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WWW August 7, 2018 THE USE OF NEGOTIABLE INSTRUMENTS IS FOUR FOLD.

History of NIL 1. It is a substitute for money


 A negotiable instrument, while it is not
It was the United Kingdom who first made a codified law
money, is a substitute for money, which
on negotiable instruments, because of its widespread
makes transactions more convenient as you
use, the thinkers at that time found that there was a
can use it in the exchange of goods and
need to provide for a uniform practice on the usage of
services. Although it is not a legal tender in
negotiable instruments. So, they drafted the Bill of
the technical sense, but similar to money, it
Exchange Act in 1886.
gets to be exchanged for possible goods or
But even before that, it has long been a practice in the services. It becomes a storage of value.
use of negotiable instruments and these practices were Although in case of negotiable instruments,
formalized into what has become known as Law it only has value if the person who issued the
Merchants (practices of the merchants). So whatever the instrument has the capacity to make good of
practice of the merchants were at that time regarding the promise or order he made, but still, it has
the use of negotiable instruments, that became the law value.
with respect to it. These practices were formalized 2. It is a medium of exchange
through the Bill of Exchange Act.  You get to transfer a negotiable instrument
and conveniently get the goods that you
BEA became the basis of the law in the US. In 1896, they
wanted. Instead of bringing a lot of cash with
drafted the basis of the Negotiable Instruments Law (NIL)
you, and risk bringing money, you get to
in the Philippines. The Uniform NIL under the initiative of
have the goods that you want.
the American Bar Association and American Banker’s
3. It is a medium of credit transactions
Association. The US has several states and several and
 The instrument is a representation of one’s
separate laws within each state and they wanted to have
credit. It is called credit because it takes into
a uniform law in relation to the use of commercial
account one’s ability to pay, one’s wealth or
papers.
reputation. The value of a negotiable
UNIL was the basis of the Philippine NIL or Act No. 2031 instrument is dependent on a person’s
which was drafted in February 3, 1911 and published in ability to make good of the promise or order,
the Official Gazette on March 4, 1911 effective 90 days hence, the negotiable instrument represents
after on June 2, 1911 his credit or liability.

The NIL is just copied from the US, and because the US 4. It is a means of making immediate payment
copied it from the UK, there are cases where the
 More or less the same with exchange.
Philippine Supreme Court has based on what was
 Instead of you paying cash, you can use a
decided in the UK and US.
check to pay for the goods or services that
UNIL in the US was further amended by the Uniform you want to avail.
Commercial Code, Art 3 of that Code specifically states
It must be emphasized that negotiable instruments are
that the UNIL should only govern negotiable instruments.
NOT legal tender. Checks, even if managerial checks, are
S, if it’s not a negotiable instrument, it is not covered by
not legal tender. In Philippine law, only money is legal
the UNIL.
tender. But checks will have the effect of payment once
In the Philippines, it is also very specific that Negotiable it is encashed.
Instruments Law (NIL) will only govern negotiable
Exception: Once there is negligence on the part
instruments.
of the person to which the check was issued, to
You have to determine then if the instrument is encash the check within a reasonable time, and
negotiable to know whether NIL will be applied. the check is impaired through no fault of the one
who issued it, then there is already payment.
TWO DISTINCT CHARACTERISTIC OF NEGOTIABLE THREE COMMON FORMS/TYPES OF NEGOTIABLE
INSTRUMENTS: INSTRUMENT

