Negotiable Instruments Law (Atty.
Amago Discussion)
404 (A.Y. 2018-2019)
August 7, 2018 (from Margil)
1. History of NIL
The use of Negotiable Instruments dates back as early as the
Tang Dynasty. Chinese were known for trading. It would have
been dangerous to bring large sums of money while trying also to
bring products. They thought it would be safer to bring a
representation of such cash.
It was the United Kingdom who first made a codified law on
negotiable instruments, because of its widespread use, the
thinkers at that time found that there was a need to provide for a
uniform practice on the usage of negotiable instruments. So, they
drafted the Bill of Exchange Act in 1886.
But even before that, it has long been a practice in the use of
negotiable instruments and these practices were formalized into
what has become known as Law of Merchants (practices of the
merchants). So whatever the practice of the merchants were at
that time regarding the use of negotiable instruments, that
became the law with respect to it. These practices were
formalized through the Bill of Exchange Act.
BEA became the basis of the law in the US. In 1896, they drafted
the basis of the Negotiable Instruments Law (NIL) in the
Philippines which is the US Uniform Negotiable Instruments Law
of 1896. The Uniform NIL under the initiative of the American Bar
Association and American Banker’s Association. The US has
several states and several and separate laws within each state
and they wanted to have a uniform law in relation to the use of
commercial papers.
UNIL was the basis of the Philippine NIL or Act No. 2031 which
was drafted in February 3, 1911 and published in the Official
Gazette on March 4, 1911 effective 90 days after on June 2, 1911
The NIL is just copied from the US, and because the US copied it
from the UK, there are cases where the Philippine Supreme
Court has based on what was decided in the UK and US.
UNIL in the US was further amended by the Uniform Commercial
Code, Art 3 of that Code specifically states that the UNIL should
only govern negotiable instruments. S, if it’s not a negotiable
instrument, it is not covered by the UNIL.
In the Philippines, it is also very specific that Negotiable
Instruments Law (NIL) will only govern negotiable instruments.
You have to determine then if the instrument is negotiable to
know whether NIL will be applied.
2. What are the uses of Negotiable Instruments?
1. It is a substitute for money
- A negotiable instrument, while it is not money, is a
substitute for money, which makes transactions more
convenient as you can use it in the exchange of goods
and services. Although it is not a legal tender in the
technical sense, but similar to money, it gets to be
exchanged for possible goods or services. It becomes a
storage of value. Although in case of negotiable
instruments, it only has value if the person who issued the
instrument has the capacity to make good of the promise
or order he made, but still, it has value.
2. It is a medium of exchange
- You get to transfer a negotiable instrument and
conveniently get the goods that you wanted. Instead of
1
bringing a lot of cash with you, and risk bringing money,
you get to have the goods that you want.
3. It is a medium of credit transactions
- The instrument is a representation of one’s credit. It is
called credit because it takes into account one’s ability to
pay, one’s wealth or reputation. The value of a negotiable
instrument is dependent on a person’s ability to make
good of the promise or order, hence, the negotiable
instrument represents his credit or liability.
4. It is a means of making immediate payment
- More or less the same with exchange.
- Instead of you paying cash, you can use a check to pay for
the goods or services that you want to avail.
It must be emphasized that negotiable instruments are NOT legal
tender. Checks, even if managerial checks, are not legal tender.
In Philippine law, only money is legal tender. But checks will have
the effect of payment once it is encashed.
Exception: Once there is negligence on the part of the person to
which the check was issued, to encash the check within a
reasonable time, and the check is impaired through no fault of the
one who issued it, then there is already payment.
3. What are the Characteristics of Negotiable
Instruments?
1. Negotiability
- It is convenient to deal with it since it can be
transferred from one person to another.
- refers to the quality or attribute of an instrument to be
transferrable from one person to another, and whoever
holds that instrument, holds such against the personal
defenses of prior parties (persons before you).
2. Accumulates secondary contracts
- The most important feature of negotiable instruments
is the accumulation of secondary contracts as they are
transferred from one person to another. Once an
instrument is issued, additional parties can become
involved.
- Additional parties get to be part of the negotiable
instrument once it is negotiated. As one person takes
possession of the instrument, he gets to have a
contract separate from all other. That’s why you have
different rights and you can have better rights than the
persons before you. As one person gets to be added
to the trail of exchanges involving the same
instrument, additional contracts are added as well. You
get to be governed by a separate contract for every
time and instrument is transferred from one hand to
another.
- This is an amazing feature of a negotiable instrument.
The use of a negotiable instrument is for you to be
able to make transactions without necessarily dealing
with cash but just based on the promise or credibility of
the person who drafted it. People accept it on the
order of someone, on their belief on this someone who
made it. It then gets to be handed to even persons
who might not even know that particular person who
drafted it. Something gets to be exchanged by just
mere words or mere credibility or reputation of another.
4. What are the Types of Negotiable Instruments?
(Technically there are only two since a check is just a
special kind of bill of exchange.)
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Negotiable Instruments Law (Atty. Amago Discussion)
404 (A.Y. 2018-2019)
1. Promissory Note
- Pertains to a promise; note pertains to it being written
down on a piece of paper.
