NEGOTIABLE INSTRUMENTS LAW Atty.
Bernardino Amago l For the exclusive use of EH 404 2016-2017
1|UNIVERSITYOFSANCARLOS
PRELIMINARIES
HISTORY OF NEGOTIABLE INSTRUMENTS LAW
The use of Negotiable Instruments dates back as early as the
Tang Dynasty.
It is not surprising that NIL originated from Chinese tradition. After all,
they are known for trading. Their trades extended beyond their own
community. Lawlessness must have been a common theme, thus it
would have been dangerous to bring large sums of money while you
are trying to also bring your products. This must have led to the idea
that instead of bringing actual cash, it would be safer to bring a
representation of such cash.
The practice trickled to the Middle East, then to Europe.
It was in London where the law was first codified under the English Bill
of Exchange Act of 1882, which is the precursor or model law of the US
known as the US Uniform Negotiable Instruments Law of 1896.
However, not all states accepted the US Uniform until negotiable
Instruments Law. They believed that there was a need to further
improve the Law. Thus, they enacted the U.S Uniform Commercial Code
which actually is the basis of most commercial laws of the Philippines
(and the world for that matter)
Example: Laws on Letters of Credit here in the Philippines is largely
based on the US Uniform Negotiable Instruments Law
Negotiable Instruments Law in the Philippines
The Philippines has copied most of the US Negotiable Instruments Law
with the exception of certain provisions which even US courts had a
hard time making a stand on. This was the basis for the creation of our
own Negotiable Instruments Law. Thus, under Act 2031 on Feb 3 1911,
our Negotiable Instruments Law came to fruition, which became
effective on June 2, 1911.
Relevance of studying the history of NIL
Knowing the period during which a particular law is enacted will help
people understand why the words or language found therein were the
ones used in the enactment of the law. The practices of the period and
culture of that time will help in understanding the law as a whole.
NIL APPLICABLE ONLY TO NEGOTIABLE INSTRUMENTS
The NIL is only applicable to Negotiable Instruments
Topics such as negotiable documents of title (under Sales) has no
application in NIL because the same is covered under the Civil Code.
The adjective and substantive aspects, the remedies of the parties are
found in the NIL itself. It is therefore imperative to determine whether
a document is negotiable or non-negotiable
Take note: NIL will only find relevance if the instrument is negotiable
(If it is not, other laws such as the Civil Code may apply)
Purpose of NIL
To facilitate and regulate commercial transactions.
Example: It would be inconvenient to bring 1M pesos to a buyer of a
parcel of land, and having to count the money in front of the purchaser.
This was born out by the circumstances of the time considering that
trade was already popular beforehand.
FUNCTIONS OF NEGOTIABLE INSTRUMENTS
What are the functions of negotiable instruments?
1. It is a substitute for money
2. It is a medium for exchange
3. It is a medium of credit transactions
4. It is a means of making immediate payment
It is a substitute for money
A negotiable instrument, while it is not money, is a substitute for
money, eliminating the risk of dealing in cash.
To illustrate the difference between money and a negotiable instrument:
1. Money, when transferred because of a particular transaction results
to termination if it is considered payment. However, for negotiable
instruments, that which is transferred is not considered payment unless
encashed.
2. Money retains its value even if transferred to multiple individuals. In
contrast, a check (which is a negotiable instrument) which is transferred
to multiple individuals, wherein one becomes bankrupt, results in the
loss of value when it reaches the last person.
Nevertheless, the purpose of the law is to place negotiable instruments
on such footing that they would be freely accepted like money without
question in commercial transactions and thereby facilitate trade.
It is a medium for exchange
It allows transactions to be closed and allows exchange of assets to
happen even if there is no actual cash. It thus increases the purchasing
medium in circulation, doing away with the active handling of money
and the need to physically count bills and coins whenever payment is
made in financial transactions.
To illustrate:
You would be willing to give to another party your assets (ex. A car) by
the simple exchange or handing down of a check. This check represents
the value of money.
It is a medium of credit transactions
The instrument is a representation of one’s credit. It is called credit
because it takes into account one’s ability to pay, one’s wealth or
reputation.
When one does not receive cash in itself, credit actually ensues.
Example: One can receive an instrument which is payable after 30 days
only, and you are still willing to close the transaction. With the passage
of time, you are actually allowing credit to happen.
Credit presupposes that there has been no actual payment of money
yet, but despite such facts, the transaction is deemed closed or
perfected.
It is a means of making immediate payment
Payment here does not mean that of the Civil Code. Rather, payment in
the sense that the transaction has been completed, is closed, with the
mere transfer of that instrument as a representation of payment.
Example: X can transfer his whiteboard marker to Y, if Y gives a piece of
paper saying that Y owes X P1 million payable to X or to his order.
