Legal Validity and Requirements for Promissory Notes (Philippine Law)

This overview is grounded in Philippine statutes—primarily the Negotiable Instruments Law (Act No. 2031, “NIL”), the Civil Code, plus related doctrines and special laws. It’s a practical “everything you should know” guide for drafting, transferring, and enforcing promissory notes (PNs) in the Philippines. It’s general information, not legal advice.

1) What a Promissory Note Is

Core idea. A promissory note is a written, signed promise by one person (maker) to pay another (payee) a sum certain in money, on demand or at a fixed/determinable time.
Two roles only. Unlike a bill of exchange (which has drawer, drawee, payee), a PN has a maker (primary debtor) and usually a payee; later holders may appear through negotiation.

2) Negotiable vs. Non-Negotiable Promissory Notes

A. Requisites of negotiability (NIL)

For a PN to be a negotiable instrument (with all the transfer advantages the NIL provides), it must:

Be in writing and signed by the maker;
Contain an unconditional promise to pay;
Be for a sum certain in money (it may include interest, installments, acceleration, exchange, or costs of collection/attorney’s fees—these do not destroy “sum certain”);
Be payable on demand or at a fixed/determinable future time;
Be payable to order or to bearer.

“Pay to the order of A” = order paper; “Pay to bearer / cash” or “to A or bearer” = bearer paper. Certain situations (e.g., fictitious payee known to the maker; blank payee; last indorsement in blank) also make an instrument bearer paper.

Extra undertakings usually destroy negotiability—except limited add-ons the NIL allows (e.g., collateral/waivers). When in doubt, keep the PN “clean”: a promise to pay money, with only standard clauses.

B. If the PN is non-negotiable

It’s still a valid written contract of loan under the Civil Code; it can be assigned, but assignees take it subject to all defenses (no “holder in due course” protection).

3) Parties, Capacity & Authority

Maker. Must have capacity (e.g., of legal age and not otherwise incapacitated).
Payee/Holder. Can be an individual or juridical person.
Corporations. Acts through the Board; corporate officers need authority (by-laws, board resolution, or apparent authority). If authority is lacking, the corporation may still be bound by estoppel or benefit received, depending on facts.

4) Consideration

Consideration is presumed. Lack or failure of consideration is a personal defense (good against ordinary holders but not against a holder in due course).
Accommodation parties (signing to lend credit) are liable to holders; they can seek reimbursement from the accommodated party.

5) Form & Content: Drafting a Strong PN

Must-haves for negotiability

Title (e.g., “Promissory Note”) – not required but helpful.
Date and place (not essential to negotiability but useful).
Maker’s name & signature (wet ink or qualified e-signature, see §13 below).
Unconditional promise: “I promise to pay…”
Payee (or “bearer/cash”).
Sum certain in money (state in words and figures; words control if they conflict).
When payable: “on demand” or specific date/ schedule; installments and acceleration are fine.
Payable to order or bearer.
Interest (state rate, basis, and accrual start).
Place of payment (optional but helps for venue/logistics).

Helpful clauses (commonly used and generally compatible with negotiability):

Acceleration on default.
Costs of collection/attorney’s fees on default.
Waiver of presentment, notice of dishonor, and protest (as allowed by law).
Venue stipulation.
Solidary (joint and several) liability if multiple makers.
Post-maturity (default) interest and penalty (ensure they’re reasonable).
No set-off / assignments (if desired).
Cross-default (if linked to other obligations).
Security reference (e.g., “secured by chattel/real estate mortgage”), while keeping the PN’s promise to pay unconditional.

Rules of construction (NIL)

Words prevail over figures.
Ambiguity is read to uphold negotiability/effectiveness.
Antedating/post-dating is permitted unless used for illegal purposes.
Interest is due only if expressly stipulated; otherwise legal interest may apply upon default/forbearance by operation of law.

6) Delivery, Completion & Alteration

Delivery is essential. A signed but undelivered instrument creates no liability (except against a holder in due course under specific circumstances).
Incomplete instruments: If delivered with blanks, the taker may fill them within authority; unauthorized completion is a personal defense (ineffective against a holder in due course).
Material alteration (e.g., amount, date, time of payment) discharges non-assenting parties except against a holder in due course who may enforce according to the original tenor.

7) Transfer: Negotiation vs. Assignment

Negotiation transfers title plus NIL rights.
- Order paper: requires indorsement + delivery.
- Bearer paper: delivery alone.
Indorsements:
- Blank (signature only) → converts to bearer.
- Special (“Pay to B”) → keeps it order.
- Qualified (“without recourse”) → no indorser’s secondary liability, but warranties still attach.
- Restrictive (“for deposit only”) → limits further negotiation/use.
Assignment (if non-negotiable or improperly negotiated): assignee gets only assignor’s rights, subject to defenses.

