NEGOTIABLE INSTRUMENTS LAW

MODULE 1

LEARNING OUTCOMES
At the end of this module, you are expected to:
A. Discuss the concept of Negotiable Instrument;
B. Elaborate the functions of Negotiable Instruments;
C. Enumerate and explain the essential requisites of negotiability;
D. Differentiate Bill of Exchange from Promissory note; and
E. Determine the different kinds of Negotiable Instruments.
NEGOTIABLE INSTRUMENTS LAW
1. WHAT IS A NEGOTIABLE INSTRUMENT?

It is a written contract for the payment of money which is intended as a substitute for
money and passes from one person to another as money, in such a manner as to give a holder
in due course the right to hold the instrument free from defenses available to prior parties. The
instrument must comply with Section 1 of the Negotiable Instruments Law (NIL for short) to be
considered negotiable.

2. REQUISITES OF NEGOTIABILITY

- Must be in writing and signed by the maker or drawer;

- Must contain an unconditional promise or order to pay a sum certain in money;
- Must be payable on demand, or at a fixed or determinable future time;
- Must be payable to order or bearer; and
- When the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.

2.01. What negotiation means. The transfer of an instrument from one person to another in
such a manner as to constitute the transferee a holder thereof. A holder is the payee or
Indorsee of a bill or note who is in possession of it, or the bearer thereof.

2.02. How is negotiability of an instrument determined?

A) Test. One should determine if the instrument, on its face, complies with the
requirements under Section 1 of the NIL. In determining the negotiability of an
instrument, consider the instrument in its entirety and only what appears on its
face.

B) When negotiability ends. Section 47 of the NIL provides that "an instrument
negotiable in its origin continues to be negotiable until (1) it has been
restrictively indorsed or (2) discharged by payment or otherwise."

Note however, that restrictive indorsement makes the instrument

non-negotiable only if it is the first type – it prevents further negotiation of the
instrument and not the two other types (constitute the indorse the agent or
trustee).

EXAMPLES AND NOTES:

1) The negotiability of the instrument is not affected if it was issued for an illegal
consideration; hence, an instrument that contains all the requisites under Section 1
of the NIL is still negotiable even if it was issued in payment for killing the political
enemies of the maker or drawer;

2) non-acceptance or lack of indorsement does not affect the negotiability of the

instrument;
NEGOTIABLE INSTRUMENTS LAW
3) Marking the instrument non-negotiable does not affect the negotiability of the instru-
ment;

A separate written contract that is not mentioned in the instrument does not affect the
negotiability of the instrument even if the separate contract contains conditions.

3. GOVERNING LAW

3.01. CODE OF COMMERCE

In addition to Act No. 2031, otherwise known as the Negotiable Instruments Law (NIL
for short), negotiable instruments are governed by the provisions of the Code of Commerce
that were not impliedly repealed by the NIL. Example: Code of Commerce provisions on
crossed checks are still in force because there is no provision in the NIL that deals with crossed
checks.

3.02. The New Civil Code applies suppletorily. Example: Article 1216 of the New Civil Code.

3.03 APPLICABILITY OF THE NIL

a) The provisions of the NIL can be applied only to negotiable instruments. If the
instrument is not negotiable, the pertinent provisions of the Civil Code or pertinent
special laws should apply.

b) The NIL can be applied, but only by analogy if the instrument is not negotiable if there
is no law that can be applied.

3.04. FOREIGN LAWS. Decisions of the courts in the United States and in England based on the
American Uniform Negotiable Instruments Law and the Bills of Exchange Act of 1882 can
be applied in this jurisdiction because those foreign laws served as bases of NIL.

4. FUNCTIONS

4.01. Functions of Negotiable Instruments

a) It operates as a substitute for money.
b) It is a means of creating and transferring credit.
c) It facilitates the sale of goods.
d) It increases the purchasing medium in circulation.
e) It is evidence of contracts (Example: it may be evidence of a contract of loan).
NEGOTIABLE INSTRUMENTS LAW
4.02. NOT LEGAL TENDER. Section 52 of the New Central Bank Act (NCBA for short), R.A. No.
7653, provides that only notes and coins issued by the Bangko Sentral ng Pilipinas are con-
sidered legal tender.

A) Section 60 of the same law expressly provides that checks are not legal tender. Sec-
tion 60 provides that "checks representing demand deposits do not have legal tender
power and their acceptance in the payment of debts, both public and private, is at the
option of the creditor." However, under the same provision, "a check which has been
cleared and credited to the account of the creditor shall be equivalent to delivery to the
creditor of cash in an amount equal to the amount credited to his account."

