INTRO (ALM1) – MODULE 15: Negotiable Instruments Law

MODULE 15
NEGOTIABLE INSTRUMENTS LAW
WEEK 12 – 16 & 18 October 2018

❶ GOVERNING LAW. – The law that governs negotiable

instruments in this jurisdiction is Act No. 2031, otherwise known as the
Negotiable Instruments Law (NIL). It was enacted on February 3, 1911,
and took effect on June 2, 1911.

⮲ Applicability of the NIL – The provisions of the NIL apply

only to negotiable instruments. If the instrument is not negotiable, the
instrument is not governed by the provisions of the NIL.

❷ NEGOTIABLE INSTRUMENT EXPLAINED. –

⮲ Definition - 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 the requirements laid
down in Section 1 of the NIL to be considered negotiable, to wit:

SEC. 1. – Form of negotiable instruments. – An

instrument to be negotiable must conform to the
following requirements:
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(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.

⮲ Distinguished from non-negotiable instruments – A negotiable

instrument in its literal sense, is an instrument which can be transferred by
negotiation. The term “negotiable” represents the mode by which an
instrument is transferred. If the instrument has the characteristic of
negotiability imposed by law, the instrument is thus “negotiable”, meaning
it is transferable by negotiation. Not every instrument is transferable by
negotiation, and not every instrument possesses the characteristics of
negotiability. If the instrument is non-negotiable, the same may be
transferred too, and the transfer is not by negotiation but by an
assignment. Where an instrument is not negotiable, it cannot be
negotiated and can only be assigned. Assignment is the mode by which a
non-negotiable instrument is transferred.

⮲ Instruments as evidence of parties’ contract – Note that

instruments (whether negotiable or non-negotiable) are in themselves
evidence of a contractual relationship between the contracting parties
thereto. An instrument which does not comply with the requirements of
the NIL is just a simple contract in writing and is merely evidence of such
intangible rights as may have been created by the agreement of the
parties. The term negotiability only refers to the mode of transferring from
one person to another and does not guaranty the validity of the
instrument. When an instrument complies with the legal requirements for
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negotiability (Sec. 1, NIL), then the instrument is said to be negotiable.

This means that the instrument can be transferred by negotiation.

⮲ Advantange of holding a negotiable instrument – A person

holding a negotiable instrument has an advantage over one who takes a
non-negotiable instrument. The former is free from the defects in the title
of the previous holder as long as he is a holder in due course. This is not
so of a mere assignee who inherits the defects in the title of the assignor.

🞈 Illustrative Example: Mabel, out of generosity without receiving

anything in return, issued a note to Percy on 15 July 2018, to wit:

15 July 2018
I promise to pay to the order of Percy P20,000.00
payable on October 15, 2018.

(Sgd) Mabel Dy

Percy also indorsed the note to Ana without receiving anything

from her. Ana later indorsed the note to Billy as payment of construction
supplies worth P20,000.00 bought from the hardware of Billy. Hence, the
following indorsements appear on the note:

Pay to Ana (Sgd.) Percy ☞ (note was indorsed without

receiving any consideration
therefor)
Pay to Billy (Sgd.) Ana ☞ (note was indorsed as payment
for construction materials
purchased from the hardware of
Billy)
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⮚ Effect if the note is negotiable - In this case, even if the note

was issued to Percy and indorsed to Ana without both of them having
given consideration for its issuance or indorsement, Billy will be deemed a
holder for value not only as regards Ana, but also as regards Mabel and
Percy (Sec. 26, NIL). As a consequence, if Billy is a “holder in due
course” (Sec. 52, NIL), he may enforce payment for the full amount
of the note against Mabel, Percy and Ana. On the other hand, if Billy is
not a holder in due course, Mabel can set up the defense of absence of
consideration. In other words, Mabel can refuse to pay Billy the amount of
the note on the ground that when she issued the note to Percy, she did
not receive any consideration from Percy for its issuance, but merely
issued it as a gratuity.

⮚ Effect if the note is non-negotiable – If the note is not

negotiable, Billy will simply step into the shoes or rights of his immediate
transferor-assignor, Ana. If Ana, not being a holder for value in this
promissory note cannot collect the amount of the note from Mabel, then
Billy will have the same rights – that is, Billy cannot likewise collect under
the note from Mabel.

❸ NEGOTIABLE INSTRUMENTS ARE NOT LEGAL TENDER. –

While negotiable instruments are used as substitute for money, they are
not legal tender. Section 52 of the New Central Bank Act (R.A. 7653)
provides that only notes and coins issued by the Banko Sentral ng
Pilipinas are considered legal tender.

