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NEGOTIABLE INSTRUMENTS LAW
Based on the Syllabus of Atty. Valerie Gayle J. Patac, the Book of Hector S. De Leon & USC EH 404 2016-17 Notes
I. INTRODUCTION
A. APPLICATION AND PURPOSE OF NIL
The Act applies only to negotiable instruments or to those instruments which
meet the requirements laid down in Section 1 of the law.
Sec. 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 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 with reasonable certainty.
What about those not provided in the Act?
It shall be governed by the provisions of existing legislation or in default
thereof, by the rules of the law merchant. The Civil Code has no effect on its
provisions except to supply any deficiency in cases not covered by the Act.
(Art 18)
B. CHARACTERISTICS OR FEATURES OF A NEGOTIABLE INSTRUMENT
NEGOTIABILITY
A quality or attribute of a bill or note whereby it may pass from hand to
hand similar to money; so as to give the holder in due course the right to hold
the instrument and collect the sum payable for himself free from any infirmity
in the instrument or defect in the title of any of the prior parties, or defenses
available to them among themselves.
The rule that one can pass no better title to personal property than he,
himself has, does not apply to negotiable instruments. As such, when one
who innocently takes currency from a finder not knowing that it is derived
from theft, he can hold it against the world. Including the true owner.
EXAMPLE:
Suppose S sells and delivers goods to B who later refuses to pay for
them as they, in fact, are not as ordered. In a suit by S against B for
the price, B can successfully raise breach of contract by S as a
defense. If S assigns the account to X, B can interpose the same
defense against X notwithstanding the fact that X did not know of
any dispute between S and B when X bought B's account. As
assignee X stands in the shoes of S, his assignor.
Assume now that B had issued to S his promissory note for the
price of the goods. If S sues B on the note, the defense of breach of
contract is available to B. But if S negotiates the note to Y who
takes the note under such circumstances as to make him a holder
in due course, B can no longer interpose such defense against Y.
A bona fide holder, however, while free from personal defenses available to
prior parties among themselves, is subject to real defenses that might have
obtained between them.
ACCUMULATION OF CONTRACTS
The most important feature of negotiable instruments is the accumulation of
secondary contracts as they are transferred from one person to another.
Once an instrument is issued, additional parties can become involved.
EXAMPLE:
Suppose A issues a promissory note payable to the order of B for
the sum stated therein. Here, the contract is only between A and B.
A is primarily liable.
If B transfers his right to the instrument to C, B thereby enters into
a new contract with C whereby B binds himself to pay in C in case
A, the maker, does not pay the note. Here, B is secondarily liable.
The primary contract is that between A and B. The transfer of the
note to C makes a secondary contract between B and C.
CASE:
FIRESTONE TIRE AND RUBBER CO. vs COURT OF APPEALS
AND LUZON DEV’T BANK
| G.R. No. 113236 | March 5, 2001
TOPIC FROM THE SYLLABUS: NEGOTIABILITY
The essence of negotiability which characterizes a negotiable paper as a credit
instrument lies in its freedom to circulate freely as a substitute for money. The
withdrawal slips in question lacked this character.
FACTS
Luzon Development Bank (Defendant/LBP) is a banking corporation. One of its
clients, the Fojas-Arca Company, maintained a special savings account with
defendant, to which the LBP allowed withdrawals of funds through the
medium of special withdrawal slips.
Tsarina | UV GLS | Pre-midterms | 2nd Yr 2nd Sem | Cases Digests By: j-c-g-c-i
Later, Firestone Tire & Rubber Co. (Plaintiff/Firestone) and Fojas-Arca entered
into a Franchised Dealership Agreement whereby Fojas Archa has the
privilege to purchase on credit and sell plaintiff’s products, amounting to P4,
896,000. In payment of these purchases, Fojas-Arca delivered six special
withdrawal slips upon LBP. Consequently, these were deposited by Firestone
in its current account with Citibank. All six withdrawal slips were honored
and paid by LBP. This circumstance made Firestone believe that the
succeeding withdrawal slips would be equally sufficiently funded.
However, on December 14, 1978, Firestone was informed by Citibank that the
TWO special withdrawal slips were dishonored and not paid for the reason of
NO ARRANGEMENT. By this, Firestone wrote a demand upon LBP for the
satisfaction of the damages suffered by it, but due to LBP’s refusal to heed
such demand, plaintiff filed this complaint.
LBP’s Assertions:
(1) The transactions mentioned by Firestone are that of Firestone and FojasArca only, and which, LBP is not involved, for which reason defendant is not
duty bound to notify nor give notice of anything to plaintiff.
(2) LBP denied that the withdrawal slips were honored by them, they merely
verified w/n the signatures were authentic, and w/n funds were sufficient. If
Firestone treated such slips as checks then Firestone has to blame itself for
gross negligence treating the withdrawal slips as check when it is clearly
stated that the withdrawal slips are non-negotiable.
LOWER COURTS’ RULING
RTC: Dismissed.
CA: Denied appeal, and affirmed RTC decision. LBP was not negligent in not
requiring a passbook under said transaction. The special withdrawal slips in
question were not purposely given the appearance of checks, contrary to
petitioner's assertions, and thus should not have been mistaken for checks.
ISSUE: W/N LBP (defendant) should be held liable for damages suffered by
Firestone, due to its allegedly belated notice of non-payment of the subject
withdrawal slips.
HELD: No. Petitioner Firestone admitted that the withdrawal slips were nonnegotiable. Hence, the giving of immediate notice of dishonor of negotiable
instruments do not apply in this case. Thus, respondent bank was under no
obligation to give such notice that it would not make payment.
Citibank could not have missed the non-negotiable nature of the withdrawal
slips. The essence of negotiability which characterizes a negotiable paper as
a credit instrument lies in its freedom to circulate freely as a substitute for
money. The withdrawal slips in question lacked this character.
Fiduciary Duty of Bank to scrutinize
The fact that the other withdrawal slips were honored and paid by respondent
bank was no license for Citibank to presume that subsequent slips would be
honored and paid immediately. By doing so, it failed in its fiduciary duty to
treat the accounts of its clients with the highest degree of care.
Ratio: Why Citibank and Firestone should bear the risk The withdrawal slips
were not checks, as Firestone admits. Citibank was not bound to accept the
withdrawal slips as valid mode of deposit. But having erroneously accepted it,
Citibank, and Firestone, must bear the risks attendant to the acceptance.
Petition is denied. CA decision affirmed.
C. FUNCTION AND IMPORTANCE OF NEGOTIABLE INSTRUMENTS

As substitute for money – Although they do not constitute as legal
tender, and are not actual money, they are used as a subtitute for
money and can be passed freely from hand to hand in the
commercial markets.
Why? What is the purpose of the law?
To place negotiable instruments on equal footing with money so
that it would be freely accepted without question in commercial
transactions, thereby facilitate trade.

As a medium of exhange for most commercial transactions –
negotiable papers, particularly checks, constitute the media of
exchange for most commercial transactions. Without NP, more
money (coins or bank bills) would be in circulation.

As a medium of credit transactions – A man does not always have
property or valuable property rights which he can turn into cash at
any time. However, these tilings measure his credit and avails
himself of his credit by executing a promissory note.
What is its purpose as regards to credit transactions?
Allow men of undoubted credit to carry on a business enterprise
upon their promissory notes, bills of exchange and checks knowing
that other businessmen will treat these promises as cash.
EXAMPLE:
S sells goods to B who gives a check or a promissory note payable until a
future date. Since S would have to wait until maturity date to collect, this
Page 1 of 9
NEGOTIABLE INSTRUMENTS LAW
Based on the Syllabus of Atty. Valerie Gayle J. Patac, the Book of Hector S. De Leon & USC EH 404 2016-17 Notes
is a form of extending credit to a buyer. Now S may wish to sell the
instrument to a bank (or a third person) for immediate cash. In order to
induce the bank (indorsee) which would have to wait for the maturity
before receiving payment, to buy the instrument, S accepts a discount of
say, 10% of the face amount.
The bank, in effect, pays less than the amount it will eventually collect as
a way of charging S (seller) interest in advance as compensation for its
role in the transaction.
CASE:
MITRA V. PEOPLE OF THE PHILIPPINES
| G.R. No. 191404 | July 5, 2010
TOPIC FROM THE SYLLABUS: Function and Importance of Negotiable
Instruments (As a substitute for money)
“A check is a negotiable instrument that serves as a substitute for money and
as a convenient form of payment in financial transactions and obligations.”
