INTRODUCTION

Act No. 2031. — Our Negotiable Instruments Law was enacted as Act No. 2031 on February 3,1911. It took effect 90 days after its
publication on March 4,1911 in the Official Gazette of the Philippine Islands was completed. (Sec. 198.) The Act, therefore, took effect on
June 2,1911. Since then, our Congress has not seen fit to amend any of its provisions
Purpose → to facilitate transactions in commercial paper and to promote free flow of credit.
Code of Commerce. — Prior to the passage of Act No. 2031, the law then existing and in force as to negotiable instruments could be found
in Book II of the Code of Commerce, from Articles 443 to 556.

Application and purpose of the Negotiable Instruments Law:

1) Applies only to negotiable instruments or to those instruments which meet the requirements laid down
in Section 1 of the law. It is designed to describe fully the law of negotiable instruments. It "covers the entire
subject of negotiable instruments and must be, treated as a complete body of law upon the subject and
controlling in all cases to which it is applicable.
2) Any case not provided for by the Act shall be governed by the provisions of existing legislation or in default thereof, by the rules of the
law merchant. (Sec. 196.) The Civil Code has no effect on its provisions except to supply any deficiency in cases not covered by the Act. (see Art
18, Civil Code.).

Function and importance of negotiableinstruments:

(1) As a substitute for money → Although they do not constitute legal tender (Art. 1249, ibid.), and are not money, they are used as a
substitute for money. One of the distinctive characteristics of a negotiable instrument is its negotiability which allows it to pass
freely from hand to hand in the commercial markets and to take the place of money in commercial transactions free
from all personal defenses (see Secs. 57-58.) available against the original owner.
(2) As a medium of exchange for most commercial transactions → Negotiable papers, particularly checks, constitute, at present,
the media of exchange for most commercial transactions. They thus increase the purchasing medium in circulation. Without
them circulating among business houses and individuals, more money either in coins or bank bills would be needed in circulation to
take care of the ever-increasing everyday business transactions. It would be very difficult for the economy to prosper
(3) As a medium of credit transactions → Men, in this way, without cash in hand are enabled by means of credit to conduct and carry
to completion business and commercial enterprises. The purpose of negotiability then is to allow men of undoubted credit to carry
on a business enterprise upon their promissory notes, bills of exchange and checks knowing that other businessmen will treat these
promises as cash.
Check → primarily used for immediate payment (as a substitute for money). The use of checks automatically provides a receipt for payment
and serves as convenient records of financial transactions, (see Sec. 185.)
→ a special form or kind of bill of exchange.
Ordinary bill of exchange and the promissory note → intended for the circulation of credits (i.e., primarily as a credit transaction). It is
used more than any other instrument of credit as a means of making payment.

Characteristics or features of negotiable instruments:

(1) Negotiability. — This is that quality or attribute of a bill or note whereby it may pass from hand to hand similar to money as to
give the holder in due course the right to hold the instrument and collect the sum payable for himself free from any infirmity in the instrument
or defect in the title of any of the prior parties, or defenses available to them among themselves,
(see Secs. 52,57.) negotiability of the instrument must be determinable from what appears on its face alone and not elsewhere, (see Sec.
1.)
A bona fide holder, however, while free from personal defenses available to prior parties among themselves, is subject to real defenses
that might have obtained between them, (see Sec. 58.)

(2) Accumulation of secondary contracts — The most important feature of negotiable instruments. they are transferred from
one person to another. Once an instrument is issued (see Sec. 191.), additional parties can become involved.

The theory of negotiable instruments

The theory of negotiable instruments, and of their currency from hand to hand, rests upon the proposition that they appear to
belong to the person having them in possession and to no one else.

Formsof negotiableinstruments:

(1) Common forms. — a) promissory note (Sec. 184.) b) bill of exchange (Sec. 126.) c) bank check. (Sec. 185.)
Negotiable Instruments Law deals only with two kinds or types of instruments:

(a) promissory notes or those in which the issuer has promised to pay; and
(b) bills of exchange or those in which the issuer has ordered a third person to pay.

