Law on Negotiable Instruments
have been obtained between them.
Part I: Introduction
Applicability of Negotiable Instruments
1. Limited Application- the Negotiable Instruments
Law is only applicable to negotiable instruments laid
down in section 1 of this law.
Functions and Importance of Negotiable Instruments
1. Negotiable instruments are used as a substitute for
money although they do not constitute as legal
tender.
Legal tender – that currency which a debtor can
legally compel a creditor to accept in payment of a
debt in money when tendered by the debtor in the
right amount.
Negotiability – allows an instrument to go from
hand to hand in commercial markets and to take
the part of money in commercial transactions from
all personal defenses available against the original
owner.
A negotiable instrument differs from money,
however, in that the former is valuable/worthless
depending upon the financial liability of the parties
to them.
2. Negotiable instruments constitute the media
exchange for most commercial transaction.
Without negotiable instruments, more money,
either in coins or bills, would be needed in
circulation to take care of the ever-increasing
everyday business transactions.
They are a safe and convenient means of doing
business that eliminate the risk of dealing in cash.
3. Negotiable instruments are used as a medium of
credit transaction.
People without cash in hand are enabled by means
of credit to conduct and carry to completion
business and commercial enterprises.
Checks – commonly used for immediate payment
(i.e. as substitute for money).
Bills of Exchange and Promissory notes are intended
for circulation of credits.
Characteristics and Features of Negotiable Instruments
1. Negotiability – quality/attribute of a bill/note
whereby it may pass from one person to another
like money, to give the holder in due course the
right to collect on the instrument the sum payable
for himself free from any defect in the title of any of
the prior parties or defenses available to them
among themselves.
A bona fide holder, while free from personal
defenses available to prior parties among
themselves, is subject to real defenses that might
Real defenses – those that attach to the instrument
and are available against all holders, whether in due
course or not, but only by the party/parties entitled
to raise them.
Personal defenses – available only against the
holder not in due course who stands in privity with
the party who is entitled to set it up or those who
are not or do not have the rights of a holder in due
course.
2. Accumulation of secondary contracts – as they are
transferable; additional parties can become
involved.
Forms of Negotiable Instruments
1. Common forms – these are promissory notes, bills
of exchange, and blank checks.
a. Promissory Notes – the issuer has promised
to pay
b. Bills of Exchange – the issuer has ordered a
third person to pay
Checks are also discussed in the law, but they are
really a special from/kind of bill of exchange.
2. Special Types – includes certificates of deposits,
bank notes, due bills, bonds, drafts, trade
acceptances, and banker’s acceptances.
Where the meaning is doubtful, the courts have
adopted the policy of resolving in favor of the
negotiability of the instrument.
Instruments with Limited Negotiability
1. Letter of Credit – a letter from a
merchant/bank/banker in one place, addressed to
another, in another place/country, requesting the
addressee to pay money/deliver goods to a third
party therein named, the writer of the letter
undertaking to provide him the money for the
goods to repay him.
It is essentially a letter requesting one person to
make advances to a third person on the credit of a
writer. It is in favor of a specified person and not to
order.
2. Treasury Warrant – a government warrant for the
payment of money such as that issued in favor of a
public officer/employee covering
payment/replenishment of cash advances for
official expenditures.
3. Postal Money Order – an order for the payment of
money to the payee named therein drawn by one
post office upon another under authority of law.
4. Bill of lading – without an unconditional
promise/order to pay a sum certain in money.
5. Certificate of Stock – a written instrument signed
by a proper officer of a corporation stating that the
person named therein is the owner of a designated
number of shares of its stock.
6. Warehouse receipt – a document of title likewise
without an unconditional promise or order to pay a
sum certain in money.
Chapter I: Form and Interpretation
Section I: Form of Negotiable Instruments
Requisites of Negotiable Instruments
a) It must be in writing and signed by the
maker/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/determinable future time.
d) Must be payable to order or bearer.
e) Where the instrument is a drawee, he must be
named or otherwise indicated therein with
reasonable certainty.
Commercial Paper – written promises/obligations that
arise out of commercial transactions from the use of
such instruments as promissory notes and bills of
exchange.
It is not a commercial paper if it does not arise out of
commercial transactions.
Negotiable instrument – a contractual obligation to pay