FACTS
Petitioner Mitra was the Treasurer, and Cabrera (now deceased) is the
President of Lucky Nine Credit Corporation (LNCC). Private respondent Tarcelo
invested money in LNCC between 1996 and 1999. Tarcelo was then issued
checks equivalent to the amounts he invested plus interest.
When Tarcelo presented the checks for payment, they were dishonored for
the reason of “account closed.” Tarcelo made demands on LNCC but was
frustrated. Hence, he filed seven informations for violation of BP22 in the total
amount of P925,000.00 with the MTCC in Batangas City.
LOWER COURT’S RULING
MTCC Ruling: MTCC found Mitra guilty. Petitioners appealed to the RTC
contending that they signed the seven checks in blank.
RTC Ruling: RTC affirmed the MTCC decision. Mitra filed a petition for review
contending that there was no proper service of the notice of dishonor on her.
CA: CA dismissed her petition for lack of merit. Hence, this petition.
ISSUE/S:
W/N the elements of violation of BP 22 must be proved beyond reasonable
doubt
W/N there is a proper service of notice of dishonor and demand to pay to the
petitioners (SC not a trier of facts)
HELD: No. The purpose of BP 22 in declaring the mere issuance of a bouncing
check as a malum prohibitum is to punish the offender in order to deter him
and others from committing the offense.
No. The 2nd issue is factual and is not proper for review. It is not the function
of the Court to re-examine the findings of facts by the CA.
RATIO RE: TOPIC
A check is a negotiable instrument that serves as a substitute for money and
as a convenient form of payment in financial transactions and obligations. The
use of checks as payment allows commercial and banking transactions to
proceed without the actual handling of money. It permits commercial and
banking transactions to be carried out quickly and efficiently. BP 22 is there to
prevent the damage caused by unfunded checks that adversely affect
confidence in our commercial and banking activities, injuring public interest.
The respondents refused to pay on the ground that they had already paid
their obligation to FEBTC.
FEBTC filed a Complaint for Replevin and Damages against the respondents
with the Metropolitan Trial Court (MeTC) of Manila praying for the delivery of
the vehicle, with an alternative prayer for the payment plus interest and/or
late payment charges per annnum from May 18, 1997 until fully paid.
Spouses’ Counterarguments:
(1) They alleged that they delivered eight postdated checks to the Auto
Financing Department of FEBTC covering the amount due, and attached an
Acknowledgement Receipt in their answer, which showed that FEBTC received
the checks.
(2) Spouses also averred that they did not receive any notice from the
drawee banks or from FEBTC that these checks were dishonored. Considering
that the checks were issued three years from the complaint, they believed in
good faith that their obligation had already been fully paid.
During trial, Mr. Vicente Magpusao testied that he had been connected with
FEBTC since 1994 and had assumed the position of Account Analyst since its
merger with BPI. He admitted that they had, in fact, received the eight checks
from the respondents. However, two of these checks (Landbank Check No.
0610947 and FEBTC Check No. 17A00-11551P) amounting to P23,692.00 were
dishonored. He recalled that the remaining two checks were not deposited
anymore due to the previous dishonor of the two checks. He said that after
deducting these payments, the total outstanding balance of the obligation
represented the last four monthly installments.
LOWER COURTS’ RULING
MTC: Dismissed the case and granted the respondent spouses’ counterclaim
for damages.
RTC: Set aside MTC’s decision upon appeal and ordered the spouses to pay
the amount claimed by the petitioner.
CA: Reversed RTC’s decision and reinstated MTC’s decision. CA denied
motion for reconsideration.
ISSUE: WON tender of checks constitutes payment and WON the respondents
were able to prove full payment of their obligation
HELD: No. A check is not a legal tender and, therefore, cannot constitute as
valid tender of payment.
Mere delivery of checks does not discharge the obligation under a judgment.
The obligation is not extinguished and remains suspended until the payment
by commercial document is actually realized. Furthermore, as correctly
observed by the RTC, the acknowledgement receipt is only proof that
respondents delivered eight checks in payment of the amount due.
Apparently, this will not suffice to establish actual payment.
To establish their defense, the respondents therefore had to present proof,
not only that they delivered the checks to the petitioner, but also that the
checks were encashed. The respondents failed to do so. Had the checks been
actually encashed, the respondents could have easily produced the cancelled
checks as evidence to prove the same. Instead, they merely averred that they
believed in good faith that the checks were encashed because they were not
notified of the dishonor of the checks and three years had already lapsed
since they issued the checks.
CASE:
BANK OF THE PHILIPPINE ISLANDS vs. SPOUSES REYNALDO
AND VICTORIA ROYECA
| G.R. No. 176664 | July 21, 2008
Because of the failure of the respondents to present sufficient proof of
payment, it was no longer necessary for the petitioner to prove non-payment,
particularly proof that the checks were dishonored. The burden of evidence is
shifted only if the party upon whom it is lodged was able to adduce
preponderant evidence to prove its claim.
TOPIC FROM THE SYLLABUS: NEGOTIABLE INSTRUMENT AS SUBSTITUTE FOR
MONEY
Settled is the rule that payment must be made in legal tender. A check is not a
legal tender and, therefore, cannot constitute a valid tender of payment. Since
a negotiable instrument is only a substitute for money, the delivery of a check
does not, by itself operate as payment, such as in the case at bar.
Ratio:
Although negotiable instruments do not constitute as a legal tender (Art.
1249, ibid.), and are not money, they are used as a substitute for money.
However, a negotiable instrument differs from money, in that the former is
valuable or worthless depending upon the financial ability of the parties to
them.
FACTS:
Spouses Reynaldo and Victoria Royeca (respondents) executed and
delivered to Toyota Shaw, Inc. a Promissory Note payable in 48 equal monthly
installments, with a maturity date of August 18, 1997. The Promissory Note
provides for a penalty of 3% for every month or fraction of a month that an
installment remains unpaid. To secure payment of said Promissory Note,
respondents executed a Chattel Mortgage in favor of Toyota.
In the case at bar, two post-dated checks dishonored thus, rendering it
worthless. In addition, as a check is not a legal tender, it therefore, cannot
constitute a valid tender of payment. Since a negotiable instrument is only a
substitute for money, the delivery of a check does not, by itself operate as
payment.
Toyota, with notice to respondents, executed a Deed of Assignment,
transferring all its rights, title, and interest in the Chattel Mortgage to Far East
Bank and Trust Company (FEBTC).
CASE:
CEBU INTERNATIONAL FINANCE CORP. v. CA
I G.R. No. 123031 I October 12, 1999
TOPIC FROM THE SYLLABUS: FUNCTION AND IMPORTANCE OF NEGOTIABLE
INSTRUMENTS
Article 1249 of the New Civil Code deals with a mode of extinction of an
obligation and expressly provides for the medium in the "payment of debts."
Claiming that the respondents failed to pay four (4) monthly amortizations
covering the period from May 18, 1997 to August 18, 1997, FEBTC sent a
formal demand to respondents asking for the payment thereof, plus penalty.
Tsarina | UV GLS | Pre-midterms | 2nd Yr 2nd Sem | Cases Digests By: j-c-g-c-i
Page 2 of 9
NEGOTIABLE INSTRUMENTS LAW
Based on the Syllabus of Atty. Valerie Gayle J. Patac, the Book of Hector S. De Leon & USC EH 404 2016-17 Notes
It provides that: "The payment of debts in money shall be made in the
currency stipulated, and if it is not possible to deliver such currency, then in
the currency, which is legal tender in the Philippines. The delivery of
promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they have been impaired.
FACTS:
Cebu International Finance Corporation (CIFC), a quasi-banking institution, is
engaged in money market operations. On April 25, 1991, private respondent,
Vicente Alegre, invested with CIFC, five hundred thousand (P500,000.00)
pesos, in cash. Petitioner issued a promissory note to mature on May 27,
1991. The note for five hundred sixteen thousand, two hundred thirty-eight
pesos and sixty-seven centavos (P516,238.67) covered private respondent's
placement plus interest at twenty and a half (20.5%) percent for thirty-two
(32) days.
