Chapter

2 Negotiability

Section 1. Form of Negotiable Instruments An
instrument to be negotiable must conform to the ff
requirements:
W it must be in writing and signed by the maker
or drawer;
U must contain an unconditional promise or order
to pay a sum certain in money;
P must be payable on demand, or at a fixed or
determinate future time;
O must be payable to order or to bearer
A where instrument is addressed to a drawee, he
must be names certain or otherwise indicated
therein with reasonable certainty

How to Determine Negotiability
By ascertaining if all the instruments of Section 1
appear on the face of the instrument

Caltex vs CA, et.al.
Negotiability is determined from the writing, that is
from the face of the instrument itself.
What parties said must be what they meant.

Factors in Determining Negotiability
W - Whole of instrument shall be considered
F - What appears on face of instrument, shall be
considered
P - Provisions of NIL especially Sec 1 shall be
applied

Acceptance Not a Requisite
Acceptance of a bill of exchange is not important in
determination of its negotiability

Philippine Bank of Commerce vs Jose Aruego
Bill of exchange is an unconditional order in writing
addressed by one to another, signed by person giving it,
requiring person to whom it is addressed to pay on
demand or fixed or determinable future time, a sum
certain in money to order or bearer.
Nature of acceptance is important only in determination
of kind of liabilities of parties involved

Indorsement
Does not affect negotiability of an instrument

Rationale of Formalities
The indispensable formalities of negotiable
instruments make these instruments effective
substitutes for money and desirable tools for credit
transaction
The form of negotiable instrument is essential for
security of mercantile transaction
There must be no twilight zone between
negotiable instruments and simple contracts

Effect of Estoppel
Parties cannot be considered estopped from
claiming that the instrument is non-negotiable.
Negotiability of instrument is determined by law
and parties cannot change what is provided by
law.

BDO Savings & Mortgage vs Equitable Banking Corporation
Petitioner by its own acts and representation cannot
deny liability because it is assumed that liabilities of an
endorser by stamping its guarantee at the back of the
checks
Such action treated the checks as negotiable
instruments and assumed warranty of endorser when
BDO stamped its guarantee

Requisites of Negotiability
Must be in writing signed by maker or drawer
Negotiable instrument must be in writing or it
cannot effectively substitute money
Manual tradition
Requiring the promise to be on paper provided it
is a tangible property: made possible to satisfy
demand that transfer of rights be effectuated by
physical delivery of something.

Materials:
o May be printed in ink or in pencil and may
be written in any material that substitutes
paper
o Section 191 written includes printing;
writing includes print

Type of Signature:
o Signature may be in ones handwriting,
printed, engraved, lithographed or
photographed as long as they are adopted
as signature of signer.
o Maker used what he affixed as his own
signature for authentication

Uniform Commercial Code:
o Any symbol executed or adopted by a party
with present intention to authenticate
writing is a signature
o Does not have to be at the end of
instrument, it can be in the body, or any part
of the instrument.

It must contain an unconditional promise or order to
pay a sum certain in money
Promise or order to pay
o Promissory Note
promise to pay
undertaking made by maker to pay sum
certain in money to payee or holder

o Bill of exchange
Order to pay
Command made by drawer addressed to
drawee ordering latter to pay payee sum
certain in money

o Equivalent words
Promise Order need not appear in
instrument
No precise words of contract necessary
provided they amount to a promise to
pay
Section 10. The instrument need not
follow language of this act but any terms
are sufficient which clearly indicate an
intention to conform to requirement
thereof

o Receipts
Does not comply as negotiable
instrument, only as evidence of payment

o Consideration of Entire Instrument
Tender of instrument and presence of
other words of negotiability may be
sufficient indication of promise

Promise or order to pay must be unconditional
o Condition under NCC
ART 1173 and 1181
Condition: a future and uncertain
event or a past event unknown to
the parties, the happening or nonhappening of which may either give
rise to an obligation or extinguish
existing ones

o Section 3 NIL
Section 3. When promise is
unconditional an unqualified order or
promise to pay is unconditional within
meaning of this act though coupled with
R - 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
S a statement of transaction which
gives rise to the instrument. But an order
or promise to pay out of a particular fund
is not unconditional.

o Reference to Transaction
Must be descriptive rather than
descriptive

Issued in connection to another

transaction not dependent on the
other.

o Subject to Transaction
Non-negotiable if:
R - Restricted by terms and conditions of
another transaction
S - Subject to provisions of another
contract
Negotiability is affected the moment the
holder is required to go beyond the
instrument requiring him to check terms
and conditions of another contract

o Account to be Debited or Source of Payment
Does not affect negotiability
What is important is unconditional
nature of promise or order to pay and
not willingness of obligor to comply with
promise.

