Law on Negotiable Instruments themselves, is subject to real defenses that might

have been obtained between them.

Part I: Introduction
Real defenses – those that attach to the instrument
Applicability of Negotiable Instruments and are available against all holders, whether in due
course or not, but only by the party/parties entitled
1. Limited Application- the Negotiable Instruments
to raise them.
Law is only applicable to negotiable instruments laid
down in section 1 of this law. Personal defenses – available only against the
holder not in due course who stands in privity with
Functions and Importance of Negotiable Instruments
the party who is entitled to set it up or those who
1. Negotiable instruments are used as a substitute for are not or do not have the rights of a holder in due
money although they do not constitute as legal course.
tender.
2. Accumulation of secondary contracts – as they are
transferable; additional parties can become
Legal tender – that currency which a debtor can
involved.
legally compel a creditor to accept in payment of a
debt in money when tendered by the debtor in the Forms of Negotiable Instruments
right amount.
1. Common forms – these are promissory notes, bills
Negotiability – allows an instrument to go from of exchange, and blank checks.
hand to hand in commercial markets and to take a. Promissory Notes – the issuer has promised
the part of money in commercial transactions from to pay
all personal defenses available against the original b. Bills of Exchange – the issuer has ordered a
owner. third person to pay
Checks are also discussed in the law, but they are
A negotiable instrument differs from money,
really a special from/kind of bill of exchange.
however, in that the former is valuable/worthless
2. Special Types – includes certificates of deposits,
depending upon the financial liability of the parties
bank notes, due bills, bonds, drafts, trade
to them.
acceptances, and banker’s acceptances.
2. Negotiable instruments constitute the media
Where the meaning is doubtful, the courts have
exchange for most commercial transaction.
adopted the policy of resolving in favor of the
Without negotiable instruments, more money, negotiability of the instrument.
either in coins or bills, would be needed in
Instruments with Limited Negotiability
circulation to take care of the ever-increasing
everyday business transactions. 1. Letter of Credit – a letter from a
merchant/bank/banker in one place, addressed to
They are a safe and convenient means of doing
another, in another place/country, requesting the
business that eliminate the risk of dealing in cash.
addressee to pay money/deliver goods to a third
3. Negotiable instruments are used as a medium of party therein named, the writer of the letter
credit transaction. undertaking to provide him the money for the
goods to repay him.
People without cash in hand are enabled by means
of credit to conduct and carry to completion It is essentially a letter requesting one person to
business and commercial enterprises. make advances to a third person on the credit of a
writer. It is in favor of a specified person and not to
Checks – commonly used for immediate payment
order.
(i.e. as substitute for money).
2. Treasury Warrant – a government warrant for the
Bills of Exchange and Promissory notes are intended
payment of money such as that issued in favor of a
for circulation of credits.
public officer/employee covering
Characteristics and Features of Negotiable Instruments payment/replenishment of cash advances for
official expenditures.
1. Negotiability – quality/attribute of a bill/note
3. Postal Money Order – an order for the payment of
whereby it may pass from one person to another
money to the payee named therein drawn by one
like money, to give the holder in due course the
post office upon another under authority of law.
right to collect on the instrument the sum payable
4. Bill of lading – without an unconditional
for himself free from any defect in the title of any of
promise/order to pay a sum certain in money.
the prior parties or defenses available to them
5. Certificate of Stock – a written instrument signed
among themselves.
by a proper officer of a corporation stating that the
A bona fide holder, while free from personal person named therein is the owner of a designated
defenses available to prior parties among number of shares of its stock.
6. Warehouse receipt – a document of title likewise It may be a demand instrument, but it is commonly a
without an unconditional promise or order to pay a time instrument.
sum certain in money.
It is a promissory paper or a “two-party” paper.
Chapter I: Form and Interpretation Two Parties in a Promissory Note
Section I: Form of Negotiable Instruments 1. Maker – the one who makes the promise and signs
the instrument.
Requisites of Negotiable Instruments
2. Payee – the party to whom the promise is
a) It must be in writing and signed by the made/the instrument is payable.
maker/drawer.
Indications on a Promissory Note
b) Must contain an unconditional promise or order to
pay a sum certain in money. 1. “For value received” – indicated the consideration
c) Must be payable on demand or at a given for the note which may be specified.
fixed/determinable future time. 2. “I promise to pay” – expressed the unconditional
d) Must be payable to order or bearer. promise to pay.
e) Where the instrument is a drawee, he must be 3. “To the order of/to bearer” – indicates the promise
named or otherwise indicated therein with to pay as ordered/by the command of the payee.
reasonable certainty.
Where no time for payment is expressed, an instrument
Commercial Paper – written promises/obligations that is payable on demand.
arise out of commercial transactions from the use of
such instruments as promissory notes and bills of Bill of Exchange – an unconditional order in writing
exchange. addressed by one person to another, signed by the
person giving it, and requiring the person to whom it is
It is not a commercial paper if it does not arise out of addressed to pay upon demand/fixed/determinable
commercial transactions. future time a sum certain in money to order or to
bearer.
Negotiable instrument – a contractual obligation to pay
money. If drawn on a bank and payable on demand, the bill is
called a check.
Determinants of the Negotiability of an Instrument
It is an order paper or a “three-party” paper.
1. The whole of an instrument;
2. Only what appears on the face of the instrument; Three Parties in a Bill of Exchange
and
3. The provisions of the Negotiable Instruments law 1. Drawer – the person who issues and draws the
especially Section 1 thereof which fully define the order bill; gives the order to pay money to a third
requirements an instrument must meet to be party.
negotiable. 2. Drawee – the party upon whom the bill is drawn;
the person to whom the bill is addressed and who is
The requirements indicated in subsections (a) to (d) are ordered/expected to pay.
necessary for a promissory note to be negotiable, while 3. Payee – the party whose favor the bill is originally
subsections (a) through (e) are necessary for a bill of issued/is payable.
exchange to be negotiable.
If the drawee accepts the obligation to pay, this person
The general rule is that the signature of the becomes an acceptor.
maker/drawer appears on the lower right-hand corner
of the negotiable instrument, however, it may appear in Idea and Purpose of a Bill of Exchange
any part thereof whether at the top, middle or bottom 1. Drawer’s funds are in the hands of the drawee
or at the margin. 2. The drawee has a liability for non-payment
Where the genuineness of the signature of the There must be a reason for the drawee to honor the bill
maker/drawer is denied, the party against whom it (e.g. liability, prior agreement).
operates must provide some evidence of its invalidity
because the signature is presumed valid. Section 2: Certainty as to Sum

