NEGOTIABLE INSTRUMENTS LAW
I. INTRODUCTION
A. GOVERNING LAWS – ACT No. 2031 effective June 2, 1911 (which
amended some of the provisions of the Rules of the Law Merchant),
the Code of Commerce and the Civil Code.
B. APPLICABILITY OF THE NEGOTIABLE INSTRUMENTS LAW – the
Act applies only to negotiable instruments or those that meet the
requirements under Sec. 1 of Act No. 2031.
KRAUFFMAN VS. PNB (GR No. 16454, Sept. 29, 1921) - Herein plaintiff
was entitled to P98,000 of the Philippine Fiber and Produce Company’s
dividend for the year 1917. George B. Wicks, treasurer of the Company,
requested that a telegraphic transfer of $45,000 to the plaintiff in New
York City. Wicks drew and delivered a check for the amount of
P90,355.50, total cost of said transfer, including exchange and cost of
message which was accepted by the officer selling the exchange in
payment of the transfer in question. As evidence of this transaction a
document was made out and delivered to Wicks, which is referred to by
the bank's assistant cashier as its official receipt. On the same day the
Philippine National Bank dispatched to its New York agency a cablegram
for $45,000. However, the bank's representative in New York replied
suggesting the advisability of withholding this money from Kauffman. The
PNB dispatched to its New York agency another message to withhold the
Kauffman payment as suggested. Meanwhile, upon advice of Wicks that
the money has been placed to his credit, Kauffman presented himself at
the office of the Philippine National Bank in New York and demanded the
money. By this time, however, the message from the Philippine National
Bank directing the withholding of payment had been received in New
York, and payment was therefore refused. Thus the present complaint to
recover said sum, with interest and costs. ISSUE: WON Act No. 2031 is
applicable in the above case? HELD: NO. The provisions of the
Negotiable Instruments Law to come into operation, there must be a
document in existence of the character described in section 1 of the Law;
and no rights properly speaking arise in respect to said instrument until it
is delivered. In the case before us there was an order transmitted by the
defendant bank to its New York branch, for the payment of a specified
sum of money to George A. Kauffman. But this order was not made
payable "to order or "to bearer," as required in Section 1(d) of that Act;
and inasmuch as it never left the possession of the bank, or its
representative in New York City, there was no delivery in the sense
intended in Section 16 of the same Law. In this connection it is
unnecessary to point out that the official receipt delivered by the bank to
the purchaser of the telegraphic order, and already set out above, cannot
itself be viewed in the light of a negotiable instrument, although it affords
complete proof of the obligation actually assumed by the bank.
GSIS VS. CA (GR No. L-40824, Feb. 23, 1989) - Private respondents, Mr.
and Mrs. Isabelo R. Racho, together with the Lagasca spouses, executed a
deed of mortgage in favor of petitioner GSIS. Subsequently, another deed
of mortgage was executed in connection with earlier two loans granted. A
parcel of land, co-owned by said mortgagor spouses, was given as
security under the aforesaid two deeds and they also executed a
"promissory note". The Lagasca spouses executed an instrument
denominated "Assumption of Mortgage" under which they obligated
themselves to assume obligation to the GSIS. This undertaking was not
fulfilled. Upon failure of the mortgagors to comply with the conditions of
the mortgage, particularly the payment of the amortizations due, GSIS
extra-judicially foreclosed the mortgage and caused the mortgaged
property to be sold at public auction. Private respondents filed a complaint
against the petitioner and the Lagasca spouses praying that the
extrajudicial foreclosure be declared null and void. In their aforesaid
complaint, they alleged that they signed the mortgage contracts not as
sureties or guarantors for the Lagasca spouses but they merely gave their
common property to the said co-owners who were solely benefited by the
loans from the GSIS. Trial court dismissed the case. CA reversed decision
stating that the respondents are that only of an accommodation party.
ISSUE: WON the NIL is applicable to the promissory note and mortgage
deed? HELD: No. Both parties relied on the provisions of Section 29 of Act
No. 2031, otherwise known as the Negotiable Instruments Law, which
Cesar Nickolai F. Soriano Jr.
