XIII. Negotiable Instruments Law (Act No. 2031) Section 4. Determinable Future Time; What Constitutes.

- An
instrument is payable at a determinable future time, within
A. Requisites for Negotiability the meaning of this Act, which is expressed to be payable -

Section 1 of the NIL enumerates the requisites for an (a) At a fixed period after date or sight; or
instrument to become negotiable: (b) On or before a fixed or determinable future time specified
therein; or
a. It must be in writing and signed by the maker or drawer; (c) On or at a fixed period after the occurrence of a specified
b. It must contain an unconditional promise or order to pay event, which is certain to happen, though the time of
a sum certain in money; happening be uncertain.
c. It must be payable on demand, or at a fixed or
determinable future time; An instrument payable upon a contingency is not negotiable,
d. It must be payable to order or to bearer; and and the happening of the event does not cure the defect.
e. Where the instrument is addressed to a drawee, he must
be named or otherwise indicated therein with reasonable
certainty. Section 5. Additional Provision Not Affecting Negotiability. -
An instrument which contains an order or promise to do any
B. Form and Interpretation - Act No. 2031, Sections 1-12. act in addition to the payment of money is not negotiable.
But the negotiable character of an instrument otherwise
Section 1. Form of Negotiable Instruments. - An instrument negotiable is not affected by a provision which -
to be negotiable must conform to the following
requirements: (a) Authorizes the sale of collateral securities in case the
instrument be not paid at maturity; or
(a) it must be in writing and signed by the maker or drawer; (b) Authorizes a confession of judgment if the instrument be
(b) Must contain an unconditional promise or order to pay a not paid at maturity; or
sum certain in money; (c) Waives the benefit of any law intended for the advantage
(c) Must be payable on demand, or at a fixed or or protection of the obligor; or
determinable future time; (d) Gives the holder an election to require something to be
(d) Must be payable to order or to bearer; and done in lieu of payment of money.
(e) Where the instrument is addressed to a drawee, he must
be named or otherewise indicated therein with reasonable But nothing in this section shall validate any provision or
certainty. stipulation otherwise illegal.

Section 2. Certainty as to Sum; What Constitutes. - The sum Section 6. Omission; Seal; Particular Money. - The validity
payable is a sum certain within the meaning of this Act, and negotiable character of an instrument are not affected
although it is to be paid - by the fact that -

(a) With interest; or (a) It is not dated; or

(b) By stated installments; or (b) Does not specify the value given, or that any value has
(c) By stated installments, with a provision that upon default been given therefor; or
in payment of any installment or of interest the whole shall (c) Does not specify the place where it is drawn or the place
become due; or where it is payable; or
(d) With exchange, whether at a fixed rate or at the current (d) Bears a seal; or
rate; or (e) Designates a particular kind of current money in which
(e) With costs of collection or an attorney’s fee, in case payment is to be made.
payment shall not be made at maturity.
But nothing in this section shall alter or repeal any statute
Section 3. When Promise is Unconditional. - An unqualified requiring in certain cases the nature of the consideration to
order or promise to pay is unconditional within the meaning be stated in the instrument.
of this Act, though coupled with -
Section 7. When Payable on Demand. - An instrument is
(a) An indication of a particular fund out of which payable on demand -
reimbursement is to be made, or a particular account to be
debited with the amount; or (a) Where it is expressed to be payable on demand, or at
(b) A statement of the transaction which gives rise to the sight, or on presentation; or
instrument. (b) In which no time for payment is expressed.

But an order or promise to pay out of a particular fund is not Where an instrument is issued, accepted, or indorsed when
unconditional. overdue, it is, as regards the person so issuing, accepting, or
indorsing it, payable on demand.

