Negotiable Instruments Law 1.

NOT AS LEGAL TENDER – but merely as PROVISIONAL PAYMENTS

valid to extinguish obligations only upon conversion into actual
(Act No. 2031 enacted on 03 February 1911 and became effective on 02
cash. They are used to facilitate business transactions and
June 1911)*
contracts for which negotiable instruments are provisionally
Section 1. Form of negotiable instruments. — An instrument to be accepted in place of actual cash.
negotiable must conform to the following requirements:
2. AS CONTRACTS – See the definition of ACCUMULATION OF
(a) It must be in writing and signed by the maker or drawer; SECONDARY CONTRACTS.

(b) Must contain an unconditional promise or order to pay a sum certain in Principal Functions of a Negotiable Instrument
money;
1. AS A SUBSTITUTE FOR MONEY – A person can acquire goods or
(c) Must be payable on demand, or at a fixed or things or make other business transactions involving money even
if he does not have the required cash by issuing instead a
determinable future time;
negotiable instrument. Although a N.I. is not considered as legal
(d) Must be payable to order or to bearer; and tender, it is acceptable as substitute for money. But as previously
stated, a N.I. will not be considered as full payment as to
(e) Where the instrument is addressed to a drawee, he must be named or extinguish an obligation until it is actually converted into cash.
otherwise indicated therein with reasonable certainty.
2. IT INCREASES CREDIT CIRCULATION – An important aspect of a
Definition of a Negotiable Instrument Negotiable Instrument is the EXTENSION OF CREDIT. A person
It is a written contract for the payment of money which is intended as a may not have the actual cash required to complete a business
SUBSTITUTE FOR MONEY and PASSES from one person to another as deal, but if he is allowed to issue a Negotiable Instrument, credit
money, in such a manner as to give a holder in due course the right to hold transactions may increase as to affect world trade favorably.
the instrument free from defenses available to prior parties.
Principal Functions of a Negotiable Instrument
NOTE: The instrument must comply with Section 1 of the Negotiable
Instrument Law (NIL for short) to be considered as NEGOTIABLE. 3. IT INCREASES PURCHASING POWER IN CIRCULATION

IMPORTANT: Never confuse the meaning of a negotiable instrument with Example: Suppose I go to the supermarket with PHP 1,000.00 cash. As a
Section 1. If you are asked to provide the definition of a negotiable rule, I can purchase only worth PHP 1,000.00.
instrument, give the above definition. Remember, Section 1 refers to the
However, suppose I know the owner of the supermarket and I was allowed
requisites for negotiability.
to purchase another PHP 1,000.00 worth of groceries on credit by issuing a
Nature of Negotiable Instruments check or another negotiable instrument.
In this case, my credit has been extended for another PHP 1,000.00 worth All negotiable instruments must be in writing, otherwise they cannot be
of groceries, and my purchasing power has been increased from my negotiated from one person to another. There is no particular form or
original PHP 1,000.00 to PHP 2,000.00 type of writing required – it may be typewritten, printed or handwritten.
Any writing implement can be used. Likewise, no particular writing
material is required – the instrument may be written in a bond paper, pad
Sec. 1. Form of Negotiable Instruments paper, linen cloth, parchment or any other kind of writing material. What
the law requires is that the instrument must be in writing.
KEYWORD: W U P O A

A negotiable instrument must conform to all of the requisites as stated in

this section, otherwise it is NON-NEGOTIABLE.

Note: Negotiability is a matter of FORM. If an instrument possesses all of

the five (5) requisites, it becomes NEGOTIABLE even though it may be void,
voidable, unenforceable or uncollectible.

Question: Suppose a person issues a promissory note in payment for the

“shabu” he purchased from a drug dealer.

1. What is the status of the contract?

2. Is the promissory note negotiable? 1st Requisite: Must be in WRITING and SIGNED by the maker or drawer.
Sec. 1. Form of Negotiable Instruments ALL of the signatures are VALID.
Answer: Signature of the maker of a promissory note or the drawer of a bill of
1. The contract is VOID for illegal consideration. exchange may be in ANY FORM, but preferably in his regularly accepted
signature, as long as he intends to be BOUND by such signature. If the
2. The PN is negotiable as long as it complies with the requisite of maker or drawer is illiterate, his signature by mark, such as “thumb mark”
Sec. 1. will be considered sufficient to bind him on the instrument as long as by
affixing such mark, he intends to be bound by it as a maker or drawer.
THEREFORE, if the instrument is NEGOTIABLE, the provisions of the
NEGOTIABLE INSTRUMENTS LAW will apply. If it is NON-NEGOTIABLE, the 1st Requisite: Must be in writing and signed by the MAKER or DRAWER.
general provisions on CONTRACTS will determine the rights and liabilities
of the parties. DRAWER – he is one of the three (3) parties in a Bill of Exchange.