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NEGOTIABLE INSTRUMENTS LAW (Act No. 2031) based on the book of Aquino and De Leon and Audio Lecture of Dean Sundiang
provide that an accommodation party is one who has signed an
instrument as maker, drawer, acceptor of indorser without receiving value
therefor, but is held liable on the instrument to a holder for value although
the latter knew him to be only an accommodation party. This approach of
both parties appears to be misdirected and their reliance misplaced. The
promissory note hereinbefore quoted, as well as the mortgage deeds
subject of this case, are clearly not negotiable instruments. These
documents do not comply with the fourth requisite to be considered as
such under Section 1 of Act No. 2031 because they are neither payable to
order nor to bearer. The note is payable to a specified party, the GSIS.
Absent the aforesaid requisite, the provisions of Act No. 2031 would not
apply, governance shall be afforded, instead, by the provisions of the Civil
Code and special laws on mortgages.
C. CONCEPT OF NEGOTIABLE INSTRUMENTS
1. DEFINITION: Negotiable Instruments are written statements
signed by the maker or drawer containing an unconditional promise
or order to pay a sum certain money, payable on demand or at a
fixed or determinable future time, to order or to bearer.
2. FUNCTIONS OF NEGOTIABLE INSTRUMENTS
a. Substitute for money - although they are not considered
legal tender. One of its distinct characteristics is its negotiability
which allows it to go from hand to hand in the commercial
markets and to take the part of money in commercial
transactions free from all personal defenses available against
the original owner.
b. Media of exchange – they thus increase the purchasing
medium in circulation. They are a safe and convenient means of
doing business that eliminate the risk of dealing in cash.
c. Medium of credit transactions – they allow men of
undoubted credit (such as those with illiquid properties) to carry
on business enterprise upon their promissory notes, bills of
exchange and checks knowing that other businessmen will treat
these promises as cash.
Checks are primarily used for immediate payment (substitute
for money); while ordinary bill of exchange and the promissory
note are intended for the circulation of credits (credit
instruments)
3. LEGAL TENDER – that amount which the creditor can be compelled
to accept as payment.
Sec. 52, Legal Tender Power. — All notes and coins issued by the
New Bangko Sentral shall be fully guaranteed by the Government
Central of the Republic of the Philippines and shall be legal tender in
Bank the Philippines for all debts, both public and private:
Act Provided, however, That, unless otherwise fixed by the
Monetary Board, coins shall be legal tender in amounts not
exceeding Fifty pesos (P50.00) for denominations of Twenty-
five centavos and above, and in amounts not exceeding
Twenty pesos (P20.00) for denominations of Ten centavos.
Sec. 60 Legal Character. — Checks representing demand deposits
do not have legal tender power and their acceptance in the
payment of debts, both public and private, is at the option of
the creditor: Provided, however, That a check which has
been cleared and credited to the account of the creditor shall
be equivalent to a delivery to the creditor of cash in an
amount equal to the amount credited to his account
TIBAJIA VS. CA (GR No. 100290, June 4, 1993) - A writ of attachment
was issued by the trial court in connection to the collection of a sum of
money filed by Eden Tan against the Tibajia spouses. The fund was then
on deposit with the cashier of the Regional Trial Court of Pasig. The
Tibajia spouses thereafter delivered to the Deputy Sheriff the total money
judgment in the form of Cashier's Check worth P262,750.00. However,
Eden Tan, refused to accept the payment made and instead insisted that
the garnished funds deposited with the cashier of the Regional Trial Court
 of Pasig be withdrawn to satisfy the judgment obligation. Petitioners filed E. INCIDENTS IN THE LIFE OF NEGOTIABLE INSTRUMENTS
a motion to lift the writ of execution on the ground that the judgment
debt had already been paid but was denied by the trial court on the PROMISSORY NOTE BILL OF EXCHANGE
ground that payment in cashier's check is not payment in legal tender. Preparation & Signing
When the petitioners' motion for reconsideration was denied, the spouses Issuance
Tibajia filed herein petition. ISSUE: WON the delivery of the cashier's Negotiation
check is considered payment in legal tender? HELD: No. A check, whether Presentment for Acceptance
a manager's check or ordinary check, is not legal tender, and an offer of a Acceptance
check in payment of a debt is not a valid tender of payment and may be Dishonor by Non-acceptance
refused receipt by the obligee or creditor. (Philippine Airlines, Inc. vs. Presentment for payment
Court of Appeals and Roman Catholic Bishop of Malolos, Inc. vs. Dishonor by Non-payment
Intermediate Appellate Court). The ruling in the two (2) abovementioned Notice of Dishonor
cases decided by the Supreme Court applies the statutory provisions Payment
which lay down the rule that a check is not legal tender and that a creditor
Discharge
may validly refuse payment by check, whether it be a manager's, cashier's
or personal check.