8) Holder in Due Course (HIDC)

Requisites

Instrument is complete and regular on its face;
Takes it for value;
In good faith;
Before overdue and without notice of prior dishonor;
Without notice of any infirmity or defect in title.

Rights

HIDC takes free from personal defenses and claims; subject only to real (universal) defenses.

Shelter rule

A non-HIDC may “inherit” HIDC rights if they take from a HIDC, unless they were part of the fraud or illegality.

9) Defenses

Real (universal) defenses—good even against a HIDC:

Forgery (no one is liable on a forged signature, except the forger or those precluded).
Fraud in factum (real fraud: signer didn’t know it was a PN, without negligence).
Material alteration (as to non-assenting parties).
Minority/incapacity; illegality that renders the instrument void; duress amounting to forgery; ultra vires (in strict cases); lack of delivery (under some circumstances).

Personal defenses—good against ordinary holders but not against HIDC:

Failure/lack of consideration; fraud in inducement; simple duress, mistake, breach of warranty; unauthorized completion/delivery (where the law treats it as personal); set-off and similar equities.

10) Presentment, Dishonor, Notice, and Protest

Presentment for payment: Required to hold indorsers secondarily liable (unless waived/excused). Makers are primarily liable; presentment is not needed to charge the maker.
When: On the maturity date (time instruments) or within a reasonable time (demand instruments).
Dishonor: Non-payment when properly presented.
Notice of dishonor: Required to fix indorser liability; can be waived.
Protest: Generally not required for PNs (protest is mainly for foreign bills unless stipulated).

11) Discharge of the Instrument and of Parties

Payment in due course by or on behalf of the party primarily liable.
Cancellation/renunciation by the holder.
Reacquisition by a prior party.
Material alteration (as to non-assenting parties).
Impairment of recourse (e.g., holder’s unjustified release of collateral can discharge an indorser to that extent).

12) Special Topics & Edge Cases

Demand PNs: Overdue after a reasonable time from issue; for prescription, conservative practice is to make prompt written demand (see §16).
Post-dated/antedated: Allowed unless illegal/fraudulent.
Ambiguity: Construed to maintain validity (e.g., “and/or” payees, sum in words vs. figures).
Fictitious payee rule: If the maker knows the payee is fictitious, instrument is bearer; indorsement forgery may not avail the maker.
Lost/destroyed PN: Enforceable upon proof and typically indemnity; expect strict court scrutiny.
Checks vs. PNs: Checks are orders drawn on a bank and intended for immediate payment; PNs are promises. Legal rules on timeliness and bank collection differ.

13) Electronic PNs, Signatures, and Notarization

E-signatures & e-documents: Under the Electronic Commerce Act (RA 8792), electronic data messages and electronic signatures can have legal effect and admissibility.
Caveat on negotiability: Traditional NIL concepts assume a tangible writing and delivery. An electronic PN will generally be a valid loan contract, but its negotiability (with full NIL attributes) may be contested absent specialized frameworks. Many lenders still require wet-ink paper for negotiable treatment.
Notarization: Not required for validity or negotiability, but converts the PN into a public document (stronger evidentiary weight) and is commonly required by banks.

14) Interest, Penalties, and Unconscionability

Usury ceilings are no longer fixed (old Usury Law ceilings effectively lifted by monetary authority issuances), but courts can strike down unconscionable interest/penalty rates and reduce them to reasonable levels.
State interest clearly (rate, basis—per annum, 360/365-day basis, compounding if any, default rate).
Attorney’s fees / collection costs: Customary but must be reasonable (courts may reduce).
Legal interest (for judgments/forbearance) is applied per current jurisprudence/monetary policy at the time of judgment; if unsure, state contractual interest clearly to avoid defaulting to legal interest.

15) Tax & Regulatory Touchpoints

Documentary Stamp Tax (DST): PNs/loan agreements may be subject to DST under the National Internal Revenue Code (NIRC) as amended. Rates and bases can change; confirm the current BIR rules.
Truth in Lending Act (RA 3765): Requires clear disclosure of finance charges and effective costs.
Financial Consumer Protection Act (RA 11765) and BSP consumer rules may apply to regulated lenders.
If secured: Comply with Chattel Mortgage Law or real estate mortgage formalities; consider PPSA concepts if applicable to your transaction structure.

