund indicated is the

the direct source of payment. direct source of payment.
Is a promissory note wherein the maker promises to
pay as soon as his means permit him to do so
negotiable?
Answer:
No. The phrase as soon as his means permit him to do so renders the promise
conditional, although under the Civil Code, it may be considered as an obligation
with a period.
PROBLEM Page 17
A treasury warrant was issued by Mr. BA in his capacity as disbursing officer of
the Food Administration, a government instrumentality. The warrant states that it is
payable for additional cash advances for the Food Program Campaign in La
Union and the amount stated therein is payable from the appropriation for Food
Administration. The warrant is now in the hands of Mr. BA who claims to be a
holder in due course. Can BA be considered a holder in due course?
ANSWER Page 17
Mr. BA cannot be considered a holder in due course because he is not even a
holder of the warrant. He cannot be holder because the warrant is not negotiable.
The promise to pay is conditional because the sum payable out of a particular
fund, that is, the appropriation for food administration (Benjamin Abubakar v. The
Auditor General, G.R. No. L-1405, July 31, 1948, 31 Phil 359).
PROBLEM Page 18
A bookstore received five postal money orders totalling P1,000.00 as part of sales
receipts, and deposited the same with A bank. A day after, the bank tried to clear
them with the Bureau of Posts. It turned out, however, that the postal money
orders were irregularly issued, thereby prompting the Bureau of Posts to serve
notice upon all banks not to pay orders if presented for payment. The Bureau of
Posts further informed the bank that the amount of P1,000.00 had been deducted
from the banks clearing account for the same amount. A complaint was filed by
the bookstore against the Bureau of Posts and the bank for the recovery of the
sum of P1,000.00 which however, was dismissed by the trial court. The bookstore
appealed contending that postal money orders are negotiable instruments and
that their nature could not have been affected by the notice sent by the Bureau of
Posts to the banks. How would you resolve the controversy?
ANSWER Page 18
The bookstores contention is untenable. Postal money orders are not negotiable
instruments. Postal money orders are not negotiable instruments. Postal money
orders are under the restrictions and limitations of the postal laws. Hence, they do
not contain an unconditional promise or order required by Sections 1 and 3 of the
NIL (1980 Bar; Philippine Education Company, Inc. v. Mauricio A. Soriano, et al.,
G.R. No. L-22405, June 30, 1971, 39 SCRA 587).
What does PAYABLE IN A SUM CERTAIN IN
MONEY mean?
Legal Tender
PAYABLE IN SUM CERTAIN IN MONEY
Legal Tender

A. Money need not be legal tender. An instrument is still negotiable although

the to be paid is expressed in currency that is not legal tender so long as it is
expressed in money (PNB v. Zulueta, 101 Phil. 1071). Example: payable in
Yen. Under RA 8183, the agreement to pay in foreign currency is valid.
What does PAYABLE IN A SUM CERTAIN IN
MONEY mean?
Deliver Something
Deliver something in lieu of money
If the obligor like the maker is given the option to deliver something in lieu of
money, the instrument is not negotiable (Sec. 5, NIL). Example: A note where the
maker promises to deliver P1,000.00 or a sack of rice at his option.
What does PAYABLE IN A SUM CERTAIN IN
MONEY mean?
Requires something to be done
Requires something to be done
If the instrument gives the holder an election to require something to be done in
lieu of payment of money, the instrument is still negotiable (Sec. 5 [d]).

Example: Where the maker promises to pay P1,000.00 or a sack of rice at the
option of the holder.
What does PAYABLE IN A SUM CERTAIN IN
MONEY mean?
Mathematical Computation
Requires Mathematical Computation
A sum is certain within the contemplation of Section 1(b) of the NIL if the amount
that is to be unconditionally paid by the maker or drawee can be determined on
the face of the instrument even if it requires mathematical computation.
What does PAYABLE IN A SUM CERTAIN IN
MONEY mean?
Although to be paid...
The sum payable is a sum certain within the meaning of this act, although it is to
be paid (Sec. 2, NIL):

1. With interest; or
2. By stated installments; or
3. By stated installments, with a provision that, upon default in payment of any
installment or of interest, the whole shall become due; or
4. With exchange, whether at a fixed rate or at the current rate; or
5. With costs of collection or an attorneys fee, in case payment shall not be
made at maturity.
What does PAYABLE IN A SUM CERTAIN IN
MONEY mean?
Stated Installments
Stated Installments
The dates of each installment must be fixed or at least determinable and the
amount to be paid for each installment must be stated.