F. KINDS OF NEGOTIABLE INSTRUMENTS
PAL VS. CA (GR No. 49188, Jan. 30, 1990) - CFI Manila ruled in favor of
Amelia Tan [under the name and style of Able Printing Press] in a 1. PROMISSORY NOTES (Sec. 184, NIL) – An unconditional promise
complaint for damages against petitioner Philippine Airlines. On appeal, in writing mace by one person to another, signed by the maker,
the CA upheld the decision of the CFI with minor modifications as to the engaging to pay on demand, or at a fixed or determinable future
damages to be awarded. The corresponding writ of execution was duly time, a sum certain in money to order or to bearer.
referred to Deputy Sheriff Emilio Z. Reyes for enforcement with checks in a. Parties to a Negotiable Promissory Note are (1) Maker and
the name of the latter. Four months later, Amelia Tan moved for the (2) Payee;
issuance of an alias writ of execution since the judgment remained b. Kinds of Negotiable Promissory Note include certificates of
unsatisfied. The petitioner filed an opposition to the motion for the deposits, bank notes, due bills and bonds.
issuance of an alias writ of execution stating that it had already fully paid
its obligation to plaintiff through the deputy sheriff of the respondent 2. BILLS OF EXCHANGE (Sec. 126, 185, NIL) – An unconditional
court, Emilio Z. Reyes, as evidenced by cash vouchers properly signed and order in writing addressed by one person to another, signed by the
received by said Emilio Z. Reyes. On March 3,1978, the Court of Appeals person giving it, requiring the person to whom it is addressed to pay
denied the issuance of the alias writ for being premature, ordering the on demand, or at a fixed or determinable future time, a sum certain
executing sheriff Emilio Z. Reyes to appear with his return and explain the in money to order or bearer.
reason for his failure to surrender the amounts paid to him by petitioner a. Parties to a Bill of Exchange are (1) Drawer, (2) Payee and
PAL. However, the order could not be served upon Deputy Sheriff Reyes (3) Drawee;
because he already absconded or disappeared. ISSUE: WON the payment b. Kinds of Bills of Exchange include drafts, trade acceptances
rendered through a check made by PAL to the absconding sheriff in his and banker’s acceptances.
name operate to satisfy the judgment debt? HELD: Under ordinary
circumstances, payment by the judgment debtor to the sheriff should be G. WHEN BILLS TREATED AS NOTES
valid payment to extinguish the judgment debt. There are circumstances,
however, which compel a different conclusion such as when the payment Sec. 130 When bill may be treated as promissory note. - Where
made by the petitioner to the absconding sheriff was not in cash or legal in a bill the drawer and drawee are the same person or where
tender but in checks. The delivery of promissory notes payable to order, the drawee is a fictitious person or a person not having
or bills of exchange or other mercantile documents shall produce the capacity to contract, the holder may treat the instrument at
effect of payment only when they have been cashed, or when through the his option either as a bill of exchange or as a promissory note
fault of the creditor they have been impaired. In the meantime, the action Sec. 17(e) Construction where instrument is ambiguous. - Where
derived from the original obligation shall be held in abeyance. Since a the language of the instrument is ambiguous or there are
negotiable instrument is only a substitute for money and not money, the omissions therein, the following rules of construction apply:
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, (e) Where the instrument is so ambiguous that there is doubt
and an offer of a check in payment of a debt is not a valid tender of whether it is a bill or note, the holder may treat it as either at
payment and may be refused receipt by the obligee or creditor. Mere his election;
delivery of checks does not discharge the obligation under a judgment.