When the paper is given to X, X deems it as payment. Thus, X in effect,
gives the white board marker. NEGOTIABLE INSTRUMENTS LAW
Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
2|UNIVERSITYOFSANCARLOS
CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS There is no requirement as to the material used. It can be on any
What are the characteristics of negotiable instruments? material as long as it can be transferred from one hand to another.
1. Negotiability SIGNED BY THE MAKER OR DRAWER
2. Accumulates secondary contracts Difference between maker and drawer
A maker is the one who makes a promise to pay in a promissory
NEGOTIABILITY note. He is personally liable to pay.
Negotiability refers to the quality or attribute of an instrument to be A drawer is the one who issues a bill of exchange to order a
transferrable from one person to another, and whoever holds that payment to be made. He orders someone to make the payment.
instrument, holds such against defenses of prior parties.
Example: A extended a loan of 1M to B which B should pay 30 days TN: Maker or drawer does not have to be the one who writes, as long
after. Before 30 days, A assigned his rights to C. What is his right? The as he/she is the one who signs.
right to collect the amount of 1M pesos to B. But instead of saying that Location of the signature
he has 1M worth of rights, he says that he actually 2M and assigns such The signature may appear in any part of the instrument. It can appear
right to C. at the back or on the face of the instrument. There is no requirement
Question: When C goes to B to enforce his right, will B be compelled on where the signature should be placed.
to pay the amount of 2M pesos? It can be signed anywhere provided that such signature signifies the
Ans – No. Because C only steps into the right of A which only has a intention by the maker or drawer to be bound by the instrument
right to the extent of 1M. Type of signature
TN: The situation does not apply when A stole a negotiable instrument There is no requirement, as long as there is intent to be bound.
from B in the amount of 1M and then negotiates said instrument to C If the signature was a heart: Valid
(hands down the instrument to C). If the signature was “Taylor Swift”: Still Valid
Question: If C goes to B to demand payment of 1M pesos, can B
allege that A stole it from B, so he should not pay C? There is no requirement as to what signature you’ll place, for as long as
Ans – No. Because the negotiable instrument has the characteristic of that mark or signature or whatever initials you place are indicators of
Negotiability. Thus, it is free from the defenses of prior parties. The your intent to be bound by the instrument.
instrument will remain payable to C. TN: But of course, if you will run counter to the usual practices of a
ACCUMULATES SECONDARY CONTRACTS particular place, wherein you’re supposed to make a signature using
The most important feature of negotiable instruments is the your name or at least one that is artistic enough not to indicate it as
accumulation of secondary contracts as they are transferred from one any other person’s name, then it may prevent the instrument from
person to another. Once an instrument is issued, additional parties can being accepted. It can affect the acceptability of the instrument if you
become involved. don’t comply with the usual practices. Then again, as to whether it will
Example: A issues a negotiable instrument in favor of B. B negotiates to affect negotiability, it will not. NEGOTIABLE INSTRUMENTS LAW
C. C negotiates to D, and then D to E. A and B have a contract. B and C Atty. Bernardino Amago l For the exclusive use of EH 404 2016-2017
also enters into another contract. The same for C to D. And then from 3|UNIVERSITYOFSANCARLOS
D to E. (A total of 4 contracts)
Question: If the instrument has already matured, where can E go for
payment?
Ans – E can go to any of the parties for payment. He can go to A for
payment. If A refuses, E can go to either B, C, D because E already
holds an instrument which holds all the contracts which the previous
parties entered into prior to his contract (referring to E). It is as if E has
contracts with B, C, and D. This is because it can accumulate secondary
contracts (save for certain limitations).
NEGOTIABLE INSTRUMENT DEFINED
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.
Does it have be negotiated before it becomes negotiable?
Yes. It has to be negotiated before it becomes negotiable. It has to be
used in a commercial transaction. If it is not used for a commercial
transaction, while it bears all the elements under Section 1, it cannot be
considered a negotiable instrument.
FORM OF NEGOTIABLE INSTRUMETS
Relevant provision
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 other indicated therein with reasonable certainty.

IT MUST BE IN WRITING AND SIGNED

BY THE MAKER OR DRAWER
MUST BE IN WRITING
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 the
language of your obligation.
Material
MUST CONTAIN AN UNCONDITIONAL PROMISE OR
ORDER TO PAY A SUM CERTAIN IN MONEY
UNCONDITIONAL PROMISE OR ORDER TO PAY
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.
TN: To make it not negotiable, the condition must be put to the promise or the order to pay.
Unconditional
It is not contingent on the happening of a future event; not subject to any condition.
Promise v. Order to Pay Order
Promise
Pertains to a promissory note Pertains to a bill of exchange.
Parties – maker and payee. Parties – Drawer, Drawee, and
Payee.
It is the person primary liable Refers to a person directing
who obliges himself on the another person or himself to
instrument pay on the instrument;
requires an additional act on
the person primarily liable-
that is, by accepting the
instrument