LAW ON NEGOTIABLE INSTRUMENTS
SECTION 1
Law on Negotiable Instrument
 Act no. 2031
 Took effect on June 2, 1911
Forms of negotiable instruments:
1. in writing & signed by MAKER or DRAWER
 GR: Signature is placed at a lower
right hand corner of the instrument
 If the signature is not clear of the
intention  INDORSER
 Initials or any mark will be
sufficient as long as the maker or
drawer intends to be bound by it.
 Party against the Genuineness of
the signature MUST PROVIDE SOME
EVIDENCE
 Unusual signature may limit the
acceptability of an instrument
 Writing material must be
TRANSFERRABLE (bawal sa board,
sa dahon pwede)
2. Contain an unconditional promise or order
to pay a sum certain in money
 Money is a medium of exchange
authorized or adopted by a
domestic or foreign government as
part of its currency
 Gold, silver, bank notes
are NOT money
3. payable on demand or at a fixed or
determinable future time
4. Payable to order or bearer   Drawer’s funds in hands of drawee
5. Name of the DRAWEE must be indicated in
the instrument
Commercial paper
 Written promises or obligations that arise
out of COMMERCIAL TRANSACTIONS
Functions of a Negotiable instrument
 Considered as “substitute” for money
 NOT legal tenders
 Doesn’t extinguish the DEBT
 Can be used in both COMMERCIAL and
CREDIT transactions
 Will be considered as Negotiable
instrument if it follow all (5) forms
provided above
2 Forms of Negotiable Instrument:
1. Promissory note
 Must contain an “unconditional promise”
 (1) to (4) characteristic MUST BE PRESENT
in order for a promissory note be
considered as NEGOTIABLE
 2 parties:
 Maker – the one who makes the
promise
 Payee – the one whom the promise
is made
 It may be a demand instrument but it is
normally a time instrument
2. Bill of Exchange
 An order made by one person to another
to pay money to a THIRD PERSON.
 Check - If drawn on the bank and
payable on demand (Most common
type of order paper)
 (1) to (5) characteristic MUST BE PRESENT
in order for a Bill of exchange be
considered as NEGOTIABLE
 3 parties:
 Drawer – the person who issues
and draws the order bill. HE DOES
NOT PAY DIRECTLY
 Drawee – the person whom the bill
is addressed and who is ordered
and expected to pay.
 In case of a CHECK  Bank
(Drawee)
 Assumes liability only when
he accepts the bill 
acceptor
 Payee – the person whose favor the
bill is originally issued or is payable
 May be specifically
designated, or may be an
office or title, or
unspecified
 Must contain an “unconditional order”
 Parties need NOT BE DISTINCT persons
 Purpose:
 Liability of drawee for non-payment
SECTION 2
Certainty as to SUM to be paid:
1. With interest – still NEGOTIABLE
a. Fixed rate
b. Increased or reduced rate
c. Accrual or rate not specified
 No date from which interest
is to run  Date of the
instrument
 Undated instrument  Date
of issuance
 Rate not specified  6
percent
2. By stated installments
a. Amount and due date must be
stated. If not  NON NEGOTIABLE
b. With Acceleration clause
dependent on MAKER
 Any installment not
paid/defaulted  Instrument
becomes DEMANDABLE
and DUE
c. Acceleration at option of HOLDER
 NON NEGOTIABLE
3. By stated installments with a provision
4. With exchange

