Negotiable Instruments

Promissory Note

Manila, Philippines
September 2, 2019

I promise to pay to the order of Peter Parker the sum of ten thousand Pesos (P10,000.00) on
or before December 31, 2019, at University of Perpetual Help, Biñan City, Laguna.

Sgd. Bruce Banner

a. The place, Manila, Philippines, shows where the contract to pay was executed.
b. The date September 2, 2019 is usually inserted either to determine when the note is
executed or to fix the time when the interest is to run, when the payment for interest is
stipulated.
c. The date of maturity on or before December 31, 2019 indicates the time when the promise
to pay is to be fulfilled. However, if the date of maturity is not indicated, the instrument is
payable on demand.
d. “I promise to pay” consists of an absolute promise to pay. It is not subject to the fulfilment
of a condition.
e. The words “to the order of” means that the promise is to pay as ordered or as commanded
by the payee. But an instrument may be payable to bearer.
f. Peter Parker is the payee. He is the person to whose order or command the money is
promised to be paid.
g. Bruce Banner is the maker of the note. He is the one who promises to pay in the first
instance.
h. The place of payment, University of Perpetual Help, Biñan City, Laguna, indicates where
the note is to be paid. However, this is not necessary. An instrument may be payable in
any other place.
i. The amount “ten thousand pesos” is the sum promised to be paid. It is written in words so
it cannot be easily altered.

Bill of Exchange

Manila, Philippines
September 2, 2019

Thirty days after sight, pay to the order of Bruce Wayne the sum of ten thousand pesos
(P10,000.00), Philippine Currency. Charge the same to the account of:

Sgd. Bruce Banner

To Arthur Curry
1234 Stark Towers

a. The order “pay to” is a command to pay.

b. The signature Bruce Banner is the drawer.
c. Arthur Curry is the drawee. He is the one ordered or commanded to pay a sum certain in
money.
 d. Bruce Wayne is the payee.

Check

Bangko de Mama
Biñan City No. BDM12345

Biñan, Laguna
December 31, 2019

Pay to Diana Prince or order One Thousand Pesos Only. (P1,000.00)

Sgd. Clark Kent

To Arthur Curry
1234 Stark Towers

a. A check is a bill of exchange drawn on a bank payable on demand. It is a special kind of

BOE.
b. It is always drawn on a bank or banker. Whereas, a BOE may or may not be drawn against
a bank.
c. A check is always payable on demand.
d. It is not necessary that a check be presented for acceptance. Checks are not to be
accepted but presented for payment.
e. A check is drawn on a deposit.
f. Death of the drawer of the check, with the knowledge of the banks, revokes the authority
of the banker to pay, while death of the drawer of an ordinary BOE does not.

Illustrations:

Payable to Bearer

Pay to B or bearer P1,000.00.

Sgd. A

To X

Payable to Order of a Specified Person

I promise to pay to the order of B

P1,000.00.

Sgd. A
Payable to a Specified Person or his Order

I promise to pay B or his order

P1,000.00.

Sgd. A

Payable to a Specified Person (Not Negotiable)

I promise to pay B P1,000.00.

Sgd. A

Parties
PN
1. Maker
2. Payee
BOE
1. Drawer
2. Drawee (becomes Acceptor if assents to the order of Drawee)
3. Payee
Others
1. Indorser
2. Indorsee
Indorser and indorsee explained. When an instrument is negotiated, other parties are added to
the instrument. Where the negotiation is completed by delivery, the parties added are the indorser
and the indorsee.
The indorser is the one who negotiates by the indorsement and the indorsee is the one to whom
the instrument is negotiated by the indorsement.
When the payee indorses the bill or note, he becomes the indorser. When the indorsee further
indorses the instrument, he likewise becomes the indorser, and the person to whom he indorses
it is another indorsee.
Payable to Bearer. Where the instrument is payable to bearer it can be negotiated by mere
delivery without necessity of indorsement.
Holder. He is a payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof.
Example:

I promise to pay B or order

P1,000.00.

Sgd. A

Situations:
a. A keeps the note in his cabinet and does not deliver it to B. Is B a holder?
Answer: NO. B is just a payee because he is not in possession of the note.

b. A delivers the note to B. B indorses it to C, but C delivers it to Y. Who is the holder?

Answer: Neither is the holder.

Y is not the holder because while he is in possession of the note, he is no indorsee.

C is not a holder because while he is an indorsee, he is not in possession of the note.

c. Suppose the note is payable to B or bearer and A keeps it in his cabinet. Is B the bearer?
Answer: No, because he is not in possession of the note.

d. But suppose that A delivered the note to Y but not to B. Is Y the bearer?
Answer: Yes, because Y is in possession of the note which is payable to bearer.

How is a bearer instrument negotiated?