⮲ The consequences of the rule that a negotiable instrument

is not legal tender include the following:
(a) Delivery of negotiable instruments does not even produce the
effect of payment. Obligations are deemed paid only when the
instruments are encashed (Art. 1249, NCC).
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(b) The creditor may refuse to accept negotiable instruments like

checks in payment of obligations.

⮲ While it has been pointed out that only notes (peso bills)
and coins issued by the Bangko Sentral ng Pilipinas are considered legal
tender, there is a limit to the amount that can be paid using coins (BSP
Circular No. 537, Series of 2006).

(a) One Centavo, Five Centavos, Ten Centavos, and Twenty-Five

Centavos - These coins shall be legal tender for debts not exceeding One
Hundred Pesos.
(b) One Peso, Five Pesos and Ten Pesos – These coins shall be
legal tender for debts not exceeding One Thousand Pesos.
(c) If the debt to be paid is more than One Thousand Pesos, it can be
paid only in Philippine currency notes.

🞈 EXAMPLE: Dindo owes Aliyah P2,000.00 due for

payment on 31 October 2018. On maturity date, Dindo cannot compel
Aliyah to receive payment of his debt in Ten Peso coins, since the
obligation to be paid is already more than P1,000.00. If Dindo, however,
tenders payment of his debt in Twenty Pesos bills, Aliyah cannot refuse
the payment, it being legal tender.

❹ FEATURES OF NEGOTIABLE INSTRUMENTS. –

(a) Negotiability – The characteristic of negotiability allows negotiable

instruments to be transferred from one person to another so as to
constitute the transferee to be a holder who can be a holder in due course
– that is, free from personal defenses (Sec. 30, NIL). Freedom of
negotiability is the foundation for the protection which the law throws
around a holder in due course.
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⮲ A personal defense (such as absence of

consideration) is one which could be availed of by the party liable on
the instrument because it affects or concerns him alone. Such a
defense cannot be set up against a holder in due course, but can be
set up against a holder not in due course.

🞈 EXAMPLE: Mercy (the maker) issued a negotiable

promissory note in favor of the payee, Pearly, who promised to deliver
a television set in exchange for the promissory note. Pearly
subsequently negotiated the instrument to Arnold, who is a holder in
due course. Later, Pearly failed to deliver the television set as
promised. On maturity date, Arnold presented the note to Mercy for
payment. But Mercy refused to pay the value of the note setting up as
defense the failure of Pearly to deliver to her the television set (which
is the consideration for the issuance of the note by Mercy). In this
case, since Arnold is a holder in due course, Mercy cannot set up as
against Arnold this personal defense. As a consequence, Mercy will
be obliged to pay Arnold the value of the promissory note.
(Sec. 28, NIL)

(b) Accumulation of Secondary Contracts – When negotiable

instruments are transferred through negotiation, secondary contracts are
accumulated because the indorsers become secondarily liable not only to
their immediate transferees but also to any holder. In the course of
negotiation, secondary liability results; more and more persons are made
liable to the holder.

🞈 ILLUSTRATIVE EXAMPLE: DR, the drawer, issued an

instrument to the payee, P, payable to P or order. P indorsed and
delivered the instrument to A, A to B, B to C, and C to D who is the
present holder. The drawee-accepter is DW.
The indorsers are P, A, B, and C. If the instrument was
dishonored by DW and the proper proceedings on dishonor is duly taken,
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any one among P, A, B and C can be made secondarily liable by D, the

holder. D need not follow any particular order. D is not compelled to
recover first from C.
⮲ Primary liability explained – There is primary liability if the
party is the person who has an absolute obligation to pay the instrument.
The person primarily liable becomes liable the moment he becomes a
party to the negotiable instrument. Immediate recourse can be had
against them on the due dates of the instruments. Thus, persons primarily
liable are: (a) the maker in a promissory note; and (b) the acceptor in a
bill of exchange.
⮲ Secondary liability explained – There is secondary liability
if the party is not subject to immediate recourse. Recourse against a
person secondarily liable is available only if the person primarily liable fails
or refuses to pay. A person secondarily liable engages that, on due
presentment, the instrument shall be accepted or paid, or both, as the
case may be, according to its tenor, and that if it be dishonored and the
necessary proceedings on dishonor be duly taken, he will pay the amount
thereof to the holder, or to any subsequent indorser who may be
compelled to pay it. The drawer and the indorsers are secondarily liable
in a bill of exchange, while the indorsers are secondarily liable in a
promissory note.