B) Even manager's and cashier's checks are not legal tender; they are not money or
cash. However, they are also considered "good as cash" in practice because the drawer
and the drawee is the same bank; it is therefore backed by the resources of the bank

4.03. COINS AS LEGAL TENDER. Pursuant to Section 52 of R.A. No. 7653 and BSP Circular No.
537, Series of 2006, the maximum amount of coins to be considered as legal tender is ad-
justed as follows:

A) One thousand pesos (P1,000.00) for denominations of 1-Peso, 5-Peso and 10-Peso
coins; and
B) One hundred pesos (P100.00) for denominations of 1-centavo, 5-centavo, 10-centavo,
and 25-centavo coins.

5. TWO DISTINCTIVE FEATURES OF A NEGOTIABLE INSTRUMENT.

5.01. Negotiability. It is that attribute or property whereby a bill or note or check may pass
from hand to hand similar to money, so as to give the holder in due course the right to hold
the instrument and to collect the sum payable for himself free from defenses.

5.02. Accumulation of secondary contracts. Secondary contracts are picked up and carried
along with them as they are negotiated from one person to another, or in the course of ne-
gotiation of a negotiable instrument, a series of juridical ties between the parties thereto
arise either by law or by privity.

6. KINDS OF NEGOTIABLE INSTRUMENTS

6.01. Bill of Exchange. A bill of exchange is an unconditional order in writing addressed by

one person to another, signed by the person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or determinable future time a sum certain in
money to order or to bearer (Sec. 126, NIL).

6.02. Promissory Note. A negotiable 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 to bearer. Where a
note is drawn to the maker's own order, it is not complete until indorsed by him.
NEGOTIABLE INSTRUMENTS LAW
Sample of a Promissory Note, Bill of Exchange and a Cheque
NEGOTIABLE INSTRUMENTS LAW
6.03. Kinds of Bills of Exchange

A) Draft- used synonymously with bill of exchange although it normally refers to

a bill of exchange used in documentary exchange like letters of credit
transactions.
B) Inland and Foreign Bill - An inland bill is a bill which is, or on its face purports
to be, both drawn and payable within the Philippines. Any other bill is a
foreign bill.
C) Time draft - draft that is payable at a fixed date.
D) Sight or Demand draft - draft that is payable when the holder presents it for
payment.
E) Trade acceptance - bill that is used in contracts of sale where the seller as
drawer orders the buyer (as drawee) to pay a sum certain to the same
seller (payee).
F) Banker's acceptance a time draft across the face of which the drawee has
written the word accepted.
G) Check - a bill of exchange drawn on a bank payable on demand.

6.04. Kinds of Promissory Notes

A) Certificate of deposit - a form of promissory note which is a written acknowl-

edgment of a bank of its receipt of a certain sum with a promise to repay the
same.

B) Bonds - a certificate or evidence of a debt on which the issuing company or

governmental body promises to pay the bondholders a specified amount of
interest for a specified length of time, and to repay the loan on the expiration
date.

C) Debenture - a promissory note or bond backed by the general credit of a

corporation and usually not secured by a mortgage or lien on any specific
property.

6.05. Cases when a Bill of Exchange can be treated as a Promissory Note.

The following are the instances when a bill may be treated as a promissory note
by the holder:
A) the drawer and the drawee are the same person;
B) the drawee is a fictitious person;
C) the drawee has no capacity to contract;
D) the instrument is so ambiguous that there is doubt whether it is a bill or a
note.
NEGOTIABLE INSTRUMENTS LAW
6.06. A) Negotiable Promissory Note vs. Negotiable Bill of Exchange

PROMISSORY NOTE BILL OF EXCHANGE

Unconditional promise Unconditional order
Involves two parties Involves three parties
Maker primarily liable Drawer secondarily liable
Only one presentment (for payment) Generally, two presentment: acceptance
and for payment

B) Bill of Exchange vs. Check

ORDINARY BILL OF EXCHANGE CHECK

Not drawn on a deposit. It is not neces-
sary that a drawer of a BOE should have
funds in the hands of the drawee.
Death of the drawer of a BOE with the
knowledge of the bank, does not revoke
the authority of the banker to pay.
May be presented for payment within a
reasonable time after its last negotiation
(Sec. 71).
It is necessary that a check is drawn on a
deposit; there is a bank account.
Death of the drawer of a check, with the
knowledge by the bank, revokes the au-
thority of the banker to pay.
Must be presented for payment within a
reasonable time after its issue (Sec.
186).

