NOTES ON NEGOTIABLE INSTRUMENTS LAW | Erika Cristel S.
Diaz
INTRODUCTION
THE NEGOTIABLE INSTRUMENTS LAW (ACT. NO 2031)
The Act applies only to negotiable instruments or to those
instruments which meet the requirements laid down in Sec. 1 of
the law. Any case not provided for by the Act shall be governed
by the provisions of existing legislation such as the Civil Code,
Code of Commerce, Rules of Court or by the rules of the law on
merchant.
The Act was not intended to make any instrument negotiable
which was not negotiable prior thereto. The rights and liabilities
of indorsers and indorsees, as well as makers and payees are
governed by the date written on the instrument. The negotiability
of a note made before but transferred after the Act took effect is
not governed by the law.
Note: Took effect on June 2, 1911.
GENERAL PROVISIONS
Definition and meaning of terms (Sec. 191)
“Acceptance” means an acceptance completed by delivery
or notification.
“Action” includes counterclaim and set-off.
“Bank” includes any person or association of persons
carrying on the business of banking, whether incorporated or
not
“Bearer” means the person in possession of a bill or note
which is payable to bearer
“Bill” means bill of exchange.
“Note” means negotiable promissory note.
“Delivery” means transfer of possession, actual or
constructive, from one person to another
“Holder” means the payee or indorsee of a bill or note, who
is in possession of it, or the bearer thereof.
“Indorsement” means an indorsement completed by
delivery
“Instrument” means negotiable instrument.
“Issue” means the first delivery of the instrument, complete
in form, to a person who takes it as a holder
“Person” includes a body of persons, whether incorporated
or not.
“Value” means valuable consideration.
“Written” includes printed.
“Writing” includes print.
Person primarily liable on instrument (Sec. 192)
The person "primarily" liable on an instrument is the person who
by the terms of the instrument is absolutely required to pay the
same. All other parties are "secondarily" liable.
From the annotations of De Leon and discussions of Atty. Lei | S.Y 2022-2023 |
Reasonable time, what constitutes (Sec. 193)
In determining what is a "reasonable time" or an "unreasonable
time," regard is to be had to the nature of the instrument, the
usage of trade or business (if any) with respect to such
instruments, and the facts of the particular case.
Time, how computed; when last day falls on holiday (Sec.
194) - Where the day, or the last day, for doing any act herein
required or permitted to be done falls on Sunday or on a holiday,
the act may be done on the next succeeding secular or business
day.
Application of Act (Sec. 195)
The provisions of this Act do not apply to negotiable instruments
made and delivered prior to the taking effect hereof.
Functions and importance of Negotiable Instruments
Substitute for money
- its negotiability which allows it to go from hand to hand in
commercial markets.
- the purpose of the law is to make negotiable instruments
freely acceptable in financial transactions and thereby
facilitate trade.
Note: Even if it can be a substitute for money, it can never be
considered money. It is not legal tender, and it is optional on the
part of the creditor whether to accept it without being at risk of
delay on the part of the creditor (mora accipiendi). Since it is not
a currency, it does not produce the effect of payment until it is
encased or impaired without the fault of the debtor.
Firestone Tire and Rubber Company of the Philippines
vs. Court of Appeals and Luzon Development Bank
G.R No. 113236, March 5, 2001
Held: At the outset, we note that petitioner admits that the
withdrawal slips in question were non-negotiable. Hence,
the rules governing the giving of immediate notice of dishonor
of negotiable instruments do not apply in this case. Petitioner
itself concedes this point. Thus, respondent bank was under
no obligation to give immediate notice that it would not make
payment on the subject withdrawal slips. Citibank should
have known that withdrawal slips were not negotiable
instruments. It could not expect these slips to be treated as
checks by other entities. Payment or notice of dishonor from
respondent bank could not be expected immediately, in
contrast to the situation involving checks.
It bears stressing that Citibank could not have missed the
non-negotiable nature of the withdrawal slips. The essence
of negotiability which characterizes a negotiable paper as a
credit instrument lies in its freedom to circulate freely as a
substitute for money. The withdrawal slips in question lacked
this character.
The withdrawal slips deposited with petitioner's current
account with Citibank were not checks, as petitioner admits.
Citibank was not bound to accept the withdrawal slips as
a valid mode of deposit. But having erroneously accepted
them as such, Citibank — and petitioner as account-holder —
must bear the risks attendant to the acceptance of these
instruments. Petitioner and Citibank could not now shift the
risk and hold private respondent liable for their admitted
mistake.
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 NOTES ON NEGOTIABLE INSTRUMENTS LAW | Erika Cristel S. Diaz

