The Negotiable Instruments Law (Act No.

2031)

Applicability:
(1) NIL applies only to negotiable instruments or those instruments which meet the requirements laid
down in Section 1 of the law.

(2) Supplementary application of other laws - any case not provided for by the act as such non-
negotiable instruments (Document of Title), shall be governed by the provisions of existing legislations
(Civil Code or Special Law).

Functions and Importance:

(1) Negotiable instruments do not constitute legal tender > a bill or note, a valid money substitute.
 Purpose of the law is to make negotiable instruments freely acceptable in financial and
commercial transactions.
(2) Tool used in commercial transactions
 Passes from hand to hand as money > facilitates trade.
(3) Medium of exchange for most commercial transactions
 Increase the purchasing medium in circulation, no need to produce more money to take care of
the ever increasing everyday business transactions.
(4) Medium of credit transaction
 Enables men to conduct and carry out business without the need to have cash on hand.

Features of a Negotiable Instrument:

(1) Negotiability
 May pass from one person to another, so as to give the holder in due course the right to hold the
instrument and collect the sum payable for himself free from defenses.

Criteria of Negotiability:
1. Section 1 of NIL
2. The whole of the instrument
3. Only what appears on the face of the instrument
 Exception to the rule: "ALLONGE"
o A separate piece of paper affixed to a negotiable instrument, that is referred to the face of
the instrument as an integral part of the face.

(2) Accumulation of Contracts

 Once issued, additional parties can become involved as they are negotiated from one person to
another.

Kinds of Negotiable Instruments

(1) Promissory Notes
An unconditional promise in writing 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.
126).

(2) Bills of Exchange

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 184).

(3) Special Types – certificates of deposists, bank notes, due bills, bonds, drafts, trade acceptances, and
banker's acceptances.

Instruments with limited negotiability – have been held to be NON-NEGOTIABLE

(1) Letter of credit
 It is in favor of a specified person
 To pay money or deliver goods

(2) Treasury Warrant

 Subject to government regulations – violates the 'unconditional' characteristic of a negotiable
instrument

(3) Postal Money Order

 Payee named - specified person
 Subject to restrictions and limitations under postal laws and regulations

(4) Bill of lading

 Represents goods/products - violates 'to pay a sum certain in money'

(5) Certificate of stock

 May represent property dividends – violates 'to pay a sum certain in money'

(6) Warehouse receipt

 Represents goods – without an unconditional promise to pay a sum certain in money

Sec 1. Form of Negotiable Instruments - WUPOA

An instrument to be negotiable must conform to the following requirements:
(1) It must be in writing and signed by the maker or drawer;
(2) Must contain an unconditional promise or order to pay a sum certain in money;
(3) Must be payable on demand or at a fixed or determinable future time.
(4) Must be payable to order or bearer; and
(5) Where the instrument is addressed to a drawee, he must be name or otherwise indicated therein
with reasonable certainty.

 Negotiable Promissory Note

o Requires only four essential requisites
 In writing and signed by the maker
 Unconditional promise to pay a sum certain in money
 Payable on demand or at a fixed or determinable future time
 Payable to order or bearer
o There are only two parties to a negotiable note:
 Maker - one who makes the promise and signs the instrument
  Payee - to whom the promise is made

 Negotiable Bill of Exchange

o Requires all 5 requisites
 In writing and signed by the drawer
 Unconditional order to pay a sum certain in money
 Payable on demand or at a fixed or determinable future time
 Payable to order or bearer
 Drawee must be named or otherwise indicated with reasonable certainty.
o There are three parties to a negotiable bill of exchange:
 Drawer - who gives order to pay money to a third party.
 Drawee - the party to whom the bill is addressed and is expected to pay. He becomes
an acceptor when indicates willingness to pay (assumes liability -PPL)
 Payee - The party whose favor the bill is originally issued

DISTINCTION
NEGOTIABLE NON-NEGOTIABLE

Must contain all requisites of Sec. 1 Does not contain all requisites of Sec.1

Transferable by negotiation and assignment Assignment only

Holder in due course have rights better than A transferee acquires only the same rights as his
his transferor transferor

Holder may run after secondary parties for Intermediate parties are not secondary liable if the
payment if dishonored by the PPL. document is dishonored

Subject is money Subject is goods

Instrument itself is property of value Instrument is merely evidence of title; thing of value
are the goods mentioned in the documents

Essential Requisites Explained

(1) Must be in writing and signed by the maker or drawer
 Writing is any form
o As such that the instrument can be readily transferred from one person to another
 Affix customary signature
o Binds himself on the instrument
o Can be placed on any part of the instrument provided it is clear that he signs it as a maker or
drawer.