a. 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
b. Does not impair negotiability
c. Drawn to one country and payable
to another
d. RA 8183: every monetary
obligation must be paid in PH
currency
e. But the parties may agree
otherwise
5. With cost of collection or an attorney’s fee
a. NON NEGOTIABLE if the amount to
be paid cannot be ascertain (Ex. To
pay all costs, charges, and
expenses)
b. Attorney’s fee not specified 
reasonable sum
c. Acquisition of instrument after
maturity – Holder NOT in due
course  Non-negotiable and
subject to defenses
Certainty of sum payable
1. Payment of fixed amount of money
 If the instrument calls for an
act (may condition)  NON
NEGOTIABLE INSTRUMENT
2. Permissible clauses or stipulations
 If the note gives the maker the
right to ascertain the amount
 NON NEGOTIABLE
INSTRUMENT
SECTION 3
When promise is UNCONDITIONAL:
 No condition
For Promissory Notes:
(1) Implied promise to pay
(2) Bare acknowledgement of indebtedness
a. If it does not constitute a PROMISE
TO PAY  NON NEGOTIABLE
For Bill of Exchange:
(1) Words equivalent to an order to pay
(2) Mere request to pay
(3) Liability of the drawer
Indication of a particular fund
1. Reimbursement is to be made –
NEGOTIABLE
a. The fund indicated is indirect
source of payment
2. Payment is to be made – NON-
NEGOTIABLE
a. The amount to be paid is made to
depend upon the adequacy or
existence of the fund
b. Direct source of payment
LAW ON NEGOTIABLE INSTRUMENTS
 If the language used is AMBIGUOUS
or OBSCURE, the court usually
decides in favor of Negotiability
3. Particular account to be debited with the
amount – NEGOTIABLE
Statement of transactions:
1. Mere recital of consideration – has no
adverse legal effect on the negotiability of
the instrument
2. Terms and condition – Instrument is
burdened by TERMS and CONDITIONS
therefore, NON NEGOTIABLE regardless of
the terms.
SECTION 4
Determinable future time:
1. At a fixed period after date or sight
2. On or before a fixed or determinable
future time specified therein
3. On or after the fixed period after the
occurrence of a specified event which is
certain to happen through the time of
happening be uncertain
Instrument payable upon Contingency
 NON NEGOTIABLE
 Happening of the EVENT doesn’t cure the
DEFECT
After DATE – After date of issuance
After SIGHT – After the date the instrument is
seen by the drawee
SECTION 5 AND 6
Provisions NOT affecting the Negotiability of the
instrument:
Under Sec. 5
 Sale of collateral securities in case the
instrument (not paid in maturity)
 Confession of judgement (Not paid in
maturity)
 Waives the benefit of any law intended for the
advantage or protection of the obligor
 Gives the holder an election to require
something to be done in lieu of payment of
money
Under Sec. 6: Omissions
 Not dated
o Promissory note – Date of issue
o Bill of Exchange – Date of the last
negotiation
 Does not specify the value given, or that any
value has been given
 Does not specify the place where it is drawn
or payable
 Bears a seal
 Designates a particular kind of current money
in which payment is to be made
SECTION 7

When payable on demand:
1. Expressly stated
2. No time for payment is expressed
3. Payable on demand as regards the maker
 Already overdue
4. Payable on demand as regards the acceptor
 Accepted by the drawee
5. Payable on demand as regards the indorser
 Indorsement after maturity
SECTION 8
When payable to order may be drawn
payable to the order of:
1. A payee who is not maker, drawer, or drawee
2. The drawer or 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
Considered as payable to order when:
 The payee must be named, if not  Non
negotiable
 Must be to a specified person, or to himself or
his order
 “to the order of”, “or order”, “to P and
assigns”
SECTION 9
Payable to bearer when:
1. Expressly stated
2. Payable to a person named or bearer
3. Payable to the order of fictitious or non-
existing person, and such fact was known to
the maker
4. When name does not purport to be the name
of any person
5. When the only or last indorsement is in BLANK
Bearer
 The person in possession of a bill or note
which is payable to bearer or legally
qualifies as bearer instrument
Bearer instrument
 Payment to any person in possession
thereof in good faith and without
notice that his title is defective
 DELIVERY alone is enough to effect the
negotiation of the instrument
 Whoever possesses the instrument is the
bearer
SECTION 10
Terms, when sufficient
Criterion of negotiability
1. Clear intention of the parties
2. Use of foreign language
3. Mere defect in the language or grammatically
error
SECTION 11
Presumptions as to date
LAW ON NEGOTIABLE INSTRUMENTS
Date is necessary to determine the maturity of
the instrument when it is:
1. Payable at a fixed period after date
2. Payable at a fixed period after sight
SECTION 12
Ante-dated and post-dated:
 Ante-dated if it contains a date earlier
than the true date
 Post-dated if it contains a date later than
the true date
No effect on the negotiability not unless, done for
an ILLEGAL or FRAUDULENT purpose.
SECTION 13
When date may be inserted:
1. Payable at a fixed period after date but is
issued undated
2. Payable at a fixed period after sight but
the acceptance is undated
Effect of insertion of a WRONG date:
 As a holder with knowledge
 Will avoid the instrument as to him but
not as to SUBSEQUENT holder in DUE
COURSE
 As to subsequent holder in due course
 Alteration, therefore is still considered
TRUE DATE
SECTION 14
o Incomplete but delivered
 The holder has the authority to
COMPLETE but not to alter any item
 Authority to put any amount when a
SIGNATURE in a blank paper was
delivered (if the maker has the
intention of making it a negotiable
instrument)
SECTION 15
o Incomplete but NOT delivered
 Defense even against a holder in
due course (real defense)
 Defense available to parties
 Invalidity only to person/s
whose signature appear on the
instrument BEFORE delivery
SECTION 16
o Complete but NOT delivered
 Still incomplete and revocable
o Complete and Delivered
 Valid instrument
SECTION 17
“If the instrument is ambiguous”
Rules:
1. Sum written in words will prevail
 But if WORDS are ambiguous,
reference will be made to figures
2. The interest will run at the date of the
instrument
 If UNDATED, the interest will run
at the date of issuance
 LAW ON NEGOTIABLE INSTRUMENTS
3. Written provision will prevail over the to A
printed provision
 Written provisions are the real
intention of the maker  M becomes liable because there has been
4. The holder has the option to determine if a TRANSFER (from P to A)
the instrument is: SECTION 23: Forgery
 Promissory note “If the signature is forged or made without
 Bill of exchange authority, it is considered inoperative.”
5. If there is doubt with the person signing, Forgery
the person will be treated as an  fraudulent alterations of any writing
INDORSER.  real defense
 Endorsers are secondarily liable Inoperative
6. Instrument where 2 or more persons  You have no right to retain, discharge, or
signed. enforce payment.
o “I promise to pay”, 2 or more persons  applies only to SIGNATURE
signed  The negotiable instrument with a forged
 Solidary liable signature is still valid.
o “We promise to pay”, 2 or more 2 ways to commit forgery:
persons signed 1. Signature
 Jointly Liable 2. Indorsement
SECTION 18,19,20 Situations under Promissory notes
GENERAL RULE: “Only those whose name or 1. By order (Forged Signature)
signature written on the document are liable.”
Exceptions: M issued a PN
1. The name written is ASSUMED NAME OR by order to P
TRADE NAME P forged M’s
2. If the person authorized someone to sign signature
in behalf of the principal
Requirements:  M is NOT liable because of inoperative
 The agent must be authorized  P is criminally and civilly liable
 He adds words indicating that he is  A, B, & C are LIABLE for Warranty
an agent
2. By Bearer (Forged Signature)
 He discloses his principal (If
M issued a PN
NOT, he will be personally
by Bearer to P
liable)
P forged M’s
SECTION 21
signature
Agent has a limited authority:
1. If he is only signing by procuration
 Procuration is an act by which a
 M is NOT liable because of inoperative
principal gives power to another to
 P is criminally and civilly liable
act in his place as he could himself
 A & B are not liable (remote parties)
2. If he acted beyond his scope or limits
 C is liable because he is an immediate
 He will be liable party (liable for warranty)
SECTION 22
 Under this situation, Liability for warranty
There will still be a transfer even if:
only extends to IMMEDIATE PARTY
1. Ultra Veris Act
2. Minor (Minority is a real defense)
3. By Order(Forged Indorsement)
Situation 1:
M is a minor
T forged the
P indorses it to A
indorsement of P
to A
 M is not liable
because of real
defense (minority)