(2) Special types. — There are, to be sure, many various forms of negotiable instruments. An analysis of the many variations will reveal,
however, that they belong to one or the other of the types mentioned.
(3)
special types of promissory notes (see Sec. 184.): held negotiable under the Negotiable Instruments Law
• certificates of deposits • bank notes • due bills • bonds
types of bills of exchange, (see Sec. 126.) held negotiable under the Negotiable Instruments Law
• drafts • trade acceptances • banker's acceptances

Commercial papers withlimitednegotiability: Instruments with limited negotiability which are also widely used in commercial transactions
but they have been held to be non-negotiable in the technical sense because they do not have the requisites that are essential under
the Negotiable Instruments Law:
1. Document of title. — It is a receipt or order for the delivery of goods, (see Part II.) It includes any bill
of lading, dock warrant, "quedan" or warehouse receipt. Although it is termed "negotiable" when the goods
are deliverable to the bearer or order, it is without an unconditional promise or order to pay a sum certain in money.
2. Letter of credit. — It is in favor of a specified person and not to order. (Art. 568, Code of Commerce; see Part III-A.) But drafts
(see Sec. 126.) issued in connection with letters of credit are negotiable instruments.
3. Trust receipt — It is a document of security pursuant to which a bank acquires a "security interest" in the goods under trust
receipt, (see Part III-C.) Under a letter of credit-trust receipt arrangement, a bank extends a loan covered by a letter of
credit with the trust receipt as a security for the loan. The transaction involves a loan feature represented by a letter of credit
and a security feature which is in the covering trust receipt which secures an indebtedness.
4. Certificate of stock. — It is a muniment of title to a given share in the assets of a corporation. It is also without an unconditional
promise or order to pay a sum certain in money.
5. Pawn ticket. — It is not a negotiable instrument under the Negotiable Instruments Law nor a negotiable document of
title under Articles 1507, et seq. of the Civil Code. (Part II-A.).
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.

•The requirements indicated in subsections (a), (b), (c), and (d) are necessary in order that a promissory note may be negotiable while
all the sub sections from (a) to (e) are necessary in order that a bill of exchange may be negotiable.
•Under subsection (a), the maker refers to the person issuing a promissory note, while the drawer, to the person issuing a bill of
exchange.
• In subsection (b), the instrument must contain an "unconditional promise" if it is a promissory note and "an unconditional order" if it
is a bill of exchange.
•Subsections (c) and (d). are both applicable to each of the two kinds of instruments, but subsection (e) is applicable only to bills of exchange.
• if the signature is so placed upon the instrument that it is not clear in what capacity the person intended to sign, he is deemed an
indorser (Sec. 17[f].) and not a maker or a drawer.
• The signature of the maker or drawer is usually written in longhand. It is preferable that the full name or at least the surname
should appear. But initials or any mark will be sufficient, provided that such signature be used as a substitute and the maker or drawer intends
to be bound by it. The name may be written in script or Roman letters with a pen or pencil, or made by rubber stamp by one having authority.
It may be printed, type-written, engraved, photographed or lithographed.
• What is important is that the signer has intended to adopt the signature on the instrument as his own and to obligate himself for its
payment. However, an unusual signature may limit the acceptability of an instrument. The use of a pencil is undesirable as it is easy to tamper
the writing.
• The reason for the requirement that negotiable instruments must be payable in money is that money is the one standard of value in
actual business. All other commodities may rise and fall in value but in theory, at least, money always measures this rise and fall, and remains
the same.
•Legal tender → is the national currency, such as paper money and coins, that is declared by law to be valid payment for debts and
financial obligations
•The drawee must be named. — This provision applies only to bills and checks. Obviously, an order which is not addressed to any
person cannot be a bill, (see Sec. 14.) A bill is an order.
→ to enable the payee or holder to know upon whom he is to call for acceptance or payment.
• A promissory note has no drawee. Like the drawee, the payee must be named with reasonable certainty, (see Sec. 8, par. 2.)