Example:

The instrument is not negotiable if payable in 5 installments in the amount of

P1,000.00 per installment without stating the dates of each installment.
PAYABLE ON DEMAND OR AT A FIXED OR
DETERMINABLE FUTURE TIME
What does payable on demand mean?
Payable on demand

The instrument should be paid the moment it is presented for payment. An

instrument is payable on demand (Sec. 7, NIL):

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

presentation; or
2. In which no time for payment is expressed; and
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.
PAYABLE ON DEMAND OR AT A FIXED OR
DETERMINABLE FUTURE TIME
What does payable on a determinable future time
mean?
Payable at a determinable future time
An instrument is payable at a determinable future time if it is expressed to be
payable (Sec. 4, NIL);

1. At a fixed period after date or sight. Example: twenty (20) days after date.
2. On or before a fixed or determinable future time specified therein. Example:
payable on or before Jan. 5, 2006.
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. Example:
payable within five (5) days from death of Mr. X.
What is an ACCELERATION CLAUSE?
Acceleration Clause
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, NIL).
What is an INSECURITY CLAUSE?
Insecurity Clause
Provisions in the contract which allow the holder to accelerate payment if he
deems himself insecure. The instrument is rendered non-negotiable.
What is an EXTENSION CLAUSE?
Extension Clause
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 after a
specified act or even.

Example: An instrument is still negotiable if it is payable two (2) years from date
subject to extension for another (1) year at the option of the maker.
PAYABLE TO ORDER OR BEARER
Payable to a specified person or entity
Payable to a specified person or entity
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.
PAYABLE TO ORDER OR BEARER

Is a certificate of time deposited wherein it is stated:

This is to certify that bearer has deposited x x x,
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 Section 27 of the NIL or a pledgee under the Civil Code.
When is an instrument payable to bearer? (Sec. 9,
NIL)
When is an instrument payable to bearer?
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
(Example: pay to cash); or
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.
What are ORDER INSTRUMENTS?
There are only two (2) ways by which an instrument can be made payable to order
under Section 8 of the NIL. The instrument can either be payable to the order of a
specified person (i.e. pay to the order of Juan De La Cruz) or to a specified person or
his order (pay to Juan De La Cruz or order).

Section 8 of the NIL likewise identifies the persons 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 several payees; or
6. The holder of an office for the time being.
PROBLEM Page 23
Determine if the following instrument is negotiable: FOR VALUE RECEIVED, I/we
jointly and severally promise to pay to the IT Corporation, the sum of ONE
MILLION NINETY THREE THOUSAND SEVEN HUNDRED EIGHTY NINE
PESOS & 71/100 only (P1,093,789.71), Philippine Currency, the said principal
sum, to be payable in 24 monthly installments starting July 15, 1978 and every
15th of the month thereafter until fully paid...
ANSWER Page 23
The note is not negotiable because it is not payable to order or to bearer. It is
payable to a specified person (Consolidated Plywood Industries, Inc., et al. V. IFC
Leasing & Acceptance Corporation, G.R. No. L-72593, April 30, 1987, 149 SCRA
448, 4588-459.
PROBLEM Page 23-24
ATL drew a check on NOv. 16, 2000 upon C Bank for the sum of P4,000.00
payable to the order of cash. He delivered the check to Mr. LHH on the same day
in exchange for money. LHH gave the money to ATL because the latter
represented that he badly needed the amount but could not withdraw from this
bank because the bank was already closed. ATLs check was later dishonored
because the account on which it was drawn did not have sufficient funds. When
ATL was later prosecuted for estafa under Article 315(d) (2) of the Revised Penal
Code, eh alleged that he is not liable arguing that the check should not have been
presented for payment because he did not indorse the same. Is the argument fo
ATL tenable?
ANSWER Page 23-24
The argument of ATL is untenable. A check that is payable to the order of cash is
a bearer instrument (Sec. 9[d], NIL). Hence, the drawee bank may pay it to the
person presenting it for payment without the drawers indorsement. A check
payable to bearer is authority for payment to the holder. Where a check is in the
ordinary form, and is payable to bearer, so that no indorsement is required, a
bank, to which it is presented for payment, need not have the holder identified,
and is not negligent in failing to do so (Ang Tek Lian v. CA, 87 Phil. 383).
IDENTIFICATION OF THE DRAWEE
IDENTIFICATION OF THE DRAWEE
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 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.
IDENTIFICATION OF THE DRAWEE
A bill may be addressed to more than one drawee jointly, whether they are
partners or not; but not to two or more drawees in the alternative or in succession
(Sec. 128, NIL).