If a note is payable to bearer, it may be negotiated by mere delivery, although the law does not
prohibit negotiation.
How is an order instrument negotiated?
An instrument payable to order is negotiated by indorsement completed by delivery. Indorsement
is necessary to make the transferee the indorsee, and delivery is also necessary to place the
transferee in possession of the instrument. Indorsement and delivery must both be done for there
to be a negotiation.
How is indorsement done?
It is effected by writing one’s own name on the back of the instrument or upon a paper attached
thereto, with or without additional words specifying the person to whom or to whose order the
instrument is to be payable whereby one not only transfers one’s full legal title to the paper
transfers but likewise enters into an implied guarantee that the instrument will be duly paid.

I promise to pay P or order P1,000.00.

Issuance by Maker to Payee
Sgd. M

Pay to A. – (A is first indorsee)

Sgd. P (P is indorser – the original payee)

Pay to B. (B is the indorsee and the new payee)

Sgd. A (A is now the indorser)

Illustration of Negotiability
A induces B by fraud to make a Promissory Note payable to the order of A in the sum of P1,000.00
payable on demand. This is fraud in inducement which is a personal defense. If A files an action
against B to recover the amount, B can interpose the defense that he was induced to make the
note by fraud. Hence, A cannot enforce payment.
Suppose that instead of collecting from B, A indorses the note to C who pays P1,000.00 and
acquires the note which made him a Holder in Due Course (Sec. 52). – [C has no knowledge of
the fraud.] If C files an action against B to claim the amount, B cannot interpose the same defense
of fraud because of the attribute of negotiability. Since C validly acquired the instrument, making
him a Holder in Due Course, C can collect the sum payable regardless of the issue between A
and B.

Illustration of Accumulation of Secondary Contracts

A make a note payable to B – this is the primary contract. If B indorses the note to C and delivers
the same, he thereby enters into a contract whereby he binds himself to pay the note to C if A
(Maker) does not pay – this is the secondary contract. If C further negotiates the note to S, he
enters in to a similar contract.
Negotiable Instruments must comply with the requirements of Section 1.
How Signature Written
The signature may be:
a. Printed
b. Typewritten
c. Stamped
d. Engraved
e. Photographed or
f. Lithographed
In such case, it must be shown to have been adopted and used by the party as his signature. The
location of the signature is immaterial.

Mere Authority to Pay for BOE (Not Negotiable)

I hereby authorize you to pay P1,000.00 to the

order of Peter Parker.

Sgd. Bruce Banner

This is not negotiable because it is not an order to pay but a mere authorization to pay.

Words of Equivalent Meaning

Illustrations:

I agree to pay B or order P1,000.00.

This is negotiable because the word agree means a
Sgd. A promise to pay.

Good to B or order P1,000.00.

This is negotiable because the word good implies a
Sgd. A promise to pay.
 Due to B or order P1,000.00
payable on demand. This is negotiable because the words payable on
demand implies a promise to pay.
Sgd. A

Due B P1,000.00.
This is not negotiable because this is a mere admission
Sgd. A of debt.

Illustration of Condition

Pay to B or bearer P1,000.00 if he

This is not negotiable because the order to pay is
marries X.
subject to the condition that B marries X.
Sgd. A

To Y

Illustration of Event Certain to Happen

I promise to pay B or order

P1,000.00, ten (10) days after the This is negotiable because the event is certain to
death of X happen

Sgd. A

Sum Payable must be Certain

I promise to pay B or order

P1,000.00, thirty (30) days from This is negotiable. The addition of interest can be
this date, at 6% interest. ascertained by mere mathematical computation.

Sgd. A
Sum Payable Not Certain

I promise to pay B or order

P1,000.00, together with all sums This is not negotiable because it appears that the
due him on December 31, 2019. P1,000.00 is not the only principal amount to be paid.

Sgd. A

Sum Payable must be in Money

I promise to pay B or order

P1,000.00, in palay. This is not negotiable because the sum is payable in
goods. This is also applicable for payment by way of
Sgd. A
services.

Reason for Requirement that the Instrument be paid in Money

Negotiable Instruments are required to be paid in money because money is the one standard of
value, at least, money always measures this rise and fall and remains the same. The chattel
(property) may fluctuate in value.
Legal Tender
The kind of money which the compels a creditor to accept in payment of the debt when tendered
by the debtor in the right amount. Negotiable Instruments are not legal tender but they are
substitute for money.

Note: In a recent Supreme Court case, the Court ruled that since a negotiable instrument is only
a substitute for money and not money, the delivery of such instrument does not, by itself, operate
as payment. A check, whether a manager’s check or ordinary check, is not legal tender, and an
offer of a check in payment of a debt is not valid tender of payment and may be refused receipt
by the creditor.

Where there is no Year Specified

I promise to pay B or order

P1,000.00, on or before December This is not negotiable because it is neither payable on
2. demand because it is to be paid at a certain time,
December 2. Unfortunately, there was no year indicated.
Sgd. A
Where payable to a Specified Person or Assigns

I promise to pay B or his assigns

P1,000.00. This is negotiable because it is payable to order. The
Sgd. A word “assign” is equivalent to the word “order”.

