Act No.

2031 – THE NEGOTIABLE INSTRUMENTS LAW

Section 1 – The instrument to be negotiable must conform to the following requirements:

a. It must be in writing, signed by the maker or drawer
 The instrument must be in writing or intentionally reduced in tangible form otherwise
nothing could be negotiated or passed from hand to hand. It may be made on any
other substitute for paper as long as it is movable in nature and materials capable of
preserving the writing.
 Drawer o maker intended to be bound by the instrument. If the signature is so placed
upon the instrument that is not clear if what capacity the person intended to sign, he
is deemed an indorser.

b. It must contain an unconditional promise or order to pay in sum certain of money

 Sec 3 - The instrument must contain an unconditional promise or order to pay a sum
certain in money because no one would accept a paper for debt if the right to recover
were not absolute or unconditional in nature. An instrument remains negotiable if
the terms appearing thereon do not affect the unconditional duty to pay, as follows:
 An indication of a fund out of which reimbursement if to be made
Fund indicated is not the direct source of payment but only the source of
reimbursement
 Or a particular account to be debited with the amount
Merely indicates a particular account out of which the holder or drawer is to
reimburse himself Ï promise to pay P or order the sum of P10,000 to be debited
with my current account”- in this case, the instrument is payable not out of a
particular fund, it merely indicates a particular account out of which the holder
or drawee is to be reimbused
 A statement of the transaction which gives rise to the instrument
 Mere recital of consideration for instrument/origin of transaction
(NEGOTIABLE)
 Terms and conditions contained in another paper (NON-NEGOTIABLE)
Because the obligation to pay is burdened with the condition of the terms
and conditions of another contract, subjecting recovery on the instrument to
defenses available under that contract
 An order or promise to pay out of a particular fund is conditional (NON-
NEGOTIABLE)
The amount to be paid is made to depend upon the adequacy or existence of the
fund designated “I promise to pay P or order the sum of P10,000 out of my salary
in the government or out of the proceeds of the sale of my shares of stocks”- in
this case, the maker or drawee is limited to the fund indicated and is not supposed
to pay if the fund should prove insufficient.
 Sec 2 - The instrument is payable in sum certain of money
 If the holder can determine from the instrument the amount he is entitled to
receive at maturity

1
 Because negotiable instrument is intended as a substitute for money and this
cannot be unless it can be ascertained the instrument exactly how much money
it represent itself
 There are factors, though stipulated in the instrument, that does not affect its
negotiability as provided in Sec 2 of this act, as follows:
i. It is payable with interest, either, (mere incident)
 At fixed rate, or
 At increase or reduced rate, or
 Not specified – use the legal rate at the date of the instrument or absence
thereof, date of issuance
 usurious
ii. It is payable by stated installments – does not affect the negotiability as
long as it expressly stated the following:
 Amount due of each installment
 Interest due of each installment
 Due date of each installment
iii. It is payable by stated installment, with a provision that, upon default in
payment of any installment or of interest, the whole amount shall become
due (acceleration clause-must be stipulated in writing)
 Acceleration clause
o Acceleration dependent on maker
The maker or holder cannot accelerate the note unless the maker
fails to pay an installment
o Acceleration at option of holder – non-negotiable
 Extension clause
o Option of the holder
Length of extension does not have to be specified
o Option of the maker
The interest of the extension must be specified to keep the
instrument negotiable, for if 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.
iv. It is payable with exchange, whether at a fixed rate or at the current rate
 Payment in foreign currency
Current rate of exchange at any given time may easily be ascertained by
inquiry from the banks dealing on Fx
 Payment with exchange rate
Applicable only to foreign bills
 Exchange not applicable to inland or domestic bill
If the instrument is both drawn and payable at the same place, there can
be no exchange so that a stipulation for payment in exchange may be
disregarded.
v. It is payable with costs of collection or an attorney’s fee, in case payment
shall not be made at maturity