Situation 2:
M issues the instrument
to P  Cut off rule – All the parties PRIOR to the
P is a minor, indorses it forgery are NOT liable (M & P are not liable)
 LAW ON NEGOTIABLE INSTRUMENTS
 T is criminally and civilly liable
 B and D are liable for warranty

4. By Bearer (Forged Indorsement)

 All parties acquired title with delivery

 Endorsement is not required
 T is criminally and civilly liable

Situations under Bill of Exchange

1. By order(Forged Signature)

CHAPTER IV: RIGHTS OF THE HOLDER

SECTION 51: RIGHT OF THE HOLDER TO SUE

Classes of holders:

1. Holders simply or Holder not in due course

2. Holder for value
3. Holders in due course

FALSE: The Holder in due course is always a

Holder for value. (NOT ALWAYS!!)
TRUE: The Holder for value is always a Holder in
due course.

Ordinary holder or mere holder

- Holder not in due course
-

Requisites for a Holder in Due Course

(HDC):

1. receives the instrument complete and regular
on its face
2. became a holder before it was overdue and
had no notice that it had been previously
dishonored if such was the fact
3. takes the instrument for value and in good
faith
4. at time he took the instrument, no notice of
infirmity in instrument or defect in the title of
the person negotiating it
Notes on Section 52
LAW ON NEGOTIABLE INSTRUMENTS
– Personal or equitable defenses are those
which grow out of the agreement or conduct of a
particular person in regard to the instrument
which renders it inequitable for him through legal
title to enforce it. Can be set up against holders
not HDC
– Legal or real defenses are those which
attach to the instrument itself and can be set up
against the whole world, including a HDC.

– every holder is presumed to be a HDC

(Sec. 59)

– the person who questions such has the

burden of proof to prove otherwise

– if one of the requisites are lacking, the

holder is not HDC

– an instrument is considered complete and

regular on its face if a) the omission is immaterial
b) the alteration on the instrument was not
apparent on its face

– an instrument is overdue after the date of

maturity.

– on the date of maturity, the instrument is

not overdue and the holder is a HDC

– acquisition of the transferee or indorsee

must be in good faith

– good faith means lack of knowledge or

notice of defect or infirmity

47. A holder is not a HDC where an instrument

payable on demand is negotiated at an
unreasonable length of time after its issue (Sec.
53 NIL)

48. Rights of a HDC:

– holds the instrument free from any defect

of title of prior parties

– free from defenses available to prior

parties among themselves (personal/ equitable
defenses)

– may enforce payment of the instrument

for the full amount against all parties liable(Sec.
57 NIL)

Notes on Section 57