Formal requirements of negotiability ingeneral: A negotiable instrument, briefly stated, is a contractual obligation to
pay money. However, whether or not an instrument is negotiable or non-negotiable depends entirely on its form and content. In
determining the negotiability of an instrument, the following must be considered:
(1) the whole of the instrument;
(2) only what appears on the face of the instrument; and
(3) the provisions of the Negotiable Instruments Law specially Section 1 thereof which gives the requirements of
negotiability.
A negotiable instrument ceases to be negotiable → if the indorsement prohibits the further negotiation of the
instrument, (see Sec. 36[a]; also Secs. 32 and 41.)
A non-negotiable instrument may not be negotiated but it may be assigned or transferred (see Sec. 30.)
Commercial paper → in its broadest sense, refers to written promises or obligations that arise out of commercial transactions from the
use of such instruments as promissory notes and bills of exchange.
Money → means what is coined or stamped by public authority and has its value fixed by public authority.
Negotiable promissory note → 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. (see Sec. 184.)
• → This class of negotiable instrument is a promise paper, or two- party paper.
Original partiestoa promissory note:
Maker → The one who makes the promise and signs the instrument.
Payee → The party to whom the promise is made or the instrument is payable.
"order" and "bearer" → usually referred to as words of negotiability.
Where no time for payment is expressed, an instrument is payable on demand. (Sec. 7[b].)
bill of exchange → usually called a "bill." If drawn on a bank and payable on demand, the order bill is, by definition, called check. (Sec. 185.)
The check is the most common form of order paper.
Negotiable bill of exchange → 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 to bearer. (Sec. 126)
• → This class of negotiable instruments is known as order paper, or three-party paper.
Original parties to a bill of exchange:
Drawer → The person who issues and draws the order bill. He gives the order to pay money to a third party. He does not pay
directly.
Drawee → The party upon whom the bill is drawn. He is the person to whom the bill is addressed and who is ordered to pay. He
becomes an acceptor when he indicates a willingness to accept responsibility for the payment of the bill. (Sec. 62.) The drawee is a
bank in the case of a check.
Payee → The party in whose favor the bill is originally drawn or is payable. The parties need not all be distinct persons. Indeed, a bill
will be valid where there is only one party to it, for one may draw on himself payable to his own order (see Sec. 8.), that is, the two parties
to the bill can be the same person (drawer-drawee or drawer-payee).

General characteristics of a bill of exchange not found in the promissory note:

(1) The words "pay to" indicate an unconditional order to pay instead of an unconditional promise to pay a promissory note.
(2) The name " XXXXXXXX" indicates the drawer, the one who signs the bill of exchange. He corresponds to the maker in the case of a
promissory note.
(3) The name "XXXXXXXXXX" indicates the drawee, the one to whom the bill is addressed. In a promissory note there is no drawee. The
drawee is not really a party to the bill. He assumes liability only when he accepts the bill usually by writing the word "accepted" and
signing his name on the face thereof (see Secs. 132 and 133.) in which case he ceases to be a drawee and becomes known as an acceptor.
By accepting, the acceptor becomes primarily liable like the maker of a note (see Sec. 62.), the drawer becoming only a surety, (seeSec.61.)