❺ COMMON FORMS OF NEGOTIABLE DOCUMENTS. –

(A) NEGOTIABLE PROMISSORY NOTES –

(A.1) Definition – 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 bearer. Where a note is drawn to the
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maker’s own order, it is not complete until indorsed by him. (Sec. 184,
NIL).

(A.2) Illustration –

Manila City, Philippines

August 12, 2016

For value received, I promise to pay to the order of Ms. Julia
Ong the sum of Two Hundred Thousand Pesos
(P200,000.00), on 15 October 2018.

(Sgd.) Bennett Sia

(A.3) General characteristics of a negotiable promissory

note –

① Place of making or issuance – Manila City, Philippines

② Date of making or issuance – August 12, 2016
③ Unconditional promise to pay – “I promise to pay”
④ Sum certain in money – Two Hundred Thousand Pesos
⑤ Payee – Julia Ong
⑥ Words of negotiability – “to the order of” Ms. Julia Ong
⑦ Date of maturity – 15 October 2018
⑧ Maker – Bennett Sia

(A.4) Parties in a promissory note –

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① Maker – He is the person who promises to pay the amount stated

in the promissory note.
② Payee – He is the person who is supposed to be paid by the
maker.

(B) NEGOTIABLE BILL OF EXCHANGE –

(B.1) Definition – 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).

(B.2) Illustration –

Manila City, Philippines

August 12, 2016

For value received, pay to the order of Ms. Julia Ong the
sum of Two Hundred Thousand Pesos (P200,000.00), on or
before 15 October 2018.

(Sgd.) Bennett Sia

To: Jerome Cruz
10 Malugay Street

(B.3) General characteristics of a negotiable bill of exchange

–

① Place of drawing or issuance – Manila City, Philippines

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② Date of drawing or issuance – August 12, 2016

③ Unconditional order to pay – “pay”
④ Sum certain payable – Two Hundred Thousand Pesos
⑤ Payee – Julia Ong
⑥ Words of negotiability – “to the order of” Ms. Julia Ong
⑦ Date of maturity – 15 October 2018
⑧ Drawer – Bennett Sia
⑨ Drawee – Jerome Cruz

(B.4) Parties in a bill of exchange –

① Drawer – He is the person who draws and signs the instrument.

He orders the drawee to pay.
② Drawee – He is the person who is being ordered to pay. However,
while he appears to be a party on the face of the bill, he is not yet liable
until he accepts.
③ Acceptor – He is the drawee (same person) who already accepted
the bill of exchange. In other words, he already accepted the order of the
drawer to pay.
④ Payee – He is the one to whom payment should be made by the
acceptor.

(C) CHECK – A check is a bill of exchange drawn on a bank payable on

demand (Sec. 185, NIL).

⮲ A check, therefore, differs from an ordinary bill of

exchange in that the drawee on a check is always a bank, whereas the
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drawee on an ordinary bill of exchange may be a bank, a person, a

partnership or a corporation.
⮲ A check is always payable on demand while an ordinary
bill may be payable on demand, or at a fixed date or a determinable future
time.
⮲ A check need not be presented for acceptance while an
ordinary bill of exchange is required to be presented for acceptance.

❻ OTHER PARTIES IN A NEGOTIABLE INSTRUMENT –

(a) Indorsers – They are the persons who transfer or negotiate an

instrument by indorsement completed by delivery.

(b) Holder – He is ① the payee or indorsee of a bill or note who is in

possession of a bill or note payable to order, or ② the bearer of a note or
bill payable to bearer.

(c) Bearer – The person in possession of a bill or note which is

payable to bearer.

❼ A PROMISSORY NOTE DISTINGUISHED FROM A BILL OF

EXCHANGE –

Promissory Note Bill of Exchange

1. It contains an 1. It contains an
unconditional promise. unconditional order.
2. There are 2 parties on its 2. There are 3 parties on its
face. face.
3. The person who signs it is 3. The person who signs it is
the maker. the drawer.
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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: (a) for
acceptance and (b) for
payment.

