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1 FOUR-C LAW LIBRARY

Commentaries andJurispudence on the

Commercial Laws of the

Philippines

Author: Aguedo F. Agbayani


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THE NEGOTIABLE INSTRUMENTS LAW

(ACT No. 2031)

INTRODUCTION

176. Codification of the Law in England. The Negotiable Instruments Law is peculiarlya creature of the law merchant, from which it was imported into England and crystallized in theEngland common law. It was codified in that country in 1882 by what is known as the Bills ofExchange Act.

177. Codification of the Law in United States. In the United States there was, prior tothe drafting of the Negotiable Instruments Law, a codification of the law in some states but therewas nothing looking toward a codification for all the states of the Union. The earliestcodification for an individual state, in a strict sense, as heretofore stated, is found in theCalifornia Code of 1372.

The history of the act looking to a uniformity of laws in all the states dated back to theyear 1895. Then, at the request of the American Bar Association and through its cooperation,acts were passed in many states providing for the appointment by the governor of Commissionsfor the Promotion of Uniformity of Legislation of the United States. It was provided that theseshould meet in joint conference, frame and adopt statutes which they would recommend to theirrespective legislature for all the states and thus endeavor to eliminate as much as possible theconfusing conflict in the commonness principles and provisions of private law.

At a conference of commissioners from nineteen states held in 1985, a resolution was

adopted requesting the committee on commercial laws to produce a draft on a bill relating tocommercial paper based on English Bills of Exchange Act and on such other sources ofinformation as the committee might deem proper to consult and to prepare a codification of thelaw relating to bills and notes. The matter, as stated by John J. Crawford, was referred to a sub-committee consisting of Layman D. Brewster, of Connecticut; Henry C. Wilcox, of New York,and Frank Bergen, of New Jersey; and Mr. Crawford was employed by the sum-committee todraw the proposed law.

In Drafting this law when to decisions of the state courts were conflicting, the rules ofthe Supreme Court of the United States were adopted and the decisions of that high tribunal were

followed. When completed, the draft was submitted to the sub-committee who printed and sentcopies each member of the conference, and also to many prominent lawyers and law professorsand to several English judges and lawyers, with an invitation for suggestions and criticisms.

The draft was submitted to the conference which met at Saratoga in August, 1896; andthe commissioners who were in attendance being twenty-seven in all and representing fourteendifferent states, in a session of three days by the entire conference went over it section by section


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and made amendments therein. The draft, as thus amended, was adopted by the conference andrecommended for general enactment by the state legislatures. It also met with the approval of theAmerican Bar Association, and in such form was unanimously recommended by said associationto the Legislatures of the several states and territories of the Union for adoption.

178. Purpose of codification. As heretofore suggested in the preceding chapter, the lawis the result of two purposes; the first and chief purpose was to produce uniformity in the laws ofthe different states upon this important subject , so that the citizens of each state might know therules which would be applied to their notes, checks, and other negotiable paper in very otherstate in which the law was enacted, since it was an absolute impossibility for the commercialpurchaser in any state to know all the details affecting the negotiability of paper governed by thelaws of all the other states. The second purpose was to preserve the law as nearly as possible as itthen existed. And it may be said probably without question that, in the enactment of the statute,no essential feature of the Law of Negotiable Instruments as therefore determined has beeneliminated. While it is simple and intelligible in its expression, great care was taken to preserve

the use of words which had repeated legal constructions and had become recognized terms in thelaw merchant.

179. Law embraces substantive and adjective law. The law of negotiable instrumentsis one of the few subjects embracing both the substantive and adjective law and consequently,pleading and practice as well as the substantive law must be treated in a book on the law onnegotiable instruments in order to completely and accurately cover that subject. A knowledge ofboth is necessary and essential.

180. Application of Law; where Exclusive. A case arising from a bank check which is

indisputably a negotiable instrument is, insofar as the indorsee is concerned vis--vis theindorser, governed solely by the Negotiable Instruments Law (Secs 1 and 185). Article 2071 ofthe New Civil Code on the rights of the guarantor is here completely irrelevant and can have noapplication whatsoever.

181. Some matters not covered by law. As already stated, the negotiable instrumentslaw was intended to govern the law on that subject upon which there was unanimity of decision.Consequently, certain matters were intentionally omitted by the author of the law arising from adiversity of decisions in a various jurisdictions on this matters and because the decisions were soevenly divided. Among the omitted matters are those pertaining to the conflict of laws, whether

or not the giving of a negotiable instrument is presumed to be given in payment, matterspertaining to negligence in the execution and circulation of negotiable instruments when fraud isalso an element, the rights of remitters, and failure to stamp.

182. Adoption of law in the Philippines. The Negotiable Instruments Law of thePhilippines was patterned after the draft approved by the Commissioners of Uniform State Lawsin the United States. It was enacted as Act No. 2031 on February 3, 1911 and took effect ninety


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days after the publication in the Official Gazette of the Philippine Islands was completed. Thiswas on March 4, 1911, and therefore, the Act took effect on June 2, 1911.

183. Most common forms of negotiable instruments. The Negotiable Instruments Lawdeals with three kinds of Negotiable Instruments, namely (1) Promissory Notes, (2) Bills of

Exchange, and (3) Checks, which are also bills of exchange, but of a special kind. There areother forms of negotiable instrument. An instrument which does not comply with therequirements of Negotiable Instruments Law is a simple contract in writing and is merely inevidence of such intangible rights as may have been created by the assent of the parties. If,however, it conforms to the requirements of the Negotiable Instruments Law, the instrument isitself the contract and not just a mere evidence of rights. It is a mercantile specialty.

184. Promissory note, defined. A negotiable promissory note, within the meaning ofthis act, is an unconditional promise in writing made by one person to another, signed by themaker, engaging to pay on demand or at a fixed determinable future time, a sum certain in

money to order or bearer. Where a note is drawn to the makers own order, it is not completeduntil indorsed by him. From the foregoing, it will be noted that a promissory note is essentiallya promise to pay a sum certain in money. The promise is to pay on demand or at a fixeddeterminable future time. Its use must, therefore, be distinguished from the use of cash. Thus, aperson who purchased a piece of land at public auction cannot be compelled to accept apromissory note which the judgment debtor is tendering under his right of redemption pursuantto Section 66 of Act 3135 as amended.

185. Illustration of promissory note. The following is an example of a promissory note:

P10,000.00 Manila, PhilippinesAugust 1, 1949

For value received, I promise to pay to the order of Pedro Reyes the sum of Ten ThousandPesos (P10,000.00) on or before December 31,1949, at the Philippine National Bank, Manila.

(Sgd.) ExequielFerrer

186. General characteristics of a promissory note. The following are the generalcharacteristics of a promissory note:

(1) The figures at the upper left hand corner of the instrument, P10,000.00. This is toindicate the amount of the note and is more quickly grasped that if the written in words.

(2) The place, Manila, Philippines. It shows the place where the contract to pay isexecuted.


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(3) The date, August 1, 1949. It is usually inserted either to determine when the note isdue or to fix the time when the interest is to run, when the payment for interest is stipulated, orwhether or not the collection of the instrument is barred by the statute of limitations.

(4) The date of maturity, on or before December 31, 1949. This indicates the time when

the promise to pay is to be fulfilled. Where, however, the date of maturity is not stated, theinstrument is payable on demand.

(5) The promise, I promise to pay. It consists of an absolute promise to do something,that is , to pay. It is not subject to the fulfillment of a condition.

(6) The words, to the order of. It means that the promise is to pay as ordered or ascommanded by the payee. But an instrument may be payable to bearer.

(7) The name, Perdo Reyes. He is the person to whose order or command the money ispromised to be paid. He is known as the payee.

(8) The signature ExequielFerrer. ExequielFerrer is the maker of the note. He is the onewho promises to pay it at the first instance. A note may be signed by more than one person eitherjointly, or jointly and severally.

(9) The place of payment, at the Philippine National Bank. It indicates where the noteis to be paid. However, that is not necessary. An instrument may be made payable at any otherplace agreed upon by the parties.

(10) The amount, Ten Thousand Pesos. It indicates, as the figures do, the sum promisedto be paid. As it is written in words, it cannot easily be altered and, since it takes longer to writethe words than the figures, the words are more likely to be accurate.

(11) The consideration, for value received. This indicates that a consideration wasgiven for the note. The consideration may be specified. But the words for value received maybe omitted and the consideration not specified, as consideration is presumed.