money.
Determinants of the Negotiability of an Instrument
1. The whole of an instrument;
2. Only what appears on the face of the instrument;
and
3. The provisions of the Negotiable Instruments law
especially Section 1 thereof which fully define the
requirements an instrument must meet to be
negotiable.
The requirements indicated in subsections (a) to (d) are
necessary for a promissory note to be negotiable, while
subsections (a) through (e) are necessary for a bill of
exchange to be negotiable.
The general rule is that the signature of the
maker/drawer appears on the lower right-hand corner
of the negotiable instrument, however, it may appear in
any part thereof whether at the top, middle or bottom
or at the margin.
Where the genuineness of the signature of the
maker/drawer is denied, the party against whom it
operates must provide some evidence of its invalidity
because the signature is presumed valid.
Money – is the medium of exchange authorized or
adopted by a domestic/foreign government as part of
its currency. It literally means “cash”.
Promissory Notes – an unconditional promise in writing
made by one person to another signed by the maker,
engaging to pay on demand, or at a fixed/determinable
future time, a sum certain in money to order or to
bearer; commonly referred to as “note”.
It may be a demand instrument, but it is commonly a
time instrument.
It is a promissory paper or a “two-party” paper.
Two Parties in a Promissory Note
1. Maker – the one who makes the promise and signs
the instrument.
2. Payee – the party to whom the promise is
made/the instrument is payable.
Indications on a Promissory Note
1. “For value received” – indicated the consideration
given for the note which may be specified.
2. “I promise to pay” – expressed the unconditional
promise to pay.
3. “To the order of/to bearer” – indicates the promise
to pay as ordered/by the command of the payee.
Where no time for payment is expressed, an instrument
is payable on demand.
Bill of Exchange – an unconditional order in writing
addressed by one person to another, signed by the
person giving it, and requiring the person to whom it is
addressed to pay upon demand/fixed/determinable
future time a sum certain in money to order or to
bearer.
If drawn on a bank and payable on demand, the bill is
called a check.
It is an order paper or a “three-party” paper.
Three Parties in a Bill of Exchange
1. Drawer – the person who issues and draws the
order bill; gives the order to pay money to a third
party.
2. Drawee – the party upon whom the bill is drawn;
the person to whom the bill is addressed and who is
ordered/expected to pay.
3. Payee – the party whose favor the bill is originally
issued/is payable.
If the drawee accepts the obligation to pay, this person
becomes an acceptor.
Idea and Purpose of a Bill of Exchange
1. Drawer’s funds are in the hands of the drawee
2. The drawee has a liability for non-payment
There must be a reason for the drawee to honor the bill
(e.g. liability, prior agreement).
Section 2: Certainty as to Sum
The amount to be paid must be stated plainly on the
face of the instrument and must be determinable from
the face of the instrument itself without reference to
any outside source.
The basic test of negotiability is whether the holder can
determine by calculation the amount payable when the
instrument is due.
Scenarios as to Certainty that Do Not affect
Negotiability
1. To be paid with interest at a fixed rate.
2. To be paid with interest at increased/reduced rate.
3. To be paid by stated installments
Stated Installments – means the interest of each
installment, and the due date of each installment
must be fixed in the instrument.
4. To be paid by stated installments with acceleration
clause
If a note provides for acceleration at the option of
the holder, the instrument is non-negotiable.
5. To be paid with exchange
Exchange – the charge for the expense of providing
funds at the place where the instrument is payable
to meet the instrument, which is issued at another
place.
Payment in foreign currency does not impair the
negotiability of an instrument.
This subsection is only applicable to instruments
drawn from one country to another.
Under RA No. 8183, every monetary obligation
must be paid in Philippine currency, which is legal
tender in the Philippines.
6. To be paid with costs of collection/attorney’s fee
The stipulation for attorney’s fees may be reduced
by the courts if found
unconscionable/unreasonable.
A transferee acquiring the instrument when it is
overdue would not be a holder in due course and,
consequently, would hold the instrument subject to
defenses as if it were non-negotiable.
Section 3: When Promise is Unconditional
Order – a command/imperative direction.
The use of polite words like “please” do not convert an
order into a request.
Requests do not constitute order.
The note/bill must be payable absolutely.
An instrument indicating from whom the drawee may
call reimbursement does not make the instrument non-
negotiable. This includes the appearance of the
statement of purpose and the collateral securing the
instrument.
An instrument payable out of particular/specified fund
is non-negotiable because the amount to be paid is