1. Negotiability (Technically there are only two since a check is just a


 It is convenient to deal with it since it can special kind of bill of exchange.)
be transferred from one person to
1. Promissory Note
another.
 Pertains to a promise; note pertains to it being
 refers to the quality or attribute of an
written down on a piece of paper.
instrument to be transferrable from one
 Pertains to the unconditional promise of the
person to another, and whoever holds
maker to pay a sum certain in money to order
that instrument, holds such against the
or to bearer.
personal defenses of prior parties
 Ex: “I promise to pay A or bearer 1M upon
(persons before you).
demand. Signed, B.”
2. Accumulates secondary contracts
 In this case, B made the promise. The
 The most important feature of
unconditional promise is to pay a sum certain
negotiable instruments is the
in money which is 1M. He will pay it upon
accumulation of secondary contracts as
demand. A or bearer gets to receive the
they are transferred from one person to
payment.
another. Once an instrument is issued,
2. Bill of Exchange
additional parties can become involved.
 Is an order; you command someone to do it for
 Additional parties get to be part of the
you; addressed to a particular person.
negotiable instrument once it is
negotiated. As one person takes  It is an unconditional order by the drawer
possession of the instrument, he gets to addressed to the drawee to pay the value as
have a contract separate from all other. stated in the instrument.
That’s why you have different rights and  Issued by a drawer to order a payment to be
you can have better rights than the made. The drawer orders someone to make the
persons before you. As one person gets payment.
to be added to the trail of exchanges  Has to have a drawee or the person you order
involving the same instrument, to pay the value as stated in the instrument.
additional contracts are added as well.  Ex: “To X, pay 1M pesos to A or bearer upon
You get to be governed by a separate demand. Signed,B.”
contract for every time and instrument is  Here, the maker is B. But this time, the one who
transferred from one hand to another. will pay (drawee) is X and the one who gets to
 This is an amazing feature of a receive payment is A or bearer. A or bearer can
negotiable instrument. The use of a get 1M upon demand.
negotiable instrument is for you to be 3. Check
able to make transactions without  Special kind of bill of exchange in which the
necessarily dealing with cash but just drawee (the one who is ordered to pay) is
based on the promise or credibility of always the bank and is payable upon demand
the person who drafted it. People accept (when you go to the bank). If it is post-dated,
it on the order of someone, on their then payment can be demanded on the date
belief on this someone who made it. It indicated in the check. Nevertheless, it is
then gets to be handed to even persons payable on demand.
who might not even know that particular LIFE OF A NEGOTIABLE INSTRUMENT
person who drafted it. Something gets to
be exchanged by just mere words or 1. PROMISSORY NOTE
mere credibility or reputation of a) Preparation and signing of the
another. instrument. The instrument is signed by
the maker.
b) Issuance - you then issue the don’t really know the drawee (Example: bill of
instrument, ideally, to the payee. The exchange ordering Jaime Zobelle de Ayala to
moment you give to the instrument to pay nya di diay to sila kaila sa nag-issue sa
the person after it is prepared (the first instrument).
time), that is when it is issued. i. If accepted – once the instrument has
c) Negotiation – when it is once again given then become mature, you can now
to someone else (not for the first time), present the bill of exchange for payment.
you don’t talk about issuance anymore, ii. If not accepted – the instrument is
this is now negotiation. considered dishonored for the first time.
a. Two forms of negotiation (depends The instrument is then deemed
on the type of instrument): dishonored by non-acceptance. Once it is
 If it is a bearer instrument – dishonored, there are several processes
negotiated by mere delivery. you have to follow. There is this notice of
 If it is an order instrument – dishonour required to be presented to
negotiated upon indorsement persons who are secondarily liable so that
coupled with delivery. they will continue to be liable for the
d) Presentation for payment – present the instrument. If you do not issue this notice,
instrument to the person who made the your right ceases there with respect to
instrument. those persons who are secondarily liable.
If maker: You cannot go after them anymore, you
i. Makes good with the payment just have to wait until the person who is
(honors the instrument) – primarily liable will pay you (the one who
instrument is deemed discharged. made the instrument).
All parties are no longer liable on e) Presentation for payment – present the
the instrument. The instrument instrument to the drawee.
ceases to be a negotiable If drawee:
instrument and is now a mere i. Makes good with the payment (honors
scrap of paper. the instrument) – instrument is deemed
ii. Does not make good with the discharged. All parties are no longer
payment – instrument is liable on the instrument. The instrument
dishonoured by non-payment. ceases to be a negotiable instrument
(Wa sya nagdiscuss unsa’y and is now a mere scrap of paper.
mahitabo huhuhu) ii. Does with make good of the payment –
instrument is dishonoured by non-
2. BILL OF EXCHANGE payment. (Wa sya nagdiscuss unsa’y
a) Preparation and signing of the mahitabo huhuhu)
instrument. The instrument is signed by
NOTE the difference between a promissory note and a bill
the drawer.
of exchange:
b) Issuance.
c) Negotiation.  For promissory note, you can immediately
d) Presentation for acceptance - In case of a bill present it for payment upon maturity (whether
of exchange, before payment can be upon demand or when the period as stated in the
demanded, the person has to go the drawee instrument arrives).
first and present it for acceptance, not yet for  For a bill of exchange, you have to present it for
payment. You have to give an opportunity first acceptance first before you can present it for
to the drawee (the one ordered to pay) to payment.
accept the order or not because it is possible
that the one who issued the order just merely
wrote the name of the drawee even if they
WHAT IS A NEGOTIABLE INSTRUMENT?

A negotiable instrument is one used in commercial


transactions and which complies with all the elements of
negotiability provided for under Section 1 of the
Negotiable Instruments Law.

WHEN IS AN INSTRUMENT NEGOTIABLE?

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
e) Where the instrument is addressed to a drawee,
he must be named or otherwise indicated
therein with reasonable certainty.