Negotiable Instruments are signed documents that promises a sum of payment to a specified person

GOVERNING LAW

Act No. 2031 - Negotiable Instruments Law

previously covered by Art 349-566 of the code of commerce which however mostly repealed by sec 197
of NIL

Sec 197. Repeals - all act and laws and parts thereof inconsistent with this act are hereby repealed

However, there are still certain provisions which currently exist like the Code of Commerce provisions in
cross checks as the NIL does not have provisions in dealing cross checks.

Also, the New Civil code provides suppletory effect in case of deficiency in the provisions of NIL

HISTORY OF NIL

NIL provisions was copied from the American Uniform Negotiable Instruments law

American Uniform Negotiable Instruments law – based largely on the Bills of Exchange Act of 1882
- Jurisprudence on both of these laws can be applied in NIL

NIL – permits in resorting to the provisions of the Bill of Exchange act and for other laws on matters
where the NIL provisions are deficient.

ex. On matters of Cross checks. Since NIL does not have a provision on it, the provision of Code of
Commerce will apply. And if there are matters not covered by the Code of Commerce, then the Bill of
Exchange act will govern the deficiency.

All the Bill of Exchange Act can apply to NIL since it is founded upon Lex Mercatoria (Merchant Law)
which deals about international trade (it developed the IT)

Sec 196. Cases not provided for in the act – Any case not provided for in this act shall be governed by
existing legislations or in default thereof, by the rules of the Law Merchant.

FUNCTIONS OF NEGOTIABLE INSTRUMENTS

2 Main Functions
1. To serve as substitute for money
2. To serve as Credit Instruments
Functions of NI
1. It is a substitute for money
2. It is a medium of exchange
3. It is a credit instrument which increases credit circulation
4. It increases purchasing power in circulation
5. It is proof of transactions

substitute for money

- NI are not mere contracts but are substitutes for money
- Long ago, Minimal need for money as trade was usually made by exchanging of goods or Barter.
- Money represents property, and it facilitated greatly the exchange of men.
- However, money was a chattel not easily to move around. Transporting or carrying a lot of money
involves substantial risk of robbery. There is something lacking. Something to represent money or future
promises of payment of money. Which resulted to the development of the Negotiable Instruments.

credit Instrument
- a debt in writing which is payable to the holder of the evidence on the period of time

Negotiable Instrument as Evidence

- NI serves as receipt or evidence of a credit, debt or loan for the debtor since NI contains an
undertaking of payment.

Not a legal Tender

- As provided by RA 7653 Section 52 (New Central bank Act) – only notes and coins issued by the BSP
are considered Legal Tender.

Coins
- Coins are limitedly considered as Legal Tender
50 Pesos composed of 25 centavos (200pcs)
20 pesos composed of 10 Centavos (200pcs)

BSP circular No 537 Series of 2006 adjusted the maximum amounts of coins allowed.
1000 pesos composed of - 1 peso (1,000 pcs)
- 5 Pesos (200 pcs)
- 10 Pesos (100 pcs)

100 Pesos composed of - 1 centavo (10,000 pcs)

- 5 Centavos (2,000 pcs)
- 10 Centavos (1000 pcs)
Checks
- As provided by RA 7653 Section 60 (New Central bank Act) – Not considered as Legal Tender.
- Cannot be compelled to accept as payment. Delivery of checks does not signify, operate or produce the
effect of payment since it is just a substitute for money. even if accepted, the obligations will still remain
until a legal payment has been tendered. The credit will not be considered paid unless the check is
encashed. (Art 1249 of the NCC)

Exception: When the check is impaired due to the fault of the creditor. Obligation is deemed paid
even if the check is not encashed.

Checks to satisfy Obligations

- although its delivery as payment for a debt or loan does not satisfy its obligation as payment, it is
sufficient in the exercise of right to redemption.

FEATURES OF NEGOTIABLE INSTRUMENTS

2 Distinct Features of NI
1. Negotiability
- allows NI to be transferred from one person to another. It gives freedom to NI to circulate as a
substitute for money.
- freedom of Negotiability is the touchstone relating to the protection of holders in due course. And it is
founded for the protection which the law throws around a holder in due course.