The obligation is not extinguished and remains suspended until the H. BILLS AND NOTES DISTINGUISHED
payment by commercial document is actually realized (Art. 1249, Civil
Code, par. 3). PAL created a situation which permitted the said Sheriff to PROMISSORY NOTES BILLS OF EXCHANGE
personally encash said checks and misappropriate the proceeds thereof to 2 parties – Maker and Payee 3 parties – Drawer, Payee and
his exclusive personal benefit. For the prejudice that resulted, the Drawee
petitioner himself must bear the fault. As between two innocent persons, Maker cannot be the payee Drawer and payee may be the same
one of whom must suffer the consequence of a breach of trust, the one person
who made it possible by his act of confidence must bear the loss. There is unconditional PROMISE by There is unconditional ORDER by the
the maker drawer to the drawee
D. CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS Presentment for payment without Some Bills need prior acceptance by
prior acceptance the drawee before presentment for
1. NEGOTIABILITY – is that quality or attribute of a bill or note payment
whereby it may pass from one person to another similar to money, Liability of the maker is primary and Liability of the drawer is secondary
so as to give the holder in due course the right to collect on the absolute and conditional
instrument the sum payable for himself free from any defect in the
title of any of the prior parties or defenses available to them among I. NEGOTIABLE INSTRUMENTS COMPARE WITH OTHER PAPERS
themselves. (Negotiability vs. Assignability)
2. ACCUMULATION OF SECONDARY CONTRACTS – as they are
transferred from one person to another. Once an instrument is SESBRENO VS. CA (GR No. 89252, May 24, 1993) - Petitioner Sesbreno
issued, additional parties can become involved. made a money market placement in the amount of P300,000 with the
Cesar Nickolai F. Soriano Jr.
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NEGOTIABLE INSTRUMENTS LAW (Act No. 2031) based on the book of Aquino and De Leon and Audio Lecture of Dean Sundiang
 Philippine Underwriters Finance Corporation (PhilFinance), with a term of
32 days. PhilFinance issued to Sesbreno (1) the Certificate of Confirmation
of Sale of a Delta Motor Corporation Promissory Note, (2) the Certificate of
Securities Delivery Receipt indicating the sale of the note with notation
that said security was in the custody of Pilipinas Bank, and (3) post-dated
checks drawn against the Insular Bank of Asia and America for
P304,533.33 payable on March 13, 1981. The checks were dishonored for
having been drawn against insufficient funds. Pilipinas Bank never
released the note, nor any instrument related thereto, to Sesbreno; but
Sesbreno learned that the Delta Promissory Note maturing on 6 April
1981, has a face value of P2,300,833.33 with PhilFinance as payee and
Delta Motors as maker; and was stamped “non-negotiable” on its face.
PhilFrance was later on placed under the custody of the Securities and
Exchange Commission. As Sesbreno was unable to collect his investment
and interest thereon, he filed an action for damages against Delta Motors
and Pilipinas Bank. Delta Motors contends that said promissory note was
not intended to be negotiated or otherwise transferred by Philfinance as
manifested by the word "non-negotiable" stamped across the face of the
Note. The trial court and the CA dismissed petitioner’s complaint and
appeal, respectively, for lack of cause of action. If anything, petitioner has
a cause of action against Philfrance, which, however, was not impleaded.
ISSUE: WON the non-negotiability of a promissory note prevents its
assignment? HELD: No. A negotiable instrument, instead of being
negotiated, may also be assigned or transferred. The legal consequences
of negotiation and assignment of the instrument are different. A non-
negotiable instrument may not be negotiated but may be
assigned or transferred, absent an express prohibition against
assignment or transfer written in the face of the instrument. The
subject promissory note, while marked "non-negotiable," was not at the
same time stamped "non-transferable" or "non-assignable." It contained
no stipulation which prohibited Philfinance from assigning or transferring
such note, in whole or in part.
J. SOME NON-NEGOTIABLE INSTRUMENTS
1. Document of Title – like a certificate of stock, bill of lading and
warehouse receipt (non-negotiable because there is no unconditional
promise or order to pay a certain sum in money);
2. Letter of Credit – a letter from a merchant or bank or banker in
one place, addressed to another, in another place or country,
requesting the addressee to pay money or deliver goods to a third
party therein named, the writer of the letter undertaking to provide
him the money for the goods or to repay him. It is a letter requesting
one person to make advances to a third person on the credit of the
writer. (It is in favor of a certain person and not to order)
3. Treasury Warrant - it is a government warrant for the payment of
money such as that issued in favor of a public officer or employee
covering payment or replenishment of cash advances for official
expenditures. (It is payable out of a specific fund or appropriation)
4. Postal Money Order
PHILIPPINE EDUCATION CO. VS. SORIANO (GR No. L-22405, June
30, 1971) - Enrique Montinola sought to purchase from the Manila Post
Office 10 money orders (P200 each), offering to pay for them with a
private check. Montinola was able to leave the building with his check and
the 10 money orders without the knowledge of the teller. Upon discovery,
message was sent to all postmasters and banks involving the unpaid
money orders. One of the money orders was received by the Philippine
Education Co. as part of its sales receipt. It was deposited by the company
with the Bank of America, which cleared it with the Bureau of Post. The
Postmaster, through the Chief of the Money Order Division of the Manila
Post Office informed the bank of the irregular issuance of the money
order. The bank debited the account of the company. The company
moved for reconsideration. ISSUE: WON postal money orders are
negotiable instruments? HELD: No. Philippine postal statutes are
patterned from those of the United States, and the weight of authority in
said country is that Postal money orders are not negotiable instruments
inasmuch as the establishment of a postal money order is an exercise of
governmental power for the public’s benefit. Furthermore, some of the
restrictions imposed upon money order by postal laws and regulations are
inconsistent with the character of negotiable instruments. For instance,
postal money orders may be withheld under a variety of circumstances,
and which are restricted to not more than one indorsement
Cesar Nickolai F. Soriano Jr.
