NEGOTIABLE INSTRUMENTS LAW

WHAT IS A NEGOTIABLE INSTRUMENT?

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 NIL to be considered negotiable.

REQUISITES OF NEGOTIABILITY (Caltex v. CA, 212 SCRA 448)

a. 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 bearer; and
e. When the instrument is addressed to a drawee, he must be named or otherwise indicated
therein with reasonable certainty.

WHAT DOES NEGOTIATION MEAN?

The transfer of an instrument from one person to another in such a manner as to constitute the
transferee a holder thereof. A holder is the payee or indorsee of a bill or note who is in possession
of it, or the bearer thereof. (Sec. 30 and 191, NIL)

HOW IS NEGOTIABILITY OF AN INSTRUMENT DETERMINED?

In determining the negotiability of an instrument, consider the instrument in its entirety and only
what appears on its face. It must comply with the requirements under Section 1 of the NIL.

WHEN NEGOTIABILITY ENDS.

Section 47 of the NIL provides that “an instrument negotiable in its origin continues to be
negotiable until it has been restrictively indorsed OR discharged by payment or otherwise. Note
however, that restrictive indorsement makes the instrument non-negotiable only if it is the first
type—it prevents further negotiation of the instrument –and not the other types (constitute the
indorsee the agent or trustee.)

GOVERNING LAW
1. Code of Commerce. In addition to Act No. 2031, otherwise known as the Negotiable
Instruments Law, negotiable instruments are governed by the provisions of the Code of
Commerce that were not impliedly repealed by the NIL.
Example: Code of Commerce provisions on crossed checks are still in force because there is
no provision in the NIL that deals with crossed checks (Chan Wan v Tan Kim (1960))
2. The New Civil Code applies suppletorily like Article 1216 of the New Civil Code.

APPLICABILITY OF THE NIL

a. The provisions of the NIL can be applied only to negotiable instruments. If the instrument
is not negotiable, the pertinent provisions of the Civil Code or pertinent special laws should
apply. (GSIS vs CA)
b. The NIL can be applied but only by analogy if the instrument is not negotiable if there is no
law that can be applied. (Borromeo v. Sun (1999))
c. Decisions of the courts in the United and in England based on the American Uniform
Negotiable Instruments Law and the Bills of Exchange Act of 1882 can be applied in this
jurisdiction because those foreign laws served as bases of NIL.
FUNCTIONS
a. It operates as a substitute for money.
b. It is a means of creating and transferring credit
c. It facilitates the sale of goods.
d. It increases the purchasing medium in circulation.

NOT LEGAL TENDER

Section 52 of the New Central Bank Act, Ra 7653, provides that only notes and coins issued by the
Bangko Sentral nd Pilipinas are considered legal tender.
Section 60 of the same law expressly provides that checks are not legal tender. Section 60
provides that “checks representing demand deposits do not have legal tender power and their
acceptance in the payment of debts, both public and private, is at the option of the creditor:
Provided however, That a check which has been cleared and credited to the account of the
creditor shall be equivalent to delivery to the creditor of cash in an amount equal to the amount
credited to his account.”

COIN AS LEGAL TENDER

Pursuant to Section 52 of RA 7653 and BSP Circular No. 537, Series of 2006, the maximum
amount of coins to be considered as legal tender adjusted as follows:
a. One thousand pesos (P1,000) for denominations of 1-peso, 5-peso and 10-peso coins.
b. One hundred pesos (P100.00) for denominations of 1-centavo, 5-centavo,10-centavo and
25-centavo coins.

WHAT ARE THE TWO IMPORTANT FEATURES OF A NEGOTIABLE INSTRUMENT

1. NEGOTIABILITY
It is that attribute or property whereby a bill or note or check may pass form hand to hand
similar to money , so as to give the holder in due course the right to hold the instrument
and to collect the sum payable for himself free from defenses.
2. ACCUMULATION OF SECONDARY CONTRACTS
Secondary contracts are picked up and carried along with them as they are negotiated
from one person to another, or in the course of negotiation of a negotiable instrument, a
series of juridical ties between the parties thereto arise either by law or by privity.

KINDS OF NEGOTIABLE INSTRUMENTS

1. 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
bearer.
2. Promissory Note
A negotiable 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
maker’s own order, it is not complete until indorsed to him. (Sec. 184, NIL)
KINDS OF BILLS OF EXCHANGE
1. Draft- used synonymously with bill of exchange although it normally refers to a bill of
exchange used in documentary exchange like letters of credit transactions.
2. Inland and foreign bill- an inland bill is a bill which is, or on its face purports to be, both
drawn and payable within the Philippines. Any other bill is a foreign bill.
3. Time draft- draft that is payable at a fixed date.
 4. Sight or demand draft- draft that is payable when the holder presents it for payment.
5. Trade acceptance- bill that is used in contracts of sale where the seller as a drawer orders
the buyer (as drawee) to pay a sum certain to the same seller (payee)
6. Banker’s acceptance- a time draft across the face of which the drawee has written the
word accepted.
7. Check- a bill of exchange drawn on a bank payable on demand.