2. Accumulation of Secondary Contracts

- when NI are transferred through negotiation, Secondary contracts are accumulated because the
indorsers become secondarily liable to their immediate transferees and to the holder.
KINDS OF NEGOTIABLE INSTRUMENTS

2 Basic types of NI

1. Bill of Exchange
- As defined under Sec 126 of the NIL, 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.

- primarily used for commercial exchange. It enables the seller to obtain cash as soon as possible after
the dispatch of goods and yet enable the buyer to defer payment until the goods is received.

BOE as draft
- a BOE is commonly called as draft.
- draft – signed order by one party, the drawer, addressed to another, the drawee, directing the drawee
to pay a specified sum of money to the order of a third person, the payee.

Time draft – payable at a fixed time

demand draft – payable upon demand
trade acceptance – the seller as drawer orders the buyer to pay a sum certain to the same seller
bankers’ acceptance - a time draft across the face of which the drawee bank has written the words
accepted

BOE as inland or foreign

Inland bill – our currency po. Peso. It is a bill which is drawn and payable within the PH
foreign bill – any other than the inland bill is considered as foreign bill unless if the holder treats it as an
inland bill (ex. foreigner yung magbabayad)

Checks
- as defined under Sec 185 of the NIL, a check is a bill of exchange drawn on a bank payable on demand.
Except as herein otherwise provided, the provisions of this act applicable to a bill of exchange is payable
on demand apply to a check
- the most common form of BOE. Primarily used as a tool for the payment of obligations.
- banks serve as intermediaries in using checks.

Distinction

BOE CHECKS
1. Drawee may/may not be a bank 1. Drawee is always bank
2. Payable on demand, fixed or determinable time 2. Always payable on demand
3. Not necessarily drawn on a deposit or checking acct. 3. Necessary drawn to deposit or checking acct
4. Death of drawer with the knowledge of bank 4. Death of drawer with the knowledge of
does not revoke the author of the bank to pay bank revokes the authority of the banker to pay

Clean Bill of Exchange - a bill to which no document attached when presentment for payment or
acceptance is made.
Documentary bill of Exchange – a bill of exchange to which a document is attached when presented for
payment or acceptance

2. Promissory Note
- As defined under Sec 184 of the NIL, A 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 the bearer. Where a note is drawn to the maker’s
own order, it is not complete until indorsed by him.

Bank Certificates

- Certificate of Deposit – a form of promissory note which is a written acknowledgement by a bank or

banker of the receipt of a sum of money on deposit which the bank or banker promises to pay to the
depositor, to the order of the depositor, or to some other person or his order, whereby the relation of
debtor and creditor between the bank and the depositor is created.

Bonds and Debentures

- Bond – defined as 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 day.
- 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.

kinds of Bonds

1. Bottomry Bond – bonds secured by mortgage of ships

2. Chattel Mortgage Bond – bonds secured by mortgage on chattels of business
3. Collateral Trust Bond – bonds secured by collateral deposited with a trustee.
4. Convertible Bond - bonds that can, at the option of the holder, be converted into stocks.
5. Coupon Bond – bonds with interest coupons attached.
- it consists of an obligation to pay a certain amount of money at a future and annexed to it is a series
of coupons each one of which is a promise for the payment of periodic installment of interests.
6. Guaranteed Bond -bond which has interest guaranteed by the company other than the issuer.
7. Income Bond – bond on which interest is payable only when earned after payment of interest upon
prior mortgages.
8. Joint and Several Bond – bond the principal interest of which is guaranteed by two or more persons.
9. Joint Bond – bond secured by two or more obligors who must be joined in any action on such bond.
10. Mortgage Bond – bond secured by a mortgage on a property

Bank notes – are promissory notes of the issuing bank which are payable to bearer on demand.

Bills of exchange treated as Promissory notes

- Sec 130 of the NIL provides that a BOE may be treated as promissory notes when
1. The drawer and the drawee are the same person
2. The drawee is a fictitious person
3. The drawee has no capacity to contract

- Sec 17(e) of NIL provides that an instrument may be treated either as a bill or a promissory note at the
election of the holder. When the instrument is so ambiguous that there is doubt on whether what
actually is it.