- Pertains to the unconditional promise of the maker to
pay a sum certain in money to order or to bearer.
- Ex: “I promise to pay A or bearer 1M upon demand.
Signed, B.”
- In this case, B made the promise. The unconditional
promise is to pay a sum certain in money which is 1M.
He will pay it upon demand. A or bearer gets to receive
the payment.
2. Bill of Exchange
- Is an order; you command someone to do it for you;
addressed to a particular person.
- It is an unconditional order by the drawer addressed to
the drawee to pay the value as stated in the
instrument.
- Issued by a drawer to order a payment to be made.
The drawer orders someone to make the payment.
- Has to have a drawee or the person you order to pay
the value as stated in the instrument.
- Ex: “To X, pay 1M pesos to A or bearer upon demand.
Signed,B.”
- Here, the maker is B. But this time, the one who will
pay (drawee) is X and the one who gets to receive
payment is A or bearer. A or bearer can get 1M upon
demand.
3. Check
- Special kind of bill of exchange in which the drawee
(the one who is ordered to pay) is always the bank and
is payable upon demand (when you go to the bank). If
it is post-dated, then payment can be demanded on
the date indicated in the check. Nevertheless, it is
payable on demand.
5. What is the life of a Negotiable Instrument?
1. Promissory Note
a) Preparation and signing of the instrument. The
instrument is signed by the maker.
b) Issuance - you then issue the instrument, ideally, to
the payee. The moment you give to the instrument to
the person after it is prepared (the first time), that is
when it is issued.
c) Negotiation – when it is once again given to
someone else (not for the first time), you don’t talk
about issuance anymore, this is now negotiation.
Two forms of negotiation (depends on the type of
instrument):
- If it is a bearer instrument – negotiated by mere
delivery.
- If it is an order instrument – negotiated upon
indorsement coupled with delivery.
d) Presentation for payment – present the instrument
to the person who made the instrument.
If maker:
- Makes good with the payment (honors the
instrument) – instrument is deemed
discharged. All parties are no longer liable on
the instrument. The instrument ceases to be a
negotiable instrument and is now a mere scrap
of paper.
2
- Does not make good with the payment –
instrument is dishonoured by non-payment.
(Wa sya nagdiscuss unsa’y mahitabo huhuhu)
2. Bill of Exchange
a) Preparation and signing of the instrument. The
instrument is signed by the drawer.
b) Issuance.
c) Negotiation.
d) Presentation for acceptance - In case of a bill of
exchange, before payment can be demanded, the
person has to go the drawee first and present it for
acceptance, not yet for payment. You have to give
an opportunity first to the drawee (the one ordered to
pay) to accept the order or not because it is possible
that the one who issued the order just merely wrote
the name of the drawee even if they don’t really
know the drawee (Example: bill of exchange ordering
Jaime Zobelle de Ayala to pay nya di diay to sila
kaila sa nag-issue sa instrument).
- If accepted – once the instrument has then
become mature, you can now present the bill of
exchange for payment.
- If not accepted – the instrument is considered
dishonored for the first time. The instrument is
then deemed dishonored by non-acceptance.
Once it is dishonored, there are several
processes you have to follow. There is this
notice of dishonour required to be presented to
persons who are secondarily liable so that they
will continue to be liable for the instrument. If
you do not issue this notice, your right ceases
there with respect to those persons who are
secondarily liable. You cannot go after them
anymore, you just have to wait until the person
who is primarily liable will pay you (the one who
made the instrument).
e) Presentation for payment – present the instrument
to the drawee.
If drawee:
- Makes good with the payment (honors the
instrument) – instrument is deemed
discharged. All parties are no longer liable on
the instrument. The instrument ceases to be a
negotiable instrument and is now a mere scrap
of paper.
- Does with make good of the payment –
instrument is dishonoured by non-payment.
(Wa sya nagdiscuss unsa’y mahitabo huhuhu)
NOTE the difference between a promissory note and a bill of
exchange:
 For promissory note, you can immediately present it for
payment upon maturity (whether upon demand or when
the period as stated in the instrument arrives).
 For a bill of exchange, you have to present it for
acceptance first before you can present it for payment.
6. What is a Negotiable Instrument?
A negotiable instrument is one used in commercial transactions
and which complies with all the elements of negotiability provided
for under Section 1 of the Negotiable Instruments Law.
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Negotiable Instruments Law (Atty. Amago Discussion) 3
404 (A.Y. 2018-2019)
7. When is an Instrument Negotiable?

Section 1. Form of Negotiable Instruments. – An instrument to

be negotiable must conform 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
e) Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty.

August 10, 2018 (from Margil)

1. Do the requisites in Sec 1 apply to all negotiable

instruments? Distinguish between a promissory note and a
bill of exchange. Sec 1(a-d) apply to both promissory note
and bill of exchange. Sec 1(e) applies only to bill of
exchange.

2. What are the requisites of a promissory note to be

negotiable?

a. It must be in writing and signed by the maker

b. Must contain an unconditional promise 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

3. What are the requisites of a bill of exchange to be

negotiable.

a. It must be in writing and signed by the drawer

b. Must contain an unconditional 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
e. Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty.

4. Can I write the negotiable instrument in this table? No,

writing must be made upon leather, cloth or any substitute of
paper, for as long as it is movable.

5. If it requires writing can it be typed? Yes, it can be

printed, stamped, etc. The only requirement is that it must be
in witing.

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