187. Origin and history of promissory note. Promissory note are said to be and to havebeen in Romans; but the negotiability of these instruments was unknown among the Romans andis the development of modern times. The time of the introduction of promissory notes into theEngland is not absolutely known but it appears to have been thirty years before the reign of

Queen Anne. They were use for a considerable time before they became the subject of thelitigation and legislation. The common law judges were opposed to the negotiability ofpromissory note payable to order or bearer matter, the result of which was the enactment of astatute conferring upon promissory notes the same qualities of assignablity and negotiability aswere opposed by the inland bills of exchange.


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P10,000.00 Manila Philippines

August 1, 1949

Thirty days after sight, pat to order of Juan Soriano the sum of Ten Thousand

Pesos (P10,000.00), Philipiine Currency. Value received and charge the same to the

account of

(Sgd.) Ernesto Reyes

To Augusto Tolentino

215 Regina Bldg.

188. Special types of promissory notes, i.e. bonds, due bills, etc.See comments underSection 184, this Volume.

189. Bill of exchange, defined. A bill of exchange is an unconditional order ofwritingaddressed by one person to another signed by the person giving it, requiring the person to

whom it is addressed to pay demand or at a fixed or determinable future time of a sum certain inmoney to order or to bearer. From the foregoing, it will be noted that a bill of exchange isessentially an order or a command in writing addressed to someone requiring him to pay a sumcertain in money.

190. Illustration of bill of exchange. The following is an example of an ordinary bill ofexchange:

191. Nature of acceptance does not determine whether negotiable paper is bill or

not.In a case, defendant, Aruego, contented that the drafts signed by him were not really billsof exchange but mere pieces of evidence of indebtedness because payments were not madebefore acceptance. It was held that as along as a commercial paper conforms with thedefinition of a bill of exchange, that paper is considered a bill of exchange. The nature ofacceptance is important only in the determination of the kind of liabilities of the parties involved,but not in the determination of whether a commercial paper is a bill of exchange or not.

192. General Characteristics of a bill of exchange.The following are the general

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

(1) The order or command to pay, Pay to. This is an order or command to pay. Thus,instead of a promise, the bill of exchange contains a command or order to pay money.

(2) The signature, Ernesto Reyes. Ernesto Reyes is the drawer. He corresponds to themaker of a promissory note,


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(3) The name, Augusto Tolentino. Augusto Tolentino is the drawee. He is the oneordered or commanded to pay a sum certain in money.

193. Bill of exchange and promissory note distinguished.The fundamental distinctionbetween a bill of exchange and a promissory note is that the first is an order or a command, while

the second is a promise. But that bill is an order to pay should not be confused with aninstrument being payable to order. A bill may be payable to bearer and still be an order to paymoney. Where a bill is payable to bearer, it is an order to pay to bearer. Where it is payable toorder, it is an order to pay to order. Thus a bill of exchange is an order to pay not because it ispayable to order but because, by it terms, it orders or commands the drawee to pay money to apayee or bearer.

A promissory note may be payable to bearer or to order, just as bill may be. Where apromissory note may be payable to bearer, it is a promise to pay to order. Where it is payableto order, it is a promise to pay to order But it does not become a bill by reason of the fact that it

is payable to order.

194. Origin and history of bills of exchange.The bill of exchange is the earliest form ofnegotiable instrument. Bills of exchange, which were first used by the bankers and merchants ofFlorence and Venice to facilitate the transfer of credits between distant points, came to Englandthrough France earl in fourteenth century, that is, came from the continent of Europe where theyformed part of modern Roman or Civil Law. The English merchants used it as an instrumentwhereby he avoided either sending money out of the country or bringing money into the country.To pay a third party, he would give an order on one of the foreign debtors. Originally a bill ofexchange was purely a trade transaction which was a means whereby one country avoided

sending money to another.

195. Special types of bills of exchange, i.e. bankers acceptance, money orders, etc .See comments under Section 126, this volume.

196. Check, defined. A check is a bill of exchange drawn on a bank payable ondemand. Already stated, a check is a bill of exchange of a special kind.

197. Illustration of a check.The following is an example of a check:

The Philippines No. 519917B

Bank of CommerceManila Philippines

Manila, August 20, 1956

Pay to Dionisio A. Lasernaor order One Thousand Pesos.

P 1,000.00

(Sgd.) Mariano C. Verzosa

To Augusto Tolentino

215 Regina Bldg.


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198. General Characteristics of a check.The general characteristics of a check aresimilar to that of a bill of exchange for a reason that a check is a bill of exchange.

199. Special types of checks, i. e. certified check, cashiers check, etc.See commentsunder Section 185, this volume.

200. Distinctions between check and bill of exchange.

(1) A check is always drawn upon a bank or banker, whereas, an ordinary bill may ormay not be drawn against a bank.

(2) A check is always payable on demand, whereas, an ordinary bill may be payable ondemand or at a fixed or determinable future time.

(3) It is not necessary that a check be presented for acceptance as in the case of a bill ofexchange. Checks are not to be accepted but presented at once for payment. However, if the

holder requests, and the banker desires, he may accept.

(4) A check is drawn on a deposit while the ordinary bill of exchange is not. In otherwords, it is not necessary that a drawer of a bill of exchange should have funds in the hands ofthe drawee, but in the case of the check, it would be fraud.

(5) The death of the drawer of a check, with the knowledge of the banks, revokes theauthority of the banker to pay, while the death of the drawer of the ordinary bill of exchangedoes not. But there are some decisions to the contrary.

(6) An ordinary bill of exchange may be presented for payment within a reasonale time

after its last negotiation. But a check must be presented for payment for payment within areasonable time after its issue.

201. To whom instruments may be payable. As ready intimated, an instrument may bemade or drawn payable to: (1) bearer, or (2) order. It may also be payable to, (3) a specifiedperson.

202. When payable to a bearer.In general, an instrument is payable to bearer: (1) whenit is expressed to be payable, or (2) when it is payable to a person named therein or bearer.

203. Illustration of payable to bearer.The following instrument is payable to bearer.

Pay to B or bearer P1,000.00

(Sgd.) A

To X


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204. When payable to order. An instrument is payable to order when it is expressed tobe payable (1) to the order of a specified person, or (2) to a specified person or his order.

205. Illustrations. (1) The following illustrates an instrument payable to the order of aspecified person.

I promise to pat to the order of BP1,000.00

(Sgd.) A

(2) The following illustrates an instrument payable to a specified person or his order.

I promise to pay toB or his order P 1,000.00

(Sgd.) A

The first payable to the order of B (the specified person) and the second is payable to B

(the specified person) or his order.

206. When the instrument payable to a specified person. An instrument is payable tospecified person when the instrument is payable to a person named in the instrument and noother. When an instrument is payable to a specified person, it is not negotiable because it isneither payable to bearer nor payable to order.

207. Illustration.The following instrument is payable to a specified person.

I promise to pay to B P1,000.00

(Sgd.) A

208. Parties to a promissory note.The following are the original parties to a promissorynote: (1) the maker, and the (2) thepayee, if the instrument is payable to order, or (3) bearer,ifthe instrument is payable to bearer.

209. Maker. The person who executes the written promise to pay. In the illustration inparagraph 201 of the text, A is the maker.

210. Payee. The person in whose favor the promissory note is made payable. In theillustration, B is the payee. If the note is made payable to bearer, no patee is designated and it ispayable to the person in possession thereof.

211. Parties to a bill of exchange. The following are the original parties to a bill ofexchange. (1) the drawer,(2) thepayee, if the instrument is payable to order, and thebearer ifthe instrument is payable to bearer, and (3) the acceptor.


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212. Drawer. The person who executes the written order to pay. In the illustration givenof a bill of exchange in the paragraph 197 of the text, A is the drawer.

213. Payee. The person in whose favor a bill of exchange is drawn payable. In theillustration, B is the payee. If the bill of exchange is payable to bearer, no payee is designated

and the bill is payable to the person in possession thereof. The beareris the person in possessionof a bill or note which is payable to bearer.

214. Acceptor. The drawee who signifies his assent to the order of the drawer. Theaddressee of a bill of exchange, that is, the person who is commanded or orders by the drawer topay a sum certain money, is called the drawee. When he signifies his assent to the order of thedrawer, he is called acceptor and by thus accepting the bill, he becomes a party thereto. Beforethe acceptance, however, he is not a party to the instrument and is therefore not liable thereon. Itis only when he accepts the bill that he becomes a party thereto and liable thereon. Acceptance isusually signified by writing across the bill the word accepted, with the signature of the drawee.