Money – is the medium of exchange authorized or The amount to be paid must be stated plainly on the
adopted by a domestic/foreign government as part of face of the instrument and must be determinable from
its currency. It literally means “cash”. the face of the instrument itself without reference to
any outside source.
Promissory Notes – an unconditional promise in writing
made by one person to another signed by the maker, The basic test of negotiability is whether the holder can
engaging to pay on demand, or at a fixed/determinable determine by calculation the amount payable when the
future time, a sum certain in money to order or to instrument is due.
bearer; commonly referred to as “note”.
Scenarios as to Certainty that Do Not affect An instrument which contains a direction to debit a
Negotiability specified account is negotiable because the
promise/order is not also made conditional.
1. To be paid with interest at a fixed rate.
2. To be paid with interest at increased/reduced rate. Section 4: Determinable Future Time
3. To be paid by stated installments
Expressly;
Stated Installments – means the interest of each
installment, and the due date of each installment 1. Payable at a fixed time
must be fixed in the instrument. 2. Payable at a fixed period after sight
4. To be paid by stated installments with acceleration After sight – after the instrument is seen by the
clause drawee upon presentment for acceptance/accepted
If a note provides for acceleration at the option of by the drawee
the holder, the instrument is non-negotiable. 3. Payable on or before a determinable future time
5. To be paid with exchange 4. Payable on the occurrence of a specified event
Exchange – the charge for the expense of providing 5. Payable after the occurrence of a specified event
funds at the place where the instrument is payable
to meet the instrument, which is issued at another An instrument payable only upon a contingency is non-
place. negotiable because it does not appear on its face
Payment in foreign currency does not impair the whether it will be paid or not.
negotiability of an instrument. Section 5: Additional Provisions Not Affecting
This subsection is only applicable to instruments Negotiability
drawn from one country to another.
Under RA No. 8183, every monetary obligation The general rule is that the instrument is non-
must be paid in Philippine currency, which is legal negotiable if it contains a promise/order to do any act
tender in the Philippines. in addition to the payment of money.
6. To be paid with costs of collection/attorney’s fee
Exceptions to the general rule
The stipulation for attorney’s fees may be reduced
by the courts if found 1. Sale of Collateral Securities
unconscionable/unreasonable. 2. Confession by judgement – a written
A transferee acquiring the instrument when it is acknowledgement by the defendant of his
overdue would not be a holder in due course and, indebtedness/liability to the plaintiff; enables the
consequently, would hold the instrument subject to holder to obtain a judgment without the delay
defenses as if it were non-negotiable. usually incident to a lawsuit, as it eliminates the
necessity or a trial.
Section 3: When Promise is Unconditional Warrants of attorney to confess a judgment is not
Order – a command/imperative direction. authorized or contemplated by our law because the
promissor bargains away his right to a day in court.
The use of polite words like “please” do not convert an A confession of judgment is given after the action is
order into a request. brought to save expenses is valid.
Requests do not constitute order. 3. Waiver of benefits granted by law
4. Election of holder to require some other act
The note/bill must be payable absolutely.
Section 6: Omissions; seal; particular money
An instrument indicating from whom the drawee may
call reimbursement does not make the instrument non- The instrument is deemed negotiable even if
negotiable. This includes the appearance of the 1. It is not dated
statement of purpose and the collateral securing the The date in a bill/note is not necessary. It shall be
instrument. deemed dated as of the time of issuance.
An instrument payable out of particular/specified fund 2. Date is not stated in the calendar
is non-negotiable because the amount to be paid is If there is a date stated, which is not on the
made to depend upon the adequacy/existence pf the calendar, the law will deem the nearest date as the
fund designated. date intended.
Cases wherein the date is necessary
The test of negotiability is whether the instrument a. Date is tied to the date of issue (e.g. payable
carries the general personal credit of the thirty days after date)
maker/drawer. b. Interest is stipulated
The intention to limit payment to a specified fund must 3. Value is not specified
be made plain. If the language used is 4. Place of payment is not specified
ambiguous/obscure, courts usually decide in favor of The presumed place of payment shall be the place
negotiability. of residence/or business of the maker/drawer.
5. Presence of seal presented for payment within a reasonable time after
It is advisable, however, to have a bill/note appear its issue, bill of exchange must be presented within
in a public instrument so that it will be included reasonable time after the last negotiation thereof.
among the preferred credits with respect to other
Section 12: Ante-dated and Post-dated
property of the debtor.
6. Designated in a particular kind of current money Ante-dated – it contains a date earlier than the true
payable date of its issuance.