Section 8. When Payable to Order. - The instrument is

payable to order where it is drawn payable to the order of a
specified person or to him or his order. It may be drawn A certificate of deposit is defined as a written
payable to the order of - acknowledgment by a bank or banker of the receipt of a sum
of money on deposit which the bank or banker promises to
(a) A payee who is not maker, drawer, or drawee; or pay to the depositor, to the order of the depositor, or to
(b) The drawer or maker; or some other pereson or his order, whereby the relation of
(c) The drawee; or debtor and creditor between the bank and the depositor is
(d) Two or more payees jointly; or created. (Prudential Bank vs. CR, G.R. No. 180390, July 27,
(e) One or some of several payees; or 2011)
(f) The holder of an office for the time being.
2. Bill of Exchange - it is an unconditional order in writing
Where the instrument is payable to order the payee must addressed by one person to another, signed by the person
be named or otherwise indicated therein with reasonable giving it, requiring the person to whom it is addressed to pay
certainty. on demand or at a fixed or determinable future time a sum
certain in money to order or to bearer. (Sec. 126, NIL). Unlike
Section 9. When Payable to Bearer. - The instrument is in making a promissory note, the person executing a bill of
payable to the bearer - exchange (referred to as the “drawer”) incurs no personal
and direct engagement to pay. There is only an order
(a) When it is expressed to be so payable; or directing another paty (called the “drawee”) to pay the
(b) When it is payable to a person named therein or bearer; instrument.
or
(c) When it is payable to the order of a fictitious or non- The parties appearing on the face of the note are the drawer
existing person, and such fact was known to the person (the issuer and signatory), the payee, and the drawee (to
making it so payable; or whom the instrument is addressed). The drawee must be
(d) When the name of the payee does not purport to be the named or otherwise indicated therein with reasonable
name of any person; or certainty. (Sec. 1, [e], NIL).
(e) When the only or last indorsement is an indorsement in
blank. Check - it is a bill of exchange drawn on a bank payable on
demand. (Sec. 185, NIL) Since a check is a bill of exchange,
Section 10. Terms, When Suffcient. - The instrument need the provisions applicable to a bill of exchange payable on
not follow the language of this Act, but any terms are demand likewise apply to a check, unless otherwise provided
sufficient which clearly indicate an intention to conform the in the NIL.
requirements hereof.
3. Treated either as a Note or as a Bill - The law also provides
Section 11. Date, Presumption As To. - Where the for certain scenarios where the holder may treat the
instrument or an acceptance or any indorsement thereon is instrument either as a note or a bill, or treat a bill as a note,
dated, such date is deemed prima facie to be the true date thus: The holder, at his election, may treat a negotiable
of the making, drawing, acceptance, or indorsement, as the instrument either as a promissory note or a bill of exchange
case may be. where the instrument ambiguous that there is doubt
whether it is a note or a bill. (Sec. 17[e], NIL).
Section 12. Antedated and Postdated. - The instrument is
not invalid for the reason only that it is antedated or Likewise, the holder, at his option, may treat a bill of
postdated, provided this is not done for an illegal or exchange either as a note or a bill when:
fraudulent purpose. The person to whom an instrument so
dated is delivered acquires the title thereto as of the date of a. ) The drawer and drawee are the same person
delivery. b. ) The drawee is a fictitious person or
c. ) The drawee is a person not having capacity to contract.
C. Types of Negotiable Instruments (Sec. 130, NIL).

1. Promissory Note - it is an unconditional promise in writing

made by one person to another, signed by the maker, D. Liabilities of the Parties - Act No. 2031, Sections 60-69;
engaging to pay on demand, or at a fixed or determinable
future time, a sum certain in money to order or to bearer. Section 60. Liability of Maker. - The maker of a negotiable
(Sec. 184, NIL) Upon issuing a promissory note, there is a instrument by making it engages that he will pay it according
personal engagement on the part of the person executing it. to its tenor, and admits the existence of the payee and his
(Sec. 60, NIL) The parties appearing on the face of the note then capacity to indorse.
are the maker, the issuer and signatory, and the payee, to
whom the maker engaged to pay. Section 61. Liability of Drawer. - The drawer by drawing the
instrument admits the existence of the payee and his then
Where a promissory note is drawn to the maker’s own order, capacity to indorse; and engages that on due presentment
it is not complete until indorsed by him. (Sec 194, NIL). the instrument will be accepted or paid, or both, according to
Bank Certificate or Certificate of Deposit its tenor, and that if it be dishonored, and the necessary
proceedings on dishonor be duly taken, he will pay the
amount thereof to the holder, or to any subsequent indorser
who may be compelled to pay it. But the drawer may insert And, in addition, he engages that on due presentment, it shall
in the instrument an express stipulation negativing or limiting be accepted or paid, or both, as the case may be, according
his own liability to the holder. to its tenor, and that if it be dishonored, and the necessary
proceedings on dishonor be duly taken, he will pay the
Section 62. Liability of Acceptor. - The acceptor by accepting amount thereof to the holder, or to any subsequent indorser
the instrument engages that he will pay it according to the who may be compelled to pay it.
tenor of his acceptance; and admits -
Section 67. Liability of Indorser Where Paper Negotiable by
(a) The existence of the drawer, the genuiness of his Delivery. - Where a person places his indorsement on an
signature, and his capacity and authority to draw the instrument negotiable by delivery he incurs all the liabilities
instrument; and of an indorser.
(b) The existence of the payee and his then capacity to
indorse. Section 68. Order in Which Indorsers are Liable. - As respects
one another, indorsers are liable prima facie in the order in
Section 63. When Person Deemed Indorser. - A person which they indorse; but evidence is admissible to show that
placing his signature upon an instrument otherwise than as as between or among themselves they have agreed
maker, drawer, or acceptor is deemed to be an indorser, otherwise. Joint payees or joint indorsees who indorse are
unless he clearly indicates by appropriate words his deemed to indorse jointly and severally.
intention to be bound in some other capacity.
Section 69. Liability of an Agent or Broker. - Where a broker
Section 64. Liability of Irregular Indorser. - Where a person, or other agent negotiates an instrument without
not otherwise a party to an instrument, places thereon his indorsement, he incurs all the liabilities prescribed by section
signature in blank before delivery, he is liable as indorser, in sixty-five of this Act, unless he discloses the name of his
accordance with the following rules: principal and the fact that he is acting only as agent.