On May 27, 1991, CIFC issued BPI Check No. 513397 (hereinafter the CHECK)
for five hundred fourteen thousand, three hundred ninety pesos and ninetyfour centavos (P514,390.94) in favor of the private respondent as proceeds of
his matured investment plus interest. The CHECK was drawn from petitioner's
current account number 0011-0803- 59, maintained with the Bank of the
Philippine Islands (BPI), main branch at Makati City. On June 17, 1991, private
respondent's wife deposited the CHECK with Rizal Commercial Banking Corp.
(RCBC), in Puerto Princesa, Palawan. BPI dishonored the CHECK with the
annotation, that the "Check (is) Subject of an Investigation." BPI took custody
of the CHECK pending an investigation of several counterfeit checks drawn
against CIFC's aforestated checking account. BPI used the check to trace the
perpetrators of the forgery.
On February 25, 1992, private respondent Alegre filed a complaint for
recovery of a sum of money against the petitioner with the Regional Trial
Court of Makati (RTC-Makati). On July 13, 1992, CIFC sought to recover its lost
funds and formally filed against BPI, a separate civil action for collection of a
sum of money with the RTC-Makati. The collection suit alleged that BPI
unlawfully deducted from CIFC's checking account, counterfeit checks.
The money market transaction between the petitioner and the private
respondent is in the nature of a loan. The private respondent accepted the
CHECK, instead of requiring payment in money. Yet, when he presented it to
RCBC for encashment, as early as June 17, 1991, the same was dishonored by
non-acceptance, with BPI's annotation: "Check (is) subject of an
investigation." These facts were testified to by BPI's manager. Under these
circumstances, and after the notice of dishonor, the holder has an immediate
right of recourse against the drawer, and consequently could immediately file
an action for the recovery of the value of the check. In a loan transaction, the
obligation to pay a sum certain in money may be paid in money, which is the
legal tender or, by the use of a check. A check is not a legal tender, and
therefore cannot constitute valid tender of payment.
LOWER COURT’S RULING:
RTC- rendered judgment in favor of Vicente Alegre.
CA- affirmed the decision of the trial court
ISSUE:
Whether or not a check is of legal tender thereby extinguishing the
obligation of Cebu International Finance Corp. to pay Alegre.
HELD:
NO. According to Article 1249 of the New Civil Code, "The payment
of debts in money shall be made in the currency stipulated, and if it is not
possible to deliver such currency, then in the currency, which is legal tender in
the Philippines.”
The obligation is not extinguished and remains suspended until the payment
by commercial document is actually realized. Although the value of the check
was deducted from the funds of CIFC, it was not delivered to Alegre therefore,
it did not not ipso facto operate as a discharge or payment.
RATIO:
"Since a negotiable instrument is only a substitute for money and not money,
the delivery of such an instrument does not, by itself, operate as payment. A
check, whether a manager's check or ordinary check, is not legal tender, and
an offer of a check in payment of a debt is not a valid tender of payment and
may be refused receipt by the obligee or creditor. Mere delivery of checks
does not discharge the obligation under a judgment. The obligation is not
extinguished and remains suspended until the payment by commercial
document is actually realized (Art. 1249, Civil Code, par. 3.)"
CASE:
STATE INVESTMENT HOUSE, INC., vs. COURT OF APPEALS
and NORA B. MOULIC
| G.R. No. 101163 | January 11, 1993
FACTS
Nora Moulic issued to Victoriano, as a security for pieces of jewelry to be sold
on commission, two postdated Equitable Banking corporation checks in the
Tsarina | UV GLS | Pre-midterms | 2nd Yr 2nd Sem | Cases Digests By: j-c-g-c-i
amount of 50,000 pesos for each. Thereafter, the payee (Victoriano)
negotiated the checks to petitioner State Investment House, Inc. (State).
Moulic failed to sell the jewelry, so she returned them to Victoriano before
the maturity of the checks. The checks could no longer be retrieved as they
had already been negotiated. Consequently, the checks were dishonoured for
insufficiency of funds upon maturity of payment. State allegedly informed
Moulic of the dishonour of the checks and requested instead for cash
payment, though Moulic denies receiving said notice.
State sued to recover of the value of the checks plus attorney’s fees.
Moulic contends that she incurred no obligation as the jewelry had never
been sold and the checks were negotiated without her consent.
LOWER COURT’S RULING
RTC dismissed the complaint and ordered State to pay Moulic attorney’s fees.
CA affirmed the RTC on the ground that the Notice of Dishonor to MOULIC
was made beyond the period prescribed by the Negotiable Instruments Law.
The sale of the jewelry was never effected; the checks, therefore, ceased to
serve their purpose as security for the jewelry.
ISSUES:
WON State was a holder of the checks in due course.
WON State may exact payment from Moulic.
HELD: Yes to both. Sec. 52 of the Negotiable Instruments Law providesWhat constitutes a holder in due course. — A holder in due course is a holder
who has taken the instrument under the following conditions: (a) That it is
complete and regular upon its face; (b) That he became the holder of it before
it was overdue, and without notice that it was previously dishonored, if such
was the fact; (c) That he took it in good faith and for value; (d) That at the time
it was negotiated to him he had no notice of any infirmity in the instrument or
defect in the title of the person negotiating it.
All requirements were present when the checks were negotiated to State,
thus, they are holders in due course.
Also, Moulic, as drawer, is liable for the value of the checks she issued to the
holder in due course, State, without prejudice to any action for recompense
she may pursue against the Victorianos as Third-Party Defendants who had
already been declared as in default. The petition is granted.
CASE:
OSMENA VS CITIBANK
| G.R. No. 141278 | March 23, 2004
TOPIC FROM SYLLABUS:
Function and Importance of Negotiable Instruments
The Negotiable Instruments Law was enacted for the purpose of facilitating,
not hindering or hampering transactions in commercial paper. Thus, the said
statute should not be tampered with haphazardly or lightly. Nor should it be
brushed aside in order to meet the necessities in a single case.
FACTS
Petitioner Michael Osmena filed for damages against Citibank and Associated
Bank, alleging that he purchased from Citibank the amount of P1,545,000
payable to respondent Frank Tan (Tan). Later, Osmena knew that the
manager’s check was deposited with Associated Bank to the account of Julius
Dizon. Due to the payment by the respondents of the check to an improper
party and the absence of any indorsement by the payee for the check, as per
knowledge of Osmena, it would turn out that Tan did not receive the value
thereof. As such, Osmena demanded from respondent Citibank the
reimbursement of the check, and upon refusal to heed such request, this
complaint.
Respondent Citibank answered that the payment of the check was made by it
in due course. Since a manager’s check is normally purchased in favor of a
third party, the identity of whom in most cases is unknown to the issuing
bank, its only responsibility is to ascertain the genuineness of the check.
LOWER COURTS’ RULING
TC: Dismissed the action, ordered Tan to pay Osmena P1, 545,000
CA: Affirmed TC’s decision
Osmena’s appeal before SC:
Julius Dizon was not a holder of the check in due course, he could not validly
negotiate the check. The latter was not even a transferee in due course
because respondent Tan, the payee, did not endorse the said check. The
position of the respondent Bank is akin to that of a bank accepting a check for
deposit wherein the signature of the payee or endorsee has been forged.
ISSUE: W/N Julius Dizon could validly negotiate the check
Page 3 of 9
NEGOTIABLE INSTRUMENTS LAW
Based on the Syllabus of Atty. Valerie Gayle J. Patac, the Book of Hector S. De Leon & USC EH 404 2016-17 Notes
HELD: Yes. Respondent Associated Bank successfully supported its assertion
that Tan and Dizon were one and the same person. The check was endorsed
by Julius Dizon and deposited to Associated Bank. Indeed, the evidence shows
that the amount was in the name of Frank Tan, who also uses the alias Julius
Dizon.
Osmena counters that such use of an alas is illegal, but this is an irrelevant
casuistry that does not retract from the fact that Tan as Julius Dizon encashed
and deposited the P1,545,000.00. All told, the petitioner’s allegation that
respondent Tan did not receive the proceeds of the check is belied by the
evidence on record and attendant circumstances. Respondent Tan did not
appeal the decision of the RTC.
CASE:
PHIL. EDUCATION V. SORIANO
| G.R. No. L-22405 | June 30, 1971
TOPIC FROM THE SYLLABUS: Function and Importance of Negotiable
Instruments (As a substitute for money)
“Postal money orders are not negotiable instruments, the reason behind this
rule being that, in establishing and operating a postal money order system,
the government is not engaging in commercial transactions but merely
exercises a governmental power for the public benefit.”