2
 When the instrument becomes overdue, the amount to which the holder is
entitled becomes uncertain, but this case, it has already ceased to perform as
a substitute for money, hence the following will not impair its negotiability:
 Increase in amount due effective after maturity
 Uncertainty of sum payable only after maturity
 Liability for attorney’s fee
c. It must be payable on demand or at a fixed or determinable future time (there must be
certainty as to the time of payment)
It is an essential requisites 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. A note containing a
provision that it may be renewed at maturity is non-negotiable because there is no
unconditional promise to pay at maturity.
 Sec 7 - On demand – cannot be contradicted by parol proof
An instrument payable on demand is due and payable immediately after delivery. It
is a present debt due at once.
An instrument is payable on demand: the holder may call for payment at any time:
 When it is so expressed to be payable on demand, or at sight, or on presentation
(in bills of exchange); or
 In which no time is expressed
 OTHERS – when an instrument was already overdue hence, ceases to be
negotiable
 Payable on demand as regards the maker
 Payable on demand as regards the acceptor
 Payable on demand as regards the indorser
 Sec 4 - An instrument is payable at a determinable future time which is expressed to
be payable – a term or time instrument is payable only upon the arrival of the time
for payment. The time must be certain so that the holder will know when he may
enforce the instrument. Otherwise, the present value of the instrument cannot be
determined
 At a fixed period after date or sight; or
“I promise to pay or order the sum of P10T on Dec 10, 2016” - The future date
specified is a fixed time.
“On or before 60 days after date, I promise to pay or order the sum of P10T” –
here, the date of maturity may be determined beforehand by counting 60 days
from the date if its issuance. However, an instrument payable “at the earliest
possible time after date “ is not payable at a definite time
“60 days after sight, pay to the order of P the sum of P10T” – after sight means
after the instrument is seen by the drawee upon presentment for acceptance or
accepted by the drawee.
 On or before a fixed or determinable future time specified therein; or
“on or before Dec 10, 2016, I promise to pay P or order P10T”
Maker – has the option to pay on Dec 10, 2016 or before the date, he has the
option to pay in advance of the legal liability if he sees fit

3
 Payee – he can demand payment only at the time fixed and not before.
“on demand or at the end of the year of the year, I promise to pay P or order
P10T”
Maker -
Payee – is given unrestricted power to declare the note due at any time before
maturity which renders the note non-negotiable because it renders the time of
payment uncertain.
 On or at a fixed period after the occurrence of a specified event, which his
certain to happen, though the time of happening be uncertain.
“I promise to pay P or order the sum of P10T upon the death of his father”-
negotiable because the specified event, is absolutely certain to happen although
the time of happening is uncertain
NOTE:
A bill or note payable before several days before the occurrence of the specified
event or payable upon the contingency is non-negotiable.
d. It must be payable to the order or bearer
 Sec 8 – when 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 to the order of:
 A payee who is not maker, or
“I promise to pay P10T to the order of P (or to pay P or order)”
Signed: R
 A payee who is not drawer; or
“Pay to the order of P P10T”
Signed: R
 A payee who is not drawee; or
“Pay to the order of P P10T”
Signed: R
To: W
 The drawer or
“Pay to the order of myself P10T”
Signed: R
To: W
 maker; or
“I promise to pay to the order of myself P10T”
Signed: R
NOTE: where the note is drawn to the maker’s own order, it is not complete until
indorsed by him (Sec 184)
 to drawee;
“Pay to the order of yourself P10T”
Signed: R
To: W
Note: Being both the drawee and payee, W can pay himself on maturity from the
funds belonging to the drawer in his possession