made to depend upon the adequacy/existence pf the
fund designated.
The test of negotiability is whether the instrument
carries the general personal credit of the
maker/drawer.
The intention to limit payment to a specified fund must
be made plain. If the language used is
ambiguous/obscure, courts usually decide in favor of
negotiability.
An instrument which contains a direction to debit a
specified account is negotiable because the
promise/order is not also made conditional.
Section 4: Determinable Future Time
Expressly;
1. Payable at a fixed time
2. Payable at a fixed period after sight
After sight – after the instrument is seen by the
drawee upon presentment for acceptance/accepted
by the drawee
3. Payable on or before a determinable future time
4. Payable on the occurrence of a specified event
5. Payable after the occurrence of a specified event
An instrument payable only upon a contingency is non-
negotiable because it does not appear on its face
whether it will be paid or not.
Section 5: Additional Provisions Not Affecting
Negotiability
The general rule is that the instrument is non-
negotiable if it contains a promise/order to do any act
in addition to the payment of money.
Exceptions to the general rule
1. Sale of Collateral Securities
2. Confession by judgement – a written
acknowledgement by the defendant of his
indebtedness/liability to the plaintiff; enables the
holder to obtain a judgment without the delay
usually incident to a lawsuit, as it eliminates the
necessity or a trial.
Warrants of attorney to confess a judgment is not
authorized or contemplated by our law because the
promissor bargains away his right to a day in court.
A confession of judgment is given after the action is
brought to save expenses is valid.
3. Waiver of benefits granted by law
4. Election of holder to require some other act
Section 6: Omissions; seal; particular money
The instrument is deemed negotiable even if
1. It is not dated
The date in a bill/note is not necessary. It shall be
deemed dated as of the time of issuance.
2. Date is not stated in the calendar
If there is a date stated, which is not on the
calendar, the law will deem the nearest date as the
date intended.
Cases wherein the date is necessary
a. Date is tied to the date of issue (e.g. payable
thirty days after date)
b. Interest is stipulated
3. Value is not specified
4. Place of payment is not specified
The presumed place of payment shall be the place
of residence/or business of the maker/drawer.
5. Presence of seal
It is advisable, however, to have a bill/note appear
in a public instrument so that it will be included
among the preferred credits with respect to other
property of the debtor.
6. Designated in a particular kind of current money
payable
Section 7: When Payable on Demand
When a Negotiable Instrument is Payable on Demand
1. It is expressed to be payable on demand/at sight/on
presentation
2. No time is expressed
An overdue instrument is necessarily a demand paper.
Section 8: When Payable to Order
A Negotiable Instrument may be payable to the order
of
1. A payee who is not maker, drawer, or drawee
2. The drawer/maker
3. The drawee
4. Two or more payees, jointly
5. One or more of several payees
6. The holder of an office for the time being
Section 9: When Payable to Bearer
Bearer – the person in possession of a bill/note which is
payable to bearer.
The instrument is payable to bearer when
1. It is expressly stated
2. It is payable to person named therein or bearer
3. It is payable to a fictitious person
Fictitious Person – one who, though named as
payee, has no right to it because the maker/drawer
so intended and it matters not, whether the name
of the payee is used by him be that one living/dead,
never existed.
4. It is payable to order of a non-existing person
5. The name of the payee is not the name of a person
6. The last indorsement is blank
Indorsement in law only refers to negotiable
instruments.
Section 10: Terms, when sufficient
The substance of the transaction rather than its form is
the criterion of negotiability.
A mere defect in language or a grammatical error does
not render an instrument non-negotiable.
Section 11: Date, presumption as to
If the instrument bears a date, it is presumed that said
date is the date when it was made by the maker, drawn
by the drawer, accepted by the drawee, or indorsed by
the payee/holder.
In some cases, the indication of the date is required
(Section 71). (i.e. the promissory note must be
presented for payment within a reasonable time after
its issue, bill of exchange must be presented within
reasonable time after the last negotiation thereof.
Section 12: Ante-dated and Post-dated
Ante-dated – it contains a date earlier than the true
date of its issuance.
Post-dated – it contains a date later than the true date
of its issuance.
Ante-dating/Post-dating an instrument does not render
it invalid/non-negotiable by that fact alone. It may be
negotiated before or after the date given as long as it is
not negotiated after its maturity.
Section 13: When date may be inserted
Two cases wherein date may be inserted by the holder
1. An instrument is payable at a fixed period after date
but is issued undated
2. Where an instrument is payable at a fixed period