215. Parties to a check.As the check is a bill of exchange, although special kind, it hadthe same parties as the ordinary bill of exchange. The only difference is that a check is usuallycertified to, not accepted by, the drawee bank. But certification is equivalent to acceptance,

216. Other parties to negotiated instruments, The following are the other partiesadded to negotiable instruments when they are negotiated: (1) indorser and (2) indorsee, in the case of instruments payable to order and (3) persons negotiating by mere delivery and (4)persons to whom the instrument is negotiated by delivery. in the case of instruments payable tobearer.

217. Indorser and indorsee, explained.When an instrument is negotiated, other partiesare added to the instrument. Where the negotiation is by the indorsement completed by delivery,the parties added are the indorser and the indorsee. The Indorser is the one who negotiates by theindorsement and the indorsee is the one to whom the instrument is negotiated by theindorsement. When the payee indores a bill or a note, he becomes also an indorser. When theindorsee further indorses the instrument, he likewise becomes an indorser, and the person towhom he indorses it is another indorsee.

218. Where the instrument is payable to bearer. Where the instrument is payable tobearer, it can be negotiated by mere delivery without necessity of indorsement. He, therefore, is

also a part added to the instrument upon negotiation. For lack of a better term, he may bedesignated as person negotiating by delivery The person to whom the instrument payable tobearer is egotiated acquires certain rights as a holder. He is, therefore, also an additional party tothe instrument. For lack of better name, he may be designated as person to whom an instrumentis negotiated by delivery.


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219. Holder. Section 190 defines holder as the payee or indorsee of a bill or note,who is in possession of it, or the bearer thereof. And the bearer is therein defined as theperson in possession of a bill or note which is payable to a bearer. Hence, the meaning ofholder depends upon the kind of instrument involved. If payable to order, holder means theperson (1) who is the payee or indorsee therein, and (2) who is in possession thereof. If the

payable to bearer, holder means the person (1) who is in possession thereof.

220. Holder explained. Suppose A makes the following instrument: I promise to pay Bor order P1,000.00 (Sgd.) A (1) keeps it in his drawer and does not deliver it to B. Is B aholder? No because B is the payee, he is not in possession of the note.

(2) Suppose that A delivers the note to B and B indorses it to C, but delivers it to Y. Whois the holder, C or Y? Neither is the holder. Y is not the holder because while he is in possessionof the note, he is no the indorsee. C is not the holder because while he is in the indorsee, he is notin possession of the note.

(3) Suppose that the note is payable to B or bearer and A keeps the note in his drawer. IsB the bearer? No, because he is not in possession of the note.

(4) But suppose that A delivers the note to Y but not to B. Is Y the holder? Yes, becauseY is in possession of the note which is payable to bearer.

221. Incidents in life of negotiable instrument. The following are the incidents inthe life so as to speak of a negotiable instrument: (1) Issue (2) negotiation (3) presentment forthe acceptance, in certain kinds of bills f exchange (4) acceptance (5) dishonor by nonacceptance (6) presentment for payment (7) dishonor by non payment (8) notice of dishonor and

(9) discharge.

222. Issue, defined. The first delivery of the instrument, complete in form to a personwho takes it as a holder. Thus, where A makes a note payable to the oerder of B who takes it asa holder, the delivery is called issue

223. Delivery, defined. Transfer of possession with intent to transfer title. It consistprincipally of placing the transferee in possession of instrument, but it must be accompanied byan intent to transfer title. Delivery is essential as every contract on negotiable instrument isincomplete and revocable until delivery of the instrument for the purpose of giving effect thereto.

224. Negotiation, defined and explained. Negotiation is such transfer of an instrumentfrom one person to another as to constitute the transferee the holder of the instrument, In otherwords, negotiation is a mode od transferring an instrument. It is distinguished form other modesof transfer in that its effect is to make the transferee the holder of the instrument. Specifically, Inthe case of an instrument which is payable to order, any series to stes which make the transfereeboth the indorsee of the instrument and the possessor thereof constitute negotiation; and in the


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case of an instrument which is payable to bearer, any step which makes the transferee of theinstrument one in possession thereof constitute negotiation.

225. How is instrument payable to bearer negotiated. It is clear from the foregoingthat how an instrument is to be negotiateddepends upon whether it is payable to bearer or to

order. If it is payable to bearer, it may be negotiated by mere delivery, although the law does notprohibit negotiation. By indorsement completed by delivery, Delivery is sufficient because bydelivery, the transferee is placed in possession of the instrument, and the moment the transfereeis in possession, he constitutes the holder thereof since the holder of an instrument is payable tobearer is one on possession of it.

226. How instrument payable to order negotiated. If the instrument is payable to order, itmust be negotiated by indorsement completed by delivery. Indorsement is necessary to make thetransferee the indorsee, and delivery is also necessary ti place the transferee in possession of theinstrument. If there is indorsement only but no delivery, the transferee would be in possession,

but not the indorsee. In either case, the transferee, would not be contributed the holder. Hence,there would be no negotiation. But there is indorsement completed by delivery, the transfereewould be constituted the holder of the instrument since the holder of an instrument payable toorder is the payee or indorsee thereof who is in possession of it.

227. Indorsement, defined and explained. Indorsement is a legal transaction, effectedby writing of one's own name on the back of the instrument or upon a paper attached thereto,with or without additional words specifying the person to whom or to whose order the instrumentis to be payable whereby one not only transfers one's full legal title to the paper transferred butlikewise enters into an implied guaranty that the instrument will be duly paid. It will be clearly

see that, essentially, an instrument consists of the signature of the one indorsing and that anindorsement is usually written at the back of the instrument. There are two principal kinds ofindorsement, (1) special, and (2) blank indorsement.

228. Special indorsement, defined and explained. A special indorsement is one thatspecifies the person to whom or to whose order the instrument is to be payable. The followingwritten at the back of the instrument is a special indorsement:

"Pay to Pedro Reyes.

(Sgd.) Ernesto Rodriguez."

Ernesto Rodriguez is the indorser. He must either have been the payee or the indorsee. PedroReyes is the indorsee in this instrument.

229. Blank indorsement, defined and explained.An indorsement in blank is one thatdoes not specify the person to whom or to whose order the instrument is to be payable. It consists


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merely of the signature of the indorser. The following written at the back of the indorsement isan illustration of a blank indorsement:

(Sgd.) Ernesto Rodriguez

Ernesto Rodriguez is the indorser. He must either have been the payee or an indorsee.

230. Negotiation, indorsement, delivery, compared.From the foregoing, the followingwill be noted:

(1) Strictly speaking, indorsement is not equivalent to negotiation. Indorsement is merely thefirst step in the process of negotiating an instrument which is payable to order. The second stepin the process is delivery. However, section 191 defines indorsement as "an indorsementcompleted by delivery." In this sense, indorsement is equivalent to negotiation.

(2) Where the instrument is payable to order, neither is delivery equipment to negotiation. The

mere delivery of such instrument, without indorsement, is merely equivalent to an assignmentthereof.

(3) But where the instrument is payable to bearer, delivery is equivalent to negotiation.

It should also be clearly understood that since the adoption of the Negotiable Instrument Law,"the terms 'indorsement,' indorser, and indorsee should be applied only to negotiableinstruments and the words assignment, assignor, and assignee to non-negotiable xxxinstrument, that is, to all other instruments except negotiable instruments,

231. Presented for acceptance, explained. Presented for acceptance consists of

exhibiting the bill to the drawee and demanding that he accept it, that is signify his assent to theorder or command of the drawer. It is required only in certain kinds of bills of exchange.

232. Meaning of after sight. Sometimes, a bill is drawn payable thirty days aftersight. This means that the bill is payable thirty days after has been resented fo r acceptance,whether it has been accepted or not. The period thirty days starts from the time the drawee seesthe bill at the time it is exhibited to him for acceptance.

233. Acceptance, defined and explained. Acceptance is the signification by the draweeof his assent to the order of the drawer. As already stated, this is usually done by writing across

the face of the bill the word accepted, followed by the signature of the drawee. The termacceptance has, therefore, a technical meaning under Negotiable Instruments Law. It should notbe used as the equivalent of receive. As to checks they generally certified instead of beingaccepted. The certification of a check is usually done by stamping on the check the wordcertified and underneath it is written the signature of the proper officer of the bank.Certification is equivalent to acceptance.


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234. Dishonor by non-acceptance. Where the bill is presented for acceptance, andacceptance is refused by the drawee, or cannot be obtained, or where presented for acceptance isexcused, and the bill is not accepted, it is said to be dishonored by non-acceptance

235. Presented for payment, explained. Presented for payment consist of exhibiting the

instrument to the person primarily liable thereon and demanding payment from him on the dateof maturity. This is required for all kinds of negotiable instruments.