Document
Postal Money
Order

Treasury
Warrant

Letters of
Credit
Certificate of
Stock

Bill of Lading
Warehouse
Receipt
Aval

Negotiability
Reason
not
Does not contain
unconditional promise or
order to pay required in
Section 1
not
Promise to pay is
conditional because sum is
payable out of particular
fund
Not
Do not contain an
unconditional promise or
order to pay
Not
No promise or order to pay
Quasi-negotiable, can be
transferred through
indorsement
Not
Represents good not money
Not
Document of title that
represents title to and
possession of goods
Not
Guarantee for payment of
drafts accepted by drawee

Payable in sum certain in money
Money
o generic and comprehensive term
o includes coin but not confined to it
o includes whatever is lawfully and actually
current in buying and selling of the value and as
the equivalent of coin.
o Still negotiable though amount to be paid
expressed in currency that is not legal tender so
long as expressed in money
o Section 6(c) negotiability not affected even if
instrument designates particular kind of money
in which payment is to be made.

 Option of Holder
o Section 5. Additional provisions not affecting
negotiability an instrument which contains an
order or promise to do any act in addition to
the payment of money is not negotiable. But
the negotiable character of an instrument
otherwise negotiable is not affected by a
position which gives the holder an election to
require something to be done in lieu of
payment of money
o Option belongs to holder

Sum Certain
o Section 2. What constitutes certainty as to sum.
The sum payable is a sum certain within the
meaning of this act, although it is to be paid
I with interest; or
S by stated installment; or
D by stated installments with a provisions that
upon default in payment of any installment
or of interest the whole shall become due;
or
E with exchange, whether at a fixed rate or at
the current rate;
C with costs of collection or any attorneys
fees in case payment shall not be made at
maturity

o Principal amount to be paid by the maker or
drawee is unaffected
o Promise to do an act or pay another item that
will make not negotiable must be a promise
that conflicts with same or one of essential
characteristics of a negotiable instrument

o Interest
sum payable still certain, negotiability of
instrument not affected

o Installment payments
Stated installment dates of each installment
must be fixed or at least determinable as
well as amount for each installment

o With exchange
Negotiability of instrument not affected
Incident to bills for transmission of money
from place to place

Payable on demand or at a fixed or determinable
future time
Not negotiable if maturity date of an instrument
is uncertain
offensive to concept of negotiability: conditional
promises and uncertain maturity, involving holder

with administrative burden and risk of assessing

contingencies.

Payable on Demand
o Persons liable may be requested to pay at any
time holder may request
o Section 7. When payable on demand-an
instrument is payable on demand:
E when it is expressed to be payable on
demand or at sight, or on presentation; or
N in which no time for payment is expressed
Where an instrument is issued, accepted or
indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it,
payable on demand.

Payable at Determinable Future
o No date but exact date of maturity is capable of
being determined.
o Section 4. Determinable future time, what
constitutesan instrument is payable at a
determinable future time, within the meaning
of this act, which is expressed to be payable.
F at a fixed period after date or sight; or
S on or before a fixed or determinable future
specified time therein; or
E on or at a fixed period after occurrence of a
specified event which is certain to
happened, though the time of happening be
uncertain.
An instrument payable upon contingency is not
negotiable, and the happening of the event
does not cure the defect.

o Acceleration Clauses
By stated installments, with a provision that
upon default in payment of any installment
or of interest, the whole shall become due
Act or omission of maker makes acceleration
clause operate
Default of obligor

o Insecurity Clauses
Non-negotiable: holders which prevail
without fault or control of maker
Allow holder to accelerate payment if he
deems himself insecure and maker will not
be able to pay on due date

o Extension Clauses
No provision in NIL deals with extension
clauses (extension of maturity date)

 Subsection 3 109 (1) (d) Uniform

Commercial Code of US: payable at definite
time if by its terms
It is payable at a definite time subject to
extension at option of holder or to
extension of definite time at option of
maker or automatically upon or after a
specified act or event

Payable to order or to bearer
Instrument must contain such words of
negotiability
Instruments were drawn payable to specified
person, his nominee or producer of document.
Expression of consent that the instrument may be
transferred by negotiation
Indispensable

Bearer of Instruments
o person in possession of an instrument that is
payable to bearer is the holder thereof
o person in possession can demand payment
from persons liable
o Section 9. When payable to bearerthe
instrument is payable to bearer
E when it is expressed to be so payable;
P payable to a person named therein or
bearer; or
F payable to order of a fictitious or non-
existent person, and such fact was known to
the person making it so payable; or
D when name of payee does not purport to
be the name of any person; or
I when only or last indorsement is in blank

o Fictitious Payee Rule
Non existing person
PNB v Erlando Rodriguez, et al.
Fictitious payee rule under which collecting bank
and drawee are relieved of liability when if
signature of payee was forged.
Forged signature is disregarded because the
check is treated as payable to bearer which can
be negotiated by mere delivery