after sight but the acceptance is undated
If a holder with knowledge of the true date writes the
wrong date constitutes material altercation. However,
the subsequent holder in due course will regard the
wrong date as the true date.
Section 17: Construction where instrument is
ambiguous
Rules of construction in case of ambiguity
1. Sums expressed in words and figures are different –
the sum expressed in words shall prevail.
2. Words ambiguous/uncertain – reference may be
had to the figures to determine the true amount
3. Date when stipulated interest to run not specified –
date runs from the date of the instrument/date of
issuance.
4. Instrument not dated – It is considered dated as of
the date of issuance
Issue – the first delivery of the instrument complete
in form, to a person who takes it as holder.
5. Written and Printed words in conflict – the words in
writing shall prevail
6. Whether instrument is a bill or a note in doubt – the
holder may treat either at his election
7. Capacity in which person signed in doubt – his is to
be deemed an indorser.
8. Instruments signed by two or more persons – their
liability may be either joint/solidary
Section 18: Liability of a person signing in trade or
assumed name
As a general rule, only persons whose signatures
appear on an instrument are liable thereon.
Exceptions to the general rule
1. Where a person signs in a trade/assumed name
2. The principal is liable if a duly authorized agent
signs on his own behalf
3. In case of forgery, the forger is liable even if his
signature does not appear on the instrument
4. Where the acceptor makes his acceptance of a bill
on a separate paper
5. Where a person makes a written promise to accept
a bill before it is drawn
Section 19: Signature by agent; authority; how
shown
The maker/drawer may sign the instrument personally
or by another duly authorized by him.
Section 20: Liability of person signing as agent
Requisites for an agent to escape liability
1. He is duly authorized
2. He adds words to his signature indicating that he
signs as an agent
3. He discloses his principal
The mere addition of descriptive words will not relieve
the agent of personal liability.
Section 21: Signature by Procuration
Procuration – the act by which a principal gives power
to another to act in his place as he could himself.
The principal is not bound if the agent has exceeded
actual limits of his authority.
Section 22: Effect of Indorsement by Infant or
Corporation
As a general rule, contracts entered into with
incapacitated minors are voidable.
Corporations are not liable on notes in a suit thereon by
an indorsee, where the corporation is without capacity
to make the contract in fulfillment of which they were
executed.
It is incumbent upon the dealer to know the extent of
authority of those that they are in contract with.
Section 23: Forged Signature
Forgery – the counterfeit-making/fraudulent altercation
of any writing
Forgery is a real defense even against holders in due
course.
Forgery must be proven with clear and convincing
evidence.
Cases of forgery in general
1. Promissory Notes
a. Forgery of an indorsement
b. Forgery of the maker’s signature
2. Bill of Exchange
a. Forgery of an indorsement
b. Forgery of the drawer’s signature
i. With acceptance by the drawee
ii. Without such acceptance but still
paid by the drawee
Forgery does not render the instrument inoperative.
Section 24: Presumption of Consideration
Consideration – the immediate, direct or essential
reason which induces a party to enter into a contract
A negotiable instrument must have a
consideration/cause thought it need not be expressly
indicated on the instrument.
Section 25: Value; what constitutes
A valuable consideration need not be adequate. It is
sufficient if it is a valuable one.
Section 26: What constitutes a holder for value
Holder for Value – one who has given a valuable
consideration for the instrument issued/negotiated to
them.
This is with respect to all parties who are/was involved.
Section 27: When Lien on Instrument Constitutes
Holder for Value
One who has taken a negotiable instrument as collateral
security for a debt has a lien on the instrument.
Lien – a right to keep possession of property belonging
to another person until a debt owed to them is
discharged.
Where a holder has lien on instrument
1. Amount of instrument > debt secured – the pledgee
can collect the full value of the instrument and
apply the same to the payment of the debt but the
surplus must be delivered to the pledgor.
2. Amount of instrument < debt secured – the pledgee
is a holder for value of the full amount and may
recover all
3. Party liable has defenses – the pledgee can only
collect to the extent of the amount of the debt. If it
is real defense, the pledgee cannot recover
anything from the party liable.
Section 28: Effect of Want of Consideration
Absence of Consideration – a total lack of any valid
consideration for the contract in consequence of which
the alleged contract must fail. (No recovery)
Failure of Consideration – the failure/refusal of one of
the parties to do, perform or comply with the
consideration agreed upon. (Recovery to the extent of
what was delivered)