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NEGOTIABLE INSTRUMENTS LAW (Act No. 2031) based on the book of Aquino and De Leon and Audio Lecture of Dean Sundiang
II. FORM AND INTERPRETATION OF NEGOTIABLE INSTRUMENTS
A. HOW NEGOTIABILITY IS DETERMINED?
CALTEX VS. COURT OF APPEALS (GR No. 97753, Aug. 10, 1992) -
Respondent bank issued 280 certificates of time deposit (CTDs) in favor of
Angel dela Cruz who delivered the same to herein petitioner in connection
with his purchased fuel products. Eventually, dela Cruz executed and
delivered an Affidavit of Loss for the reissuance of the CTDs. Dela Cruz
later on obtained a loan from respondent bank and negotiated the said
CTDs, executing a Deed of Assignment of Time Deposit which stated,
among others, that the bank has full control of the indicated time deposits
from and after date of the assignment and may set-off such and apply the
same to the payment of amount or amounts that may be due on the loan
upon maturity.
Petitioner then went to the Sucat branch for verification of the CTDs
declared lost, alleging that the same were delivered to herein petitioner as
“security for purchases made with Caltex Philippines, Inc.” and requested
that the CTDs be pre-terminated, which was refused by the respondent
bank due to the failure of petitioner to present requested documents to
prove such allegation. Petitioner then filed a complaint in the RTC, which
was dismissed. On appeal, the CA affirmed the decision of the RTC. Thus,
the present petition. ISSUE: WON the CTDs are considered negotiable?
HELD: Yes. A sample text of the certificates of time deposit is reproduced
below:
SECURITY BANK
AND TRUST COMPANY
6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICE P4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19
This is to Certify that B E A R E R has deposited in this Bank the sum of
PESOS: FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE
P4,000 & 00 CTS Pesos, Philippine Currency, repayable to said depositor 731
days. after date, upon presentation and surrender of this certificate, with interest
at the rate of 16% per cent per annum.
(Sgd. Illegible) (Sgd. Illegible)
AUTHORIZED SIGNATURES
Section 1, of Act No. 2031, otherwise known as the Negotiable
Instruments Law, enumerates the requisites for an instrument to become
negotiable. The CTDs in question undoubtedly meet the requirements of
the law for negotiability. The accepted rule is that the negotiability or non-
negotiability of an instrument is determined from the writing, that is, from
the fact of the instrument itself. Contrary to what respondent court held
(that the CTDs are payable to the “depositor” which is Angel dela Cruz),
the documents provide that the amounts deposited shall be repayable to
the depositor. And who, according to the document is the depositor? It is
the “bearer”. The documents do not say that the depositor is Angel dela
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.
B. EFFECT OF ESTOPPEL
BANCO DE ORO SAVINGS VS. EQUITABLE BANKING CORP. (GR No.
74917, Jan. 20, 1988) - Manager's checks (Checks) having an aggregate
amount of P45,982.23 and payable to certain member establishments of
Visa Card. Subsequently, the Checks were deposited with the defendant
(respondent Equitable) to the credit of its depositor (Aida Trencio’s
account). Following normal procedures, and after stamping at the back of
the Checks the usual endorsements (All prior and/or lack of endorsement
guaranteed), Equitable sent the checks for clearing through the Philippine
Clearing House Corporation (PCHC). Accordingly, BDO paid the Checks; its
clearing account was debited for the value of the Checks and defendant's
clearing account was credited for the same amount. Thereafter, BDO
discovered that the endorsements appearing at the back of the Checks,
purporting to be that of the payees, were forged and/or unauthorized or
otherwise belong to persons other than the payees. Pursuant to the PCHC
Clearing Rules and Regulations, it presented the Checks directly to
Equitable for the purpose of claiming reimbursement from the latter.