236. Dishonor by non-payment. Where the instrument is presented for payment, andpayment is refused or cannot be obtained, or where presentment for payment is excused and theinstrument is overdue and unpaid, it is said to be dishonored by non-payment

237. Notice of dishonor, explained. When a negotiable Instrument has been dishonoredby non-acceptance or non-payment, a notice of dishonor must be given to the drawer and to eachindorser, and any drawer or indorser to whom such notice is not given discharged. The purpose

is to notify the drawer and the indorsers that the instrument has not been accepted by the drawee,or that it has not been paid by the acceptor, in the case of bills, or by the maker, in the case ofnotes.

238. Discharge, explained. A negotiable instrument is usually discharged by paymentin due course by or on behalf of the principal debtor. But where the one paying is a partysecondarily liable on the instrument, it is not discharged. Thus, suppose that A is the maker of anote and B is the payee. He indorses to C, C to D, D to E and E to F. If A pays the instrument, itis discharged. If C pays, the instrument is not discharged.

239. Parties primarily and secondarily liable, explained. Under the Negotiable

Instruments Law the person primarily liable on an instrument is the person who by terms ofthe instrument is absolutely required to pay the same. All other parties are secondarily liable.When one speaks of primary and secondary liability, at least two debtors or obligors arecontemplated. For instance, A and B are indebted to C in the sum of P10,000.00, A beingprimarily liable, B secondarily liable. This means that A, the person primarily liable, must in thefirst instance be made to pay obligation, and that it is only when he fails to pay, that the personsecondarily liable, B in this case, must be made to pay.

240. In bills of exchange. In a bill of exchange, the acceptor is primarily liable. He is theprimarily liable because under Section 62, he is absolutely required to pay the instrument as he

engages that he will pay it according to the tenor of his acceptance. He does not say that he willpay it if someone does not pay. In the bill of exchange, the drawer, the qualified or generalindorser, and the person negotiating by mere delivery, are secondarily liable.

241. Secondarily liability of drawer. By the mere drawing of a bill, without sayingmore, the drawer assumes the liability stated in Section 61. Under the said section, the generaltenor of the liability of the drawer is that he will pay the bill if the drawee does not accept or pay


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the bill. In other words, he is not absolutely required to pay the bill. If the drawee pays, then he isnot required to pay. It is only when the drawee does not pay that he will be required to pay.

242. Secondary liability of indorser. By indorsing an instrument, without saying more,an indorser assumes all the liability stated in Section 65 or 66, Under the said sections, the

general tenor of the liability of the indorser is that he will pay the instrument if the personprimarily liable will not pay. He is, therefore, not absolutely required to pay the instrument. If theperson primarily liable pays, the indorser will not be required to pay. It is only when the personprimarily liable fails to pay that he may be required to pay.

Thus a check while not regarded as legal tender is normally, under commercial usage, asubstitute for cash. The credit represented by it in stated monetary value is properly capable ofappropriation, as by the accused depositing check in his personal account.

243. Secondarily liability of one negotiating by delivery, By merely delivering an

instrument payable to bearer, without saying more, a person negotiating by mere deliveryassumes the liability stated in the Section 65. Under the said section, the general tenor of theliability of a person negotiating by delivery is similar to that of an indorser.

244. In promissory notes. In the promissory note, the marker is primarily liable. Thequalified or general indorser and person negotiating by mere delivery are secondarily liable.Under Section 60, the agreement of the maker is that he will pay the instrument in according toits tenor. He does not say that he will pay it if somebody does not pay. Hence, he is primarilyliable.

245. Function of negotiable instruments. They are a substitute for money and increase

the purchasing medium in circulation. Otherwise, mere specie or paper money would be neededin circulation to take care of everyday business transactions. Many customers of merchants paytheir monthly bills by check and manufacturers when unable to obtain cash from their customers,take promissory notes, accepted bills, trade acceptances, or some form of commercial paperwhich their banks will discount and turn into money for their payrolls. Thus, negotiableinstruments operate to supplement the currency of the government. The check is used forimmediate payment while the ordinary bill of exchange and the promissory note are intended forcirculation of credits.

246. Payment by negotiable instruments. Since a negotiable instrument is a substitute

for money, the question arises as to whether or not the giving and taking of a promissory note orbill of exchange is a prima facieabsolute payment as in the case of money or merely a primafacieconditional payment. In the Philippines, there is no conflict of opinions. The rule is that,the delivery of promissory notes payable to order, or bills of exchange or other merchantiledocuments shall produce the effect of payment only when they have been cashed, or when,through the fault of the creditor, they have been impaired. In the meantime, the action derivedfrom the original obligation shall be held in abeyance.


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247. Where there is no showing when check given in payment was encashed, filing of

action to collect not clearly unfounded.

In the case, the debtors (Panginibans) sent a check to the creditor to to his check to hisdebt. It is shown when the check was cashed by the creditor (Inhelder) who later February 19,

1975, acknowledged having received the check. Meanwhile, February 12, 1975, the attorney ofthe creditor filed a collection case against the debtor which was dismissed. Later the debtor fileda case against the debtor which was dismissed. Later the debtor filed a case against the creditorfor actual compensatory, moral and exemplary damages on the ground, among others, that thecollection case was clearly unjustified. Is the debtor entitled to damages?

Held: It is not clear that the account of the Panganibans had already been paid as of February 12,1975. Under the Article 1249 of the Civil Code, payment should be held effective only whenPNB Check No. 32058 was actually cashed by, or credited o the account of Inhelder. If that didnot eventuate on or the account would still be unpaid, and the complaint in the Collection Case,

technically, could not be considered as substantially unfounded.

It is true that when the check of the Panginibans was received on February 5, 1975, the betterprocedure would have been to withhold a complaint pending determination whether or not thecheck was good. If dishonored, that would be the time to file the complaint. That procedure wasnot followed because of the failure of the corresponding advice which could have been given toAtty. Fajardo by the Inhelder Credit and Collection Manager. But the lack of that advice shouldnot justify qualifying the Collection Case as clearly unfounded. If the check had bounced, theCollection Case would have been tried and acted upon by the Mandaluyong Court on merits.

248. Principal features of negotiable instruments. Negotiable Instruments have twoimportant features, namely: (1) negotiability, and (2) accumulations of secondary contracts asthey are transferred from one person to another.

249. Negotiability, explained. It is that attribute or property whereas a bill, note orcheck passes or may pass from the hand to hand similar to money, so as to give the holder in duecourse the right to hold the instrument and collect the sum payable for himself free fromdefense. Thus, men in this way without cash in hand are enabled by means of credit to conductand carry to completion business enterprises upon their promissory notes, bill of exchange andchecks, knowing that other businessmen will treat these promises as cash. Furthermore, the

purpose of negotiability is to allow the bills and notes to go from hand to hand in the commercialmarkets and to take the part of money in commercial transactions. The defenses from which theholder in due course is free are personal defenses but not his free from real defenses.

250. Purpose of Negotiability. The primary purpose of negotiability of negotiableinstrument is to allow bills and notes the effect which money, in the form of government bills ornotes, supplies in the commercial world.


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(1) Assignability is a more comprehensive term than negotiability and pertains tocontracts in general. On the other hand, negotiability pertains only to special class of contracts,namely, to negotiable instruments.

(2) A person who takes an instrument by assignment takes the instrument subject to

defenses obtaining among the other original parties, whereas, a person who takes an instrumentby negotiation takes it free from personal defenses available among the parties.

(3) At a common law, to maintain an action on a common law instrument, it wasnecessary to allege and prove consideration. But in action on negotiable instrument,consideration is presumed and need not be alleged and proved. This distinction does not,however exist in the Philippines, as in every contarct, whether negotiable or not, although thecause is not stated in the contract, it is presumed that it exists, and is lawful unless the debtorproves the contrary.

(4) The indorser is not liable on his indorsement unless there be presentment for paymentat maturity and prompt notice of dishonor in case of dishonor. When these steps are taken, hebecomes immediately liable on the instrument.

(5) The general indorser is secondarily liable for any cause for which the party primarilyliable on negotiable instrument does not pay. He warrants the solvency of the party primarilyliable. The qualified indorser and the person negotiating by mere delivery have limited secondaryliability.

The assignor in good faith, however, does not warrant the solvency of the debtor unless ithas been expressly stipulated or unless the solvency was prior to the assignment and of common

knowledge. He merely warrants the existence and legality of the credit assigned at the time of theassignment.


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IFORMS AND INTERPRETATION

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.

256. Requisites as to negotiable note. A promissory note, to be negotiable, mustconform to the following requirements: (1) It must be in writing and signed by the marker; (2) itmust contain an unconditional promise to pay a sum certain in money; (3) it must be payable ondemand, or at a fixed or determinable future time; and (4) it must be payable to order or to

bearer.