4
  Two or more payees jointly; or
“Pay to the order of P and A P10T”
Note: sec 41, where an instrument is payable to the order of two or more payees
or indorsees who are not partners, all must indorse unless the one indorsing it
has the authority to indorse for the others
 One or some of several payees; or
“Pay to the order of P, A, or B P10T” or “Pay to the order of P, A, and B, or any of
them or any two of them”
Note: in this case, the instrument is payable to either one or them, and the
indorsement of any one is sufficient to pass title.
 The holder of an office for the time being
“Pay to the order of the Commissioner of Internal Revenue” or “Pay to the order
of the Treasurer, PNB”
 NOTE: EFFECT WHERE PAYEE/DRAWEE NOT NAMED OR DESCRIBED
 A specified person (payee) must always be named in an order instrument either
before or after the word “order” because if there is none, then, there is nobody
who could give the order or authority to collect. In other words, there would be
nobody who could indorse the instrument and therefore, there is no point
considering it negotiable.
 The instrument is not negotiable if the is not named or otherwise indicated
therein with reasonable certainty
 Sec 9 - when payable to bearer (the person in possession of a bill or note which is
payable to bearer)
 When it is expressed to be so payable; or
“I promise to pay to the bearer P10T”
Note: “bearer, P” is not negotiable, since the word bearer merely described P.
The instrument therefore is payable to a definite person only.
 When it is payable to a person named therein or bearer; or
“pay to P or bearer/holder P10T”
 When it is payable to the order of a fictitious or non-existing person, and such
fact was known to the person making it so payable; or
“pay to John Doe or order P10T”
NOTE:
 The bill is payable to bearer and not to order because John Doe if a fictitious
person. It is essential that the payee is known to the maker or drawer to be
a fictitious or non-existing person, otherwise, it would not be a bearer
instrument but an order instrument.
 Since the maker or drawer knows that the payee is not capable of indorsing,
he cannot expect the instrument to circulate through the indorsement of the
payee and therefore, he must have intended the same to be transferred by
mere delivery just like an instrument payable to bearer.
 When it is payable to the order of a non-existing person, and such fact was
known to the person making it so payable; or
“pay to the order of the King of the Pacific Ocean”

5
 In this case, the payee named is one who does not exist and had never existed.
Since indorsement is obviously impossible, the manifest intention of the drawer
is to make the instrument a bearer paper negotiable by delivery. Further, an
instrument payable to a person who is already dead is payable to bearer.
 When the name of the payee does not purport to be the name of any person; or
“pay to cash” “pay to cash or order” “to the order P’s estate”
In making the instrument payable to an impersonal payee, the maker or drawer
intends the same to be payable to bearer, since the indorsement of this
instrument by the payee is impossible.
 When the only indorsement is an indorsement in blank
Face of the Instrument:
Pay to P or order P10T
Signed: R
To: W
Back:
Signed: P
The instrument is indorsed in blank by P by simply writing his name on the back
thereof. The blank indorsement makes the instrument payable to bearer.
 When the last indorsement is an indorsement in blank
Pay to A
Signed: P
Pay to B
Signed: A
Signed: B (delivers it to C)
The blank indorsement makes the instrument payable to bearer. Hence, C may
negotiate the bill by delivery since the last indorsement is in blank.

e. Where the instrument is addressed to a drawee, he must be named or otherwise

indicated therein with reasonable certainty
 Although it is not necessary that the drawee be named or addressed by his correct
name, the instrument may be addressed to his trade or assumed name (the
administrator of the estate of P). The holder must know to whom he should present
it for acceptance and/or for payment, otherwise the purpose of negotiable
instrument as a tool in commercial dealings will be greatly hampered.
 Sec 128 – a bill may be addressed to more than one drawee jointly, whether they are
partners or not; but not to two or more drawees in the alternative or in succession.
 “to Juan and Pedro”
xx “to Juan or Pedro
 A bill of exchange not addressed to a drawee may be treated by the holder as a
promissory note of the drawer

OMISSIONS AND PROVISIONS THAT DO NOT AFFECT NEGOTIABILITY:

Sec 5 – The negotiable character of an instrument is not affected by a provision which:
a. Authorizes the sale of collateral securities in case the instrument be not paid at maturity

