Negotiable Instruments Law Act.
Characteristics of Negotiable
2031 Atty. Amado R. Villegas, Jr.
Effectivity – June 2, 1911
The law is applicable only to
negotiable instruments or those
instruments which meet the
requirements laid down in Section 1
of the law
Any case not provided in the law
shall be governed by existing
legislation or in default thereof, by
the rules of the law merchant
The Civil Code has no effect on its
provisions except to supply any
deficiency in cases not provided by
the law.
Functions of Negotiable
Instruments
(1) Used as substitute for money
(2) Medium of commercial
transaction
(3) Medium of credit transaction
(4) Written evidence of the
indebtedness of the parties
Instruments
1. Negotiability -it may pass from
one person to another similar to
money
2. Accumulation of secondary
contracts - secondary contracts are
created when they are transferred
from one person to another
Forms of Nego Instruments
1. Promissory note (Sec. 184)
2. Bill of Exchange (Sec. 126)
3. Check (Sec. 185)
Instruments (not negotiable)
1. Letter of credit – payable to a
specific person
2. Treasury warrant – payable out
of a specific fund
3. Postal money order – subject to
restrictions
4. Bill of lading – no unconditional
promise or order
5. Certificate of stock – no
unconditional promise or order
6. Warehouse receipt – no
unconditional promise or order
Non-Negotiable Instrument
• does not or not all
• transferred by assignment
• transferee acquires only rights of
transferor
• prior parties merely warrant
legality of his title
• no such right of recourse
Negotiable Documents of Title
• goods
• mere evidence of title
• does not
• intermediate parties are not
secondarily liable if dishonored
• merely steps into the shoes of the
transferor
Steps in the execution of a
negotiable instrument
• Act of writing (making or drawing)
the instrument conformably with
the requirements of Section1 of NIL;
and
• Delivery or issuance of the
instrument with intent to be bound
thereunder to a person who takes it
as a holder
Incidents in the Life of a Negotiable
Instrument
1. Issue – the first delivery of the
instrument complete in form to a
person who takes it as a holder.
2. Negotiation – transfer of an
instrument from one person to
another as to constitute the
transferee the holder thereof.
3. Presentment for Acceptance –
this is required in certain kinds of
bills of exchange as in the case
where presentment for acceptance
by the drawee is necessary to fix
the maturity of an instrument
payable after sight.
4. Acceptance – this is a
signification by the drawee of his
assent to the order of the drawer.
In this case, the drawee becomes an
acceptor who is primarily liable
under the instrument.
5. Dishonor by Non-Acceptance –
this takes place when the bill of
exchange is presented for
acceptance by the drawee and the
latter refuses to accept the same.
6. Presentment for Payment – this
takes place when the holder
exhibits the instrument to the
drawee or the person liable thereon
and demands payment from him on
or after the date of maturity.
7. Dishonor by Non-Payment – this
takes place where the instrument is
presented for payment and
payment is refused or cannot be
obtained, or where presentment for
payment is excused and the
instrument is overdue and unpaid.
8. Notice of Dishonor – this takes
place when the instrument is
dishonored by non-acceptance or
non-payment in order to notify the
parties secondarily liable thereon of
the identity of the instrument, the
fact of dishonor and the demand for
payment. (In the case of foreign
bills of exchange, the notice must
be in the form of a protest which
contains substantially the same
matters as a notice of dishonor but
must be notarized.)
9. Discharge – it takes place when
the instrument is paid at or after
maturity by a person who is
principally liable thereon, and also
when notice of dishonor or protest
is not given within the time as
specified by law. In the latter case,
all parties secondarily liable are
discharged and can no longer be
held liable by the holder.
Section 1- Form of Negotiable
Instrument
(a) It must be in writing and signed
by the maker or drawer;
(b) Must contain an unconditional
promise or order to pay 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
bearer;
(e) Where the instrument is
addressed to the drawee, he must
be named or otherwise indicated
therein with reasonable certainty
Promissory note – is 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 bearer
Bill of exchange – is an
unconditional order in writing
addressed by one person to
another, signed by the person
giving it, and requiring the person
to whom it is addressed to pay
upon demand or a fixed or
determinable future time a sum
certain in money to order or bearer.