FACTS
On April 18, 1958, Enrique Montinola sought to purchase from the Manila
Post Office ten money orders of P200.00 each payable to Montinola.
Montinola offered to pay for them with a private check. As checks were not
generally accepted in payment of money orders, the teller advised him to see
the Chief of Money Order Division. However, Montinola managed to leave
with the money orders and his own check.
Upon discovery of the disappearance, an urgent message was sent to all
postmasters, instructing them not to pay anyone of the money orders if
presented for payment. The Bank of America received a copy of the notice
three days later.
On April 23, 1958, one of the money orders was received by petitioner as part
of its sales receipts. It deposited with Bank of America and cleared it with the
Bureau of Posts and received the face value of P200.00.
On Sept. 27, 1961, Soriano notified the Bank of America that the money order
was irregularly issued and that, the amount it represented was deducted from
the bank’s clearing account.
On Jan. 8, 1962, petitioners filed an action against respondents in the
Municipal Court of Manila praying for the notice to be countermanded and to
pay the plaintiff damages.
LOWER COURT’S RULING
MTC Ruling: MTC ruled in favor of petitioners.
Court of First Instance Ruling: CFI reversed the decision. Hence this petition.
ISSUE: W/N the postal money order is a negotiable instrument.
HELD: No. Petitioners averred that postal money order is a negotiable
instrument; that its nature is not in any way affected by the letter signed by
the Director of Posts and that money orders, once issued, create a contractual
relationship of debtor and creditor between the government and the
remitters payees, or endorsees.
In the cases of Bolognesi v. US and US v. Stock Drawers National Bank held
that postal money orders are not negotiable instruments. The reason behind
this rule being that, in establishing and operating a postal money order
system, the government is not engaging in commercial transactions but
merely exercises a governmental power for the public benefit.
RATIO RE: TOPIC
The postal statutes are patterned after similar statutes in force in the US. For
this reason, ours are generally construed in accordance with the construction
given in the United States to their own postal statytes, in the absence of any
special reason justifying a departure from this policy or practice.
CASE:
LORETA SERRANO vs. COURT OF APPEALS and LONG LIFE PAWNSHOP, INC.
| G.R. No. L-45125 | April 22, 1991 |
TOPIC FROM THE SYLLABUS: NEGOTIABILITY
A pawn ticket is not a negotiable instrument under the Negotiable
Instruments Law nor a negotiable document of title under Articles 1507, et
seq. of the Civil Code.
FACTS:
Tsarina | UV GLS | Pre-midterms | 2nd Yr 2nd Sem | Cases Digests By: j-c-g-c-i
Petitioner Loreta Serrano bought pieces of jewelry from Niceta Ribaya. The
petitioner, then in need of money, instructed her private secretary, Josene
Rocco, to pawn the jewelry. Josena Rocco went to private respondent Long
Life Pawnshop, Inc. ("Long Life"), pledged the jewelry with its principal owner
and General Manager, Yu An Kiong, and then absconded with the money and
the pawn ticket. The pawnshop ticket issued to Josena Rocco stipulated that it
was redeemable "on presentation by the bearer."
Three months later, Niceta Ribaya was informed that a pawnshop ticket issued
by Long Life was being offered for sale. She was told that the ticket probably
covered jewelry she once owned and which jewelry had been pawned by one
Josena Rocco.
Suspecting that it was the same jewelry she had sold to petitioner Loreta
Serrano, Niceta informed petitioner of this offer and suggested that she go to
the Long Life pawnshop to check the matter out. Petitioner went to Long Life,
verified that indeed her missing jewelry was pledged there and told Yu An
Kiong not to permit anyone to redeem the jewelry because she was the lawful
owner thereof. Petitioner claims that Yu An Kiong agreed.
Petitioner then went to the Manila Police Department to report the loss, and
filed a complaint against Josena Rocco. On the same date, Detective Corporal
Mateo went to the pawnshop, showed Yu An Kiong petitioner's report and
left the latter a note asking him to hold the jewelry and notify the police in
case someone should redeem the same. However, Yu An Kiong permitted one
Tomasa de Leon, exhibiting the appropriate pawnshop ticket, to redeem the
jewelry the next day.
Hence, petitioner filed a complaint damages against Long Life for failure to
hold the jewelry and for allowing its redemption without first notifying
petitioner or the police.
LOWER COURTS’ RULING:
CFI: Rendered a decision in favor of petitioner Loreta Seranno.
CA: Dismissed the complaint and reversed the CFI’s decision on appeal. The
CA gave credence to Yu An Kiong's testimony that neither petitioner nor
Detective Mateo ever apprised him of the misappropriation of petitioner's
loan, or obtained a commitment from him not to permit redemption of the
jewelry.
ISSUE: WON the pawn ticket was a negotiable instrument and;
WON it dissolved Yu An Kiong’s duty to hold the things pledged and to give
notice to petitioner and the police of any effort to redeem them
HELD: No. A pawn ticket is not a negotiable instrument under the Negotiable
Instruments Law nor a negotiable document of title under Articles 1507, et
seq. of the Civil Code.
Having been notified by petitioner and the police that jewelry pawned to it
was either stolen or involved in an embezzlement of the proceeds of the
pledge, private respondent pawnbroker became duty bound to hold the
things pledged and to give notice to petitioner and the police of any effort to
redeem them. Such a duty was imposed by Article 21 of the Civil Code. 6 The
circumstance that the pawn ticket stated that the pawn was redeemable by
the bearer, did not dissolve that duty.
If a third person who claimed to be the owner thereof, redeemed the things
pledged a day after petitioner and the police notified Long Life, the prudent
recourse of the pawnbroker was to file an interpleader suit, impleading both
petitioner and the third person. The respondent pawnbroker was, of course,
entitled to demand payment of the loan extended on the security of the
pledge before surrendering the jewelry, upon the assumption that it had given
the loan in good faith and was not a "fence" for stolen articles and had not
conspired with the faithless Josena Rocco or with a third person. Respondent
pawnbroker acted in reckless disregard of that duty in the instant case and
must bear the consequences, without prejudice to its right to recover
damages from Josefina Rocco.
Ratio:
The pawn ticket is not a negotiable instrument and will not absolve
respondent pawnbroker from his duty to hold the things pledged and to give
notice to petitioner and the police of any effort to redeem the pawn. Having
failed to uphold his duty, the respondent pawnbroker must bear the
consequences.
D. FORMS OF NEGOTIABLE INSTRUMENTS

Common Forms

Special Types
COMMON FORMS
1. Promissory Note – an unconditional promise in writing made by
one person to another, signed by the maker, engaging to pay on
demand, or at a fixed or determinable future time, a sum certain in
money to order or to bearer. Where a note is drawn to maker’s
own order, it is not complete until indorsed by him (sec 184).

Certificates of Deposits
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NEGOTIABLE INSTRUMENTS LAW



2.
Based on the Syllabus of Atty. Valerie Gayle J. Patac, the Book of Hector S. De Leon & USC EH 404 2016-17 Notes
Bank Notes
Due Bills
Bonds
Bill of Exchange – an unconditional order in writing addressed by
one person to another, signed by the person giving it, requiring the
person to whom it is addressed, to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to
bearer (sec 126).

Drafts

Trade Acceptances

Banker’s Acceptances
(SPECIAL FORM OR KIND OF BILL OF EXCHANGE)
3. Bank Check – a bill of exchange drawn on a bank payable on
demand. Except as otherwise provided, the provisions of NIL
applicable to a bill of exchange payable on demand, apply to a
check.
II. GENERAL CONCEPTS
NON-NEGOTIABLE INSTRUMENT
An instrument which is not negotiable, that is, an instrument which does not
meet the requirements laid down to qualify an instrument as a negotiable one
(section 1 of NIL), or an instrument which in its inception was negotiable but
has lost its quality of negotiability. Non-negotiable instruments are covered
by the Civil Code.
Example: When instrument is Payable only to a specified person. A negotiable
instrument ceases to be negotiable if the endorsement stated prohibits
further negotiation.
MONEY
Coined or stamped by public authority and has its value fixed by public
authority, It is a medium of exchange authorized or adopted by a government
as part of its currency.
BILL OF EXCHANGE
This theory states that the drawer has funds in the hands of the drawee it is at
least presumed that the former must have made arrangements with the latter
so that he will honor the bill.
