ACT NO 2031 — NEGOTIABLE INSTRUMENTS LAW OF THE PHILIPPINES

- Contained in Commercial Laws of the PH Volume I

- Patterned after the NIL of England and USA
- Enacted: 3 February 1911
- Effective: 2 June 1911
- NIL never underwent amendments since its inception

OTHER LAWS THAT GOVERN THE NEGOTIABLE INSTRUMENTS:

1. Provisions of the Code of Commerce which were not repealed by the NIL
2. Provisions of the NCC which apply suppletorily
3. Decisions of USA and England’s courts on negotiable instruments

NCC AND OTHER SPECIAL LAWS GOVERN NON-NEGOTIABLE INSTRUMENTS

NON-NEGOTIABLE INSTRUMENT CAN BE CONVERTED INTO A NEGOTIABLE INSTRUMENT:

1. If it is modified to comply with the provisions of Section 1 of NIL; or

2. Through the effect of estoppel due to the action or inaction of any party to the instrument
a. Estoppel — prevent someone from asserting something that is contradictory to his or
her previous statement

NEGOTIABLE INSTRUMENT IS A WRITTEN CONTRACT FOR THE PAYMENT OF MONEY WHICH IS

INTENDED AS A SUBSTITUTE FOR AN ACTUAL MONEY

- Note: Oral contract is invalid

NEGOTIABLE INSTRUMENT VS ACTUAL MONEY

- It is used in commercial transactions involving large amount of money, since it is more

convenient than carrying loads of cash.

WRITTEN INSTRUMENT PAYABLE IN GOODS, PROPERTIES, OR SERVICES IS NOT NI

- Rationale: P1000 bill will still have the same value in the future while 10 sacks of rice worth
P1000 will not — either the value increases or decreases

FUCTIONS OF NI:

1. Substitute for money (check)

2. It is a means of creating and transferring credit (promissory note)
3. It facilitates the sale of goods (lessors requiring lessees postdated check as rental payments)
4. It increases the purchasing medium in circulation

NEGOTIABILITY

- Attribute whereby a bill, note or check may pass from hand to hand similar to money
- NI makes it easier for a person to negotiate using a substitute for money as if that person is
indeed using real money
 o Such transaction gives that person the confidence and convenience to negotiate without
fear of being questioned afterwards

ACCUMULATION OF SECONDARY CONTRACTS

- Secondary contracts are picked up and carried along with them as they are negotiated from one
person to another
o Instance: A issued a promissory note as payment to B  B can encash the same note or
use it to pay for his obligation to C — secondary contract
 C can now ask payment to A or C

LEGAL TENDER

- Notes and coins issued by the BSP (Sec 52 of the New Central Bank Act)

NI NOT BEING NOTES OR COINS ISSUED BY BSP, IS NOT CONSIDERED AS LEGAL TENDER

NI CAN PRODUCE THE EFFECT OF LEGAL TENDER

1. When a check has already been cleared and credited to the account of the creditor
2. When the NI has been impaired due to the fault of the creditor — impairment clause
- Note: NI does not become legal tender, but merely produces the effect of legal tender

ASSIGNABILITY VS NEGOTIABILITY

ASSIGNABILITY NEGOTIABILITY
Contracts in general NI
Takes the instrument subject to the defenses Takes the instrument by negotiation free from
obtaining among the original parties personal defenses available among parties

NEGOTIABLE INSTRUMENTS VS NON-NEGOTIABLE INSTRUMENTS

NI
Governed by NIL
Can be transferred by negotiation, by operation
of law and assignment or by assignment
Transferee of NI can be a holder in due course
Transferee takes NI free from all personal
defenses
N-NI
NIL only applies by analogy
Can only be transferred by operation of law and
assignment, never through negotiation
Transferee can never be a holder in due course
All defenses available to prior parties may be
raised against the last transferee

PAWN TICKETS, BILLS OF LADING, AND MONEY ORDER ARE N-NI

1. Pawn tickets – it is issued by the pawnshop in exchange for an article pawned, bearing
particulars of the loan.  it represents pawned article and not money
2. Bill of lading – document issued by a carrier which details a shipment of merchandise and gives
title of that shipment to specified party  it represents shipped goods and not money
3. Money order – payment order for a pre-specified amount of money  it represents money BUT
is governed by Postal Rules and Regulations which may be inconsistent with the NIL
WAREHOUSE RECEIPTS RARE N-NI