Section 7: When Payable on Demand Post-dated – it contains a date later than the true date
of its issuance.
When a Negotiable Instrument is Payable on Demand
Ante-dating/Post-dating an instrument does not render
1. It is expressed to be payable on demand/at sight/on
it invalid/non-negotiable by that fact alone. It may be
presentation
negotiated before or after the date given as long as it is
2. No time is expressed
not negotiated after its maturity.
An overdue instrument is necessarily a demand paper.
Section 13: When date may be inserted
Section 8: When Payable to Order
Two cases wherein date may be inserted by the holder
A Negotiable Instrument may be payable to the order
1. An instrument is payable at a fixed period after date
of
but is issued undated
1. A payee who is not maker, drawer, or drawee 2. Where an instrument is payable at a fixed period
2. The drawer/maker after sight but the acceptance is undated
3. The drawee
If a holder with knowledge of the true date writes the
4. Two or more payees, jointly
wrong date constitutes material altercation. However,
5. One or more of several payees
the subsequent holder in due course will regard the
6. The holder of an office for the time being
wrong date as the true date.
Section 9: When Payable to Bearer
Section 17: Construction where instrument is
Bearer – the person in possession of a bill/note which is ambiguous
payable to bearer.
Rules of construction in case of ambiguity
The instrument is payable to bearer when
1. Sums expressed in words and figures are different –
1. It is expressly stated the sum expressed in words shall prevail.
2. It is payable to person named therein or bearer 2. Words ambiguous/uncertain – reference may be
3. It is payable to a fictitious person had to the figures to determine the true amount
Fictitious Person – one who, though named as 3. Date when stipulated interest to run not specified –
payee, has no right to it because the maker/drawer date runs from the date of the instrument/date of
so intended and it matters not, whether the name issuance.
of the payee is used by him be that one living/dead, 4. Instrument not dated – It is considered dated as of
never existed. the date of issuance
4. It is payable to order of a non-existing person Issue – the first delivery of the instrument complete
5. The name of the payee is not the name of a person in form, to a person who takes it as holder.
6. The last indorsement is blank 5. Written and Printed words in conflict – the words in
Indorsement in law only refers to negotiable writing shall prevail
instruments. 6. Whether instrument is a bill or a note in doubt – the
holder may treat either at his election
Section 10: Terms, when sufficient
7. Capacity in which person signed in doubt – his is to
The substance of the transaction rather than its form is be deemed an indorser.
the criterion of negotiability. 8. Instruments signed by two or more persons – their
liability may be either joint/solidary
A mere defect in language or a grammatical error does
not render an instrument non-negotiable. Section 18: Liability of a person signing in trade or
assumed name
Section 11: Date, presumption as to
As a general rule, only persons whose signatures
If the instrument bears a date, it is presumed that said
date is the date when it was made by the maker, drawn appear on an instrument are liable thereon.
by the drawer, accepted by the drawee, or indorsed by Exceptions to the general rule
the payee/holder.
1. Where a person signs in a trade/assumed name
In some cases, the indication of the date is required
2. The principal is liable if a duly authorized agent
(Section 71). (i.e. the promissory note must be
signs on his own behalf
3. In case of forgery, the forger is liable even if his Forgery does not render the instrument inoperative.
signature does not appear on the instrument
Section 24: Presumption of Consideration
4. Where the acceptor makes his acceptance of a bill
on a separate paper Consideration – the immediate, direct or essential
5. Where a person makes a written promise to accept reason which induces a party to enter into a contract
a bill before it is drawn
A negotiable instrument must have a
Section 19: Signature by agent; authority; how consideration/cause thought it need not be expressly
shown indicated on the instrument.