III. FORM AND INTERPRETATION
Relevant Provision (WUDON)
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.
The requirements above A-D, are necessary in order that a promissory note
may be negotiable, while A-E are necessary in order that a bill of exchange
may be negotiable.
The above requisites are deemed essential for the security of commercial
transactions as they enable one to tell at a glance whether or not an
instrument is negotiable and accordingly, to gauge the risks involved in taking
it as security.
A. DETERMINATION OF NEGOTIABILITY
A negotiable instrument, briefly stated, is a contractual obligation to pay
money. However, whether or not an instrument is negotiable or nonnegotiable depends entirely on its form and content. In determining the
negotiability of an instrument, the following must be considered:
(1)
(2)
(3)
the whole of the instrument;
only what appears on the face of the instrument; and
the provisions of the Negotiable Instruments Law especially Section
1 thereof which gives the requirements of negotiability.
A valid instrument is not necessarily negotiable. Every negotiable instrument
is presumed to be a contract but not every contract is a negotiable
instrument.
CASE:
CALTEX PHILIPPINES v. CA
I G.R. No. 97753 I August 10, 1992
FACTS:
Security Bank and Trust Company (Security Bank), a commercial banking
institution, through its Sucat Branch issued 280 certificates of time deposit
(CTDs) in favor of one Angel dela Cruz who deposited with herein defendant
Tsarina | UV GLS | Pre-midterms | 2nd Yr 2nd Sem | Cases Digests By: j-c-g-c-i
the aggregate amount of P1,120,000.00. Angel dela Cruz delivered the said
certificates of time deposit (CTDs) to herein plaintiff, Caltex, in connection
with his purchase of fuel products from the latter. After some time, dela Cruz
informed Mr. Tiangco, the Sucat branch manager, that he lost all the
certificates of time deposit. Mr. Tiangco advised dela Cruz to execute and
submit a notarized Affidavit of Loss. Angel dela Cruz negotiated and obtained
a loan from defendant bank and executed a notarized Deed of Assignment of
Time Deposit.
Mr. Aranas, Credit Manager of plaintiff Caltex (Phils.) Inc. went to the
defendant bank's Sucat branch and presented for verification the CTDs
declared lost by Angel dela Cruz alleging that the same were delivered to
Caltex as security for purchases made with Caltex Philippines, Inc. by said
depositor, dela Cruz. Caltex was requested by Security Bank to furnish a copy
of the document evidencing the guarantee agreement with Mr. Angel dela
Cruz as well as 'the details of Mr. Angel dela Cruz' obligations against which
Caltex proposed to apply the time deposits. However, no copy of the
requested documents was furnished so Security Bank rejected Caltex’s
demand for payment. The loan matured and the time deposits were
terminated and then applied to the payment of the loan of Angel dela Cruz.
Petitioner Caltex demands the payment of the certificates but to no avail.
LOWER COURT’S RULING:
RTC- dismissed the complaint filed therein by Caltex against private
respondent bank.
CA- respondent court affirmed the lower court's dismissal of the complaint
ISSUE:
WON the Certificates of Time Deposit (CTD) are Negotiable Instruments.
WON the petitioner can rightfully recover the CTDs.
HELD:
A) YES. The documents provide that the amounts deposited shall be repayable
to the depositor. The documents do not say that the depositor is Angel de la
Cruz and that the amounts deposited are repayable specifically to him. Rather,
the amounts are to be repayable to the bearer of the documents or, for that
matter, whosoever may be the bearer at the time of presentment. If it was
really the intention of respondent bank to pay the amount to Angel de la Cruz
only, it could have with facility so expressed that fact in clear and categorical
terms in the documents, instead of having the word "BEARER" stamped on the
space provided for the name of the depositor in each CTD.
B) NO. The records reveal that Angel de la Cruz, whom petitioner chose not to
implead in this suit for reasons of its own, delivered the CTDs amounting to
P1,120,000.00 to petitioner without informing respondent bank thereof at any
time. Unfortunately for petitioner, although the CTDs are bearer instruments,
a valid negotiation thereof for the true purpose and agreement between it
and De la Cruz, as ultimately ascertained, requires both delivery and
indorsement. For, although petitioner seeks to deflect this fact, the CTDs were
in reality delivered to it as a security for De la Cruz' purchases of its fuel
products.
RATIO:
Negotiability or non-negotiability of an instrument is determined from the
writing, that is, from the face of the instrument itself. In the construction of a
bill or note, the intention of the parties is to control, if it can be legally
ascertained. While the writing may be read in the light of surrounding
circumstances in order to more perfectly understand the intent and meaning
of the parties, yet as they have constituted the writing to be the only outward
and visible expression of their meaning, no other words are to be added to it
or substituted in its stead.
B. MUST BE IN WRITING AND SIGNED BY THE MAKER OR DRAWER
Form of writing – Any form of writing will do. It can also be printed,
typewritten, or stamped, as long as there is a manifestation in physical form of
the language of your obligation.
Material – There is no requirement as to the material used. It can be on any
material as long as it can be transferred from one hand to another.
SIGNED BY THE MAKER OR DRAWER
Difference between maker and drawer
-
A maker is the one who makes a promise to pay in a promissory
note. He is personally liable to pay.
A drawer is the one who issues a bill of exchange to order a
payment to be made. He orders someone to make the payment.
Note: Maker or drawer does not have to be the one who writes, as long as
he/she is the one who signs.
Location of the signature – The signature may appear in any part of the
instrument. It can appear at the back or on the face of the instrument. There
is no requirement on where the signature should be placed.
It can be signed anywhere provided that such signature signifies the intention
by the maker or drawer to be bound by the instrument
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NEGOTIABLE INSTRUMENTS LAW
Based on the Syllabus of Atty. Valerie Gayle J. Patac, the Book of Hector S. De Leon & USC EH 404 2016-17 Notes
Type of signature – There is no requirement, as long as there is intent to be
bound.

If the signature was a heart: Valid

If the signature was “Nadine”: Still Valid
There is no requirement as to what signature you’ll place, for as long as that
mark or signature or whatever initials you place are indicators of the intent to
be bound by the instrument.
When is sum considered certain in money?
A sum is certain in money if it can be determined on its face or that which can
be computed without resorting to any extrinsic evidence. If the instrument
calls for an act other than the payment of money, it is not negotiable because
a negotiable instrument is intended as a substitute for money.
Example: “Sum of 1,000,000” – It is determinable but the question is in what
form is the 1,000,000? You have to indicate the currency, the full amount
including the denomination of the amount.
Note: If one runs counter to the usual practices of a particular place, wherein
she’s supposed to make a signature using her name or at least one that is
artistic enough not to indicate it as any other person’s name, then it may
prevent the instrument from being accepted. It can affect the acceptability of
the instrument if she doesn’t comply with the usual practices. Then again, as
to whether it will affect negotiability, it will not.
The reason for the requirement is that money is the one standard of value in
actual business. All other commodities may rise and fall in value but in theory,
money always measures this rise and fall and remains the same. With this
requirement, negotiable instruments acquire a uniform stand of value
enabling them to pass freely in lieu of money in the business world.
CASE:
ASTRO ELECTRONICS CORP., vs. PHILIPPINE EXPORT AND FOREIGN LOAN
GUARANTEE CORP.
| G.R. No. 136729 | September 23, 2003
Statements added to the instrument do not affect its negotiability –
There may be statements added to the instrument but which cannot affect its
negotiability and cannot affect the sum being certain in money. The basic test
is whether the holder can determine by calculation or computation, the
amount payable when the instrument is due.
FACTS
Astro was granted several loans by the Philippine Trust Company (Philtrust)
amounting to P3,000,000.00 with interest and secured by three promissory
notes. In each of these promissory notes, it appears that petitioner Roxas
signed twice, as President of Astro and in his personal capacity.
Thereafter, Philguarantee, with the consent of Astro, promised to pay 70% of
Astro’s loan to Philtrust, subject to the condition that upon payment by
Philguarantee of said amount, it shall be proportionally subrogated to the
rights of Philtrust against Astro.
As a result of Astro’s failure to pay its loan obligations, despite demands,
Philguarantee paid 70% of the guaranteed loan to Philtrust. Subsequently,
Philguarantee filed against Astro and Roxas a complaint for sum of money
with the RTC of Makati. Roxas disclaims any liability on the instruments,
alleging, inter alia, that he merely signed the same in blank and the phrases
"in his personal capacity" and "in his official capacity" were fraudulently
inserted without his knowledge.