Section 29: Liability of Accommodation Party
Accommodation note/bill – one to which the
accommodation party has put their name, without
consideration, for the purpose of accommodating some
other party to use it, and is expected to pay it.
Accommodation Party – one who has signed the
instrument as maker, drawer, acceptor, indorser,
without receiving value thereof, and for the purpose of
lending his name to another party/
Accommodated party – one whose favor a person
without receiving a value, signs an instrument of
lending his credit and enabling said party to raise money
upon it.
Absence of consideration between the accommodation
party and the accommodated party does not, of itself,
constitute a valid defense against a holder for value
even though he knew of it when he becomes a holder.
Section 30: What Constitutes Negotiation
Negotiation – transfer of a negotiable instrument from
one person to another made in such a manner as to
constitute the transferee the holder thereof.
There is no negotiation is the transfer does not make
the transferee the holder of the instrument.
Methods of transfer of a negotiable instrument
1. Issue – already defined.
2. Negotiation – already defined
3. Assignment – the transfer of the title to an
instrument with the assignee generally taking only
such title or rights as his assignor has, subject to all
defenses available against his assignor.
Methods of Negotiation
1. Instruments payable to order
a. Indorsement by the payee/present holder
b. Delivery to the next holder
2. Instruments payable to bearer
a. Delivery
Delivery – transfer of possession, actual or constructive,
from one person to another.
The payment of a check by the drawee bank is not a
negotiation and does not make the bank a holder.
Section 31: Indorsement; how made
Indorsement – the writing of the name of the payee on
the instrument with the intent either to transfer the
title to the same, or to strengthen the security of the
holder by assuming a contingent liability for its future
payment, or both.
Indorsement alone without delivery conveys no title
and creates no holder.
Indorsement is derived from the Latin word indorsa
meaning “writing on the back”.
Where the indorsement is a slip of paper physically
attached to the instrument so as to become part of it,
the paper is known as allonge.
Section 32: Indorsement must be of entire
instrument
The instrument must be delivered to the indorsee and
there can be no partial payment.
An indorsement which implicates to transfer to the
indorsee partially, or which implicates to transfer the
instrument to two or more indorsees severally, does not
operate as a negotiation of the instrument.
If the indorsees are joint or payees are alternative (e.g.
pay A or B), negotiation is valid.
If the instrument is partially paid, it may be indorsed as
to the residue.
Section 33: Kinds of Indorsement
1. As to methods of negotiation
a. Special
b. Blank
2. As to the kind of title transferred
a. Restrictive
b. Non-restrictive
3. As to scope of liability of indorser
a. Qualified
b. Unqualified/general
4. As to presence/absence of limitations
a. Conditional
b. Unconditional
5. Others
a. Joint
b. Successive
c. Irregular/anomalous
d. Facultative
Indorsement cannot negate the negotiability of an
instrument if it satisfies the requisites stated in Section
1.
Section 34: Special Indorsement
Special Indorsement – the name of the payee is
specified
Special and Blank indorsements are unqualified
indorsements.
Forms of Special Indorsement
1. Specifies to whom the instrument is paid
2. Specifies to whose order the instrument is payable
If it is originally payable to order and indorsed by the
payee through special indorsement, the indorsement of
the indorsee is necessary.
If it is originally payable to bearer, it may be negotiated
by mere delivery.
Blank indorsement – specified no particular indorsee.
It consists only of the signature of the payee/indorser.
It may be negotiated by mere delivery.
Section 35: Blank Indorsement
An instrument made payable to bearer by an
indorsement in blank may be converted into an order
instrument by writing over the signature of the indorser
in blank any contract not inconsistent with the
character of the indorsement.
The contract of the blank indorser must not change.
Section 36: When Indorsement is Restrictive.
Restrictive Indorsement – either restricts/prohibits
entirely the further negotiation of an instrument, or
modifies the rights of the holder or the liabilities of the
indorser.
The indorser notifies all prospective holders that the
indorsee has only the authority to deal with the
sinrtument as thereby directed and that the indorsee
has only a restrictive title thereto.
Restrictive indorsement makes the instrument non-
negotiable.
2. Special and Qualified (e.g. Pay to A without recourse
signed P)
3. Special and Conditional (e.g. Pay to A if he marries
before he reaches the age of 25 Signed P)
4. Blank and restrictive (e.g. For collection only signed
A)
5. Blank and Qualified (e.g. Without recourse Signed
A)
6. Blank and Conditional (e.g. Payable upon
completion of my house in Pateros, Metro Manila.
Signed A)
7. Special, Unrestrictive, Unqualified (e.g. Pay to B.
Signed A)
8. And so on.