However, Equitable refused to do so. After an exhaustive investigation and
hearing, the Arbiter rendered a decision in favor of BDO and against
Equitable ordering the PCHC to debit the clearing account of the
defendant (E), and to credit the clearing account of the plaintiff (B) of the
foregoing amount with interest at the rate of 12% per annum from date of
the complaint. The Board of Directors of the PCHC affirmed the decision of
the Arbiter. Hence this petition. ISSUE 1: Were the subject checks non-
negotiable and if not, does it fall under the ambit of the power of the
PCHC? OR Does the PCHC has jurisdiction over the controversy involved in
view of petitioner’s claim that the subject matter of the case (the Checks)
was not negotiable. HELD: Yes. As provided in the articles of
incorporation of PCHC, its operation extend to "clearing checks and other
clearing items." No doubt transactions on non-negotiable checks are
within the ambit of its jurisdiction. The term check as used in the said
Articles of Incorporation of PCHC can only connote checks in general use
in commercial and business activities. It cannot be conceived to be limited
to negotiable checks only. Checks are used between banks and bankers
and their customers, and are designed to facilitate banking operations. It
is of the essence to be payable on demand, because the contract between
the banker and the customer is that the money is needed on demand.
Further, the participation of the two banks, petitioner and private
respondent, in the clearing operations of PCHC is a manifestation of their
submission to its jurisdiction. ISSUE 2: How does principle of estoppel
apply? HELD: Petitioner is estopped from raising the defense of non-
negotiability of the checks in question. It stamped its guarantee on the
back of the checks and subsequently presented these checks for clearing
and it was on the basis of these endorsements by the petitioner that the
proceeds were credited in its clearing account. The principle of estoppel
effectively prevents the defendant from denying liability for any damages
sustained by the plaintiff which, relying upon an action or declaration of
the defendant, paid on the Checks. The same principle of estoppel
effectively prevents the defendant from denying the existence of the
Checks. The petitioner by its own acts and representation cannot now
deny liability because it assumed the liabilities of an endorser by stamping
its guarantee at the back of the checks. The petitioner having stamped its
guarantee of "all prior endorsements and/or lack of endorsements" (Exh.
A-2 to F-2) is now estopped from claiming that the checks under
consideration are not negotiable instruments. The checks were accepted
for deposit by the petitioner stamping thereon its guarantee, in order that
it can clear the said checks with the respondent bank. By such deliberate
and positive attitude of the petitioner it has for all legal intents and
purposes treated the said cheeks as negotiable instruments and
accordingly assumed the warranty of the endorser when it stamped its
guarantee of prior endorsements at the back of the checks. It led the said
respondent to believe that it was acting as endorser of the checks and on
the strength of this guarantee said respondent cleared the checks in
question and credited the account of the petitioner. Petitioner is now
barred from taking an opposite posture by claiming that the disputed
checks are not negotiable instrument.
PBCOM VS. JOSE ARUEGO (GR No. L-25836-37, Jan. 31, 1981) - Herein
plaintiff instituted against an action against defendant for the recovery of
the total sum of money plus interests and attorney’s fees. The complaint
filed by the Philippine Bank of Commerce contains twenty-two (22) causes
of action referring to twenty-two (22) transactions entered into by the said
Bank and Aruego on different dates. The sum sought to be recovered
represents the cost of the printing of "World Current Events," a periodical
published by the defendant. To facilitate the payment of the printing the
defendant obtained a credit accommodation from the plaintiff. Thus, for
every printing of the "World Current Events," the printer collected the cost
of printing by drawing a draft against the plaintiff, said draft being sent
later to the defendant for acceptance. As an added security for the
payment of the amounts advanced to printer, the plaintiff bank also
required defendant Aruego to execute a trust receipt in favor of said bank
wherein said defendant undertook to hold in trust for plaintiff the
periodicals and to sell the same with the promise to turn over to the
plaintiff the proceeds of the sale of said publication to answer for the
payment of all obligations arising from the draft. Defendant filed an
answer interposing for his defense that he signed the drafts in a
representative capacity, that he signed only as accommodation party and
that the drafts signed by him were not really bills of exchange but mere
Cesar Nickolai F. Soriano Jr.
