Drafting Promissory Notes in the Philippines

Introduction

A promissory note is a fundamental legal instrument in Philippine law, serving as a written promise by one party (the maker or borrower) to pay a specified sum of money to another party (the payee or lender) either on demand or at a fixed or determinable future time. It is commonly used to document loans, credit transactions, and other financial obligations, providing evidence of debt and facilitating enforcement in case of default. In the Philippine context, promissory notes play a crucial role in both personal and commercial dealings, from simple interpersonal loans to complex corporate financing.

This article provides a comprehensive guide to drafting promissory notes under Philippine law, drawing from relevant statutes such as the Negotiable Instruments Law (Act No. 2031), the Civil Code of the Philippines (Republic Act No. 386), and ancillary regulations like the Tax Code and rules from the Bangko Sentral ng Pilipinas (BSP). While promissory notes can be straightforward, their drafting requires precision to ensure enforceability, negotiability (if desired), and compliance with legal requirements. Non-compliance may render the note void, unenforceable, or subject to penalties.

Legal Basis

Negotiable Instruments Law (NIL)

The primary statute governing promissory notes is the Negotiable Instruments Law (Act No. 2031, enacted in 1911). Section 184 defines a promissory note as "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." The NIL outlines the requisites for negotiability, rights of holders in due course, defenses, and modes of negotiation.

Civil Code of the Philippines

Promissory notes are also underpinned by the Civil Code, particularly Book IV on Obligations and Contracts. Article 1156 defines an obligation as a juridical necessity to give, to do, or not to do. In the context of loans, Articles 1933 to 1961 govern simple loans (mutuum), where money or fungible things are delivered with the obligation to return an equal amount. A promissory note evidences such an obligation and must comply with general contract principles: consent, object, cause (Article 1318), and formalities where required.

Other Relevant Laws

Tax Code (Republic Act No. 8424, as amended): Imposes documentary stamp tax (DST) on promissory notes under Section 179.
BSP Regulations: For interest rates in bank-issued notes, the BSP sets guidelines via the Manual of Regulations for Banks. For non-bank lenders, the Usury Law (Act No. 2655) was repealed by Central Bank Circular No. 905 in 1982, allowing contractual freedom in interest rates, subject to unconscionability doctrines.
Corporation Code (Batas Pambansa Blg. 68): For corporate makers, the note must be authorized by the board of directors.
Anti-Money Laundering Act (Republic Act No. 9160, as amended): High-value notes may trigger reporting requirements.
Data Privacy Act (Republic Act No. 10173): If personal data is involved in the note or transaction.

Case law from the Supreme Court, such as Banco Filipino Savings and Mortgage Bank v. Court of Appeals (G.R. No. 129227, 2000), emphasizes that promissory notes are actionable as independent contracts, even if underlying obligations are disputed.

Essential Elements of a Promissory Note

For a promissory note to be valid and enforceable, it must include certain core elements. Under the NIL, for negotiability, these are mandatory; for non-negotiable notes, they are still advisable for clarity.

Unconditional Promise to Pay: The language must clearly state an absolute promise (e.g., "I promise to pay") without conditions precedent, except those allowed by law (e.g., reference to a transaction does not make it conditional per Section 3, NIL).
Sum Certain in Money: The amount must be definite, including principal and any interest. It can include provisions for installment payments, but the total must be ascertainable (Section 2, NIL). Currency is typically Philippine Pesos (PHP), but foreign currency is permissible if specified.
Payable on Demand or at a Determinable Time: Options include "on demand," a specific date, or events like "30 days after sight" (Sections 4-7, NIL).
Payable to Order or Bearer: For negotiability, use words like "to the order of [Payee]" or "to bearer." Non-negotiable notes can be "to [Payee] only."
Signed by the Maker: The borrower's signature is essential; digital signatures may suffice under the Electronic Commerce Act (Republic Act No. 8792), but physical signatures are preferred for court admissibility.
Date and Place: While not strictly required for validity, including the date establishes maturity and prescription periods (4 years for oral contracts, 10 years for written under Article 1144, Civil Code). Place aids in determining jurisdiction.

Additional elements for robustness:

Identification of parties (full names, addresses, TIN if applicable).
Consideration (e.g., "for value received").
Governing law (Philippine law by default).

Types of Promissory Notes

Promissory notes vary based on purpose and features:

Negotiable vs. Non-Negotiable: Negotiable notes can be transferred by endorsement or delivery, granting holders in due course superior rights (Sections 52-59, NIL). Non-negotiable notes are assignable but subject to defenses.
Secured vs. Unsecured: Secured notes are backed by collateral (e.g., real estate mortgage under Articles 2085-2092, Civil Code, or chattel mortgage under Act No. 1508). Unsecured rely on the maker's credit.
Interest-Bearing vs. Non-Interest-Bearing: Interest-bearing specify rates (e.g., 12% per annum). Non-interest-bearing may imply legal interest (6% per annum under BSP Circular No. 799, effective 2013).
Demand vs. Time Notes: Demand notes are payable anytime; time notes at a fixed date.
Installment Notes: Payable in parts, with possible acceleration clauses.
Corporate Notes: Issued by corporations for fundraising, subject to Securities and Exchange Commission (SEC) regulations if publicly offered.
Joint and Several Notes: Multiple makers, liable solidarily (Article 1207, Civil Code).