16) Enforcement, Venue, and Prescription

Default & demand. Send a written demand (even if not strictly required) to fix default dates, trigger acceleration, and clarify interest/penalties.
Where to sue. Venue may be stipulated; otherwise follow the Rules of Court (generally where the plaintiff or defendant resides).
Which court. Depends on amount (exclusive of interest, damages, and attorney’s fees for jurisdictional purposes) under the latest jurisdictional thresholds (MTC vs. RTC).
Small claims. For lower-value PNs, Small Claims procedure may be available (amount threshold set by the Supreme Court’s A.M. rules).
Prescription. Actions on written contracts generally prescribe in 10 years (Civil Code).
- For time notes: Count from maturity (or acceleration).
- For demand notes: Safer to assume prescription can run from issue or demand depending on circumstances—make prompt demand and avoid delay.

17) Practical Drafting Checklist (Negotiable PN)

Title: PROMISSORY NOTE
Date & Place of Execution
Parties: Full legal names, IDs/addresses (maker; payee)
Unconditional promise to pay
Amount (words & figures; words control)
Payable to: “order of [Payee]” (or “bearer” if intended)
When due: on demand / specific date / installments (with schedule)
Interest: rate, basis, start date; default interest
Acceleration clause
Costs/Attorney’s fees upon default (reasonable)
Waiver of presentment/notice (if desired)
Venue stipulation
Security reference (if any), but keep payment promise unconditional
Signatures of maker(s); indicate solidary liability if multiple makers
Notarization (optional but recommended for evidentiary strength)
DST and regulatory compliance as applicable

18) Common Pitfalls (and How to Avoid Them)

Conditional promises (“pay if/when…”) → destroys negotiability.
Extra obligations (deliver goods, do acts) → usually non-negotiable.
Conflicting amounts/dates without a construction clause.
Ambiguous payee language; forgetting “order/bearer” words.
Usurious-looking or punitive charges → risk of judicial reduction.
No authority documents for corporate makers.
Relying solely on an e-note when you actually need a negotiable paper instrument.
Skipping DST or required disclosures (for regulated lenders).
Letting prescription run on demand notes—send demand early and keep records.

19) Simple Template (Negotiable, Unsecured — Illustrative Only)

PROMISSORY NOTE

Date: ___________      Place: __________________

FOR VALUE RECEIVED, I, __________________ (the “Maker”), of __________________,
HEREBY UNCONDITIONALLY PROMISE TO PAY to the ORDER of __________________ (the “Payee”)
the principal sum of __________________ PESOS (PHP ____________) (the “Principal”),

together with interest on the unpaid Principal at the rate of _____% per annum,
computed on a ______-day year, from ___________ until full payment.

Maturity: The Principal, together with accrued but unpaid interest and charges, shall be due and payable
(on demand / on ___________ / in the following installments: __________________).

Default & Acceleration: Upon failure to pay any amount when due, the entire unpaid balance shall,
at the option of the holder, become immediately due and payable without need of notice.

Costs of Collection: In case of default, the Maker agrees to pay reasonable costs of collection,
including attorney’s fees of ______% of the amount due, in addition to court costs.

Waivers: The Maker waives presentment, demand, notice of dishonor, and protest to the extent permitted by law.

Venue: The parties agree that any action arising from or in connection with this Note may be brought in
the proper courts of __________________, to the exclusion of other venues.

This Note is a negotiable instrument under Act No. 2031.

__________________________
Signature over Printed Name of MAKER
(If corporate: signatory’s name & position; attach Board Resolution/Secretary’s Certificate)

Adapt as needed (e.g., secured PN, multiple solidary makers, installment table, default rate, etc.).

20) Quick Q&A

Do I need notarization? Not for validity/negotiability, but it strengthens evidence and is often a bank requirement.
Can I issue a digital PN? Yes as a contract (RA 8792). For negotiability, paper with wet-ink signatures remains the safest in practice.
What if the interest seems too high? Courts can reduce unconscionable rates/penalties even with freedom to contract.
Is a non-negotiable PN useless? No—it’s still enforceable as a written loan; it just lacks HIDC protections and negotiability mechanics.

Bottom Line

If you want negotiability, stick closely to the NIL elements and avoid extra undertakings.
Draft clearly (amount, dates, rate, remedies) and keep good delivery/demand records.
Mind authority (corporate signers), DST/disclosures, and reasonable charges.
For enforcement, move promptly and use the appropriate forum (small claims/MTC/RTC) with a solid documentary trail.

If you’d like, I can adapt the template to your exact deal terms (installments, security, multiple makers, corporate signer, etc.) and produce a clean, ready-to-sign PN.