6
 “I promise to pay P or order P10T on Nov 10, 2016 secured by a ring, to which he could
sell should I fail to pay him at maturity”
Negotiable. The provision or additional act is to be performed after the date of maturity
when the instrument is no longer negotiable in the full commercial sense. Note that the
statement does not subject the promise or order to the terms and conditions of the
pledge.
b. Authorizes a confession of judgment if the instrument be not paid at maturity; or
Refers to a written confession of action by the defendant acknowledging his indebtedness
to the plaintiff after the action has been filed and by withdrawal of the defense.
“for value received, I promise to pay P or order P10T and I hereby authorized my attorney-
at-law to appear in any court or record after the obligation becomes due and waive the
issuing and service of process and confess a judgment against me in favor of a holder of
the note for such amount as may appear to be unpaid thereon, together with costs of suit
and thereupon to waive all errors in any such proceedings and waive all rights to appeal”
c. Waives the benefit of any law intended for the advantage or protection of the obligor;
Neither does a waiver of protest, presentment for payment, or demand, or exemption
from attachment or execution, destroy the negotiability of an instrument.
“three months, after date, I promise to pay to the order of P10T, waiving the benefit of
the homestead and all other statutory exemptions as to the debt evidenced by this note”
d. Gives the holder an election to require something to be done in lieu of payment of
money
“I promise to pay P or order P15T or an air conditioner at the option of the holder”
Note:
If the option is with the promissor, the instrument is non-negotiable because the holder
cannot compel him to make payment in money.

Sec 6 - The validity and negotiable character of an instrument are not affected by the fact that:
a. It is not dated (date of issuance); or
Sec 17 – Construction where instrument is ambiguous:
 (b) where the instrument provides for the payment of interest, without specifying the
date from which interest is to run, the interest runs from the date of instrument, and
if instrument is undated, from the issue thereof;
 © where the instrument is not dated, it will be considered to be dated as of the time
it was issued
Sec 12 – Instrument may be ante-dated or post-dated, provided it is not done for an
illegal or fraudulent purpose. The person to whom an instrument so dated is delivered
acquires the title thereto as of the date of delivery.
Sec 13 – when date may be inserted
This section which authorizes the holder to put a date on an instrument, refers to two (2)
cases, namely
 Where an instrument is payable at a fixed period after date but is issued undated;
and
 Where an instrument is payable at a fixed period after sight but the acceptance is
undated

7
 Note:
Date stated not in calendar – the law will deem the nearest date of the month the date
intended. i.e. a note date Sep 31 will be construed as to have been intended for Sec 30.
b. Does not specify the value given, or that any value has been given therefor; or
Negotiable. It is not necessary to state that value has been received for the instrument
because consideration is presumed.
c. Does not specify the place where it is drawn or the place where it is payable; or
Sec 73 specifies where presentment for payment should be made when the place of
payment is not specified:
 An instrument is presumed to have been made where it is dated
 A note that does not specify the place of payment is presumed to be payable at the
place of residence of the maker
 If the place of execution or payment is not stated, it is presumed to be the maker’s or
drawer’s place of business or his home.
d. Bears a seal; or
There is no difference in legal effect between sealed and unsealed private writings. It is
advisable, however, to have a bill or note appear in a public instrument so that it will be
included among the preferred credits with respect to other property of the debtor. (Art
2244(4) of NCC)
e. Designates a particular kind of current money in which payment is to be made
The law does not require that payment should be made in legal tender. Money is not
necessarily limited to legal tender, as follows:
 It includes any particular kind of current money or foreign money which has fixed
value in relation to our money.
 It has been held that an instrument payable in currency or in current funds or current
bank notes constitutes good commercial paper and are really payable in money. An
instrument payable in current coins is also deemed payable in money.
 The instrument is still negotiable although it is payable in foreign money which is not
current in the Philippines if the obligation may be discharged in pesos of equivalent
amount