Equitable PCI Bank vs. Ong The parties are bound to the enforcement of the negotiable
G.R No. 156207, September 15, 2006 instrument every time it is negotiated. Even if you are not privy
to the original contract, you are still bound by all the transfers of
the instrument.
Held: It may be true that plaintiff's PCIB Check for
P132,000.00 which was paid to her by Warliza Sarande was Forms of Negotiable Instruments
actually not funded but since plaintiff became a holder in due Common Forms
course, defendant-bank cannot interpose a defense of want (1) Promissory note – the issuer has promised to pay.
or lack of consideration because that defense is equitable or (2) Bills of exchange – the issuer has ordered a third person
personal and cannot prosper against a holder in due course to pay.
pursuant to Section 28 of the Negotiable Instruments Law.
Therefore, when the aforementioned check was endorsed Promissory Note Bills of Exchange
and presented by the plaintiff and certified to and accepted Definition A negotiable promissory A bill of exchange is
by defendant-bank in the purchase of PCIB Manager's Check note is an unconditional an unconditional
in the amount of P132,000.00, there was a valid premise in writing made order in writing
consideration. by one person to addressed by one
another, signed by the person to another,
Media of exchange for most commercial transactions. maker, engaging to pay signed by the
- increase the purchasing medium in circulation since less on demand, or at a fixed person giving it,
money in coins or bills are needed in circulation for business or determinable future requiring the person
transactions and it can help the economy. time, a sum certain in to whom it is
- safe and convenient means of doing business that eliminate money to order or to addressed to pay
risk of dealing in cash. bearer. Where a note is on demand or at a
drawn to the maker's fixed or
Medium of credit transaction own order, it is not determinable future
- enabled by means of credit to conduct and carry to complete until indorsed time a sum certain
completion business and commercial enterprises. by him. (Sec. 184) in money to order or
- the check is primarily used for immediate payment, while to bearer. (Sec.
the bill of exchange and promissory note are intended for 126)
the circulation of credits.
- it can be used as a contract to collect the amount of the note It is a written promise to Essentially an order
or check. pay a sum of money. It made by one
may be demand person to another to
Characteristics of Negotiable Instruments instrument or a time pay money to a
(1) Negotiability instrument. third person.
It may pass from one person to another similar to money, so as
to give the holder in due course the right to collect the Original 1. Maker – the one 1. Drawer – the
instrument. A negotiable instrument is analogous to money. Parties who makes the person who
When transferability is limited or restricted, the paper may be promise and signs issues or
said to be non-negotiable. the instrument. draws the
order bill. He
The rule that one can pass no better title to personal property The maker’s signature gives the order
than he himself has does not apply to negotiable instruments. A must appear on the face to pay money
bona fide holder while free from personal defenses available to of the note for him to be to a third party.
prior parties among themselves, is subject to real defenses that liable thereon. 2. Drawee – the
might have obtained between them. party upon
2. Payee – the party to whom the bill is
What constitutes negotiation (Sec. 30) whom the promise is drawn. The
An instrument is negotiated when it is transferred from one made or the person to
person to another in such manner as to constitute the transferee instrument is whom the bill is
the holder thereof. If payable to bearer, it is negotiated by payable to. addressed and
delivery; if payable to order, it is negotiated by the indorsement is ordered or
of the holder completed by delivery. The payee may be expected to
specifically designated pay the payee.
(2) Accumulation of secondary contracts by name, office or title 3. Payee – the
Once an instrument is issued, additional parties can become (order) or may be party in whose
involved. Thus, the more debts are added, the more unspecified (bearer). favor the bill is
advantageous it will be to the holder as he can proceed not only originally
against the maker but also against all transferors. issued.

Every time you negotiate, there is a series of juridical ties
created among the new parties involved. The principle of
relativity of contracts which states that the contract is only
binding between the parties thereto does not apply to negotiable
instruments.
Note: In a bill of exchange, parties need not all be distinct
persons. The drawer may draw on himself payable to his own
order. The two parties of the bill can be the same person
(drawer-drawee or drawer-payee).