Note: A promissory note giving the maker the right to ascertain the amount
rightly payable thereunder is non-negotiable.
WITH INTEREST
Interest at a fixed rate – A provision for the payment of interest is a mere
incident; it does not render the instrument non- negotiable because it does
not make uncertain the sum payable.
Example: "I promise to pay P2 or order P10,000.00, with interest at 15% per
annum – The entire sum is still certain because the principal sum of
P10,000.00 is certain and the amount of interest due at any given time can
easily be computed.
Interest at increased or reduced rate – a provision for increased interest rate
if the note is not paid at maturity or for a reduced rate if payment is made at
or before maturity, or for payment of interest on interests, does not destroy
negotiability.
LOWER COURT’S RULING
RTC ruled in favour of Philguarantee ordering Astro and Roxas to pay the
total obligation, because if Roxas really intended to sign the instruments
merely in his capacity as President of Astro, then he should have signed only
once in the promissory note.
CA affirmed the RTC decision.
Example: "I promise to pay P or order P10,000.00 with interest at 18% per
annum from date until paid; 15% if paid when due” – Here, the payee wants
the obligation to be paid at the due date of the contract, and to secure this, he
binds the debtor to pay an increase of the rate of interest in case of
delinquency. The increase (3%) is a penalty. Consequently, the note draws the
same rate of interest before as after maturity, i.e., 15%.
ISSUE
WON Roxas should be jointly and severally liable with Astro.
Accrual/rate of interest not specified — If the instrument provides for the
payment of interest:
(1) without stating the date from which interest is to run, it shall be
computed – from the date of the instrument.
(2) if the instrument is not dated – from the issue thereof.
(3) If there is a stipulation for the payment of interest but the rate is
not specified – legal rate of 6% (Art. 2209, Civil Code.)
HELD: Yes. The promissory notes are valid and binding against Astro and
Roxas. As it appears on the notes, Roxas signed twice: first, as president of
Astro and second, in his personal capacity. In signing his name aside from
being the President of Astro, Roxas became a co-maker of the promissory
notes and cannot escape any liability arising from it.
Under the Negotiable Instruments Law, persons who write their names on
the face of promissory notes are makers, promising that they will pay to the
order of the payee or any holder according to its tenor. Thus, even without
the phrase "personal capacity," Roxas will still be primarily liable as a joint and
several debtor under the notes considering that his intention to be liable as
such is manifested by the fact that he affixed his signature on each of the
promissory notes twice which necessarily would imply that he is undertaking
the obligation in two different capacities, official and personal.
Additionally, as to Roxas’ claim that the phrases "in his personal capacity" and
"in his official capacity" were inserted on the notes without his knowledge,
this is untenable. Regardless, he still signed the notes twice.
As aptly found by both the trial and appellate court, Roxas did not offer any
explanation why he did so. Thus the presumption is he signed twice knowing
of the intention for doing so.
C. SUM CERTAIN IN MONEY
Relevant Provision (ISDEC)
Section 2. Certainty as to sum; what constitutes. — 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 default 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 attorney's fee, in case payment shall not be
made at maturity.
Tsarina | UV GLS | Pre-midterms | 2nd Yr 2nd Sem | Cases Digests By: j-c-g-c-i
BY STATED INSTALLMENTS
Stated installments, within the meaning of sec.2, means that:
(a) The interest of each installment; and
(b) The due date of each installment must be fixed in the instrument
Example: "I promise to pay P or order the sum of PI,000.00 in two installments
as follows: P500.00, on or before November 1,2010 and P500.00, on or before
December 1,2010."
Note: A promise to pay P1,000.00 in "two installments" or "in installments"
does not fulfill the requirements of the law.
WITH AN ACCELERATION CLAUSE
The sum is still certain although payable by stated installments with an
acceleration clause.
Acceleration clause – is a promise that if any installment or interest is not paid
as agreed, the whole shall become due. Such a clause requires full payment of
an instrument immediately upon default on any installment. It does not make
an instrument payable upon contingency (and so non-negotiable) since the
time of payment will surely come and the exact value of the instrument can
be ascertained.
Acceleration dependent on the maker – The maker can avoid the acceleration
by paying the installments on the due date.
Example: "I promise to pay P or order P10,000.00 with interest at 15% per
annum in four equal monthly installments beginning July 1, 2010. Upon
default in payment of any installment or interest, the whole sums shall
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NEGOTIABLE INSTRUMENTS LAW
Based on the Syllabus of Atty. Valerie Gayle J. Patac, the Book of Hector S. De Leon & USC EH 404 2016-17 Notes
become due and payable." – The payee or holder cannot accelerate the note
unless the maker fails to pay an installment.
transaction, does not affect the character of order of promise as being
unconditional.
Note: A note providing for acceleration at the option of the holder is nonnegotiable.
The condition is imposed not on the order to pay but on the reimbursement
which has nothing to do with the negotiable instrument anymore. The
existence of the fund does not extend to the order to pay. It only extends to
the reimbursement. In other words, the fund indicated is not the direct source
of payment but only the source of reimbursement which is an act subsequent
to the payment.
Extension Clauses – These are the opposite of acceleration clauses. They
appear in instruments with fixed future maturity date and provide that under
certain circumstances, the date shall be further extended.
Note: If the right to extend payment is given to the:
(a) Holder – the time of payment need not contain a new fixed
maturity date or the length of extension does not have to be
specified. The reason is that the holder is free to demand payment
at the maturity date or any time after said date.
(b) obligor – the interest of the extension must be specified to keep
the instrument negotiable. If the right to extend is without limit, it
cannot be determined with absolute certainty when the holder will
have the absolute right to be paid.
Example: "Pay to the order of P PI,000.00 and reimburse yourself from the
rentals of my house." – The drawee may pay the amount out of any fund. It is
only the reimbursement that is to come from the rentals.
What about if “payable out of a particular fund?”
Non-negotiable as it is not payable "in any event" because the amount to be
paid is made to depend upon the adequacy or existence of the fund
designated. It is immaterial whether or not the fund is in actual existence or is
yet to be created. The instrument remains non-negotiable even if the fund is
found to be sufficient at maturity.
WITH EXCHANGE
Payment in foreign currency – a provision for payment of a sum in a foreign
currency does not impair negotiability because the current rate of exchange at
any given time may easily be ascertained by inquiry from the banks dealing on
exchange or foreign currencies and such rate is a matter of common
knowledge.
The test of negotiability in every case is said to be whether or not the
instrument carries the general personal credit of the maker or drawer. If it
does, the instrument is negotiable; if it carries only the credit of a particular
fund, the instrument is non-negotiable.
Payment with exchange rate — The provision on payment with exchange
applies to instruments drawn in one country and payable in another. In other
words, exchange is applicable only to foreign bills.
STATEMENT OF TRANSACTIONS WHICH GIVES RISE TO INSTRUMENT
The mere recital of the consideration for which the instrument was issued or
mere reference to a separate agreement out of which the instrument has
arisen does not make it conditional. Such kind of reference has no adverse
legal effect on the negotiability of the instrument
Examples:
(1) M promises to pay P or order $1,000.00 with exchange at 3/4%.
(2) M promises to pay P or order the sum of $1,000.00 with exchange
at the current rate (or "going rate" or "market rate").
Example: "I promise to pay to the order of P P300,000.00 being the price of a
car this day sold and delivered to me." –
Exchange not applicable to inland or domestic bill — If the instrument is both
drawn and payable at the same place, there can be no exchange so a
stipulation for payment in exchange may be disregarded. Under Republic Act
No. 8183, every monetary obligation must be paid in Philippine currency
which is legal tender in the Philippines. However, the parties may agree that
the obligation or transaction shall be settled in any other currency at the time
of payment.
D. UNCONDITIONAL PROMISE OR ORDER TO PAY
Relevant Provision (RS)
Section 3. When promise is unconditional. — An unqualified order or promise
to pay is unconditional within the meaning of this Act, though coupled with —
(a) 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
(b) A statement of the transaction which gives rise to the instrument.
But an order or promise to pay out of a particular fund is not unconditional.
Condition – any future event which may or may not happen. It could also refer
to a past event not known to the parties which give rise to an obligation or
extinguishes an obligation.