257. Requisites as to negotiable bill. A bill of exchange, to be negotiable, must conformto the following requirements. (1) It must be in writing and signed by the drawer; (2) it mustcontain an unconditional promise to pay a sum certain in money; (3) it must be payable ondemand, or at a fixed or determinable future time; and (4) it must be payable to order or tobearer; and (5) the drawee must be named or otherwise indicated therein with reasonablecertainty.

258. The instrument must be in writing. The word in instruments implies that whichhas been put into writing. In order to negotiate, there must be in writing of some kind, for, if theinstrument were not in writing, there would be nothing to be negotiated or passed from hand tohand. The writing may be in ink, print, or pencil. It may be upon parchment, cloth, leather, orany other substitute of paper.

259. The instrument must be signed by the maker or drawer. The full name may bewritten. At least, the surname should appear and, generally, the signature usually is by writingthe signers name. But it consist of mere initials or even numbers such as 1, 2, 8. But, wherename is not signed, the holder must prove that what is written is intented as a signature of theperson sought to be charged.

260. How signature written. The name may be printed, tyoewritten, stamped, engraved,photographed or lithographed. But in such case, it must me shown to have ben adopted and usedby the party as his signature.

261. Location of Signature. The signature of the maker or drawer is usually written atthe bottom right hand corner. The location of the signature is not material. It may be at the top,


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the middle, or at the bottom. What is important is that it appears there from that the personintended to make it his own.

262. Illustration of location of signature. Suppose the promissory note reads as follows.

P3,000.00

Manila, P.I.

January 1, 1950

I, ORLANDO FERRER, after date of promise to pay to X or his order thesum of P3,000.00.

This is held sufficient, as the signature appears in the body or the note.

263. If a bill, it must be contain an Order to pay. A bill is something more than the

mere asking of a favor. It is an instrument demanding right. It is, however, not necessary that theword order be used. Any words which are equivalent to an order or which show the drawerswill that the money should be paid are sufficient to make the instrument a bill of exchange.

264. Effect of mere authority to pay.Suppose the bill of exchange reads as follows:

I hereby authorize you to pay P1000.00, on our account, to the order toPedro Cruz.

(Sgd.) Jose Reyes

To X

Is this instrument negotiable? It is not negotiable because not is not an order to pay. It ismere authorization to pay. By the terms, the bill gives a discretion to the drawee to pay or not topay,

265. Effect or mere request to pay. Suppose the bill of exchange reads as follows.

Please to let the bearer have P70.00 and place to my account and you will oblige.

(Sgd.) Ernesto Cruz

To Reynaldo Reyes

207 LUZCo Bldg.

This bill is not negotiable because it does not contain an order to oay. It is nothing but mererequest to pay.


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266. Effect of mere words of civility. Suppose the instrument reads as follows.

Mr. X will oblige X by paying Z or order P1,000.00 on his account.

(Sgd.) Y

To X

This instrument is negotiable. The mere fact that it contains word of civility or courtesy does notmake it non negotiable. In spite these words of courtesy or civility, the bill still contains an orderto pay. The word by paying are held sufficient to import an order to pay.

267. Where instrument is a note, it must contain promise to pay. The promise to paymust be on the instrument itself, although it is not necessary to use the word promise. It isenough (1) that words of equivalent meaning are used, or (2) that the promise is implied from thepromissory words contained in the instrument. But the promise to pay cannot be implied fromthe mere existence of a debt.

268. Words of equivalent meaning. Instead of the promise, the following words may beused: agree, will pay shall pay and the like. Thus, the follo wing will be deemed to containa promise:

I agree to pay to the order of B, P1,000.00

(Sgd.) Z

The foregoing is the promissory note because, although it does not use the wordpromise, still the word agree means a promise to pay.

269. Promissory word implying a promsise; illustrations.

As already stated, instead of the word promise, any word s fairly importing apromise to pay may suffice. The following may be given as illustrations:

(1)The following contains a promise to pay because the word good implies a promise to pay.

Good to X or order P1,000.00

(Sgd.) Y

(2)When it is alleged that the defendant company se obligo a pagar it may, perhaps, beconsidered as equivalent to an allegation that the company promised or agreed to pay.

(3) The following also contains a promise to pay because the words payable on demandnecessarily imply a promise to pay.


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Due X or order P1,000.00 payable on demand.

(Sgd.) Y

270. Effect of mere acknowledgement of debt. A mere admission that the debt is due isnot sufficient. Thus:

Due x P1,000.00

(Sgd.) Y

The foregoing is not a promissory note because nothing but an acknowledgement of a debt. Assuch, it evidences only the existence of a debt. As already stated before, a promise to pay cannotimplied from the mere existence of a debt.

271. When the acknowledgement of a debt is a promise; Illustration. In addition tothe acknowledgement of the indebtedness, there must be other words expressing the intention topay, such as:

(1) In the following, the words, to be paid imply a promise to pay.

I do acknowledge myself to be indebted to X or order in the sum ofP1,000.00, to be paid on demand.

(Sgd.) Y

(2) The following may be held promise because the sense requires the words to be paid to besupplied before the words on demand.

Due X or order on demandP1,000.00

(Sgd.) Y

(3)In the following, the fact that the note contains on express promise to pay a specified amountis no moment because an acknowledgement may become a romise in addition words by which apromise of payment is naturally implied, such as, payable on demand: paid when called for

Received from A P10,000.00 payable six months after the war, without interest.

(Sgd.) Y

272.Effect of words of negotiability; illustrtations. The words order and bearer areusually referred to as words of negotiability. Will the insertion of words of negotiability to beconstrued to import promise. Thus;

(1) In the following, the word orderhas been held to imply a promise to pay.


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Due X or order value received.

(2) In the following, the word bearer has been held to imply a promise to pay.

Due X or bearer P100, for value with interest.

273. The promise or order ro pay must be unconditional. It is not enough that there bea promise or order. The promise or order must also be unconditional or absolute. This means thatit must not be subject to condition. Based on Article 1179 of New Civil Code, a condition is: (1)a future event that may or may not happen, or (2) a past event which is unknown to the parties. Itis distinguished from an event that is certain to happen, even though the time of its happening isnot known.

274. Illustration of condition; effect. An example of a condition is marriage. In thefollowing, the order to pay is subject to a condition.

Pay to X or bearer P1,000.00 if he marries Z.

(Sgd.) Y

To A

The foregoing is not negotiable instrument because the order to pay is subject tothe condition that X marries Z. It is a condition because X may or may not marry Z. In otherwords, the marriage is uncertain.

275. Illustration of event certain to happen; effect. An example of an event that is

certain to happen, even though the happening thereof is uncertain is death. In the following, thepromise to pay is subject to the happening of such an event:

I promise to pay B or order P1,000.00, ten (10) days after death of x.

(Sgd.) A

The Instrument is not rendered non-negotiable.

276. Sum payable must be definite and certain.The amount of money to be paid mustbe determinable by inspection and must be stated plainly on the face of the instrument, and, like

the denomination of money, must be stated in the body of the instrument. Suppose that A makesthe following note:

I promise to pay X or order P1,000.00 thirty (30) days from this date, at6% interest.

(Sgd.) Y


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Will the addition of interest make sum uncertain? No. The sum is certain because bymere mathematical computation, the amount to be paid on the maturity is ascertainable, namely,P1,000.00 plus 6% interest for 30 days. All that is required, however, is that the principal shall becertain.

277. Where the sum is not certain; illustration. But suppose the instrument reads asfollows.

I promise to pay to B or order P1,000.00 together with all sums that may be due tohim on December 31, 1950.

(Sgd.) A

The sum is not certain, P1,000.00 is not only the principal amount due. It also includes allsums which may be due to B on December 31, 1950. How much those sums are is not stated andare unknown until December 31, 1950. Consequently, this instrument is not negotiable as the

sums to be paid are not sums certain.

278. Sum payable must be in money only. Accordingly, a bill or note, if it is to benegotiable, cannot be made payable in goods, wares, or merchandise, or in property, or in laboror services. So also, an instrument is not negotiable if it is made payable in bonds, corporatestocks, state paper, scrip, checks, foreign bills. Thus, the following instrument is not negotiablebecause it is not payable in money but in carabaos.

I promise to pay to B or his order P1,000.00 in carabaos.

279. Reasons for requirement that instrument be paid in money. The real reason forthe requirement that negotiable instrument must be payable in money obviously is that money isthe one standard of value but in theory, at least, money always measures this rise and fall andremains the same. The chattel which is used as means of payment may fluctuate in value.