Where payable to a Specified Person of his Agent

I promise to pay B or his collector

P1,000.00. This is not negotiable because the collector is an
Sgd. A “agent” of the principal, B. The collector merely takes the
place of B.

Where the word “bearer” is not used

I promise to pay B or possessor

P1,000.00. This is negotiable because this is payable to bearer. In
Sgd. A this case, possessor also means bearer.

Where payable to “bearer B”

I promise to pay to bearer B

P1,000.00. This is not negotiable. The word bearer here merely
Sgd. A describes B. This note is payable only to a specified
person, B.

Determination of Negotiability
1. Check the provisions on Section 1 of the Negotiable Instruments Law;
2. Consider the whole instrument; &
3. Check what appears on the face of the NI and not elsewhere.
Installments Not Stated

I promise to pay B or order

P1,000.00, in installments. This is not negotiable because the installment periods
are not stated. This makes the sum payable for each
Sgd. A installment uncertain.

Installments Stated

I promise to pay B or order
P1,000.00, in four equal monthly
installments beginning September
1, 2019.
Sgd. A
This is negotiable because the installment periods are
clearly stated. (Payment of P250 per month for four
months starting September 1, 2019.) The sum payable
is certain for each installment period.

Illustration: (Non Negotiable)

I promise to pay B or order P100 I promise to pay B or order P100

out of my salary in the government. out of the proceeds of a mortgage
loan.
Sgd. A
Sgd. A

I promise to pay B or order P100

from payment received on account
of sale of the merchandise.

Sgd. A

Illustration of Statement of Transaction (Negotiable)

I promise to pay B or order

P1,000.00 in payment for a chicken
I bought from him the other day.

Sgd. A
In case of specified event, the correct word to be used is “After”

10 days before the death of X, I

promise to pay B or order This is not negotiable because of the word “before”.
P1,000.00. This makes the time of payment uncertain.

Sgd. A

Where Promise Conditional

I promise to pay B or order

P1,000.00, days after B passes the This is not negotiable. It is fixed after a specified
board exams. period but the event is not certain to happen. Hence,
the promise is conditional.
Sgd. A

General rule as to Additional Act

I promise to pay B or order

P1,000.00 and deliver a cow. This is not negotiable because it contains as
additional act to be performed.
Sgd. A

Meaning of Payable to Order

I promise to pay B or order

P1,000.00 on December 31, 2019. This means A promises to pay B or if not to B, to anybody
designated by B, or to anybody designated by the person
Sgd. A designated by B and so on. The designation is made by
insdorsement.

Illustration:
PN by A in favour of B, then indorsed by B to C, thus:
Pay to C Sgd. B
Pay to D Sgd. C – C now indorses it to D and so on.
Drawee as Payee

Pay to the order of myself,

P1,000.00. This is negotiable and is payable to the order of the
drawer. If accepted by the drawee, the instrument is
Sgd. A equivalent to a promissory note made by the acceptor in
To B favour of the drawer.

Maker as Payee

I promise to pay to the order of

myself, P1,000.00. This is instrument will be completed when indorsed by
the maker.
Sgd. A

Drawee as Payee

Pay to yourself or order, P1,000.00.

This authorizes the drawee to pay himself from the funds
Sgd. A belonging to the drawer.

To B

Payable to two or more Payees jointly

I promise to pay A and B or order

P1,000.00. This is instrument will be completed when indorsed by
the maker.
Sgd. A

Payable to one or more of several Payees

I promise to pay to the order of A, B

or C P1,000.00. This is instrument will be completed when indorsed by
the maker.
Sgd. A
Note: Ante-dating or Post-dating an Instrument does not invalidate it
When AD and PD invalidates an instrument
The only limitation is that the ante-dating or post-dating is not done for illegal and fraudulent
purposes.

Effect of insertion of the wrong date

I promise to pay B or order
P1,000.00 on or before December
31, 2019, December 1, 2019.
Sgd. A
Payee knowingly inserted the wrong date to hasten the
date of maturity. The instrument is void as to B. But if B
indorses it to C, who is a holder in due course, the
insertion of the wrong date does not avoid the
instrument. It will be regarded as the true date.

Negotiation
Section 30. What constitutes negotiation. – An instrument is negotiated when it is transferred
from one person to another in such a manner as to constitute the transferee the holder thereof. If
payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by indorsement
of the holder completed by delivery.
Section 52. What constitutes a Holder in Due Course. – A holder in due course is a holder
who has taken the instrument under the following conditions:
a) That it is complete and regular upon its face;
b) That he became the holder of it before it was overdue, and without notice that it had been
previously dishonoured, if such was the fact;
c) That he took it in good faith and for value;
d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument
or defect in the title of the person negotiating it.