6.07. Are the following commercial papers negotiable instruments under the NIL?

1) a crossed check
2) a trade acceptance
3) a money order
4) a warehouse receipt
5) pawn ticket
6) treasury warrant
7) bill of lading
8) trust receipt
9) cash disbursement voucher
10)letters of credit

A) Crossed check – usually negotiable as it normally complies with the requirements

under section 1 of the NIL but issued for a special purpose and can be negotiated
only once.
B) Trade acceptance – negotiable , it is a bill of exchange addressed by the seller of the
goods to the buyer. However, Section 1 must be complied with.
C) Postal Money Order – non-negotiable as it is governed by postal rules and regula-
tions which may be inconsistent with the NIL, and it can only be negotiated once.
NEGOTIABLE INSTRUMENTS LAW
D) Warehouse receipt – not negotiable instrument under the NIL, it represents goods,
not money.
E) Pawn Ticket – non-negotiable, it does not represent money but the pawned articles.
F) Treasury Warrant – non-negotiable being payable out of a particular fund.
G) Bill of Lading – not negotiable instrument under the NIL, as it represents goods, not
money.
H) Trust Receipt - not negotiable under the NIL; it is an evidence of security interest of
the entrustee over the goods.
I) Cash disbursement voucher - not negotiable under the NIL because it is nothing
more than a receipt evidencing the payment.
J) Letters of Credit - not negotiable; by nature, it is payable to a specified beneficiary and
payment by the issuing bank is subject to the condition that the beneficiary submit
the required documents

6.08. Electronic Messages. Electronic messages received by banks from its investor clients
as instruction in managing the client's peso and foreign currency accounts are not
negotiable instruments under the NIL. The electronic messages are not signed by the
investor- clients as supposed drawers of a bill of exchange; they do not contain an
unconditional order to pay a sum certain in money as the payment is supposed to come
from a specific fund or account of the investor-clients; and, they are not payable to
order or bearer but to a specifically designated third party. Thus, the electronic
messages are not bills of exchange.

A) The same electronic messages are also not "acceptances" because they did not
constitute the written and signed manifestation of H Bank to a drawer's order to pay
money.

7. PERSONS INVOLVED

1. Maker - the person who makes a promissory note and promises to pay the amount stated
therein.
2. Payee - the obligee, that is, the person who, by the terms of the note or the bill, is to receive
payment.
3. Drawer - the person who draws the bill of exchange and orders the drawee to pay a sum
certain in money.
4. Drawee - the person to whom the order to pay is addressed in a bill of exchange.
5. Acceptor - a drawee who accepts the order to pay made by the drawer. It is only when a
drawee becomes an acceptor that he is primarily liable.
6. Holder - the person who is in possession of a bearer instrument or an indorse of an order
instrument who is in possession thereof. A holder is the obligee, a person who can enforce
payment of the instrument.
7. Referee in case of need a person who may be designated in the instrument as the person
who may be resorted to by the parties in case of dispute.
NEGOTIABLE INSTRUMENTS LAW
8. DISTINCTIONS

8.01. Distinctions between Negotiable Instruments and Non-Negotiable Instruments may be

stated as follows:
A) Only negotiable instruments are governed by the NIL. If an instrument is not
negotiable, the NIL does not apply. Application of the NIL to non- negotiable
instruments is only by analogy.
B) Negotiable instruments can be transferred by negotiation or by assignment. Non-
negotiable instruments can be transferred only by assignment.
C) The transferee of a non-negotiable instrument can never be a holder in due course
but remains to be an assignee. A transferee of a negotiable instrument can be a
holder in due course if all the requirements under section 52 of the NIL are
complied.
D) Since the transferee of a non-negotiable instrument cannot be a holder in due
course, all defenses available to prior parties may be raised against the last transfer-
ee.

9. REQUISITES OF NEGOTIABILITY

Section 1. Form of negotiable instruments. – An instrument to be negotiable must con-

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

9.01. IN WRITING AND SIGNED BY THE MAKER OR DRAWER

A) Must be in writing - may be printed, in ink or in pencil, and it may be written in any
material that substitutes paper like cloth, leather, or parchment. Section 191 of the NIL
provides that the word “written” includes printed, and ‘writing’ includes print.”