280. Legal tender, defined. The kind of money which the law compels a creditor toaccept in payment of his debt when tendered by the debtor in the right amount.

281. Legal tender in the Philippines. The following are legal tender in the Philippines:

(1) The Philippine peso and half-peso, including the Philippine treasury certificates of any

denomination, shall be legal tender at the rate of one dollar for two pesos for all debts, public andprivate. Philippine Subsidiary Coins of twenty centavos shall be legal amounts not exceedingtwenty pesos. Philippine minor coins of nickel and copper shall be legal tender in amounts notexceeding two pesos.

(2) All notes and coins issued by the Central Bank shall be fully guaranteed by the Governmentof the Republic of the Philippines for all debts, both public and private.


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(3) The new victory series of the Philippine Treasury Certificate and Philippine coins identical topre-war issue now in circulation.

282. Check not legal tender. A creditor is not bound to accept a check, in satisfaction ofhis demand because a check even in good when offered, does not meet yhe requirements of a

legal tender. This is true even as to manager check or whether the check is certified or not.Accordingly, a consignation by check is not binding upon the creditor unless accepted by him.And, it has further been held that, where a person entitled to make a repurchase of someproperty, deposits with the court by way of consignation a check for the repurchase price, thevendee is not under duty to accept the check and may refuse the consignation which cannotproduce the effect of payment.

There is no question that the rule applies to ordinary checks. However as to certified checks andprobably similarly situated checks such as managers check, as will be seen it has been held in a1980 case, that a creditor cannot refuse to receive as payment a certified check, it beingequivalent to cash.

However, in a recent case, it was held that a negotiable instrument is only substitute for moneyand not money, the delivery of such instrument does not by itself, operate as payment. A checkwhether a managers check or ordinary check, is not legal tender and an offer of a check inpayment of a debt is not a valid tender of payment and may be refused receipt by the oblige orcreditor. Mere delivery of checks does not discharge the obligation under a judgement. Theobligation is not extinguished and remains suspended until the payment by commercialdocument is actually realized. (Art. 1249, Civil Code, par. 3)

283. But if authorized by law or consent of creditor, cash may be substituted byother means, or may be check. In the absence of an agreement, either express or implied,

payment means the discharge of a debt or obligation in money (US v. Robertson, 5 Pet. (US)641, 8 L. ed. 257) and unless the parties so agree, a debtor has no rights, except is ownperil, tosubstitute something in lieu of cash as medium ofpayment of his debt. Consequently, unlessauthorized to do so by law or consent of the obligee a public officer has no authority to acceptanything other than money in payment ofan obligation under a judgment being executed. Strictlyspeaking, the acceptance by, the sheriff of the petitioners checks, in the case at bar, does not perse, operate as a discharge of the judgement.

284. Redemption by managers check where accepted, or not objected to on thatground, is valid.Redemption of fore closed property by tender of payment accompanied by amanagers check is valid and efficacious where the purchaser rejected the tender on sole groundthat it was insufficient, and not that it was not efficacious because it was made by check. Thatwas accordingly waived. This Court has already sanctioned redemption by check where it wasaccepted.

285. Creditor cannot refuse payment of his credit by it being equivalent to cash.

Illustrative case.

NEW PACIFIC TIMBER & SUPPLY CO., INC y SENERIS


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Facts. Creditor private respondent in the petition for certiorari refused used to accept thepayment of debtor petitioner herein, in the amount of P63,130, consisting of a certified, check forP50,000 and P13,130 in cash. Thereafter, creditor caused certain property of debtor to be sold atpublic auction.

The lower court sustained the refusal of the creditor on the basis of Section 63 of the CentralBank Law Articles1249 and 1248 of the New Civil Code.

Held: The check deposited by the petitioner in the amount of P50,000.00 is not an ordinarycheck but a Cashiers Check of the Equitable Banking Corporation, a bank of good. Standing andreputation. As testified to by the Ex-Officio Sheriff with whom it has been deposited, it is acertified crossed check. It is a well-known and accepted practice in the business sector that aCashiers Check is deemed as cash. Moreover, since the said check had been certified by thedrwee bank, by the certification, the funds represented by the check are transferred from thecredit of the maker to that of the payee or holder; and for all intents and purposes, the latterbecomes the depositor of the drawee bank, with rights and duties of one in such situation.

Hence, the exception to the rule enunciated under Section 63 of the Central Bank Act to theeffect that a check which has been cleared and credited to the account of the credit or shall beequivalent to a delivery to the creditor in cash in an amount credited to his account shall apply inthis case. Considering that the whole amount, deposited by the petitioner consisting of CashiersCheck of P50,000.00 and P13,130.00 in cash covers the judgment obligation of P63,000.00 asmentioned in the writ of execution. Then see no valid reason for the private respondent to haverefused acceptance of the payment if the obligation in his favor. The auction sale therefore, wasuncalled for."

286. In recent cases, Supreme Court has apparently made a contrary ruling. In tworecent cases, the Supreme court has ruled that since a negotiable instrument is only a substitutefor money and not money, the de1ivy of such an instrument does not, by itself, operate aspayment. A check whether a managers check or ordinary check, is not legal tender, and an offerof a check in payment of a debt is not valid tender of payment and may be refused receipt by theobligee or creditor.

Hence, the tender of payment made by the debtor was not valid for failure to comply withthe requisite payment in legal tender or currency stipulated, the refusal to receive the tender ofpayment by the creditor is valid, and the subsequent consignation did not operate to dischargethe former-from its obligation to the latter.

287. Treasury certificates not legal tender for all purposes. Even treasury certificatesare not legal tender except for the payment of taxes and public debts under Section 1626 of ActNo. 2711 as amended by Act No. 3058.

288. Instrument need not be payable in legal tender. It has been held that aninstrument need not be payable in lawful money of the United States. This is with reference tothe pro vision of the Negotiable Instrument Law that the validity and negotiable character of aninstrument are not affected by the fact that it designates a particular kind of current money in


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which payment is to be made. But where the instrument is made payable in the paper or currencyof a particular bank, specifically and absolutely, and without reference to the currency or valueof the paper, it is held not to be for the payment of money and is not negotiable.

289. Instrument payable in foreign money. A bill or note may be made payable in

denominations of foreign money, currency, or coins, such as pounds or lire. Thus, where a noteis made payable in a country in the money or coins of another Country, which money or coinshave a value fixed by the lawor under the authority of the law of the country where the note ispayable and which value can, by a simple mathematical calculation, be expressed in the value ofthe lawful money of the latter country, such note is negotiable.

290. Illustration:Suppose the promissory note reads as follows:I promise to pay to B or his order P1,000.00

(Sgd.) AThis instrument is negotiable, although payable in foreign money because dollars have a

fixed value under our law in relation to our peso and the value of dollars can, by simple

mathematical calculation, be expressed in the value of our pesos. But at present, this is subject tothe provision of Republic Act No. 529.

291. Instrument must specify denomination. But the courts have held that theinstrument should express the specific denomination of money when it is payable in the moneyof a foreign country in order that the courts may be able to ascertain its equivalent value;otherwise, it is not negotiable.

And, under a leading New York case, where an instrument is made payable generally inthe money of a foreign country without specifying the kind or denomination of the coin ormoney, so that payment may be made in our own coin or equivalent value as determined by thepar of exchange, it is not negotiable. The foregoing, however, is not the invariable rule. In a case,a note payable in Canada currency was held negotiable.

292. Republic Act 529. Section 1 of Republic Act No. 529 provides that everyprovision contained in, or made with respect to, any obligation which provision purports to givethe oblige the right to require payment n gold in a particular kind of coin or currency other thanPhilippine currency or in an amount of money of the Philippines measured thereby, be as it ishereby declared against public policy, and gp1, void and of no effect, and no such provision shallbe contained in, or made with respect to, any obligation hereafter incurred in every otherdomestic obligation heretofore or hereafter incurred, whether or not any such provision as topayment is contained therein or made with respect thereto, shall be discharged upon payment inany coin or currency which at the time of payment is legal tender for public and private debts.Provided that, if the obligation was incurred prior to the enactment of this Act and requiredpayment in a particular kind of coin or currency measured, it shall be discharged in Philippinecurrency measured at the prevailing rate of exchange at the time the obligation was incurredexcept in case of a loan made in foreign currency stipulated to be payable in the same currency inwhich case, the rate of exchange prevailing at the time of the stipulated date of payment shallprevail. All coin and currency, including Central Bank notes, heretofore or hereafter issued and


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declared by the Government of the Philippines shall be legal tender of all debts, public andprivate. This Republic Act took effect upon its approval on June 16, 1950.