- It is a document that provides proof of ownership of commodities that are stored in warehouse,
vault, or depository for safekeeping  it is governed by Warehouse Receipts Law and not the
NIL
o Although, Sec 5 of the Warehouse Receipts Law talks about a negotiable receipt, that is,
if the receipt states that the goods received will be delivered to the bearer or to the
orders of any person named in such receipt

OTHER N-NI

1. Treasury warrant  payable out of a particular fund of the national treasury

2. Letters of credit
3. Trust receipts
4. Certificate of stocks  there is no order or promise to pay
5. Withdrawal slip  it cannot be considered as a substitute of money
6. Electronic messages  not compliant with Sec 1 of NIL

COMMON TYPES OF NI

1. Promissory note
2. Bill of exchange
3. Check (a kind of bill of exchange)

PROMISSORY NOTE

- Unconditional promise in writing made by one person to another, signed by the maker,
engaging to pay on demand, or at fixed or determinable future time, a sum certain in money to
order or to bearer
o Illustration: I promise to pay to the order of B the sum of P10,000 on or before 23
January 2001, at the Land Bank of the Philippines, Malate.

PARTIES INVOLVED IN A PN

1. Maker – person who made the note  the one who promises to pay
2. Payee – person whom the promise to pay is made

BILL OF EXCHANGE

- Unconditional order in writing addressed by one person to another, signed by the person
demanding at a fixed or determinable future a sum certain in money to order or to bearer
o Illustration: Thirty days after sight, pay to order of B the sum of P10,000. Value received
and charged the same to the account of:

CHECK

- Bill of exchange drawn on a bank payable on demand

o Illustration: Pay to the Order of B the amount of P10,000

PARTIES INVOLVED IN A BILL OF EXCHANGE (CHECK)

 1. Drawer – person who draws the bill/check  the one who gives order to pay (magbabayad)
2. Drawee – the one who is ordered by the drawer to pay the instrument  check is drawn against
him (Bank)
3. Payee - person to whom the order to pay is to be made  (babayaran)

OTHER PARTIES TO NI

1. Acceptor – drawee of the bill of exchange who has accepted the bill when precented to it for
acceptance
a. Once the bill has been accepted, the drawee becomes acceptor
2. Holder/Bearer – party who is currently in possession of the instrument.
3. Indorser – party who negotiated an order instrument by indorsement
i. Note: indorsement – act of signing at the back of NI and delivering the same to
another person
a. Payee negotiating an order instrument becomes an indorser
4. Indorsee – party to whom an order instrument has been indorsed
a. Last indorsee is the holder

PARTY PRIMARILY LIABLE IN NI

1. PN – maker
2. Bill of exchange (check) – drawee

PARTY SECONDARILY LIABLE IN NI

1. PN
a. PN payable to order – drawers and indorsers
b. PN payable to bearer – drawers and immediate transferor
2. Bill of exchange
a. Payable to order – drawers and indorsers
b. Payable to bearer – drawers and immediate transferor
- Note: to order – specific ; to bearer – possessor of the instrument

IMPORTANCE TO KNOW WHO ARE THE PARTIES PRIMARILY OR SECONDARILY LIABLE

- For the holder to know who should he ask payment from

o Primary [if declined]  secondarily liable

NI CAN BE MADE PAYABLE TO ORDER OR TO BEARER

PN VS BILL OF EXCHANGE

PN BILL OF EXCHANGE
Unconditional promise Unconditional order
2 parties are involved 3 parties are usually involved
Maker is primarily liable Drawee is primary liable
1 presentment is needed 2 presentments are needed
- Presentment for payment - Presentment for acceptance
- Presentment for payment
BILL OF EXCHANGE VS CHECK

BILL OF EXCHANGE CHECK

Not drawn on deposit
- Not necessary that the drawer should
have funds in the hands of the drawee
Death of the drawer with the knowledge of the
drawee bank does not revoke the authority of
the bank to pay
Necessary that it is drawn on deposit 
otherwise fraud
Death of the drawer with the knowledge of the
drawee bank revokes the authority of the bank
to pay