DISTINCTION

PROMISSORY NOTE BOE

1. Contains an unconditional promise 1. Contains an unconditional order
2. There are 2 parties on its face 2. There are 3 parties on its face
3. The person who signs it is the maker 3. The persons who signs it is the drawer
4. The person who signs it, the maker, is primarily
liable
5. The person primarily liable is the maker
6. There is only one presentment: for payment
4. The person who signs it, the drawer,
is secondarily liable.
5. The Person primarily liable is the
drawee-acceptor
6. There are two presentments: (1) Acceptance
and (2) for payment

PARTIES TO NEGOTIABLE INSTRUMENTS

Promissory Note
- Maker and payee
Maker – the person who promises to pay accordingly to the tenor of note
Payee – the person who is to receive payment from the maker

Bill of Exchange
- Drawer, Drawee and Payee
Drawer – the person who draws the bill and orders the drawee to pay the payee a certain sum of money
Drawee – the one being commanded to pay the instrument (not a party unless he accepts the bill,
becomes acceptor if accepts)
Payee – the person who is to receive payment from the drawee

Parties after issuance

- indorsers and holders
Indorsers – persons who transfer or negotiate an instrument by indorsement completed by delivery
Holders – the payee or indorsee of a bill or note who is in possession of it or the bearer thereof
Bearer – the person in possession of a bill or note which is payable to him

Referee in case of need

- Under Sec 131 of NIL, Referee in case of need, The drawer of a bill and any indorser may insert thereon
the name of a person to whom the holder may resort in case of need. That is to say, in case the bill is
dishonored by non-acceptance or non-payment. Such person is called referee in case of need. It is in the
option of the holder to resort to the referee in case of need or not as he may see fit.

- at the time the NIL was enacted, the form was: if the referee pays the bill the drawer will be liable to
him for the amount.

DISTINGUISHED FROM NON-NEGOTIABLE INSTRUMENTS

- Validity is not required for negotiability

- Negotiable Instruments are signed documents that promises a sum of payment to a specified person
- Negotiable instrument may arose from invalid, voidable, rescissible or unenforceable contracts as
these can remain negotiable.

- Non-negotiable instruments are those that cannot be transferred from one party to next
- Non-negotiable instrument may still be transferred by art 1624-1635 on assignment of credit.
- if there are no defenses available to any party, then there is no use to distinguish both.

- However, the transfer under non-negotiable instruments is at a disadvantage. The transfer of title
would amount to a derivative title. Therefore, if the title of the transferor is defective, the title of the
transferee will be defective too. On the other hand, unlike with the negotiable instruments, the
transferee will acquire more rights as he will obtain a clean title. One which is free from infirmities in
the instrument and defects of title of prior transferors.

- in Negotiable Instruments, the insolvency of the debtor is in the sense guaranteed by the indorsers
because they engage that the instrument will be accepted, paid or both and that they will pay if the
instrument is dishonored.

Distinctions

NEGOTIABLE NON-NEGOTIABLE
1. Governed by the NIL 1. NIL does not apply, only by analogy.
2. Can be transferred by negotiation or by assignment 2. Can only be transferred by assignments
3. Transferee can be a holder in due course 3. Transferee cannot be a holder in due course
(if complied with the requirements under sec 52 NIL) but remains to be an assignee
4. No defenses are available since holder in due course 4. All defenses are available to prior parties
may be raised against the last transferee.

INCIDENTS OR STAGES IN THE LIFE OF A NEGOTIABLE INSTRUMENT

1. Preparation and signing complete with all the requisites provided for in Sec 1 of the NIL
2. Issuance - delivery of the instrument to the payee
3. Negotiation – transfer from one person to another so as to constitute the transferee a holder
4. Presentment for acceptance for certain kinds of Bills of Exchange – the BOE shall be presented to the
drawee so that the latter will signify his agreement to the order of the drawer to pay
5. Acceptance – written assentment of the drawee to the order
6. Dishonor by Non-acceptance – refusal to accept by the drawee
7. Presentment for Payment – instrument is shown to the M/D/A so that the said M/D/A will pay
8. Dishonor by Non-payment – refusal to pay by the M/D/A
9. Notice of Dishonor – notice to the persons secondarily liable that the M/D/A refused to pay/accept
10. Protest
11. Discharge