Liability of drawee for non-payment. — If the drawee refuses to accept when he has funds for the purpose, he becomes liable to the
drawer for the resulting damages and the harm done to his credit.
Sec. 2. Certainty as to sum; what constitutes. — The sum payable isa sum certain within the meaning of this Act, althoughitisto bepaid —
(a) With interest; or
(b) By stated installments; or
(c) By stated installments, with a provision that upon default in payment of any installment or of interest the whole shallbecomedue;or
(d) With exchange, whether at a fixed rate or at the current rate;or
(e) With costs of collection or an attorney's fee, in case payment shall not be made at maturity.
Permissible clauses or stipulations → The sum is not rendered uncertain by a clause in the instrument that it is to be paid with interest,
by stated installment, with exchange, with costs of collection, or with attorney's fees. Neither is the certainty of the sum affected by an
acceleration provision in an installment note.
basic test: whether the holder can determine by calculation or computation the amount payable when the instrument is due. But a
promissory note giving the maker the right to ascertain the amount rightly payable thereunder is non-negotiable
Accrual/rate of interest not specified → If the instrument provides for the payment of interest without stating the date from which interest
is to run, it shall be computed from the date of the instrument, and if the instrument is not dated, from the issue thereof. (Sec. 17[b].) If
there is a stipulation for the payment of interest but the rate is not specified, it shall be the legal rate of 6% (Art. 2209, Civil Code.), now 12%.
Interest usurious → If the interest stipulated is usurious,3 the instrument is still negotiable because the contract remains valid as to
the principal. (Sec. 7, Act No. 2655 [Usury Law]
Acceleration at option of holder. — A note providing for acceleration at the option of the holder is non-negotiable.
Extensionclauses→The extension clauses are the opposite of acceleration clauses. They appear in instruments with fixed future maturity
date and provide that under certain circumstances, the date shall be further extended. An instrument is negotiable 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 or after a specified event.
If right to extend is given to the holder → the time of payment need not contain a new fixed maturity date or the length of extension does
not have to be specified. The reason is that the holder is free to demand payment at the maturity date or any time after said date. In
fact, the holder is free to postpone the time of payment even if no extension clause appears.
If obligor is the one given the right to extend payment → the interest of the extension must be specified to keep the instrument negotiable,
for of the right to extend is without limit, it cannot be determined with absolute certainty when the holder will have the absolute
right to be paid.
extension clauses → the opposite of acceleration clauses. They appear in instruments with fixed future maturity date and provide that
under certain circumstances, the date shall be further extended.

Sum to be paid withexchange:

Exchange → the charge for the expense of- providing funds at the place where the instrument is payable to cover such instrument
which is issued at another place. It may be at a fixed rate or at the current rate.
→ The provision on payment with exchange applies to instruments drawn in one country and payable in another.
In other words, exchange is applicable only to foreign bills, (see Sec. 129.) Exchange not applicable to inland or domestic bill. so that a
stipulation for payment in exchange may be disregarded.
Under Republic Act No. 8183, 5→ monetary obligation must be paid in Philippine currency which is legal tender in the Philippines. However,
the parties may agree that the obligation or transaction shall be settled in any other currency at the time of payment.
Increase in amount due effective after maturity. — Negotiability is not affected by a provision that in case payment shall not be made
at maturity there shall be added to the amount due on the note costs of collection or an attorney's fee.
Liability for attorney's fees. — The stipulation for attorney's fees may be reduced by the courts if found unconscionable or unreasonable. But
attorney's fees which the debtor binds himself to pay in case of litigation shall not be considered interest under the Usury Law (see note 2.)
because said law is not applicable. If the attorney's fee is not specified, then it shall be in a reasonable sum.

Sec. 3. When promise is unconditional. — An unqualified order or promise to pay is unconditional within the meaning of this Act,though
coupled with —
(a) 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
(b) A statement of the transaction which gives rise to the instrument.But an order or promise to pay out of particular fund is not unconditional.