1st Requisite: Must be in WRITING and SIGNED by the maker or drawer. *See Sec. 126, NIL for definition of a Bill of Exchange (BOE).
In a BOE, there are 3 parties, namely: “I promise to pay any amount which may be asked.” Negotiable or Non-
Negotiable?
DRAWER – He is actually the DEBTOR who draws the BOE requiring the
Drawee to extend him credit by asking the latter to pay the Bill to the NOTE: It is important that the amount payable must be clearly stated so
Payee first from his own pocket and later recover from the Drawer the that when it is paid on maturity, it will discharge the instrument.
amount the Drawee paid to the Payee.

PAYEE – he is actually the CREDITOR to whom the Drawer is indebted.

Sec. 2. Certainty as to sum; what constitutes.
Payee must first collect from the Drawee who is required by the Drawer to
pay him on maturity. a. With interests;

DRAWEE – He is considered the Party Primarily Liable on the Bill, subject to I promise to pay to the order of B PHP 10,000.00 on 31 December
his acceptance. The Drawee is required by the Drawer to pay the Payee 2023 at 10% per annum. (Sgd.) A
first from his own funds and recover what he has paid to the Payee from
the Drawer later on. Negotiable or Non-Negotiable?

DRAWER DRAWEE PAYEE Sec. 2. Certainty as to sum; what constitutes.

Answer: Negotiable.

The rule states that the sum payable as stated in the instrument is still
considered the sum certain although the interest on that amount is
chargeable. While the amount of interest may increase the total amount
to be paid by the payor on maturity date, still considered as the sum
certain in the principal payable.

Sec. 2. Certainty as to sum; what constitutes

Rules on %

1. Must be clearly stated otherwise not chargeable.

2. If the rate of % is not stated, what will govern is the legal rate of %
Sec. 1(b) …to pay a sum certain in money. which is 12%.

The amount to be paid must be FIXED, DEFINITE or LIQUIDATED. 3. % shall be based on the instrument if no date is expressly
stipulated on the instrument from which the interest will start to
QUESTION: A promise to pay a “large sum of money.” Negotiable or Non-
run.
Negotiable?
 4. If the instrument is undated, % shall run from the date of issue of The whole indebtedness AUTOMATICALLY becomes due and demandable
the instrument. upon default of one or two successive installments or of the interest.

Sec. 2. Certainty as to sum; what constitutes. Does it affect the negotiability of the instrument?

b. By stated installments; No, because the principal amount is still a sum certain in money.

Question: I promise to pay to the order of B PHP 10,000.00 in four (4) Note: The obligor loses the benefit of the period.
installments. Negotiable or Non-Negotiable?
Also, the holder has the option to sue only for the unpaid
Question: I promise to pay to the order of B PHP 10,000.00 in four (4) installments and collect the other installments as they fall due.
equal monthly installments beginning on 01 September 2023. Negotiable
d. With exchange, at a fixed rate or at the current rate
or Non-Negotiable?
I promise to pay to the order of B $1,000.00 US dollars on or
As to the first question, NON-NEGOTIABLE because the exact amount and
before 31 December 2022.
the due date of each installment cannot be clearly ascertained.
What is the effect if it is payable in foreign currency?
As to the second question, it is NEGOTIABLE because it is clear that a
monthly installment of PHP 2,500.00 will have to be paid starting Answer: The obligation remains valid and enforceable BUT payable only in
September up to December 2023. Philippine currency at the prevailing rate of exchange at the time the
obligation is constituted.
Determination of Negotiability
Supposed in the given problem, the PN was issued on 01 November 2022
1. By the provisions of the NIL, particularly Sec. 1 thereof;
and the exchange rate at that time is $1=PHP 52.40. When the note was
2. By considering the whole instrument; paid on 31 December 2022, the exchange rate is $1=PHP 55.50. How much
should be paid to B?
3. By what appears on the face of the instrument and not elsewhere.
e. With cost of collection or an attorney’s fees etc.
Note: When in DOUBT, it is resolved in FAVOR of NEGOTIABILITY in order
to encourage the FREE CIRCULATION of the instrument. I promise to pay to the order of B PHP 5,000.00 on or before 31
December 2023. In case I fail to pay him on the said date, I will answer the
Sec. 2. Certainty as to sum; what constitutes
cost of litigation in the amount of PHP 20,000.00 (Sgd.) A
c. With escalation clause in case of default of one or two
NEGOTIABLE
installments
The total cost of collection is merely added to the principal obligation and
What is an Escalation Clause?
does not alter the amount of the sum payable.
The costs and attorney’s fees are merely incidents in the collection of the “PHP 500.00 in cash or in rice.”
principal obligation.
“Partly in money and partly in rice.”
Sec. 1. Requisite B. Must contain an unconditional promise or order to
“PHP 500.00 in goods.”
pay a sum certain in money
Answer: NON-NEGOTIABLE.
The promise or order to pay in both the promissory note and the bill of
exchange, respectively, must be completely UNCONDITIONAL. If the Payment of a sum certain must be in money or legal tender only.
payment of the amount is subject to the fulfillment of a condition or the
happening of a contingency, the PN or the BOE becomes NON- Supposed, “promise to pay PHP 500.00 in cash or in goods, at the option
NEGOTIABLE. of the holder?”