- Before presentment
Presented within a reasonable time after its last Presented for payment within a reasonable time
negotiation after its last issue

INCIDENTS IN THE LIFE OF NI

1. PN and checks (which need not be presented for acceptance) — instrument was paid when
presented for payment
a. Issue  negotiation  presentment for payment  payment by party primarily liable
 discharge
2. PN and checks (which need not be presented for acceptance) — instrument was dishonored
when presented for payment
a. Issue  negotiation  presentment for payment  dishonor by non-payment 
notice to dishonor/protest  payment by party secondarily liable  reimbursement if
allowed  discharge
3. Bills of exchange (needed to be presented for acceptance)
a. Issue  negotiation  presentment for acceptance  acceptance  presentment for
payment  payment by party primarily liable  discharge
4. Bills of exchange (needed to be presented for acceptance) but dishonored when presented for
acceptance
a. Issue  negotiation  presentment for acceptance  dishonor by non-acceptance 
notice of dishonor/protest  payment by party secondarily liable  reimbursement if
allowed  discharge
5. Bills of exchange (needed to be presented for acceptance) but dishonored when presented for
payment
a. Issue  negotiation  presentment for acceptance  presentment for payment 
dishonor by non-payment  notice of dishonor/protest  payment by party
secondarily liable  reimbursement if allowed  discharge

STAGES IN THE LIFE OF NI

1. Issue – maker makes PN; drawer draws a bill of exchange

a. Instrument must contain all the provisions in Sec 1 of NIL
2. Negotiation – payee negotiates it by delivery if it is a bearer instrument; or indorsement if it is
an order instrument
 3. Presentment for acceptance – holder presents the instrument for acceptance to the drawee
a. If the instrument is needed to be accepted, it must be presented for acceptance first
4. Acceptance – if the drawee accepts, he becomes the acceptor. Writing the word “accepted” on
the instrument
5. Presentment for payment – if accepted, the holder should present the accepted bill for
payment to the acceptor
a. Acceptor is the drawee who has accepted the instrument
6. Payment by the party primarily liable – maker in PN; drawee/acceptor in bill, pays the
instrument; drawee may now debit the amount it paid against the account of the drawer
7. Discharge – the end of the life of NI
8. Dishonor by non-acceptance or non-payment – the party primarily liable refused to pay by
raising personal or real defense
a. **See defense**
9. Notice to dishonor/protest – holder must notify the parties secondarily liable about the
dishonor made on the instrument
a. Note: failure to notify will discharge the parties secondarily liable
10. Payment by a party secondarily liable – drawer, any indorsers or immediate transferor are
asked to pay by the holder
a. Note: payment does not necessarily discharge the instrument  it needs to be
reimbursed
11. Reimbursement – the party secondarily liable who paid is in possession of the instrument. He
needs this so he could ask reimbursement from the other parties
a. However if it is the drawer who paid, reimbursement is no longer allowed since he is the
party who drew the bill. The party ultimately liable

CASES

SALAS VS CA AND FIRST FINANCE LEASING CORP

(Distinctions of negotiable instruments and non-negotiable instruments)

DOCTRINE: in order to be considered negotiable, it must contain “words of negotiability” — I.e., must be
payable to “order” or to “bearer.”

- In payable to order, it is essential to specify a person. Without the words “or order” or “to the
order of,” the instrument is non-negotiable

FACTS

- On 6 February 1980, Juanita Salas (petitioner) bough a motor vehicle from VMS for P58,138.20
as evidenced by a promissory note
- The PN was subsequently endorsed to Filinvest Finance & Leasing Corp (private respondent)
which financed the purchase
 - Petitioner defaulted in her installments beginning 21 May 1980, alleging discrepancy in the
engine and chassis numbers. Furthermore, she discovered that the vehicle figured in accident on
9 May 1980
- Because of this the private respondent initiated Civil Case 5915 for a sum of money against the
petitioner before the RTC on Pampanga

RULINGS

- RTC ordered the defendant to pay the plaintiff the sum of P28,414.40 with interest at the rate of
14% from 2 October 1980 until the sum is fully paid, + attorney’s fees
o Petitioner and private respondent appealed.
 Petitioner prayed that she may be absolved from the obligation under the
contract because of fraud, bad faith, and misrepresentation
- CA modified ordering the defendant to pay the plaintiff (private respondent) the sum of
P54,908.30 at 14% per annum from 2 October 1980 until full payment