Three Classes of Restrictive Indorsement Section 40: Indorsement of Instrument Payable to

1. Prohibits further negotiation (e.g. Pay to A only)
2. Constitutes indorsee agent of indorser (e.g.) Pay to
A for collection)
3. Vests title in indorsee for the benefit of the indorser
or a third party (e.g. Pay to A in trust for B)
Bearer
In accordance to section 40, an instrument payable to
bearer is not converted into an order instrument by
special indorsement. The indorser may negotiate
through delivery.

Section 37: Effect of Restrictive Indorsement The indorser indorsing specially is liable only to those
holders who can trace their title to the instrument by a
Rights of Indorsee in Restrictive Indorsement
series of unbroken indorsments from special indorser.
1. May receive payment on the instrument His liability shall be that of a general indorser (Section
2. Sue thereon in his name 66).
3. Negotiate the instrument except when it is prohibited.
This section applies to original bearer instruments only.
Section 38: Qualified Indorsement
Qualified Indorsement – one which constitutes the
indorser a mere assignor of the title to the instrument.

An indorsement may be qualified by adding “without

recourse”.

Recourse – a resort to a person who is secondarily liable

after the default of the person who is primarily liable.

The purpose of qualified indorsement is to transfer title

without guaranteeing payment.

Qualified indorsement does not impair the negotiability

of the instrument.

Section 39: Conditional Indorsement

Absolute indorsement – the indorser binds himself to
pay, upon no other condition than the failure of prior
parties to do so, and of due notice to him of such
failure.

Conditional indorsement – one by which the indorser

imposes some other condition to his liability, or on the
indorsee’s right to collect the proceeds of the
instrument.

A condition on the indorsement does not impair its

negotiability, but a condition appearing on the
instrument itself renders it non-negotiable.

Different Combinations of Indorsements

1. Special and restrictive (e.g. Pay to A only Signed P)