B) Signed by the maker or drawer – the signature may be in one’s handwriting, printed,
engraved, lithographed, or photographed, so long as they are adopted as the signature
of the signer. What is important is that the maker or the drawer used what he affixed to
an instrument as his own signature for authentication.
NEGOTIABLE INSTRUMENTS LAW
9.02. IT MUST CONTAIN AN UNCONDITIONAL PROMISE OR ORDER TO PAY A SUM
CERTAIN IN MONEY

A) Promise or Order to Pay

The promise in a promissory note is the undertaking made by the maker
to pay a sum certain in money to the payee or the holder. The certain in money to
the payee or the holder. The “order” in a bill is a command made by the drawer
addressed to the drawee ordering the latter to pay the payee or the holder a sum
certain in money.

1) The word “promise” or “order” need not appear in the instrument to satis-
fy the requirements of Section 1(b) of the NIL. Examples: (1) “An
acknowledgment may become a promise by the addition of words by which a
promise of payment is naturally implied, such as, ‘payable,’ ‘payable ona given
day,’ ‘payable on demand,’ ‘paid ... when called for’;

2) “’Due A.B. or order Php 10,000.00, payable on demand, or, 'I acknowledge
myself to be indebted to the order of A in Php 10,000.00, to be paid on de-
mand, for value received, I.O.U. Php 10,000.00 to be paid on May 5th,' are held
to be promissory notes, significance being given to words of payment as
indicating a promise to pay"

3) However, mere acknowledgement of debt is not a negotiable instrument.

Example: This is to certify that the bearer has deposited in this bank the sum
of P4,000.00 only repayable to the depositor 200 days after date.

4) If there are two or more makers and the instrument states that "I promise
to pay the liability of the makers is solidary. The liability is joint if it states
"We promise to pay . . .".

B) Promise or Order to Pay Must be Unconditional

An unqualified order or promise to pay is unconditional within the mean-

ing of NIL though coupled with:

1) An indication of a particular fund out of which reimbursement is to be made or a

particular account to be debited with the amount (after payment); or

2) A statement of the transaction which gives rise to the instrument. Examples: (1)
An instrument is still negotiable if it contains the following: "per contract of sale
dated January 1, 2003" (2) An instrument is not negotiable if it is "subject to" a con-
tract like loan or mortgage.
NEGOTIABLE INSTRUMENTS LAW
C) Conditional

1) An order or promise to pay out of a particular fund; Examples: (1) A promise is

conditional if it is payable "from my inheritance which I will get after the death of
my father”;It is also conditional if the sum certain is payable from a specified bank
account.

2) An instrument payable upon a contingency (the happening of the event does not
cure the defect); Example: An instrument is not negotiable if payment will be made
if the payee "will pass the bar examinations"

D) Indication of a Particular Fund for Payment vs. Fund for Reimbursement

Fund for Reimbursement Indicating Particular Fund

A. A. There is only one act - the drawee pays

The drawee pays the payee from his directly from the particular fund
(the drawee's) own funds. indicated.

After paying the payee, the drawee

pays himself from the particular
fund indicated.

B. Particular fund indicated is not the B. Particular fund indicated is the direct
direct source of payment. source of payment.

9.03 PAYABLE IN A SUM CERTAIN IN MONEY

A) Money need not be “legal tender.” An instrument is still negotiable although the
amount to be paid is expressed in currency that not legal tender, so long as it is ex-
pressed. Example: An instrument that is payable in Yen is still negotiable if the other
requisites are present.

B) If the obligor, like the maker, is given the option to deliver something in lieu of mon-
ey, the instrument is not negotiable (Sec. 5, NIL).

Examples: The following are not negotiable:

1. A note where the maker "promises to deliver P100,000.00 or “Volvo Sedan"

at his option;

2. A note where a maker promises to pay the bearer the amount of PhP1 Million
and to keep his BMW free from any other encumbrances.

3 A note which states that the maker also promises to pay the portrait of the
bearer.
NEGOTIABLE INSTRUMENTS LAW
C. If the instrument gives the holder an election to require something to be done in lieu
of payment of money, the instrument is still negotiable (Sec. 5[d]).

Example: Where the maker promises to pay P1,000.00 or a sack of rice at the option
of the holder.

D. A sum is certain within the contemplation of Section 1(b) of the NIL if the amount that
is to be unconditionally paid by the maker or drawee can be determined on the face
of the instrument even if it requires mathematical computation.