FACTS (CONTENTION)

- Petitioner assigns 12 errors which focus on the alleged fraud, bad faith, and misrepresentation
of VMS, to which she must be released from liability and should instead proceed against VMS
- Private respondent prayed for dismissal due to the breach of contract

ISSUE

- W/ the PN in question is a negotiable instrument which will bar completely all the available
defenses of the petitioner against private respondent

HELD

- The PN is a negotiable instrument

o Made in writing and signed by the maker (petitioner, in this case)
o Unconditional promise to pay [the amount of P58,138.20]
o Payable at a fixed or determinate future time
 Which is P1,614.95 monthly for 36 months due and payable on the 21 st day of
each month starting 21 March 1980 thru and inclusive of 21 Feb 1983
o “Payable to” [VMS] (or order and as such)
o Drawee is named or indicated with certainty
- It was negotiated by indorsement in writing on the instrument itself payable to the Order of
Filivest Finance and Legal Corp and it is an indorsement of the entire instrument
o Filinvest is a holder in due course, having taken the instrument under conditions of:
 Complete and regular
 Became the holder before it was overdue and without notice that it had
previously been dishonored
 Took the same in good faith and for value
 It was negotiated to Filinvest — to which it had no notice of any infirmity in the
instrument
- Private respondent holds the instrument free from any defect, and may enforce payment of the
instrument for full amount thereof
  Petitioner cannot set up against respondent the defense of nullity of the contract of sale
between her and VMS
- SC affirmed the decision of CA. VMS Corp is not a party in this case. She should have impleaded
VMS, instead

PHILIPPINE EDUCATION CO., INC VS SORIANO, ET AL

(Money Order – non-negotiable instrument)

FACTS

- On 18 April 1958, Montinola sought to purchase from Manila Post Office 10 money orders of
P200 each payable to E.P. Montinola with address at Lucena, Quezon
- After the postal teller had made out money, Montinola offered to pay for them with a private
checks which were not generally accepted in payment of money orders
- He was advised to see the Chief of the Money Order Division, but instead, he left the building
with his check and 10 money orders, without the knowledge of the teller
- A notice was then served upon all banks, instructing them not to pay anyone with the money
orders who has the codes given to Montinola.
- On 23 April 1958, the money orders was received by appellant as part of its sales receipt. It
deposited the same with the Bank of America, to which the latter cleared with the Bureau of
Posts and received its face value of P200
- Appellee Soriano — Chief of Money Order Division of the Manila Post Office, acting for and in
behalf of his co-appellee — Postmaster Palomar, notified the Bank that the money order
attached has been irregularly issued .
o The amount it represented had been deducted from the bank’s clearing account
o The Bank of America debited appellant’s account with the same amount and gave it
advise thereof by means of debit memo
- Appellant requested the Postmaster General to reconsider, but was denied. It was brought to
Secretary of Justice, then Secretary of Public Works and Communications, but the latter
sustained the actions taken by the postal officers
- Montinala was charged with theft

FACTS (RULING)

- Appellant filed an action against the appellees in MC of Manila:

o To countermand (revoke) the notice given to the Bank of America
o To pay the plaintiff out of their personal funds, jointly and severally, actual and moral
damages in the amount of P1000, P1000 for exemplary damages, and attorney’s fee of
P1000
 It was decided in the favor of the appellant
- It was appealed to the Court of First Instance of Manila

ISSUE

- W/ postal money order is a negotiable instrument

RULING
- Postal money orders are non-negotiable. It was patterned after the statutes in force in US.
o Rationale: the government is not engaging in commercial transactions but merely
exercises a governmental power of the public benefit
- Postal laws and regulations are inconsistent with the character of negotiable instruments
o It usually provide not more one endorsement
o Payment of money orders may be withheld under a variety of circumstances
- Condition in money order
o In cases of adverse claim, the money order or money orders involved will be returned to
you (the bank) and the, corresponding amount will have to be refunded to the
Postmaster, Manila, who reserves the right to deduct the value thereof from any
amount due you if such step is deemed necessary."