Act.

2031:
The Negotiable
Instruments Law
A Brief Introduction
Definition
Article 3 of the Uniform Commercial Code of the
United States of America:
A "negotiable instrument" means an
unconditional promise or order to pay a fixed
amount of money, with or without interest or
other charges described in the promise or order,

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 to be
considered negotiable. (Sundiang & Aquino, 2019)
History
U.S. Uniform Negotiable Instruments Act of 1896 –
Act 2031 is mostly copied from this law.

U.S. Uniform Commercial Code – replaced the

Uniform Negotiable Instruments Act of 1896 – 1952

Code of Commerce – law that governed Negotiable

Instruments Law

Act No. 2031 – took effect on June 2, 1911

Application and Purpose of the
Negotiable Instruments Law

• Covers the entire subject of negotiable

instruments
• Controlling in all cases to which it is applicable
• Civil Code has no effect on its provisions except
to supply any deficiency in cases not covered
by the Act
• Enacted for the purpose of facilitating, not
hindering or hampering transactions in
commercial paper.
Modern relevance
• As a substitute for money
• As a medium of exchange for most commercial
transactions
• As a medium of credit transactions.
Characteristics
• Negotiability
• Accumulation of Secondary Contracts
 • An instrument is negotiable when it transfers from
one hand to another. It is not just a mere transfer
but a deliberate and with intention to give or
NEGOTIABIL transfer. Where there is proper negotiation, the
person who holds it as a consequence of delivery is
ITY called a “holder”. Therefore, negotiation is the
transfer of a negotiable instrument for the purpose
of making the transferee the holder of the
negotiable instrument.
 Negotiability
(continued)

Non-Negotiable Instrument Negotiable Instrument

to specified person to order or bearer

transfer by assignment transfer by negotiation

Transferee is holder. Unlike an assignee, a holder is

in due course is free from all personal defenses
Transferee is assignee. Assignee is similar to a
available among the parties. Thus, one of the big
subrogee. Therefore, assignee only acquires the
advantages of a holder is that he can get rights
totality of the right of the transferor.
better or superior to those rights of his immediate
transferor.
 Assignability
more comprehensive term pertains to contracts in
general
and
Negotiability subject to the defenses among the original parties
( continued ) obtaining
it is necessary to allege and prove consideration to
maintain an action on a common law instrument
assignor in good faith does not warrant the
solvency of the debtor unless it has been expressly
stipulated or unless the insolvency was prior to the
assignment and of common knowledge
Negotiability
pertains only to a special class of contracts –
negotiable instruments
takes it free from personal defenses available among
the parties
consideration is presumed and need not be alleged
and proved
Indorser is not liable on his indorsement unless
there be presentation for payment at maturity and
prompt notice of dishonor in case of dishonor
A general indorser is secondarily liable for any
cause for which the party primarily liable on a
negotiable instrument does not or cannot pay. He
warrants the solvency of the person primarily liable.
The qualified indorser and the person negotiating by
mere delivery have limited secondary liability.
Accumulation
of Secondary
Contracts
Classes
• Promissory Note
• Bill of Exchange
• Checks
PROMISSORY NOTE
A negotiable promissory note within the meaning of this Act
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
( Sec. 184, NIL)
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)
CHECK
A check is:
• A bill of exchange
• Drawn on a bank
• Payable on demand
(Sec. 185, NIL)
A COMPARISON OF
NEGOTIABLE INSTRUMENTS

Bill of Exchange Promissory Note

Unconditional order or command to pay Unconditional promise to pay

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

Bill of Exchange Checks

may not be drawn against a bank always drawn upon a bank or banker

may be payable on demand or at a fixed or determinable future time always payable on demand

must be presented for acceptance not needed to be presented for acceptance

need not drawn on a deposit drawn on a deposit

death of a drawer of an ordinary bill of exchange does not revoke the authority of the banker to death of a drawer of a check, with knowledge by the banks, revokes the authority of the banker
pay to pay

may be presented for payment within a reasonable time after its last negotiation must be presented for payment within a reasonable time after its issue
 • (1) Document of title. — It is a receipt or order for the delivery of goods, It
includes any bill of lading, dock warrant, "quedan" or warehouse receipt.
Although it is termed "negotiable" when the goods are deliverable to the
Commercial bearer or order, it is without an unconditional promise or order to pay a sum
certain in money;

papers with • (2) Letter of credit. — It is in favor of a specified person and not to order.

limited (Art. 568, Code of Commerce;) But drafts (see Sec. 126.) issued in connection
with letters of credit are negotiable instruments. (Lee vs. Court of Appeals,
375 SCRA579 [2002].)
negotiability.
• (3) Trust receipt — It is a document of security pursuant to which a bank
acquires a "security interest" in the goods under trust receipt, Under a letter
of credit-trust receipt arrangement, a bank extends a loan covered by a
letter of credit with the trust receipt as a security for the loan. The
transaction involves a loan feature represented by a letter of credit and a
security feature which is in the covering trust receipt which secures an
indebtedness. (Lee vs. Court of Appeals, supra.)
Commercial
papers with • (4) Certificate of stock. — It is a muniment of title to a given
share in the assets of a corporation. It is also without an

limited unconditional promise or order to pay a sum certain in

money; and

negotiability. • (5) Pawn ticket. — It is not a negotiable instrument under

the Negotiable Instruments Law nor a negotiable
document of title under Articles 1507, et seq. of the Civil
Code.
Assignment for
next meeting:
• Read Sections 1-
23,126,184,185
• Read annotations of
Sections 1-10
• Memorize section 1