Parties to a Promissory Note
1. Maker – one who signs the
instrument
2. Payee – party to whom the
promise is made
Parties to a Bill of Exchange
1. Drawer – who issues and draws
the bill
2. Payee – party to whom the bill is
payable
3. Drawee – party upon whom the
bill is drawn
Sec. 2 –Certainty as to sum what
constitutes
(a) With interest
- whether fixed, compounded,
increasing or decreasing
(b) With stated installments
- 2 important things
1. amount to be paid must be
stated
2. date of maturity must also be
stated
(c) By stated installments with
acceleration clause
if dependent on maker – Negotiable
if dependent of payee/holder –
Non-negotiable
(d) With exchange – (not applicable
to inland or domestic bill)
(e) With costs of collection or
attorney’s fee – due to the fact that
it take effect after maturity of the
instrument
Sec. 3 – When promise is
unconditional
If source of payment – not
negotiable
If source of reimbursement –
negotiable
Past tense – negotiable
Future tense – non-negotiable
Sec. 4 – Determinable future time;
what constitutes
(a) At a fixed period after date or
sight; or
(b) On or before a fixed or
determinable future time specified
therein; or
(c) On or at a fixed period after the
occurrence of a specified event
which is certain to happen
Sec. 5 – Additional provisions not
affecting negotiability
General Rule – the instrument is
non-negotiable if it contains a
promise or order to do any act in
addition to the payment of money
Exceptions –
1. Sale of collateral securities
2. Confession of judgment
3. Waiver of benefit granted by law
4. Election of holder to require
some other act
if option is on holder – negotiable
if option is on maker – non-
negotiable
Sec. 6 – Omissions
Even if the following are not stated,
still negotiable
1. Not dated
2. Omission of value
3. Omission of place
4. Presence of seal
5. Designation of particular kind of
current money payable
Sec. 7 – When payable on demand
(a) Where it is expressed to be
payable on demand, or at sight, or
on presentation
(b) In which no time for payment is
expressed.
(c) When issued, accepted or
indorsed when overdue
Sec. 8 – When payable to order
Payee is not maker/drawer/drawee
Payee is the drawer/maker
Payee is the drawee
2 or more payees jointly
One or more several payees
Holder of an office for a time being
Principle
Once bearer, always bearer
Order instrument can become a
bearer instrument
Sec. 9 – When payable to bearer
(a) When expressed to be payable;
(b) When payable to a person
named therein or bearer;
(c) When it is payable to the order
of a fictitious or non-existing
person, and such fact was known to
the person making it so payable;
(d) When the name of the payee
does not purport to be the name of
any person; or
(e) When the only or last
indorsement is an indorsement in
blank
Sec. 10 – Terms , when sufficient
- Mere defect in language or
grammatical error will not
invalidate the instrument
- Substitution is allowed
Sec. 11 – Date, presumption
- whenever there is a date written,
it is the true/correct date
- only a disputable presumption
Sec. 12 – Ante-dated and post-
dated
Gen. rule – ante-dating or post-
dating is not per se illegal
Exception – if done for an illegal
purpose
Sec. 13 – Date
Gen. rule – not allowed to insert or
change any date (Effect – material
alteration)
Exception
1. To fix the maturity
2. To fix the interest
3. To determine whether there is
reasonable period of time
Complete – sec 1-13
Incomplete- no payee no amount
Delivered – negotiate
Undelivered – not allowed
HDC v. HnotDC
Personal- HDC! Yes
Real defense- not HDC
Prior v. Remote
Subsequent v. Immediate
Assignment v. Negotiation
Sec. 14 – Incomplete but delivered
instrument –(only a personal
defense)
- Doctrine of Comparative
Negligence
- Breach of Trust or Authority
• Holder has prima facie authority
to complete the instrument;
• Completion to be done within a
reasonable time and according to
the authority given;
• Holder in due course of the
instrument previously completed in
breach of instructions can enforce
the same as if regularly completed.
Sec. 15 – Incomplete and
Undelivered Instrument- a real
defense
• Between immediate parties and a
remote party not a holder in due
course, delivery to be effectual
must be made by or under the
authority of the maker, drawer,
acceptor or indorser, as the case
may be; • If the instrument is in the
hands of a holder in due course, all
prior deliveries are conclusively
presumed valid;
• If the instrument is out of the
hands of the person who signed it, a
valid and intentional delivery is
disputably presumed.
Sec. 16 – Complete but undelivered
instrument- a personal defense
Incomplete and Undelivered
Instrument (Section 15)
• If the completed and delivered
without authority, the instrument is
not a valid contract against any
person who signed before delivery.