293. Negotiability under Republic Act 529. The question now arises as to whetherunder the foregoing provisions, an instrument otherwise complying with all the requirements of

Section 1 but payable in foreign money, is thereby rendered non-negotiable. It will be noted thatwhat the law declares to be void is to require payment in gold or in foreign money. Theobligation or instrument containing the void provision remains valid itself.

It be noted further that the law provides that every obligation or instrument, whethercontaining the provision in question or not, shall be discharged upon payment in any coin orcurrency which at the time of payment is legal tender for public or private debts in thePhilippines. Thus, it seems also that the obligation or instrument containing the void provision inquestion- becomes payable in Philippine money which at the time of the payment is legal tender.

It may, therefore, be concluded that, since an instrument payable in foreign money is

converted into an instrument payable in Philippine money, such an instrument would benegotiable if it otherwise complies with all the requirements of Section 1 of the NegotiableInstruments Law.

For obligations incurred (after the enactment of RA 529, the rate of exchange shall bethat prevailing at the time of paymenst.

294. Only agreement to pay in foreign exchange is void, but creditors claim for

payment is not defeated. WhiIe an agreement to pay in dollars is declared as null and void andof no effect, what the law specifically prohibits is payment in currency other than the legaltender. It does not defeat a creditors claim for payment, as it specifically provides that everyother domestic obligation x xxx whether or not any such provision as to payment is containedtherein or made with respect thereto shall be discharged upon payment in any coin or currencywhich at the time of payment is legal tender for public and private debts. A contrary rule wouldallow a person to profit or enrich himself inequitably at anothers expense.

"If there is any agreement to pay an obligation in a currency other than Philippine legaltender, the same is null and void as contrary to public policy, pursuant to Republic Act. No. 529,and the most that could be demanded is to pay said obligation in dollars, meaning that a creditorcannot oblige the debtor to pay him in dollars, even if the loan were given in said currency.

In such case, the indemnity to be allowed should be expressed in Philippine currency onthe basis of the current rate of exchange at the rime of payment.

295. Payable on demand or at a fixed or determinable future time. An instrument, tobe negotiable, must be payable either (1) on demand or (2) at a fixed or determinable future time.If it is not either the instrument is not negotiable.

296. Where no year is specified. The following is neither payable on demand nor at afixed or determinable future time:


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I promise to pay X or order P1,000.00 on or before December 2.(Sgd.) Y

The time of payment is not determinable as the year is not stated. Neither is it payable on

demand as it. is to be paid at a certain time, December 2, Hence, the note is non-negotiable.But an instrument in the following form: 250. August 14, 1907. Mr. W. T. will pleasepay to R. T. J., or to order, two hundred fifty dollars and charge to my account. Due Oct. 1st, J..R. is payable Oct. 1st, and is a bill of exchange.

297. The instrument must be payable to order or to bearer.

An instrument is not negotiable unless made payable to a person or his order tobearer or unless words of similar equivalent import are use such as or assignee, or Thus, theword on return of this certificate properly indorsed imply that it is to be indorsed and therefore

payable to order within the Negotiable Instruments Law.298. Where payable to a specified person or assigns. Suppose that A draws the

following bill:

Pay to B or his assigns P1,000.

(Sgd.) A

To X

This instrument is negotiable because it is payable to order, although instead of the word order,the word assign is used. The reason is that the word assigns is equivalent to the wordorder.

299. Where payable to the order of bearer. The following is also negotiable:

I promise to pay to the order of bearer P1,000.00.

(Sgd.) A

This was held to be payable to order. The payee of such an instrument is the bearer and it can be

negotiated by his indorsement.7 But this has been criticized the ground payee is not named orotherwise indicated with reasonable certainty, as required under Section 8.

300. Where payable to specified person. Where the instrument is payable only to aspecified person, it is not payable to order. Thus, in case, Kauffman v. National Bank , thePhilippine National Bank dispatched to its New York Agency a cablegram to the followingeffect;


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PAY GEORGE A KAUFFMAN, NEW YORK PHILIPPINE CO.,$45,000. (SGD.) MANILA.

This was held to be non-negotiable as it was neither made payab1e to order, or to bearer asrequired by subsection (d) of Section 1.

301. Where payable to a specified person or his agent. Suppose that A makes thefollowing note:

I promise to pay to B or his collector (or to B or his agent) the sum ofP1,000.00.

(Sgd.) A

This is payable to a specified person. The reason is that a collector or an agent is the sameas the principal. The agent or collector is merely taking the place of the principal. Consequently,the instrument is actually payable only to a specified person, namely, to B, or B through hisagent or collector.

302. Where word bearer not used.The following is an illustration of an instrumentwhich is payable to bearer not withstanding that the word bearer is not used:

Pay to possessor P1,000.00 on demand.(Sgd.)A

This is payable to bearer. The word possessor is equivalent to the word bearer.

303. Where payable to bearer B.But the following is not payable to bearer.I promise to pay to bearer B P1,000.00.

(Sgd.) AThe reason is that the word bearer is merely descriptive. It is nothing but a modifier of B. In

effect, therefore, the instrument is payable to a specified person, namely, B, to be identified asbeing the bearer.

304. The drawee must be named.This requirement refers only to bill of exchange butnot to promissory notes. The name of the person on whom a bill is drawn should appear on itsface.Otherwise, the instrument would not be negotiable. Thus, an instrument in the form of a bill butaddressed to -------- Manila. Philippines is not negotiable.

305. Drawees name may be filed in. But under the Section 14, the drawees name matybe omitted amd be filled in under implied authority like any other blank. And, an acceptance maysupply the omission of a designation. So, in example, if Pedro Facundo writes across the bill:Accepted. (Sgd.) Pedro Facundo, the acceptance supplies the omission and the instrument isnegotiable.

306. Importance of formalities.The formalities requiredby the Negotiable InstrumentsLaw are essential for the security of merchantile transactions. They distinguish non-transferablewritten contract, just as the coinage of a silver peso distinguishes it from uncoined silver, therebyenabling the businessman to tell at glance whether he is taking negotiable paper or not.


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307. Necessity of compliance with provisions.Before the Negotiable Instruments Lawcan come into operation, there must be a document in existence of the character described inSection 1 of the Law. This means that, where the instrument does not comply with therequirement of Section 1 of the Negotiable Instruments Law, the provisions of that law will not

govern the instrument.308. Illustration.(1) Thus, suppose that A makes the following note:

I promise to pay to B P1,000.00.(Sgd.) A

It is evident that this note is not negotiable because it is neither payable to bearer nor payable toorder but to a specified person, and therefore, does not conform with paragraph of Section 1.Consequently, the rights and liabilities of theparties thereto are not governed by the NegotiableInstruments Law.

(2) Suppose then that A the maker, was induced by fraud to make the promissory-note in theillustration. Then B, the payee, indorses the instrument to C, C to D, D to E, and E to F, undercircumstances that would have made F a holder in due course had the instrument beennegotiable. F then files an action against A, the maker, to collect the P1,000.00. Under the factsof the illustration, can A interpose the defense of fraud against F?

Under the Negotiable Instruments Law, A cannot interpose the defense of fraud against aholder in due course. But since the instrument is not negotiable, the Negotiable Instruments Lawdoes not apply. Consequently, A can still interpose the defense of fraud as the transfers of theinstruments by B to C, C to D, D to E, and E to F are nothing but assignments of the instruments.

(3) Furthermore, under the Negotiable Instruments Law, indorsers are entitled to oresentmentfoipayment and notice of dishonored. Otherwise, they would be discharged. But since theinstrumentis not negotiable, its provisions giving indorserssuch rights are not applicable. Hence, C, D andE, transferors, are not entitled to presentment for payment and notice of dishonor, and where Ffails to present the instrument for payment to A, maker, or fails to give notice of dishonor t C,D,and E, said C, D and E will not be discharged.

309. Determination of negotiability. The negotiability of an instrument is to bedetermined: (1) by the provisions of the Negotiable Instruments Law, particularly Section 1thereof; (2) by considering the whole of the instrument; and(3) by what appears on the face ofthe instrument and not elsewhere. In other words, to determine whether an instrument isnegotiable or not, only the instrument itself, and no other, must be examined and compared withthe requirements of the Negotiable Instruments Law as stated in Section 1. If it appears on theInstrument that it lacks one of the requirements, it is not negotiable. The requirement lackingcannot be supplied by using a separate instrument in which that requirement which is lackingappears.


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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.

(a) With interest; or -

(b) By stated installments; or

(c) By stated installments, with a provision that, upon de fault in payment of any

installment or of interest, the whole shall become due; or(d) With exchange, whether at a fixed rate or at the current rate; or

(e) With costs of collection or an attorneys fee, in case payment shall not be made at

maturity.