Implied promise to pay. — It is not essential that the word "promise" should be used. Any words equivalent to a
promise or assumption of full responsibility for the payment of the note (like "payable", "to be paid," "I agree to pay," "I guaranty to pay,"
"M obliges himself to pay," "Good for," "due on demand," etc.) on the face of an instrument are sufficient to constitute a "promise to
pay."
Bare acknowledgment of indebtedness. — A bare admission or acknowledgement of indebtedness (like "I.O.U.," "due PI,000.00," "for value
received," etc.) alone is not a negotiable instrument as it does not import an express promise to pay or show that the parties intend the debt to
be paid.
In the case of a bill of exchange →there must be an unconditional order to pay by one party to another; otherwise, it is non- negotiable. (Sec.
l[b].)
The test of negotiability in every case is said to be whether or not the instrument carries the general personal credit of the maker or drawer.
If it does, the instrument is negotiable; if it carries only the credit of a particular fund, the instrument is non-negotiable.
Terms and conditions contained in another paper. — If the promise or order is "subject to or governed by the terms and conditions of our
contract executed by us on___________________ ," the instrument is not negotiable because the obligation to pay is burdened with the terms
and conditions of another contract, subjecting recovery on the Instrument to defenses available under the contract.
The negotiability of a bill or note is not affected by a reference which is simply:
(a) a recital of the consideration for which the paper was given; or
(b) a statement of the origin of the transaction; or
(c) a statement that it is given in accordance with the terms of a contract between the same parties."

Sec. 4. Determinable future time; what constitutes. — An instrument is payable at a determinable future time, within the meaningof
this Act, which is expressed to be payable —
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future time specified therein; or
(c) 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. An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect.

Certainty of time of payment:

(1) Instrument payable at all events. — It is an essential requisite of a negotiable instrument that it must be payable at all
events. Hence, an instrument which is only payable upon a contingency is not negotiable because it does not appear on its
face whether or not it will ever be paid.
(2) When time of payment certain. — In order that an instrument may be negotiable, there must be certainty as to the time of
payment, i.e., the payment will certainly become due and payable one time or other, though it may be uncertain when that time
will come. And there is certainty as to the time when the instrument is payable on demand, or at a fixed or determinable
future time. (Sec. l[c].)
demand (or right) instrument → the holder may call for payment at any time.
term or time instrument → payable only upon the arrival of the time for payment.
Payable upon a contingency → non-negotiable because the order is conditional. The payment is not certain.
contingency → in law, an uncertain future event which may or may not happen.
Sec. 18. Liability of person signing in trade or assumed name. — No person is liable on the instrument whose signature does not appear
thereon, except as herein otherwise expressly provided. But one who signs in a trade assumed name will be
liable to the same extent as if he had signed in his own name.

Persons liable on an instrument.

(1) General rule. — As a general rule, only persons whose signatures appear on an instrument are liable thereon. Thus, a drawee is not liable where
his signature does not appear on the bill. Neither is one bound by a promissory note executed by another because part of the consideration for which the note
was given was received by him.
(2) Exceptions. — The following are the exceptions to the general rule:
(a) Where a person signs in a trade or assumed name (Sec. 18, par. 2.) But one who signs in a trade assumed name will be liable to the same extent as if
he had signed in his own name.
(b) The principal is liable if a duly authorized agent signs on his own behalf (Sec. 19.); Sec. 19. Signature by agent; authority; how shown. — The
signature of any party may be made by a duly authorized agent. No particular form of appointment is necessary for this purpose; and the authority of the agent
may be established as in other cases of agency
(c) In case of forgery (Sec. 23.), the forger is liable even if his signature does not appear on the instrument; Sec. 23. Forged signature; effect of.—
When a signature is forged or made without authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the
instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature,
unless the party against whom it Is sought to enforce such right is precluded from setting up the forgery or want of authority.
(d) Where the acceptor makes his acceptance of a bill on a separate paper (Sec.134.);Sec. 134. Acceptance by separate instrument—Where an
acceptance is written on paper other than the bill itself, it does not bind the acceptor except in favor of a person to whom it is shown and who, on the faith
thereof, receives the bill for value
(e) Where a person makes a written promise to accept a bill before it is drawn. (Sec. 135.) Sec. 135. Promise to accept; when equivalent to
acceptance. —An unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who, upon the
faith thereof, receives the bill for value.