Sec. 17 – Rules of construction in
case of ambiguity or omission
(a) Gen rule – Words v. Figures =
Words
Exception –Figures
(b) Payment of interest
Rule – date of interest
Exception – date of instrument
Exception to exception – date of
issuance
(c) Date required (but no date) –
date of issuance
(d) Written provisions v. Printed
provisions
(e) PN or BE = the holder may treat
it either at his election
(f) Doubt on signature – deemed as
an endorser
(g) I promise to pay – Solidary
We promise to pay - Joint
Sec. 18 – Liability of person signing
in trade or assumed name
Gen rule – Only persons whose
signature appears on the
instrument are liable thereon
Exception – LIABLE (even if
signature does not appear)
1. person signs in a trade or
assumed name
2. principal is liable if a duly
authorized agent signs in his own
behalf (agent)
3. In case of forgery
4. Where the acceptor makes his
acceptance of a bill on a separate
paper (Sec. 134)
5. Where a person makes a written
promise to accept a bill before it is
drawn (Sec. 135)
Secs. 19/20 Signature by Agent
Requisites to apply
1. Duly authorized
2. Signs in a representative capacity
3. Discloses the principal
If one is absent – agent is personally
liable
Sec. 21 – Signature by procuration
- The agent has limited authority to
sign the instrument
Sec. 22 – Infancy and Ultra vires
act of the corporation
- Both are real defenses
- Minor can negotiate but not liable
Sec. 23 – FORGERY (real defense)
• Forgery – is the counterfeit
making or fraudulent alteration of
any writing.
• b. Effect – The signature is wholly
inoperative, and no right to retain
the instrument, or to give a
discharge therefore, or to enforce
payment thereof against any party
to it, is acquired through or under
such signature.
a. Forgery in Order instrument
b. Forgery in bearer
c. Forgery in check/bill of exchange
(liability of the drawee)
Sec. 24 – Consideration
- Presumption of consideration
- Presumption to have been a party
thereto for value
• Absence of consideration – is the
total lack of consideration, no
consideration or illegal
consideration.
• Failure of consideration – is
failure of the agreed consideration
to materialize.
• Both absence and failure of
consideration are defenses personal
to the prejudiced party, and
available against any person not a
holder in due course.
Sec. 25. Value – any consideration
sufficient to support a simple
contract.
An antecedent or pre-existing debt
constitutes value
Sec. 26 – Holder for value
- one who has given valuable
consideration for the instrument
issued or negotiated to him
Sec. 28 – Effect of want or failure
of consideration
– BOTH are personal defenses
Sec. 29 – Liability of
accommodation party
Accommodated party– Primarily
liable
Accommodation party – Surety
Regular party v. Accommodation
party
Sec. 30 – Negotiation
- is the transfer of a negotiable
instrument from one person to
another as to constitute the
transferee the holder thereof
Methods of transfer of negotiable
instrument
1. Issue
2. Negotiation
3. Assignment
How is instrument negotiated?
If order instrument – indorsement
plus delivery
If bearer – mere delivery
Sec. 31 – How indorsement is
made?
- On the back of the instrument
itself
the - On a separate piece of paper
attached to the instrument
(Allonge)
Sec. 32 – Gen Rule – Indorsement
must be of the entire instrument (if
not, not negotiable)
Exception – if already partially paid
Sec. 33 – Kinds of indorsement
Special- name is specified
Blank- specifies no particular
indorsee
Restrictive v.non-restrictive
Qualified v. unqualified
Conditional v. unconditional
Joint v. successive v. irregular v.
facultative
Sec. 34 – Special indorsement;
indorsement in blank
Special indorsement
e.g. Pay to B Pay to B or order
Blank indorsement
e.g. (mere signature)
Sec. 35. Blank indorsement; how
changed to special indorsement
BI to Special Indorsement – allowed
BI to RI, QI, CI or any other – not
allowed (material alteration)
Sec. 36 – Restrictive indorsement
a. Pay to A only
b. Pay to A for collection
c. Pay to A, in trust for B
Effects of restrictive indorsement
a. Destroys the negotiability of the
instrument
b. All subsequent indorsees acquire
only the title of the first indorsee
under the restrictive indorsement
Sec. 37 – Effects of restrictive
a. to receive payment
b. to bring any action thereon
c. transfer his rights as such
indorsee
Sec. 38 – Qualified Indorsement
e.g. – “without recourse”
Effects –
1. Does not affect the negotiability
of the instrument
2. Indorser’s liability is limited
3. Does not bar negotiation
Sec. 39 – Conditional Indorsement
If condition is on the face – non-
negotiable
If condition is at the back – holder
may collect but maker may choose
to pay or not
Sec. 40 – Indorsement of
instrument payable to bearer
Effects –
- Once bearer, always bearer
- The person indorsing specially is
liable as an indorser to only such
holders as make title through his
indorsement
Sec. 41 – Indorsement where
payable to 2 or more persons
e.g. Pay to A and B (Joint)
G.R. - Both must indorse
Exception –
1. Partnership
2. Authorization to indorse
Pay to A or B (Solidary)
Sec. 42 – Effect of instrument
drawn or indorsed to a person as
cashier
~deemed prima facie to be payable
to the bank or corporation of which
he is officer- may be negotiated by
either indorsement of the bank or
officer
Sec. 43 – Indorsement where name
is misspelled- when the name of
payee or indorsee is wrongfuly
designated, he may indorse the
instrument as describe adding, if he
thinks fit, his proper signature.