If payee not the intended recipient of

proceeds of the check, the payee is
considered fictitious and check is bearer
instrument

o Burden of Proof Under Fictitious Payee Rule
Rests on person making allegations
Proof that maker of check intended for
payee to have no interest in transaction
If proven, drawee bank can accept heck even
without indorsement

o Bad Faith Exception to Fictitious Payee Rule

Commercial bad faith on drawee bank or any
transferee of check will strip fictitious payee
rule defense will bear loss
Commercial bad faith if transferee acts in
bad faith, dishonest party to fraudulent
scheme
Section 3405 UCC Commercial bad faith
applicable when transferee acts dishonestly
where it has actual knowledge of facts and
circumstances that amount to bad faith
thus, itself becoming a participant in a
fraudulent scheme

o Only or Last Indorsement is in Blank
Involves instruments originally order
instruments payable to order from time of
issuance
Negotiated by delivering duly indorsed
instrument to transferee
Bank indorsement automatically converts
order instrument to bearer instrument

Order Instruments
o Two ways instrument can be made payable to
order under Section 8
(1) Payable to order of specified person
(pay to order of juan)
(2) Specified person or his order
(pay to juan or order)
o Required words of negotiability: or order to
the order of
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
payable to the order of:
N payee who is not maker or drawer or
drawee
M drawee or maker
D drawee
2 two or more payees jointly
1 one or some of several payees
H holder of an office for the time being
When the instrument is payable to order, the
payee must be named or otherwise indicated
therein with reasonable certainty.

Payable to Order of Bearer
o Not payable to order of a fictitious or nonexistent person or to an inanimate payee

 Parable to Order of Bearer not order Instrument in

all cases
o Intention of maker must be determined based
on face of the instrument
o Check payable to order of cash is a bearer
instrument
o A check payable to bearer is authority for
payment to holder
o A check in ordinary form and payable to bearer
does not require indorsement

Security Bank Trust and Company
Certificate of time deposits in question are
negotiable instruments
Documents provide amounts repayable to depositor
according to document, depositor is bearer, not dela
cruz

Identification of Drawee
o Applies only to bills
o In BOE, drawee is the person being commanded
by drawer to pay the payee. If he accepts, he
becomes primarily liable.

o Two or more drawees
Bill may be addressed to 2 or more
drawers JOINTLY, not alternative or in
succession

o Option to treat as Promissory Note
Sec 130. Where in a bill the drawer and
drawee are the same person or where
drawee is a fictitious person or a person
not having capacity to contract, the holder
may treat the instrument at his option as
bill of exchange or as promissory note
Satisfies Section 1 (e) - addressed to a
named drawee or one identified with
reasonable certainty

o Cashiers Check
Drawee himself is drawer in case of
cashiers checks promissory note

Omission and Provisions that do not affect

negotiability
Omissions
o Section 6. Omission: Seal; Particular money
the validity and negotiable character of an
instrument are not affected by the fact that:
D not dated; or
V does not specify the value given, or that any
value have been given thereof; or
P does not specify the place where it is drawn
or the place where it is payable; or
S bears a seal; or
C designates a particular kind of currency
money in which payment is to be made
But nothing in this section shall alter or repeal
any statute requiring in certain cases the nature
of the consideration to be stated in the
instrument.

o Undated Instruments
There are certain cases where date is
necessary and in the absence thereof can be
inserted in the instrument
Section 13. When date may be inserted
D - where an instrument expressed to be
payable at a fixed period after date, is
issued undated, or
S - when the acceptance of an instrument
payable at a fixed period after signature
is undated, any holder may insert true
date of issue or acceptance.
Section 11. Date deemed prima facie to be
true

Additional Provisions
o Section 5. Additional Provisions not affecting
negotiability an instrument which contains an
order of promise to do any act in addition to
payment of money is not negotiable. But the
negotiable character of an instrument
otherwise negotiable is not affected by a
provision which:
S authorizes sale of collateral securities in
case the instrument be not paid at maturity;
or
C authorizes a confession of judgment if the
instrument be not paid at maturity; or
W waives benefit of any law intended for the
advantage or protection of obligor; or
D gives holder on election to require
something to be done in lieu of payment of
money
But nothing in this section shall validate any
provision or stipulation otherwise illegal.

o Collateral
Statement that instrument is secured by
collateral does not make the promise or
order conditional.

o Confession of Judgment
Takes form of a warrant of attorney to
confess judgment
Void for being contrary to public policy

PNB vs Manila Oil Refining & By-Products

Provisions authorizing attorneys to appear and
confess judgments should not be recognized
Enlarge fraud because instruments bargain away
promissors rights

Types of confession
C Cognovii actionem
Written confession by defendant
acknowledging his indebtedness to
plaintiff after action has been filed
against him
R Relicta Verificationem
Confession of judgment by withdrawal
of defense

o Waiver by Obligor
Indorser may waive benefit of any provision
of NIL that is designed for his benefit
Does not affect negotiability of instrument
Section 109. Notice of dishonor may be
waived either before time of giving notice
has arrived or after omission to give due
notice. Waiver may be expressed or implied.