Unconditional – it is not contingent on the happening of a future event; not
subject to any condition.
Promise vs. Order to Pay
Promise
Pertains to a promissory note
Parties – maker and payee
It is the person primary liable who
obliges himself on the instrument
Order
Pertains to a bill of exchange
Parties – Drawer, Drawee and Payee
Refers to a person directing another
person or himself to pay on the
instrument; requires an additional
act on the person primary liable –
that is, by accepting the instrument
Is death a condition?
No. Death is not considered a condition because everyone is certain to die. It
is the exact time when death will happen that is uncertain but death itself is
certain. It is just a period.
What about death because of cancer?
It is a condition. While everyone dies, it may not be of cancer. It is uncertain to
happen that a person dies because of cancer.
The statement merely identifies the transaction which gives rise to the
instrument. It does not qualify the order or promise to pay making it
conditional. The instrument is to be paid whether or not the contract is
performed.
What about if “Subject to the terms of a loan contract?”
If you are the holder of that instrument and you don’t know what the loan
contract provides then you may not able to demand payment. It may also be
easy for the loan-maker to say that there is no loan contract or that the terms
are not complied with. It is made to depend on a separate contract and it sets
a condition. It makes the promise conditional.
What about if “Arose from a loan contract?”
You are made to promise to pay because of a loan contract. Whether or not
the contract exist does not matter. It is merely stating a transaction which
brings about the promise to pay.
The promise to pay here already exists whether or not the loan contract
exists. The instrument can stand on its own. It will not affect the negotiability.
CASE:
BENJAMIN ABUBAKAR VS THE AUDITOR GENERAL
| G.R. No. L-1405 | July 31, 1948
TOPIC FROM THE SYLLABUS: UNCONDITIONAL PROMISE OR ORDER TO PAY
The document bearing on its face the words "payable from the appropriation
for food administration," is actually an order for payment out of "a particular
fund," and is not unconditional, and does not fulfill one of the essential
requirements of a negotiable instrument.
FACTS:
In 1941, a treasury warrant was issued in favor of Urbanes, a gov’t employee
in the province of La Union. The said treasury warrant was meant to augment
Food Production Campaign in the province. It was then negotiated by Urbanes
to Benjamin Abubakar, a private individual. When Abubakar sought to have
the treasury warrant encashed, the Auditor General denied payment because
of it against the appropriating law (RA 80) to authorize payments to private
individuals when it comes to treasury warrants. Abubakar then contends that
he is entitled to encash as he was a holder in good faith.
Case did not mention lower court/s ruling.
ISSUE: W/N a treasury warrant is a negotiable instrument.
INDICATION OF A PARTICULAR FUND OUT OF WHICH REIMBURSEMENT IS
TO BE MADE OR A PARTICULAR ACCOUNT TO BE DEBITED WITH THE
AMOUNT
What about if “Reimburse from a particular fund?”
A statement specifying the particular fund from which reimbursement can be
made or that fund which may be debited or deducted or a statement of the
Tsarina | UV GLS | Pre-midterms | 2nd Yr 2nd Sem | Cases Digests By: j-c-g-c-i
HELD: No. This treasury warrant is not within the scope of the negotiable
instruments law. For one thing, the document bearing on its face the words
"payable from the appropriation for food administration," is actually an order
for payment out of "a particular fund," and is not unconditional, and does not
fulfill one of the essential requirements of a negotiable instrument.
Page 7 of 9
NEGOTIABLE INSTRUMENTS LAW
Based on the Syllabus of Atty. Valerie Gayle J. Patac, the Book of Hector S. De Leon & USC EH 404 2016-17 Notes
CASE:
METROBANK V. CA
| G.R. No. 88866 | February 18, 1991
TOPIC FROM THE SYLLABUS: UNCONDITIONAL PROMISE OR ORDER TO PAY
FACTS
Metrobank is a commercial bank with branches throughout the Philippines
and even abroad. Golden Savings and Loan Association was, at the time,
operating in Calapan, Mindoro, with the other private respondents as its
principal officers.
On January 1979, Eduardo Gomez opened an account with Golden Savings
and deposited over a period of two months 38 treasury warrants with a total
value of P1,755,228.37. They were all drawn by the Philippine Fish Marketing
Authority and purportedly signed by its General Manager and counter-signed
by its Auditor. (Treasury warrants are orders by the drawer authorizing
someone to pay a sum of money to another)
Between June 25 – July 16, 1979, all these warrants were subsequently
indorsed by Gloria Castillo as Cashier of Golden Savings and deposited to its
Savings Account No. 2498 in Metrobank branch in Calapan, Mindoro. They
were then sent for clearing by the branch office to the principal office of
Metrobank, which forwarded them to the Bureau of Treasury for special
clearing.
Gloria Calapan went to the Calapan branch several times to ask whether the
warrants had been cleared. However, “exasperated” over Goria’s repeated
inquiries (kuti daw keyoh si Gloria), petitioner decided to allow Golden Savings
to withdraw from the proceeds of the warrants. (Note: wala pa na cleared ang
treasury warrants ha, samok lang jud ning mga babae haha jk labyu guys)
Total withdrawal was P968,000.00.
In turn, Golden Savings allowed Gomez to make withdrawals from the
“cleared” warrants. Last withdrawal was made on July 16, 1979.
On July 21, 1979, Metrobank informed Golden Savings that 32 of the warrants
had been dishonored by the Bureau of Treasury and demanded refund by
Golden Savings of the amount withdrawn. (such was dishonored due to
forgery of the signatures of the general manager and auditor of the drawer
corporation PERO this was not established) Demand was rejected. Then
Metrobank sued Golden Savings.
They argued that Golden Savings was negligent in checking the personal
circumstances of Gomez before accepting his deposit. Moreover, Metrobank
contended that Sec. 66 of Act 2031 applies.
Sec. 66. Liability of general indorser. - Every indorser who indorses without
qualification, warrants to all subsequent holders in due course:
(a) The matters and things mentioned in subdivisions (a), (b), and (c) of the
next preceding section; and
(b) That the instrument is, at the time of his indorsement, valid and
subsisting;
And, in addition, he engages that, on due presentment, it shall be accepted or
paid, or both, as the case may be, according to its tenor, and that if it be
dishonored and the necessary proceedings on dishonor be duly taken, he
will pay the amount thereof to the holder, or to any subsequent indorser
who may be compelled to pay it.
LOWER COURT’S RULING
RTC Ruling: Judgement was rendered in favor of Golden Savings.
CA: Affirmed.
ISSUE/S
W/N Metrobank has the right to charge back for the amount withdrawn. (No.
They were negligent. Wala nila gihulat na ma clear siya sa Bureau of Treasury)
W/N treasury warrants are negotiable instruments. Thus, rendering Section 66
of Act 2031 applicable. (No. Sec. 3, Negotiable Instruments Law)
HELD: No. Metrobank was negligent in giving Golden Savings the impression
that the treasury warrants had been cleared and that due to that impression,
Golden Savings allowed Gomez to withdraw the proceeds from his account.
Since Golden Savings had no clearing facilities of its own, it relied on
Metrobank to determine the validity of the warrants through its own services.
Metrobank allowed Golden Savings to withdraw thrice from the uncleared
treasury warrants for the reason that it was “exasperated” over the persistent
inquiries of Gloria and that it wanted to “accommodate” a valued client. They
would not have lost a single centavo by waiting for the clearance.
No. The treasury warrants in question are not negotiable instruments. It is
stamped on their face the word “non-negotiable.” Moreover, it is indicated
that they are payable from a particular fund, to wit, Fund 501.
Tsarina | UV GLS | Pre-midterms | 2nd Yr 2nd Sem | Cases Digests By: j-c-g-c-i
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; (must comply with section 3)
(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.
But an order or promise to pay out of a particular fund is not unconditional.
The indication of Fund 501 as the source of the payment to be made on the
treasury warrants makes the order or promise to pay “not unconditional” and
the warrants themselves non-negotiable. Thus, Metrobank cannot contend
that by indorsing the warrants in general, Golden Savings is liable under
Section 66 for the simple reason that the law is not applicable to nonnegotiable treasury warrants.
E. PAYABLE ON DEMAND
An instrument payable on demand is due and payable immediately after
delivery. It is a present debt due at once.