Sec. 44 – Indorsement in
representative capacity- agent-
authority need not to be in writing.
He may indorse
Sec. 45 – Time of indorsement-
effected before the instru was
overdue.
Sec. 46 – Place of indorsement-
where instrument dated. Prima
facie
Sec. 47 –Gen rule – An instrument
negotiable in origin is always
negotiable
Exceptions
1. if restrictively indorsed
2. discharged by payment or
otherwise
Sec. 48 – Striking out indorsements
Effect on bearer instrument
Effect on order instrument
Effect if stricken – no longer liable
Sec. 49 – Transfer without
indorsement
Effect – non-negotiable
Remedy – ask that it be indorsed
Sec. 50 – Reacquirer
- A holder who negotiates an
instrument and then subsequently
reacquires it
Sec. 51 – Rights of the holder
a. to sue on the instrument
b. to receive payment
Sec. 52 – Holder in due course
a. Complete and regular upon its
face
b. Became the holder of it before it
was overdue
c. Took it in good faith and for value
d. At the time it was negotiated to
him, he had no notice of any
infirmity in the instrument or defect
in the title of the person negotiating
the instrument
Material Alteration of Instrument
(Section 124)
Material alteration – Any alteration
which changes the date, the sum
payable, the time or place of
payment, number or relation of the
parties, or medium or currency of
payment, or adds a place of
payment where none is specified,
or which alters the effect of the
instrument in any respect.
• Effect – It avoids the instrument
except as against the party who
made, authorized or assented to
the alteration, and subsequent
indorsers.
• Where the altered instrument,
however, is in the hands of a holder
in due course, not a party to the
alteration, he may enforce payment
thereof according to its original
tenor.
Holder in due course (Section 52)
• Rights – He may enforce the
instrument and sue thereon in his
own name. He holds the instrument
free from any defect of title of prior
parties, free from defenses of prior
parties among themselves and he
may enforce payment of the
instrument for full amount against
all parties liable thereon.
Holder not in due course – is one
who became a holder of the
instrument without any, some or all
of the requisites under Sec. 52 of
NIL.
• Rights – He can enforce the
instrument and sue under it in his
own name. Prior parties, however,
even though remote, can avail
against him any defense among
these prior parties and prevent the
said holder from collecting in whole
or in part the amount stated in said
instrument.
Holder for value – is one who has
all the requisites for a holder in due
course except notice of want of
consideration. He is not necessarily
a holder in due course; hence, prior
parties may avail of defenses
against said holder. (Prudencio v.
CA, 143 SCRA 596)
Real / Absolute / Legal Defense – a
defense which attaches to the
instrument irrespective of the
parties and is predicated on the
principle that the right sought to be
enforced has never existed or has
ceased to exist.
• Examples – forgery or
unauthorized signature (Sec. 23);
material alteration (Sec. 124),
incomplete and undelivered
instrument (Sec. 15)
• Against whom available – a real
defense is available against all
holders, whether in due course or
not.
Personal or Equitable Defense – a
defense growing out of an
agreement or conduct of a
particular person in regard to an
instrument which renders it
inequitable for him although owner
of it, to enforce it against the
defendant.
• Examples – complete but
undelivered instrument (Sec. 16),
incomplete but delivered
instrument (Sec. 14), absence or
failure of consideration, defect of
title
Rights of Holder in General
(Section 51)
a) He may sue on the instrument in
his own name; and
b) He may receive payment and if
the payment is in due course, the
instrument is discharged.
Rights of Holder in Due Course
a) He may sue on the instrument in
his own name (Section 51);
b) He may receive payment and if
payment is in due course, the
instrument is discharged;
c) He holds the instrument free
from any defect of title of prior
parties;
d) He holds the instrument free
from defenses available to prior
parties among themselves; and
e) He may enforce payment of the
instrument for the full amount
thereof against all parties liable
thereon.
Rights of Holder NOT in Due Course
• He may sue on the instrument in
his own name (Sec 51);
• He may receive payment and if
the payment is in due course, the
instrument is discharged;
• He is entitled to the instrument
but holds it subject to the same
defenses as if it were non-
negotiable (Section 58); and
• He has all the rights of the holder
in due course from whom he
derives his title in respect of all
parties prior to such holder,
provided he is not himself a party to
any fraud or illegality affecting the
instrument (Section 58).
SECTION 184
Promissory note- A negotiable promissory note within the
meaning of this ACT is 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.
Where a note is drawn to the maker’s own order, it is not
complete until indorsed by him.
SECTION 185
Check defined- A check is a bill of exchange drawn on a blank
payable on demand. Except as herein otherwise provided, the
provisions of this ACT applicable to a bill of exchange payable
on demand apply to a check.