310. With interest. The fact that the sum payable is to be paid with interest, as forexample, 8% per annum from date until paid does not render the sum uncertain. The amountdue can easily be computed. Thus, in the following note:

I promise to pay to B or order within 90 days from date the sum of P1,000.00 at8% per annum provided, however, that when paid after maturity, the interest shall

be 10%. (Sgd.) AThe sum would still be certain because the principal sum of P1.000.00 is certain. If paid beforethe date of maturity, the sum would still be P1,000.00 plus, of course, 8% interest for the periodwithin which the payment is not made. If the payment is made after maturity, the principal sumis certain, namely, P1,000.00 plus 10% interest from the date the note is not paid.

311. When interest stipulated but not specified. When interest is stipulated but notspecified, the interest shall be the legal rate, which is 12% for loans or forbearance of money.Thus:

30 days from this date, I promise to pay to the order of B P1,000.00 with interest.(Sgd.) A

Here, the interest is stipulated but not specified. This isalso the case where the note is expresslyto be payable with interest but the rate is left blank. The rate is determined to be the legal rate.

312. Where interest not stipulated.Where interest is not stipulated, legal interest willbe paid when the debtor incurs in delay. A debtor incurs in delay from the time the obligeejudicially or extrajudicially demands from him the payment of the instrument. Thus, where thereis no evidence in the case of any demand for payment of the debt made prior to thecommencement of the action, interest can be recovered only from- said commencement of theaction.

313. When interest shall earn interest. Interest due shall earn legal interest from thetime it is judicially demanded, although the instrument may be silent upon this point.

314. Escalation clause, and deescalation clause, defined; former valid ifaccompanied by latter. An agreement pertaining to a loan or forbearance of money, goods orcredits may stipulate that the rate of interest agreed upon may be increased in the event that theapplicable maximum rate of interest is increased by law or by the Monetary Board. Deescalationclause is a stipulation in the agreement that the rate of interest agreed upon shall be reduced if the


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maximum rate of interest is decreased by law or by the Monetary Board. The escalation clause isvalid if there is also a descalation clause.

315.

By stated installments. The sum payable is a sum certain within the meaning ofthis act, although it is to be paid by stated installments. Consequently, an instrument containing

such a stipulation would not thereby be rendered non-negotiable. But the installments: (1) bestated and (2) the maturity of each installment must be fixed or determinable. This lastqualification is required in order to comply with the requisite that the instrument, if not payableon demand, must be payable at a fixed or determinable future time.

316. Illustration of installments not stated.Suppose the instrument reads as follows:I promise to pay to B or order P1,000.00 in installments.

(Sgd.) A

This is not negotiable because the installments are not. Stated and, therefore, the sumpayable for each installment is uncertain. The same is true when the instrument is payable in

two installments, without more.317. Illustration of stated installments.But in the following, the installments are stated:

I promise to pay to B or his order P1,000.00 in four equal monthly installmentsbeginning January 1, 1949.

(Sgd.) A

The same is true as to the following:

I promise to pay to the order of B the sum of P100.00 in two installments, asfollows:

(1) P45.00 on February 1, 1950(2) P55.00 on June 1, 1950

(Sgd.) A

It is to be noted that, as already stated, it is also essential that the maturity of each installment beknown. It is not enough that the installments be stated.

318. By stated installments, with acceleration clause. The sum payable is a sum certainwithin the meaning of this Act, although it is to be paid by stated installments, with aprovision that upon default in payment of any installment or of interest, the whole shallbecome due. Consequently, an instrument containing such a stipulation would not therebybe rendered non-negotiable.

I promise to pay to B or his order P1,000.00 in four equal monthly installments, thefirst to be paid within the first five days of the month following this month, and theother within the first five days of every month thereafter. Upon default in thepayment of any installment, the whole sum payable under this note shall become due.

(Sgd.) A


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The last sentence is called the acceleration clause. It is so called because it hastens the paymentof the whole note. Under the note, only the sum P250.00 is payable within the first five days ofeach month, not the whole amount, which is payable in four months in equal monthlyinstallments.

319. Effect of failure to pay an installment. But suppose B fails to pay the firstinstallment on its date of maturity. Not only the sum of P250.00 is due but the whole amount ofP1,000.00.

320. With exchange. The sum payable is a sum certain within the meaning of thisact, although it is to be paid with exchange, whether at a fixed rate or at the current rate.Consequently, an instrument containing such a stipulation would not thereby be rendered non-negotiable. This is because while the rate of exchange is not always the same and while it istechnically true that resort must be had to extrinsic evidence to ascertain what it is, yet thecurrent rate of exchange between two places at a particular date is a matter of common

commercial knowledge, or at least easily ascertained by any one so that the parties can always,without difficulty, ascertain the exact amount necessary to discharge the paper.

321. Exchange, defined and explained. Exchange is the difference in value of the sameamount of money in different countries. The exchange may be at the (1) current rate or at a (2)fixed rate. In the case of the latter, there is really no question of uncertainty as to the amountbecause the rate is fixed. Thus:

Pay to B or order P1,000.00 with exchange at 1.2%.(Sgd.) A

322. Exchange applicable only to foreign bills. The provision on payment withexchange naturally applies only to instruments drawn in one country and payable in another.Where an instrument is drawn and payable in the same country, there can be no exchange, so aprovision for payment of exchange may be disregarded.

GREGORIO ARANETA, INC. y. PHILIPPINE: NATIONAL BANK The plaintiff filed anapplication for commercial letter of credit with the defendant, which the latter granted. Said letterof credit was in favor of an English firm in London for the sum of 7,440 pounds. On August 30,1949, a draft in the amount of 4,031.13 pounds was negotiated by the defendants correspodentbank in London against the plaintiffs credit. The defendant paid said correspondent bank theamount of the draft at the official parity rate then existing at 4.0325 for every English pound. Onthe face of the draft, it matured on December 25, 1949. On September 23, 1949, the Britishpound was devaluated to $2.80125. The defendant contended that the plantiff was liable in thesum of P33,727.92 based on the rate of exchange on August 30, 1949 when the draft wasnegotiated. The plaintiff contended, however, thatit was liable only for P23,194.37 on the basisof the rate of exchange on the date of maturity of the draft. The application for the letter ofcredit, which embodies the contract of the parties, provides that the draft must be drawn andpresented or negotiated and agreed to pay at maturity in Philippine currency, the equivalent ofany amount that might be drawn or paid upon the faith of plaintiffs credit; and that the plaintiffagreed to reimburse the defendant bank in said manner


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HELD: Although the plaintiffs application provides for payment at maturity of the draft, thisrefers merely to the time when the plaintiff was bound to pay, and not to the rate of exchange atwhich the draft should be paid by the plaintiff,since the latters obligation is determined by therate of exchange on the date the draft was drawn and presented or negotiated which was not laterthan August 31, 1949. x xx. Plaintiff-appellant invokes an alleged banking practice, custom or

practice whereby a draft should be paid at the rate existing onthe date of its maturity. Evenassuming the existence of thisbanking practice, the same is clearly immaterial, as there isanexpress contract between the parties defining their rights and obligations.

323. With costs and attorneys fees. The sum payable isa sum certain within themeaning of this Act, although it isto be paid with costs of collection or an attorneys fee, incase,payment shall not be made at maturity. Consequent ly, aninstrument containing such astipulation would not thereby be rendered non-negotiable. An instrument may thus stipulatethatcosts of collection and/or attorneys fees shall be paid bythe debtor in addition to the principalin case the instrumentshall not be paid at maturity. The legality of such a stipulation is expresslyrecognized in the Negotiable Instruments Law, and impliedly in the New Civil Code.

324. Stipulation as to attorneys fees not usurious. Such a stipulation is not void asusurious, even when added to acontract for the payment of the highest rate of interestpermissible. It may, of course, be made to conceal usury. Butthat is a matter of proof to bedetermined in each case. Thepurpose of a stipulation in a note for reasonable attorneys feeisnot to give the lender a larger compensation for the loan than the law allows, but to safeguard thelender against future loss or damage by being compelled to retain counsel to institute judicialproceedings to collect his debt.

325. Stipulation as to attorneys fees will not make sum uncertain . Although such astipulation will make the sum payable after maturity, uncertain, it will not affect the certainty ofthe sum payable at maturity and, therefore will not affect the negotiability of the instrument inwhich it is stipulated. Thus:

One year after date, for value received. I promise to pay A. S. Juan & Co. orbearer the sum of P1,000.00 with interest

agbayani nego (1)

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