(2.a) Must contain an unconditional promise or order

 Unconditional - must be payable absolutely
 An instrument remains negotiable if the terms appearing do not affect the unconditional duty to
pay.
o Indication of a particular fund out of which reimbursement is to be made.
 Fund is not the direct source of payment
 Reimbursement is an act subsequent to the payment
 o Indication of a particular account to be debited with the amount
 Payment does not depend upon the existence or adequacy or the particular account
to be debited.
o Mere recital of consideration for instrument or origin of transaction
 Other cases - NON NEGOTIABLE
o Indication of a particular fund out of which payment is to be made
o Terms and conditions contained in another paper

(2.b) To pay a sum certain in money

 Not necessarily limited to legal tender.
 Any particular kind of current money or foreign money on which has fixed value in relation to our
money.
 Sum certain - definite amount.
o Holder can determine from the instrument itself the amount he is entitled to receive at
maturity.
o Not impaired by:
 Stipulation of interest
 Stated installments
 Amount of each and every installment must be stated and the date when each
and every installment is due
 Stated installments with acceleration clause
 Only a function to hasten the demandability of the sum payable
 At the option of the holder - non-negotiable
 Sum to be paid with exchange - refers to foreign currency.
 Sum to be paid with costs of collection or an attorney's fee
 Does not affect negotiability - increase in the amount due even if uncertain,
takes place after maturity when the instrument ceases to be negotiable.
Time of Payment
 Determines when the note is due
 Or the interest is to run

(3.a) Payable on Demand

 Expressly stated on the instrument to be payable on demand
 No time for payment is expressed
 Issued, accepted or indorsed when overdue as regards the person so issuing, or accepting or
indorsing
o Only to immediate parties

(3.b) Payable on a Fixed Date

 Day, month, and year are definitely stated on the face of the instrument.

(3.c.) Payable at a Determinable Future Time

 Determinable Future Time - a time that can be determined with certainty after the execution of
the instrument, i.e. next school semester
 On occurrence of a specified event
o The event is absolutely certain to happen although time of occurrence is not known
o Maturity date can be on that event or after.
 After the occurrence of a specified event
 o Maturity date can be on that event or after.
o But, a bill or note payable several days before occurrence of the specified event is not
negotiable.

(4.a) Payable to Order

 An instrument payable to order (Sec. 8) is payable to the payee named therein or to the indorsee
or the person ordered or authorized by the payee to collect.

 Payable to the order of a specified person

 Payable to him (specified person) or order
o Payee who is not the maker, drawer or drawee
o Drawer or maker
 Order of maker - not complete unless indorsed (no contract)
o Drawee
o Two or more payees jointly - both payees must indorse unless one is authorized to indorse
for the other
o One or more several payees
o The holder of an office for the time being - not necessary to name the payee, its is sufficient
that he is identified with reasonable certainty.

(4.b) Payable to Bearer

 Bearer means the person in possession of a bill or note which is payable to bearer or legally
qualifies as a bearer instrument
o Bearer instrument - payment to any person in possession thereof in good faith discharges
the instrument
 When expressed to be so payable
o 'I promise to pay to bearer'
 When payable to a person named therein or bearer
o 'I promise to pay to Maria or bearer'
o B, bearer - non-negotiable, in this case bearer refers to title
 Fictitious or Non-existing person
o Fictitious - existing but the make or drawer does not intend to issue the instrument to him
o Non-existing - imaginary
o Payable to the order of a fictitious or non-existing person
 Instrument must be payable to the order of a specified payee
 Specified payee is fictitious or non-existing
 The maker or drawer must know that this payee is fictitious or non-existing and does
not intend to issue it to his payee.
*payable to bearer; if one or two is missing - non negotiable
o Name does not purport to be the name of any person
 Pay to the order of CASH - payable to bearer

Sec 5. Additional Provisions not affecting negotiability.