From the annotations of De Leon and discussions of Atty. Lei | S.Y 2022-2023 | 2

Idea and Purpose of bill of exchange
Drawer’s funds in the hands of drawee
The drawer has funds in the hands of the drawee which tge
former desires to be paid to the payee.
Liability of drawer for non-payment
There must be some kind if agreement obligating the drawee to
honor the order of the drawer or an existing debtor-creditor
relationship between them. The drawer orders the drawee to pay
the debt of it to a third party.
Special Forms
(1) Certificate of deposits;
(2) Bank notes;
(3) Due bills;
(4) Bonds;
(5) Drafts;
(6) Trade acceptances;
(7) Banker’s acceptances.
Note: Checks are a special type or form of bill of exchange. It is
drawn on a bank.
Doubts resolved in favor of negotiability
Where the meaning is doubtful, the courts have adopted the
policy of resolving in favor of the negotiability of the instrument.
The purpose is to encourage the free circulation of the
negotiable papers.
Negotiable Instruments
Those that comply with the requirements of Sec. 1. of the law. It
is considered as a contract that must comply with the essential
elements of a contract namely (1) Consent; (2) Object: (3)
Consideration.
Consent – signified by the signature of the maker or drawer.
Object – there is no other object allowed except for the payment
of money.
Non-negotiable instruments
The following documents are beyond the scope of the negotiable
instruments law and are governed by other laws:
(1) Letter of credit – it is a letter requesting one person to
make advances to a third person on the credit of the writer.
It is in favor of a specified person and not to order.
(2) Trust receipt – it is a document of security pursuant to
which a bank acquires a security interest in the goods under
the trust receipt. A bank extends a loan covered by a letter
of credit which is secured with the trust receipt as a security
for the loan.
(3) Treasury warrant – it is a government warrant for the
payment of money such as that issued in favor of a public
officer or employee covering payment or replenishment of
cash advances for official expenditures.
(4) Postal money order – an order for the payment of money
to the payee named therein by one post office upon another
under authority of law. Only one indorsement is allowed.
(5) Bill of lading – without an unconditional promise or order
to pay a sum certain in money.
(6) Certificate of stock – a written instrument signed by a
proper officer of a corporation stating that the person named
therein is the owner of a designated number of stocks. It is
also without an unconditional promise or order to pay a sum
certain in money.
From the annotations of De Leon and discussions of Atty. Lei | S.Y 2022-2023 |
NOTES ON NEGOTIABLE INSTRUMENTS LAW | Erika Cristel S. Diaz
(7) Warehouse receipt – a document of title without an
unconditional promise or order to pay as sum certain in
money.
(8) Pawn ticket – not a negotiable instrument nor a negotiable
document of title.
Nature of Non-negotiable instrument
An instrument which does not meet the requirements laid down
to qualify an instrument as a negotiable one, or an instrument
which in its inception but has lost its quality of negotiability. A
negotiable instrument ceases to be negotiable if the
indorsement prohibits the further negotiation of the instrument.
It is merely a simple contract in writing, covered by the general
provisions of the Civil Code. It may not be negotiated but it may
be assigned or transferred. Persons who transfer or assign
contractual or non-negotiable rights pass only the rights that
they had.
TITLE I: NEGOTIABLE INSTRUMENTS IN GENERAL
CHAPTER 1: FORM AND INTERPRETATION
Sec 1. Form of negotiable instrument – An instrument to
be negotiable must conform to the following requirements:
wup-od
(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.
Note:
(a) to (d) applies to promissory notes.
(a) to (e) applies to bills of exchange.
(a) Must be in writing and signed by the maker or drawer.
In writing
The instrument is reduced to a tangible form. It may be written
on paper with a pen or pencil or may be in print or has been
typewritten. There is no such thing as an oral negotiable
instrument.
Signed by the maker or drawer
The signature may appear in any part thereof. It is prima facie
evidence of his intention to be bound as either maker or drawer.
If it is not clear in what capacity the person intended to sign, he
is deemed an indorser. The signature is presumed valid. The
party asserting its validity must provide proof of its genuineness.
(b) Must contain an unconditional promise or order to pay.
Negotiable instruments may be classified as either promises or
orders to pay.
(c) Must payable on demand or at a fixed or determinable
future time.
(d) Must be payable to order or bearer.
(e) The drawee must be named.
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 NOTES ON NEGOTIABLE INSTRUMENTS LAW | Erika Cristel S. Diaz

Applies only to bills and checks. To enable the payee or holder

to know upon whom he is to call for acceptance or payment.

From the annotations of De Leon and discussions of Atty. Lei | S.Y 2022-2023 | 4