I promise to pay to the order of B PHP 5,000.00 if he passes the CPA Board This is NEGOTIABLE because the option or the right to choose
Examination this coming November, 2023. (Sgd.) A what to accept as payment for the debt or obligation is given to the holder
of the instrument.
Pay to the order of B PHP 5,000.00 if he passes the CPA Board this coming
November 2023. Sec. 3. When promise is unconditional

(Sgd.) A a. Reimbursement from a particular fund or debit a particular

account
To: X
As a rule, negotiable instruments involve EXTENSION OF CREDIT and
I.O.U. PHP 500.00 (Sgd.) A
An UNQUALIFIED order to pay is deemed UNCONDITIONAL if the
Nego or Non-Nego? party primarily liable (i.e. Drawee) pays the sum certain FIRST out of his
own funds, THEN laters reimburses himself from a particular fund
Answer: NON-NEGOTIABLE.
belonging to the drawer.
In a PN, a mere acknowledgment of a debt does not constitute a
Pay to the order of B P1,000.00 on 30 November 2023 and you may
promise. There must be an indication as to when the debt will be paid.
reimburse yourself from the sale of my car.
Example: I.O.U. PHP 500.00 payable on 15 November 2023. (Sgd.) A
TO: X (Sgd.) A
This now becomes a valid promise to pay.
Pay to the order of B P1,000.00 on 30 November 2023 from the sale of my
NOTE: In a BOE, there must be a DEFINITE ORDER TO PAY. A REQUEST, car.
SUPPLICATION or a PLEA TO PAY will NOT be valid.
TO: X (Sgd.) A
State if the following is negotiable or non-negotiable:
NEGOTIABLE I promise to pay to the order of B PHP 500,000.00 on or before 30
November 2023 for the 2023 Black Toyota Vios Manual Transmission that I
In the above case, A drawer is requiring X, drawee, to extend him
will purchase from him.
credit by ordering X to pay B, payee, the PHP 1,000.00 out of the personal
funds of X, and afterwards, X may recover what he paid to B by I promise to pay to the order of B PHP 500,000.00 on or before 30
reimbursing himself from the proceeds of the sale of A’s car. November 2023 for the 2023 Black Toyota Vios Manual Transmission that
he will purchase from C.
NON-NEGOTIABLE
ANSWER:
Here, there is no extension of credit. Rather payment to B will
come directly from a particular fund which in this case is the sales NEGOTIABLE – it merely explains the nature of the transaction.
proceeds of A’s car.
NON-NEGOTIABLE – it is subject to the terms and condition of another
NEGOTIABLE or NON-NEGOTIABLE? contract.

I promise to pay to the order of B P1,000.00 out of the mortgage loan I will Sec. 4. Determinable future time: What constitutes
obtain from the bank.
a. At a fixed period after date or sight
I promise to pay to the order of B P1,000.00 from the proceeds of the sale
of my car. “AFTER DATE” – PN

Pay to the order of B P1,000.00 on 30 November 2018 and charge it to my “AFTER SIGHT” – BOE Valenzuela City, 29 Nov. ’23
account.
I promise to pay to the order of B P1,000.00 30 days after date.
TO: X (Sgd.) A (Sgd.) A
ANSWERS: Supposed in the problem presented earlier, the PN is UNDATED?
NON-NEGOTIABLE – payment will come from a mortgage loan. Valenzuela City

NON- NEGOTIABLE – based on contingency. I promise to pay to the order of B P1,000.00 30 days after date.

NEGOTIABLE – A (drawer) is ordering X (drawee) to pay B from X’s own The 30 days will be counted from the DATE OF ISSUE
funds which later on is charged to the account of A. Valenzuela City, 29 Nov. ’23
b. Statement of the Transaction Pay to the order of B P1,000.00 30 days after sight.
NEGOTIABLE or NON-NEGOTIABLE? TO: X (Sgd.) A
When will it be counted? From the date of the bill? Date of issue? TEST OF NEGOTIABILITY:

ANSWER: Whether or not (WON) the promise or order would give rise
to a separate cause of action for breach of contract if the additional
It is counted from the date of the first presentment for acceptance
act is not performed or done.
to be made by the holder to the drawee.
If the answer is YES, then it is NON-NEGOTIABLE.
b. On or before a fixed or determinable future time

I promise to pay to the order of B P1,000.00 on or before 30

November 2023.

I promise to pay to the order of B P1,000.00 on or before Christmas.

c. On or at a fixed period after the occurence of an event sure to

happen.

The event must be a FUTURE and CERTAIN event which is

sure to happen although the exact time of its occurence is not
known. This is what we call a period or a day certain.

I promise to pay to the order of B P1,000.00 10 days after B’s father

dies.

I promise to pay to the order of B P1,000.00 ten days after B marries

Nancy.

Sec. 5. Additional Provisions NOT Affecting Negotiability

General Rule: The Party Primarily Liable (PPL)

PN – MakerBOE – Drawee

Shall be required to pay a “SUM CERTAIN IN MONEY”

Therefore: I promise to pay to the order of B PHP 1,000.00 and

deliver an Iphone XIV on or before April 22, 2023.