Example: An instrument may be addressed to Juan De La Cruz and Pedro

Santos but not to Juan De La Cruz or Pedro Santos.
What are the OMISSIONS and PROVISIONS that
DO NOT AFFECT NEGOTIABILITY?
Omissions and provisions that do not affect negotiability
The validity and negotiable character of an instrument are not affected by the fact
that (Sec. 6, NIL:

1) It is not dated (date of issuance); or

2) Does not specify the value given, or that any value had been given therefore;
or
3) Bears a seal; or
4) Designates a particular kind of current money in which payment is to be
made;
5) Addressed to more than one drawee jointly.
When may date be inserted by holder?
When date may be inserted by holder
When date is necessary in order to determine the maturity date of the instrument.
Examples: (1) where an instrument expressed to be payable at a fixed period after
date is issued undated; (2) where the acceptance of an instrument payable at a
fixed period after sight is undated.

Note: Under Section 11 of the NIL, 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.
PROBLEM Page 25
Can a bill of exchange or a promissory note qualify as a negotiable instrument if:
(a) it is not dated; (b) or the day and the month, but not the year of its maturity, is
given; (c) or it is payable to cash; (d) or it names two alternative drawees; (e) or it
does not state the place where it is made or payable?
ANSWER Page 25 (a)
Yes. Section 6(a) provides that the negotiability of an instrument is not affected if it
is not dated. The date of issuance is not a requisite of negotiability prosecribed by
Section 1, NIL.
ANSWER Page 25 (b)
No. Absence of the year of maturity affects the negotiability. The evident intent is
to make the instrument payable on a fixed date but the year was omitted. Hence,
the time for payment is not determinable in this case.
ANSWER Page 25 (c)
Yes. Under Section 9(d) of the NIL, an instrument is payable to bearer if the name
of the payee does not purport to be the name of any person. The name of a payee
(cash) is an inanimate object, hence, it is a bearer instrument.
ANSWER Page 25 (d)
No. Section 128 of the NIL provides a bill may not be addressed to two or more
drawees in the alternative or in succession. Otherwise, there is no certainty as to
the person to whom the instrument maybe presented for payment.
ANSWER Page 25 (e)
The negotiability of an instrument is not affected if it does not state the place
where it is made or where it is payable. All that is required under the NIL is
compliance with Section 1 thereof (1988 and 1997 BAR).
ADDITIONAL PROVISIONS
ADDITIONAL PROVISIONS
An instrument is still negotiable even if the following are present (Sec. 5, NIL):