4 Arellano University School of Law 2011-0303
NEGOTIABLE INSTRUMENTS LAW (Act No. 2031) based on the book of Aquino and De Leon and Audio Lecture of Dean Sundiang
pieces of evidence of indebtedness because payments were made before
acceptance. ISSUE1: WON the drafts Aruego signed were bills of
exchange? HELD: YES. Under the Negotiable Instruments Law, a bill of
exchange is 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. As long as a commercial paper
conforms with the definition of a bill of exchange, that paper is considered
a bill of exchange. The nature of acceptance 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. ISSUE2: WON Aruego is personally liable? HELD: YES. Firstly,
Section 20 of the Negotiable Instruments Law provides that "Where the
instrument contains or a person adds to his signature words indicating
that he signs for or on behalf of a principal or in a representative capacity,
he is not liable on the instrument if he was duly authorized; but the mere
addition of words describing him as an agent or as filing a representative
character, without disclosing his principal, does not exempt him from
personal liability." An inspection of the drafts accepted by the defendant
shows that nowhere has he disclosed that he was signing as a
representative of the Philippine Education Foundation Company. He
merely signed as follows: "JOSE ARUEGO (Acceptor) (SGD) JOSE
ARGUEGO For failure to disclose his principal, Aruego is personally liable
for the drafts he accepted. Secondly, an accommodation party is one
who has signed the instrument as maker, drawer, indorser, without
receiving value therefor and for the purpose of lending his name to some
other person. Such person is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of the taking of the instrument
knew him to be only an accommodation party. In lending his name to the
accommodated party, the accommodation party is in effect a surety for
the latter. He lends his name to enable the accommodated party to obtain
credit or to raise money. He receives no part of the consideration for the
instrument but assumes liability to the other parties thereto because he
wants to accommodate another. In the instant case, the defendant signed
as a drawee/acceptor. Under the Negotiable Instrument Law, a drawee is
primarily liable. Thus, if the defendant who is a lawyer, he should not
have signed as an acceptor/drawee. In doing so, he became primarily and
personally liable for the drafts.
C. REQUISITES OF NEGOTIABILITY
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.
(a) It must be in writing and signed by the maker or drawer;
Section 191. Definition and meaning of terms.
“Written” includes printed, and “writing” includes print.
Signature of the maker or drawer is usually written, preferably with the full
name or at least the surname. However, initials or any mark will be sufficient,
provided that such signature be used as a substitute and the maker or drawer
intends to be bound by it.
Signature is presumed valid, the person denying and to whom the
signature operates must provide evidence of its invalidity.
(b) Must contain an unconditional promise or order to pay a sum
certain in money;
Money is the medium of exchange authorized or adopted by a domestic or
foreign government as part of its currency. In a literal sense, the term means
“cash”. It includes all legal tender which has been defined in p.1.

1. Promise or Order to Pay
Sec. 10 Terms, when sufficient. - The instrument need not follow the
language of this Act, but any terms are sufficient which clearly
indicate an intention to conform to the requirements hereof.
Clear intention of the parties – the substance of the transaction rather than
the form is the criterion of negotiability. Instead of “promise” the words “bind
myself” may be used; instead of “on demand”, the words “on call” may be used
and instead of “bearer”, the word “holder” may be used.
Mere defect in language or grammatical error – The words “himself
order” may be construed as “himself or order” and thus not render the
instrument non-negotiable.
2. Promise or Order to Pay Must be Unconditional
Condition – Resolutory or Suspensive - In conditional obligations, the
acquisition of rights, as well as the extinguishment or loss of those already
acquired, shall depend upon the happening of the event which constitutes the
condition (Art. 1181, NCC)
Period – As opposed to a condition, is when the event is certain to happen or
come.
3. When is a promise unconditional
Promissory Notes:
It is not essential that the word “promise” be used. Any words equivalent to a
promise or assumption of responsibility for the payment of the note (like
“payable”, “to be paid”, “I agree to pay”, “I guarantee to pay”, “M obliges
himself to pay”, “good for”, “due on demand”, etc.) are sufficient to constitute
a “promise to pay”.