Drafting Guidelines

Drafting a promissory note requires clarity, precision, and avoidance of ambiguity to prevent disputes. Follow these steps:

Gather Information: Identify parties, amount, terms, security (if any), and special clauses.
Use Clear Language: Employ simple, direct wording. Avoid legalese unless necessary.
Structure the Document: - Header: "Promissory Note" - Parties and Date - Promise Clause - Payment Terms - Interest and Penalties - Default Provisions - Signatures
Incorporate Protective Clauses: - Interest: Specify rate, compounding, and legal interest on default. - Penalties: Allowed under Article 1229, Civil Code, but not excessive (e.g., 2-3% per month). - Acceleration Clause: Allows full balance due on default. - Waiver of Presentment: Per Section 82, NIL, to simplify enforcement. - Attorney's Fees: Recoverable under Article 2208, Civil Code. - Governing Law and Venue: Specify Philippine courts. - Severability: If one clause is invalid, others remain.
Consider Capacity: Ensure parties are of legal age (18+), sound mind, and authorized (e.g., corporate resolution).
Formalities: Notarization is not required for validity but recommended for public document status (evidentiary weight under Rule 132, Rules of Court). Affix DST stamp.

Sample Template

PROMISSORY NOTE

[City/Municipality], Philippines
[Date]

FOR VALUE RECEIVED, I/We, [Maker's Full Name/s], of legal age, Filipino, single/married, with residence at [Address], promise to pay to the order of [Payee's Full Name], of legal age, Filipino, single/married, with residence at [Address], the sum of [Amount in Words] (PHP [Amount in Figures]), with interest at the rate of [Interest Rate]% per annum, compounded [monthly/annually], from the date hereof until fully paid.

This Note shall be payable [on demand / in [Number] equal monthly installments of PHP [Amount] each, beginning on [Date], at [Place of Payment]].

In case of default in the payment of any installment or interest when due, the entire balance shall become immediately due and payable at the option of the holder, without need of demand.

The Maker waives presentment for payment, notice of dishonor, protest, and notice of protest.

In case of judicial or extrajudicial collection, the Maker agrees to pay attorney's fees equivalent to [Percentage]% of the amount due, plus costs of suit.

This Note shall be governed by the laws of the Republic of the Philippines.

IN WITNESS WHEREOF, I/We have hereunto set my/our hand/s this [Date] at [Place].

[Maker's Signature]
[Maker's Printed Name]

Signed in the presence of:

[Witness 1 Signature] [Witness 2 Signature]
[Witness 1 Name] [Witness 2 Name]

[Notary Public Acknowledgment, if applicable]

Execution and Notarization

Signing: All makers must sign; witnesses (at least two) enhance validity.
Notarization: Converts to a public document, admissible without further proof (Article 419, Civil Code). Notary must comply with the 2004 Rules on Notarial Practice.
DST: Affix stamps worth PHP 1.50 for every PHP 200 or fractional part of the face value (Section 179, Tax Code). Failure incurs penalties under Section 250.

Enforcement and Remedies

Demand: For demand notes, a formal demand letter is advisable.
Action: File a collection suit in the appropriate court (Municipal Trial Court for amounts up to PHP 400,000 in Metro Manila, per Republic Act No. 7691).
Defenses: Maker can raise personal defenses (e.g., lack of consideration) against original payee but not against holders in due course (Section 58, NIL).
Prescription: 10 years from due date (Article 1144, Civil Code).
Foreclosure: For secured notes, follow extrajudicial foreclosure under Act No. 3135 for real mortgages.
Criminal Liability: If issued with intent to defraud, may constitute estafa under Article 315, Revised Penal Code.

Tax Implications

DST: As noted, mandatory on issuance.
Income Tax: Interest income is taxable (Section 24, Tax Code); withholding tax may apply.
VAT/Gross Receipts Tax: For lenders in business.
Donations: If forgiven, subject to donor's tax.

Common Pitfalls

Ambiguous terms leading to disputes (e.g., unclear interest calculation).
Excessive interest rates deemed unconscionable (Supreme Court in Mendiola v. Court of Appeals, G.R. No. 159333, 2007).
Failure to pay DST, rendering inadmissible in court (Section 20, Rule 132, Rules of Court).
Lack of authorization in corporate notes, making them ultra vires.
Not specifying currency, assuming PHP but risking forex issues.
Ignoring data privacy in digital notes.

Conclusion

Drafting promissory notes in the Philippines demands adherence to statutory requirements and best practices to ensure they serve as reliable instruments of obligation. While templates provide a starting point, consulting a lawyer is essential for tailored advice, especially in complex transactions. Properly drafted notes not only facilitate smooth repayments but also provide strong legal recourse, contributing to financial stability and trust in economic dealings.