The maker/drawer may sign the instrument personally Section 25: Value; what constitutes
or by another duly authorized by him.
A valuable consideration need not be adequate. It is
Section 20: Liability of person signing as agent sufficient if it is a valuable one.

Requisites for an agent to escape liability Section 26: What constitutes a holder for value

1. He is duly authorized Holder for Value – one who has given a valuable
2. He adds words to his signature indicating that he consideration for the instrument issued/negotiated to
signs as an agent them.
3. He discloses his principal
This is with respect to all parties who are/was involved.
The mere addition of descriptive words will not relieve
Section 27: When Lien on Instrument Constitutes
the agent of personal liability.
Holder for Value
Section 21: Signature by Procuration
One who has taken a negotiable instrument as collateral
Procuration – the act by which a principal gives power security for a debt has a lien on the instrument.
to another to act in his place as he could himself.
Lien – a right to keep possession of property belonging
The principal is not bound if the agent has exceeded to another person until a debt owed to them is
actual limits of his authority. discharged.

Section 22: Effect of Indorsement by Infant or Where a holder has lien on instrument
Corporation 1. Amount of instrument > debt secured – the pledgee
As a general rule, contracts entered into with can collect the full value of the instrument and
incapacitated minors are voidable. apply the same to the payment of the debt but the
surplus must be delivered to the pledgor.
Corporations are not liable on notes in a suit thereon by 2. Amount of instrument < debt secured – the pledgee
an indorsee, where the corporation is without capacity is a holder for value of the full amount and may
to make the contract in fulfillment of which they were recover all
executed. 3. Party liable has defenses – the pledgee can only
It is incumbent upon the dealer to know the extent of collect to the extent of the amount of the debt. If it
authority of those that they are in contract with. is real defense, the pledgee cannot recover
anything from the party liable.
Section 23: Forged Signature
Section 28: Effect of Want of Consideration
Forgery – the counterfeit-making/fraudulent altercation
of any writing Absence of Consideration – a total lack of any valid
consideration for the contract in consequence of which
Forgery is a real defense even against holders in due the alleged contract must fail. (No recovery)
course.
Failure of Consideration – the failure/refusal of one of
Forgery must be proven with clear and convincing the parties to do, perform or comply with the
evidence. consideration agreed upon. (Recovery to the extent of
Cases of forgery in general what was delivered)

1. Promissory Notes Section 29: Liability of Accommodation Party

a. Forgery of an indorsement Accommodation note/bill – one to which the
b. Forgery of the maker’s signature accommodation party has put their name, without
2. Bill of Exchange consideration, for the purpose of accommodating some
a. Forgery of an indorsement other party to use it, and is expected to pay it.
b. Forgery of the drawer’s signature
i. With acceptance by the drawee Accommodation Party – one who has signed the
ii. Without such acceptance but still instrument as maker, drawer, acceptor, indorser,
paid by the drawee
without receiving value thereof, and for the purpose of An indorsement which implicates to transfer to the
lending his name to another party/ indorsee partially, or which implicates to transfer the
instrument to two or more indorsees severally, does not
Accommodated party – one whose favor a person
operate as a negotiation of the instrument.
without receiving a value, signs an instrument of
lending his credit and enabling said party to raise money If the indorsees are joint or payees are alternative (e.g.
upon it. pay A or B), negotiation is valid.