However, bare acknowledgements like “IOU”, “Due P1,000” or “for value
received” do not constitute promise to pay and are non-negotiable, unless
words constituting a promise to pay is added, like “IOU (or Due) P1,000 to be
paid on Jan. 8”.
Bills of Exchange:
It is not necessary to use the word “order”. Any other words like “Let the
bearer” or “Drawer obliges the drawee to pay P or order” are sufficient.
An order is a command or imperative direction and, therefore, a mere request,
supplication, or authority (like “I request you to pay”, or “I hope you will pay”
or “I authorize you to pay”) is not sufficient. However, the use of polite words
like “please” does not convert an order to a request.
Sec. 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.
Sec. 39 Conditional indorsement., - see Part III, Conditional
Indorsement, p. 13.
Sec. 3 (a): does not render the instrument non-negotiable because the
reimbursement is a subsequent act to the payment, which still makes it
absolute. Same is true if there is indication of a particular fund to be “debited”,
like “Pay P or order the sum of P10,000 and charge it to my account”, because
here the instrument is payable absolutely, the “debit” of the account is also a
subsequent act to the payment.
Sec. 3, last paragraph: The instrument is deemed non-negotiable because
Cesar Nickolai F. Soriano Jr.
5 Arellano University School of Law 2011-0303
NEGOTIABLE INSTRUMENTS LAW (Act No. 2031) based on the book of Aquino and De Leon and Audio Lecture of Dean Sundiang
the payment depends upon the adequacy or existence of the fund designated.
It is immaterial, whether the fund has sufficient funds at maturity.
METROPOLITAN BANK & TRUST CO. VS. CA (GR No. 88866; Feb. 18,
1991) - Eduardo Gomez opened an account with Golden Savings and
deposited over a period of two months 38 treasury warrants. They were
all drawn by the Philippine Fish Marketing Authority and purportedly
signed by its General Manager and counter-signed by its Auditor. Six of
these were directly payable to Gomez while the others appeared to have
been indorsed by their respective payees, followed by Gomez as second
indorser. On various dates all these warrants were subsequently indorsed
by Gloria Castillo as Cashier of Golden Savings and deposited to its
Savings Account in the Metrobank. 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. After being told to
wait several times, Gloria Castillo and Gomez made subsequent
withdrawals at Metrobank with the impression that the treasury warrants
had been cleared. Metrobank informed Golden Savings that 32 of the
warrants had been dishonored by the Bureau of Treasury and demanded
the refund by Golden Savings of the amount it had previously withdrawn,
to make up the deficit in its account. The demand was rejected. ISSUE:
WON treasury warrants are negotiable instruments? HELD: No. The
treasury warrants in question are not negotiable instruments. Clearly
stamped on their face is the word "non-negotiable." Moreover, it is
indicated that they are payable from a particular fund, to wit, Fund 501.
Sections 1 and 3 of the Negotiable Instruments Law especially
underscored this requirement. 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. Metrobank cannot contend that
by indorsing the warrants in general, Golden Savings assumed that they
were "genuine and in all respects what they purport to be," in accordance
with Section 66 of the Negotiable Instruments Law. The simple reason is
that this law is not applicable to the non-negotiable treasury warrants. The
indorsement was made by Gloria Castillo not for the purpose of
guaranteeing the genuineness of the warrants but merely to deposit them
with Metrobank for clearing.
4. Provisions which do not affect certainty of sum
The Basic Test: is whether the holder can determine by calculation or
computation the amount payable when the instrument is due.
Sec. 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 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.
Sec. 2(b): STATED instalments must clearly indicate the amount due on each
instalment and the interest, if any. A bill or note indicating “payable in two
instalments” or “in instalments” does not fulfil the requirement of the law.
Sec. 2(c): Stated instalments with acceleration clause:
Acceleration clause – requires the debtor to pay off the balance sooner than
the due date if some specified event occurs, such as failure to pay an
instalment.
Insecurity clause – allows the creditor to demand immediate and full
payment of the loan balance if the creditor has reason to believe that the
debtor is about to default, as when the debtor suddenly loses a significant
source of income.
Extension clause – allows additional time for the payment of the loan due.
Acceleration at the option of the HOLDER will render the instrument non-
negotiable.
Sec. 2(d): refers to instruments payable in foreign currency. Exchange is the
charge for the expense of providing funds at the place where the instrument is