KINDS OF PROMISSORY NOTES

a. Certificate of deposit- a form of promissory note which is a written acknowledgement of a
bank of its receipt of a certain sum with a promise to repay the same.
b. Bonds- 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 date.
c. Debenture- a promissory note or bond backed by the general credit of a corporation and
usually not secured by a mortgage of lien on any specific property.

WHEN CAN A BILL OF EXCHANGE BE TREATED AS A PROMISSORY NOTE?

Instances when a bill may be treated as a promissory note by the holder (Secs. 17(e) and 130 of
the NIL)
a. The drawee and the drawer are the same persons
b. The drawee is a fictitious person
c. The drawee has no capacity to contract
d. The instrument is so ambiguous that there is doubt whether it is a bill or a note.
Negotiable Promissory Note v. Negotiable Bill of Exchange
PROMISSORY NOTE BILL OF EXCHANGE
Unconditional promise Unconditional order
Involves 2 parties Involves 3 parties
Maker primarily liable Drawer secondarily liable
Only one presentment (for payment) Generally 2 presentments; acceptance and for
payment

Bill of Exchange vs Check

Ordinary Bill of Exchange
Not drawn on a deposit. It is not
necessary that a drawer of BOE should
have funds in the hands of the drawee
Death of the drawer of a BOE with the
knowledge of the bank, does not revoke
the authority of the banker to pay
May be presented for payment within a
reasonable time after its last negotiation
( Sec. 71)
Check
It is necessary that a check is drawn on a
deposit. Otherwise, there would be fraud.
Death of the drawer of a check, with the
knowledge of the bank, revokes the authority
of the banker to pay
Must be presented for payment within a
reasonable time after its issue. (Sec. 186)

Crossed Check-usually negotiable as it normally complies with the requirements under Sec. 1 of
NIL, but issued for a special purpose and can be negotiated only once.
Trade Acceptance- negotiable. It is a Bill of Exchange addressed by the seller of the goods to the
buyer. However, Section 1 must be complied with.
Money Order- non-negotiable as it is governed by postal rules and regulations which may be
inconsistent with the NIL and it can be negotiated only once.
Warehouse Receipt-not negotiable under the NIL for the same reason as in Bill of Lading
Pawn Ticket- non-negotiable. It does not represent money, but the pawned articles.
Treasury Warrant- non-negotiable being payable out of a particular fund.
Bill of Lading- not negotiable under the NIL as it represents goods, not money.
Trust Receipt- not negotiable under the NIL. It is an evidence of ownership of goods, not money.

PERSONS INVOLVED
a. Maker- the person who makes a promissory note and promises to pay the amount the
amount stated therein.
b. Payee- the obligee, that is, the person who by the terms of the note or the bill, is to
receive payment.
c. Drawer-the person who draws the bill of exchange and orders the drawee to pay a sum
certain in money.
d. Drawee- the person to whom the order to pay is addressed in a bill of exchange.
e. Acceptor- a drawee who accepts the order to pay made by the drawer. It is only when a
drawee becomes an acceptor that he is primarily liable.
f. Holder- the person who is in possession of a bearer instrument or an indorsee of an order
instrument who is in possession thereof. A holder is the obligee, a person who can enforce
payment of the instrument.
g. Referee in case of need- a person who may be designated in the instrument as the person
who may be resorted to by the parties in case of dispute.

DISTINCTIONS
Distinctions between Negotiable Instruments and Non-negotiable Instruments may be stated as
follows:
a. Only negotiable instruments age governed by the NIL. If an instrument is not negotiable,
the NIL does not apply. Application of the NIL to non-negotiable instruments is only by
analogy.
b. Negotiable instruments can be transferred by negotiation or by assignment. Non-negotiable
instruments can be transferred only by assignment.
c. The transferee of a non-negotiable instrument can never be a holder in due course but
remains to be an assignee. A transferee of a negotiable instrument can be a holder in due
course if all the requirements under Section 52 of the NIL are complied with.
d. Since the transferee of a non-negotiable instrument cannot be a holder in due course, all
defenses available to prior parties may be raised against the last transferee.

Distinguish Negotiability from Assignability

a. Assignability pertains to contracts in general, negotiability pertains to negotiable
instruments.
b. One who takes an instrument by assignment takes the instrument subject to the defenses
obtaining among the original parties, whereas a person, who takes the instrument by
negotiation, takes it free from personal defenses available among the parties.