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;
or
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.
PROBLEM Page 26 -27
The manager and treasurer of MORB Company executed and delivered to PNB a
promissory note whereby the company promises to pay to the order of PNB the
amount of P61,000.00. The note contains the following stipulations: Without
defalcation, value received; and do hereby authorize any attorney in the
Philippines, in case this note be not paid at maturity, to appear in the name and
confess judgment for the above sum with interest, cost of suit and attorneys fees
of ten percent (10%) for collection, a release of all errors and waiver of all rights to
inquisition and appeal, and to the benefit of all laws exempting property, real or
personal, from levy or sale. MORB claims that the instrument is not negotiable
because the above stipulations are invalid. Is MORB correct?
ANSWER Page 26 - 27
The negotiability of the instrument is not affected by the stipulations. Although
MORB is correct in stating that the stipulations are void, it is still negotiable if all
other requirements of Section 1 are present. They are in the nature of stipulations
authorizing confession of judgment which is considered void for being against
public policy in this jurisdiction. However, Section 5 of the NIL provides that the
negotiable character of an instrument otherwise negotiable is not affected by a
provision which authorizes confession of judgment if the instrument be not paid at
maturity. In other words, only the stipulation is avoided (Philippine National Bank
v. Manila Oil Refining & By-Products Co., 43 Phil. 444).
TRANSFER AND NEGOTIATION
Transfer & 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 a

holder and he merely steps into the shoes of the transferor (Salas v. CA, G.R.
No. 76788, Jan. 22, 1990). Any defense available against the transferor is
available against the transferee. Example: Where the instrument that is
payable to order was merely delivered without indorsement.
ISSUANCE
Issuance
Issue is the first delivery of the instrument complete in form to a person who takes it as a
holder (Sec. 191, NIL).

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.
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 (De la Victoria v. Burgos, 245 SCRA 374 [1995])
NEGOTIATION
Negotiation

An instrument is negotiated when it is transferred from one person to 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.
BEARER INSTRUMENT ALWAYS A BEARER
INSTRUMENT
Bearer instrument always a bearer instrument
Where an instrument, payable to bearer, is indorsed specially, it may nevertheless
be further negotiated by delivery; but any person indorsing specially is liable as
indorser to only such holders as to make title through his indorsement (Sec. 40,
NIL).
PROBLEM Page 29
Richard Clinton makes a promissory note payable to bearer and delivers the same
to Aurora Page. Aurora Page, however, indorses it to X in this manner:

Payable to X. SIgned: Aurora Page

Later, without indorsing the promissory note, X transfers and delivers the same to
Napoleon. Richard Clinton subsequently dishonors the note. May Napoleon
proceed against Richard Clinton for the note?
ANSWER Page 29
Yes, Napoleon may proceed against Richard Clinton. The instrument was
negotiated by delivery to Napoleon. Despite the special indorsement of Ms. Page
it can still be negotiated by delivery because it is originally a bearer instrument
(Sec. 40, NIL). Hence, Napoleon became a holder has the right to enforce the
instrument against the maker, Richard Clinton (1998 Bar).
INCOMPLETE NEGOTIATION OF ORDER
INSTRUMENT
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, NIL).
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.
Incomplete negotiation of order instrument

Example: Mr. M through fraud was induced by Mr. A to issue a negotiable

promissory note payable to the order of Mr. A. The payee, Mr. A delivered the note
to Mr. B on May 3, 2003 without indorsing it. On May 20, 2003, Mr. A, upon Mr.
Bs request, placed his indorsement at the back of the note: Pay to B, Sgd. A. If
Mr. B cannot be a holder in due course because he had knowledge of the defect
of title of Mr. A at the time the negotiation was made complete. He can be a holder
in due course if he had no such knowledge at the time the indorsement was made
on May 20, 2003.
INDORSEMENT
Where indorsement should be placed
Where indorsement should be placed
1) On the instrument itself; or
2) Separate piece of paper attached to the instrument called allonge (Sec. 31,
NIL).
Indorsement (entire instrument)
Indorsement must be of the entire instrument (Sec. 32, NIL). Example: An
instrument for P5,000.00. Exception: When there was previous partial payment.
Indorsement (two or more indorsers severally)

Section 32 of the NIL disallows negotiation to two or more indorsees severally.

Example: Indorsement of a P20,000.00 note that states pay to Jose Cruz,
P15,000.00 and Pedro Santos P5,000.00 is not considered negotiation although it
may be considered assignment.
Kinds of Indorsement