E. The sum payable is a sum certain within the meaning of this act, although it is to be
paid (Sec. 2, NIL):
1. With interest; or
2. By stated installments; or
3. By stated installments, with a provision that, upon default in payment of any
installment or of interest, the whole shall become due; or
4. With exchange, whether at a fixed rate or at the current rate; or
5. With cost of collection or an attorney’s fee, in case payment shall not be made
at maturity.

F. Stated Installments. The dates of each installment must be fixed, or at least determi-
nable and the amount to be paid for each installment must be stated. Example: The
instrument is not negotiable if "payable in five (5) installments in the amount of
P1,000.00 per installment" without stating the dates of each installment.

G. Discrepancy. If there is discrepancy between the sum payable in words and in figures,
the sum in words prevail except if the words are ambiguous or uncertain (Sec. 17[a],
NIL).

9.04. PAYABLE ON DEMAND OR AT A FIXED OR DETERMINABLE FUTURE TIME

A) Payable on Demand
The instrument should be paid the moment it is presented for payment. An in-
strument is payable on demand (Sec. 7, NIL):

1. When it is so expressed to be payable on demand, or at sight, or on presenta-

tion; or
2. In which no time for payment is expressed; and
3. Where an instrument is issued, accepted, or indorsed when overdue, it is, as
regards the person so issuing, accepting, or indorsing it, payable on demand.
NEGOTIABLE INSTRUMENTS LAW
B) Payable at a Determinable Future Time
An instrument is payable at a determinable future time if it is expressed to be
payable (Sec. 4,NIL):
1. At a fixed period after date or sight. Example: "twenty days after date."
2. On or before a fixed or determinable future time specified therein. Example:
"payable on or before Jan. 5, 2006.
3. On or at a fixed period after the occurrence of a specified event which is cer-
tain to happen, though the time of happening be uncertain. Examples: (1) An
instrument is negotiable if it is "payable within five (5) days from death of Mr.
X" (2013 Bar); (2) An instrument is not negotiable if it is "payable five days
after the completion of the house of the maker" because the completion is un-
certain.

Note: An instrument is not negotiable if the day and month is given but
not the year of its maturity; this is not a determinable future time

C) Acceleration Clauses.

The negotiability of the instrument is not affected even if it is to be paid by stat-

ed installments, with a provision that, upon default in payment of any installment or of
interest, the whole shall become due (Sec. 2, NIL).

D) Extension Clauses
An instrument is payable at a definite time if by its terms it is payable at a defi-
nite time subject to extension at the option of the holder, or to extension to a further
definite time at the option of the maker or acceptor or automatically upon or after a
specified act or event.

Example: An instrument is still negotiable if it is payable "two (2) years from date
subject to extension for another one (1) year at the option of the maker.”

9.05. PAYABLE TO ORDER OR BEARER

A) An instrument that is payable to a specified person or entity is not negotiable because

the NIL requires that the instrument must be payable to order or to bearer.

B) When is an instrument payable to bearer (Sec. 9,NIL)

1) When it is expressed to be so payable; or
2) When it is payable to a person named therein or bearer; or
3) 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; or
4) When the name of the payee does not purport to be the name of any person
(Example: "pay to cash"); or
5) When the only or last indorsement is an indorsement in blank.

Note: In No. 3, the payee need not be actually fictitious or non-existent. It can still be payable to bearer even
if the payee is existing, if the maker or drawer does not intend the payee to have any right over the instrument.
NEGOTIABLE INSTRUMENTS LAW
D) Order Instruments

There are only two (2) ways by which an instrument can be made payable to or-
der under Section 8 of the NIL. The instrument can either be payable to the order of
a specified person (i.e., "pay to the order of Juan De La Cruz") or to a specified person
or his order ("pay to Juan De La Cruz or order").

Section 8 of the NIL likewise identifies the persons who can be designated as pay-
ees in an order instrument the persons to whose order the instrument may be made
payable. The instrument may be payable to the order of:
1. A payee who is not the maker, drawer, or drawee; or
2. The drawer or maker; or
3. The drawee; or
4. Two or more payees jointly; or
5. One or some of several payees; or
6. The holder of an office for the time being.

10. OMISSIONS AND PROVISIONS THAT DO NOT AFFECT NEGOTIABILITY

10.01. The validity and negotiable character of an instrument are not affected by the fact
that (Sec. 6, NIL):

1. It is not dated (date of issuance); or

2. Does not specify the value given, or that any value had been given therefor; or
3. Does not specify the place where it is drawn or the place where it is payable; or
4. Bears a seal; or
5. Designates a particular kind of current money in which payment is to be made;
6. Addressed to more than one drawee jointly.