(a) If the instrument is payable to the order of a third

person, he is liable to the payee and to all subsequent
parties. E. Defenses - Forgery, Want of Delivery and Material
(b) If the instrument is payable to the order of the maker or Alteration
drawer, or is payable to bearer, he is liable to all parties
subsequent to the maker or drawer.
(c) If he signs for the accommodation of the payee, he is Real defenses inlude:
liable to all parties subsequent to the payee.
1. Forgery
Section 65. Warranty Where Negotiation by Delivery and So 2. Minority and ultra vires acts of corporation
Forth. - Every person negotiating an instrument by delivery 3. Incomplete and undelivered instrument
or by a qualified indorsement warrants - 4. Material alteration
5. Duress which amount to forgery
(a) That the instrument is genuine and in all respects what it 6. Fraud in factum or in esse contractus
purports to be; 7. Illegality
(b) That he has a good title to it;
(c) That all prior parties had capacity to contract; Personal defenses include:
(d) That he has no knowledge of any fact which would
impair the validity of the instrument or render it valueless. 1. Want of deliery of a complete instrument
2. Incomplete but delivered instrument or cases where the
But when the negotiation is by delivery only, the warranty instrument was filled up beyond the authority given
extends in favor of no holder other than the immediate 3. Absence, failure or partial failure of consideration
transferee. 4. Insertion of a wrong date
5. Ante-dating or posting
The provisions of subdivision (c) of this section do not apply 6. Fraud in inducement, duress or fear.
to persons negotiating public or corporation securities, other
than bills and notes. Forgery - Sec. 23 provides, “When a signature is forged or
made without the authority of the person whose signature it
Section 66. Liability of General Indorser. - Every indorser purports to be, it is wholly inoperative, and no right to retain
who indorses without qualification, warrants, to all the instrument, or to give a discharge therefor, or to enforce
subsequent holders in due course - payment thereof against any party thereto, can be acquired
through or under such signature, unless the party against
(a) The matters and things mentioned in subdivisions (a), (b), whom it is sought to enforce such right is precluded from
and (c) of the next preceding section; and setting up the forgery or want of authority.”
(b) That the instrument is at the time of his indorsement valid
and subsisting. Want of Delivery - Every contract on a negotiable
instrument is incomplete and revocable until delivery of the
instrument for the purpose of giving effect thereto. As
between immediate parties and as regards a remote party (b) That he became the holder of it before it was overdue,
other than a holder in due course, the delivery, in order to be and without notice that it has been previously dishonored, if
effectual, must be made either by or under the authority of such was the fact;
the party making, drawing, accepting or indorsing, as the ase (c) That he took it in good faith and for value; and
may be; and, in such case, the delivery may be shown to have (d) That at the time it was negotiated to him, he had no
been conditional, or for a special purpose only, and not for notice of any infirmity in the instrument or defect in the title
the purpose of transferring the property of the instrument. of the person negotiating it.”

But where the instrument is in the hands of a holder in due

course, a valid delivery thereof by all parties prior to him so
as to make them liable to him is conclusively presumed.

Material Alteration - Material alteration is any alteration

which changes:

(a) The date;

(b) The sum payable, either for principal or interest;
(c) The time or place of payment;
(d) The number of the relations of the parties;
(e) The medium or currency in which payment is to be made;
(f) Or which adds a place of payment where no place of
payment is specified, or any other change or addition which
alters the effect of the instrument in any respect, is a
material alteration. (Sec. 125, NIL).

Where a negotiable instrument is materially altered without

assent of all parties liable thereon, it is avoided, except as
against a party who has himself made, authorized, or
assented to the alteration and subsequent indorsers.

F. Relationship among Drawer, Drawee, and Holder, and

their corresponding rights and obligations.

Drawer - The maker and the drawer warrant the existence of

the payee and his then capacity to indorse.

Drawee - If the instrument is a bill of exchange, it is

categorailly required that the drawee must be named or
otherwise indicated therein with reasonable certainty.

Holder - means the payee or indorsee of a bill or note who is

in possession of it, or the bearer thereof.

In an order instrument, the possessor must be a payee or

indorsee to be considered as the holder. In a bearer
instrument, the person in possession is considered by law as
“bearer”. Hence, he is the holder.

A holder has the right to sue thereon in his own name. Also,
payment to him in due course discharges the instrument.

Holder in due course - holds the instrument free from any

defect of title of prior parties, and free from defenses
available to prior parties among themselves, and may enforce
payment of the instrument for the full amount thereof
against all parties liable thereon.

Sec. 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;