Absence of consideration between the accommodation If the instrument is partially paid, it may be indorsed as
party and the accommodated party does not, of itself, to the residue.
constitute a valid defense against a holder for value
Section 33: Kinds of Indorsement
even though he knew of it when he becomes a holder.
1. As to methods of negotiation
Section 30: What Constitutes Negotiation
a. Special
Negotiation – transfer of a negotiable instrument from b. Blank
one person to another made in such a manner as to 2. As to the kind of title transferred
constitute the transferee the holder thereof. a. Restrictive
b. Non-restrictive
There is no negotiation is the transfer does not make
the transferee the holder of the instrument. 3. As to scope of liability of indorser
a. Qualified
Methods of transfer of a negotiable instrument b. Unqualified/general
1. Issue – already defined. 4. As to presence/absence of limitations
2. Negotiation – already defined a. Conditional
3. Assignment – the transfer of the title to an b. Unconditional
instrument with the assignee generally taking only 5. Others
such title or rights as his assignor has, subject to all a. Joint
defenses available against his assignor. b. Successive
c. Irregular/anomalous
Methods of Negotiation d. Facultative
1. Instruments payable to order Indorsement cannot negate the negotiability of an
a. Indorsement by the payee/present holder instrument if it satisfies the requisites stated in Section
b. Delivery to the next holder 1.
2. Instruments payable to bearer
a. Delivery Section 34: Special Indorsement

Delivery – transfer of possession, actual or constructive, Special Indorsement – the name of the payee is
from one person to another. specified

The payment of a check by the drawee bank is not a Special and Blank indorsements are unqualified
negotiation and does not make the bank a holder. indorsements.

Section 31: Indorsement; how made Forms of Special Indorsement

Indorsement – the writing of the name of the payee on 1. Specifies to whom the instrument is paid
the instrument with the intent either to transfer the 2. Specifies to whose order the instrument is payable
title to the same, or to strengthen the security of the If it is originally payable to order and indorsed by the
holder by assuming a contingent liability for its future payee through special indorsement, the indorsement of
payment, or both. the indorsee is necessary.
Indorsement alone without delivery conveys no title If it is originally payable to bearer, it may be negotiated
and creates no holder. by mere delivery.
Indorsement is derived from the Latin word indorsa Blank indorsement – specified no particular indorsee.
meaning “writing on the back”.
It consists only of the signature of the payee/indorser.
Where the indorsement is a slip of paper physically
attached to the instrument so as to become part of it, It may be negotiated by mere delivery.
the paper is known as allonge.
Section 35: Blank Indorsement
Section 32: Indorsement must be of entire An instrument made payable to bearer by an
instrument indorsement in blank may be converted into an order
The instrument must be delivered to the indorsee and instrument by writing over the signature of the indorser
there can be no partial payment. in blank any contract not inconsistent with the
character of the indorsement.
The contract of the blank indorser must not change. 2. Special and Qualified (e.g. Pay to A without recourse
signed P)
Section 36: When Indorsement is Restrictive.
3. Special and Conditional (e.g. Pay to A if he marries
Restrictive Indorsement – either restricts/prohibits before he reaches the age of 25 Signed P)
entirely the further negotiation of an instrument, or 4. Blank and restrictive (e.g. For collection only signed
modifies the rights of the holder or the liabilities of the A)
indorser. 5. Blank and Qualified (e.g. Without recourse Signed
A)
The indorser notifies all prospective holders that the 6. Blank and Conditional (e.g. Payable upon
indorsee has only the authority to deal with the completion of my house in Pateros, Metro Manila.
sinrtument as thereby directed and that the indorsee Signed A)
has only a restrictive title thereto. 7. Special, Unrestrictive, Unqualified (e.g. Pay to B.
Restrictive indorsement makes the instrument non- Signed A)
negotiable. 8. And so on.

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

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