Relevant provision (ET)
Section 7. When payable on demand. - An instrument is payable on demand:
(a) Where it is expressed or to be payable on demand, or at sight or on
presentation;
(b) 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.
Under the first paragraph, an instrument is payable on demand not only as
between the immediate parties but also as to subsequent parties. On the
other hand, the provision of the second paragraph refers only to immediate
parties since between immediate parties there is no difference between a
holder in due course and a person not a holder in due course.
Where it is expressed or to be payable on demand, or at sight or on
presentation:
Example: I promise to pay P10,000 on demand.
Note: “At sight” applies only to Bills of Exchange where there is a drawee.
“At sight” vs. “Upon Presentation”
A.
B.
Purpose of “at sight” is for it to be presented to the drawee for
acceptance. When it is accepted by the drawee, that’s when he
obliges himself to pay on the instrument.
“Upon presentation” is for the purpose of payment. It is applicable
to both promissory notes and bill of exchange requiring payment
from persons primarily liable.
In which no time for payment is expressed:
If the instrument does specify a date as to when it is payable, it is deemed
payable on demand
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:
This is when an instrument is payable on demand only to certain parties. The
type of parties referred to here are “immediate parties”
Immediate parties – those who are privy to the transactions.
Example: I promise to pay 1 M to bearer 10 days after Y dies.
(assume Y dies on the 5th)
Delivery 10 days after the death of Y
When it was delivered on the 15th, it was already demandable but not
payable on demand because the period has not yet lapsed.
Delivery beyond 10 days from the death of Y
It is only after the 15th that it has already become payable on demand
because that is when the period has lapsed. That is when the last paragraph
that “the instrument is issued, accepted, or indorsed when it is overdue” only
applies.
Beyond 10 days from death, but bearer is without knowledge of death of Y
But, let’s say, it was transferred on the 16th but C does not know Y is already
dead. Can you say that the instrument is payable on demand in relation to C
who later transferred on the instrument to D on 7/20?
Ans – No, because C is not an immediate party even if they are actually, in
terms of proximity, very close to B. B, is probably the only one, who knows
Page 8 of 9
NEGOTIABLE INSTRUMENTS LAW
Based on the Syllabus of Atty. Valerie Gayle J. Patac, the Book of Hector S. De Leon & USC EH 404 2016-17 Notes
that Y has already died on 7/5. So that’s means after 10 days of his death,
payment may already be due, hence can be demanded.
LOWER COURT’S RULING:
CFI: Dismissed petition for mandamus.
But because C doesn’t know it, in relation to D, D cannot demand payment to
C right there and then. The instrument as to C, cannot be considered payable
on demand, for the purpose of application of the last paragraph of section 7.
ISSUE: WON the Negotiable Land Certificates were payable on demand
The last paragraph, therefore, tells us that there could be an instance when an
instrument is payable on demand only to certain parties.
If the instrument was indorsed
It would have been easier if the instrument had been indorsed, because it is
very easy to say that this party is considered an immediate party because you
can see the date when it was indorsed.
CASE:
BUENCAMINO vs HERNANDEZ
| G.R. No. L-14883 | July 31, 1963 |
TOPIC FROM THE SYLLABUS: PAYABLE ON DEMAND
An instrument payable on demand is one which (a) is expressed to be payable
on demand, or at sight, or on presentation; or (b) expresses no time for
payment. (Sec. 7, Negotiable Instruments Law)
FACTS:
On May 11, 1957, the Land Tenure Administration (LTA) purchased the
hacienda of herein petitioners for a total consideration of P2,746,000.00. For
that purpose, a Memorandum Agreement was executed on the said date
which expressly declared that the LTA was purchasing the hacienda upon
petition of the tenants thereof in accordance with Republic Act No. 1400,
otherwise known as the Land Reform Act of 1955.
The parties to the sale agreed that of the full price, 50% or P1,373,000.00 was
to be paid in cash and the remaining balance in Negotiable Land Certificates.
The NLC indicated that it was due and payable to BEARER on demand and
upon presentation at the Central Bank of the Philippines without interest, if
presented for payment within five years from the date of issue.
It further specified that the certificate may not be encashed until after five (5)
years from the date of execution of the Deed of Sale pursuant to the
conditions under the Memorandum Agreement. This condition was then
ratified by the Cabinet and the President. This stipulation was also
incorporated and clarified in the Absolute Deed of Sale executed to formalize
the terms contained in the Memorandum Agreement.
These provisions provided under the Memorandum Agreement and the
Absolute DOS in relation to the condition in the negotiable land certificate
were implementation of Section 10 of Republic Act No. 1400, which provides
that land certificates may be used by the holder thereof for payment of all tax
obligations of the holder thereof, or of any debt or monetary obligation of the
holder to the Government or any of its instrumentalities or agencies, including
the rehabilitation Finance Corporation and the Philippine National Bank.
HELD: No. An instrument payable on demand is one which (a) is expressed to
be payable on demand, or at sight, or on presentation; or (b) expresses no
time for payment (Sec. 7, Negotiable Instruments Law).
The Court ruled that the refusal of the respondent treasurer to accept the
certificates was legally justified. As correctly contended, although land
certificates shall be payable on demand, the ones issued to the petitioners
were payable to bearer only after the lapse of five years from the execution of
the Absolute Deed of Sale. Obviously then, the requisites for an instrument to
be payable on demand was not met as the certificate expressed a time for
payment. The 5-year period within which the certicates could not be encashed
was an expression of the time for payment contrary to Sec. 7, par. (b) of the
Negotiable Instruments Law.
As for the assertion that the certificates may be used for payment of realty
taxes, the Court ruled that while section 10 of RA 1400 expressly authorizes
the use of the said certificates for payment of tax obligations, the said section
can only have meant such certificates as were issued strictly in accordance
with Section 9 of the same Act; that the instrument is payable on demand.
And as the certificates issued were not payable on demand, then the benefits
of Section 10 cannot properly be invoked.
Ratio:
For instruments to be payable on demand, it must meet the requirements
under Sec. 7 of the Negotiable Instruments Law: (a) it is expressed to be
payable in demand, or at sight, or on presentation; or (b) that no time for
payment is expressed.
In the case at bar, the 5-year period within which the certificates could not be
encashed was an expression of time, contrary to the aforecited law. Thus,
order appealed from is affirmed.
F. DETERMINABLE FUTURE TIME
Relevant Provision (FBA)
Section 4. Determinable future time; what constitutes. — An instrument is
payable at a determinable future time, within the meaning of this Act, which is
expressed to be payable —
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future time specified therein; or
(c) On or at a fixed period after the occurrence of a specified event, which is
certain to happen, though the time of happening be uncertain.
An instrument payable upon a contingency is not negotiable, and the
happening of the event does not cure the defect.
Availing themselves of what they considered was their contractual and
statutory rights under the certificate, the petitioners presented two of them
to the respondent City Treasurer in payment of certain 1957 realty tax
obligations to Quezon City. However, the respondent Treasurer refused to
accept it claiming that as per the opinion of the Secretary of Finance, it was
discretionary on his part to accept or reject it and invoking that discretion, he
explained that QC was in great need of funds. Thus, the petitioners were
obliged to settle their tax obligation in cash.
Subsequently, the petitioners tendered the same certificates once more, in
payment of their 1958 realty taxes and the respondent treasurer similarly
rejected it. As a result, the petitioners filed a petition for mandamus
compelling the respondent treasurer to accept the certificates.
The respondent treasurer did not file an answer but instead, filed a Motion to
Dismiss on the ground that the petition failed to state a cause of action. He
further contended that the certificates in question were not issued strictly in
accordance with the provisions of Republic Act No. 1400 because while
Section 9 of that Act requires that "negotiable land certicates shall be payable
to bearer on demand”, the ones issued to the petitioners were payable to
bearer not on demand, but, only upon the expiration of the five-year period
therein specified.
Petitioners’ counterarguments:
(a) They contended that although the certificates issued could not really be
encashed within the period therein mentioned, they could, however, still be
used for the settlement of tax liabilities at any time after their issue, in
accordance with Section 10 of RA 1400.
(b) They also maintained that the 5-year restriction against encashment
referred merely and exclusively to the time when the certificates may be
converted to cash and not anymore to the utility of the said instrument as
substitutes for tax obligations.
Tsarina | UV GLS | Pre-midterms | 2nd Yr 2nd Sem | Cases Digests By: j-c-g-c-i
Page 9 of 9
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