❼ INCIDENTS IN THE LIFE OF A NEGOTIABLE INSTRUMENT –

(A) Preparation and signing – complete with all the requisites
provided for in Section 1 of the NIL.
(B) Issuance – first delivery of the instrument to the payee (from the
maker to the payee/bearer, or from the drawer to the payee/bearer)
(C) Negotiation – transfer from one person to another so as to
constitute the transferee a holder.
(D) Presentment for acceptance for certain kinds of Bills of Exchange
– the bill of exchange shall be presented to the drawee so that the latter
will signify his agreement to the order of the drawer to pay.
(E) Acceptance – written assent of the drawee to the order.

(F) Dishonor by non-acceptance – refusal to accept by the drawee.

(G) Presentment for payment – the instrument is shown to the maker

(in a promissory note) or drawee/acceptor (in a bill of exchange) so that
the said maker
(H) Dishonor by non-payment – refusal to pay by the maker or
drawee/acceptor.
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(I) Notice of dishonor – notice to the persons secondarily liable that

the maker or the drawee/acceptor refused to pay or to accept the
instrument.
(J) Protest (in some cases).

(K) Discharge – the release of all parties, primarily or secondarily

liable, from further liability, obligation, or from the binding effect of the
negotiable instrument.

❽ SOME BASIC LEGAL CONCEPTS IN NIL EXPLAINED –

(A) Negotiation – It is the transfer of an instrument from one person to
another as to constitute the transferee the holder of the instrument. It is a
mode of transferring an instrument. The right to collect a sum certain in
money is transferred from one person to another.
⮲ If the instrument is payable to order, it is negotiated by the
indorsement of the holder completed by delivery.
⮲ If the instrument is payable to bearer, it is negotiated by
mere delivery.

(B) Indorsement – It is a legal transaction effected by the writing of

one’s own name on the back of the instrument or upon a paper attached
thereto, with or without additional words specifying the person to whom or
to whose order the instrument is to be payable whereby one not only
transfer one’s full legal title to the instrument, but likewise enters into an
implied guaranty that the instrument will be duly paid.

(C) Holder – the holder is the payee or indorsee of a bill or note,

who is in possession of it, or the bearer thereof.
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⮲ If the instrument is payable to order, the holder means the

person who is the payee or indorsee therein, and is in possession thereof.
⮲ If the note or instrument is payable to bearer, the holder
means the person who is in possession thereof.

(D) Holder in due course – Under Section 52, a holder in due

course is one who has taken the instrument under the following
conditions:
① That it is complete and regular upon its face;
② That he became the holder of the instrument before it was overdue,
and without notice that it had been previously dishonored, if such was
the fact;
③ That he took it in good faith and for value;
④ That 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 it.

(E) Presumption of consideration – Section 24 of the NIL provides

that, every negotiable instrument is deemed prima facie to have been
issued for a valuable consideration; and every person whose signature
appears thereon to have become a party thereto for value.

(F) Accomodation party – Section 29 of the Negotiable Instruments

Law provides that, an accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some other person.
Such person is liable on the instrument to a holder for value,
notwithstanding such holder, at the time of taking the instrument, knew
him to be only an accommodation party.
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(G) Indorser – Section 63 of the NIL provides that, a person

placing his signature upon an instrument otherwise than as maker, drawer,
or acceptor, is deemed to be an indorser unless he clearly indicates by
appropriate words his intention to be bound in some other capacity.

❾ DISCHARGE OF NEGOTIABLE INSTRUMENTS. – Section 119

of the NIL provides that, a negotiable instrument is discharged:

(a) By payment in due course by or on behalf of the principal debtor;

(b) By payment in due course by the party accommodated, where the
instrument is made or accepted for his accommodation;
(c) By the intentional cancellation thereof by the holder;
(d) By any act which will discharge a simple contract for the payment
of money;
(e) When the principal debtor becomes the holder of the instrument
at or after maturity in his own right.

* * * END * * *
HAPPY READING & LEARNING! 

SOURCES of NOTES:

The discussions outlined in this module have been

collectively lifted from the cases cited and
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commentaries made by the authors in the references cited below:

1. Salvador E. Austria and Timoteo B. Aquino. Fundamentals of

Negotiable Instruments Law (Quezon City: Central Book Supply, Inc.,
2009).

2. Virginia M. Diaz. Handbook on Negotiable Instruments (Manila:

Anvil Publishing, Inc., 2007).

3. Marcelino T. Lizaso. Introduction to Law (Quezon City: Central

Lawbook Publishing Co., Inc., 1991).

4. Ruperto G. Martin. Introduction to Philippine Laws (Manila:

Premium Book Store, 1986).

FOOD FOR THOUGHT

“I hear and I forget.

I see and I remember.
I do and I understand.”
Confucius