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
defences
available
to
prior
parties. The instrument must
comply with Section 1 of the
Negotiable Instruments Law to be
considered negotiable.
REQUISITES OF NEGOTIABILITY
(Sec. 1) W-U-D-O-A
1. 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. 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.
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 Sec. 1 of the
NIL.
When negotiability ends?
Sec. 47 of the NIL provides that
an instrument negotiable in its
origin continues to be negotiable
until:
1. It
has
been
restrictively
indorsed; or
2. 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 two
other types (constitutes the
indorsee the agent or trustee).
GOVERNING LAW
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impliedly repealed by the NIL.

The New Civil

suppletory.

Code

applies

Applicability of the Negotiable

Instruments Law
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.
The NIL can be applied but only
by analogy if the instrument is
not negotiable if there is no law
that can be applied.
Decisions of the courts in the
United States and in England
based on the American Uniform
Negotiable Instruments Law and
the Bills of Exchange Act of 1882
can be applied in the jurisdiction
because those foreign laws
served as bases of NIL.
FUNCTIONS
1. It operates as a substitute of
money.
2. It is a means of creating and
transferring credit.
3. It facilitates the sale of goods.
4. It increases the purchasing
medium in circulation.
TWO IMPORTANT FEATURES OF
NEGOTIABLE INSTRUMENT
1. Negotiability it is that
attribute or property whereby a
bill or note or check pass from

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
defences.
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
judicial ties between the parties
thereto arise either by law or by
privity.
KINDS
OF
NEGOTIABLE
INSTRUMENTS
1. Bill of Exchange it 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.
2. Promissory Note it 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 makers own order, it is not
complete until indorsed by him.

KINDS OF BILL OF EXCHANGE

1. Draft used synonymously with
bill of exchange although it
normally refers to a bill or
exchange used on documentary
exchange like letters of credit
transactions.
2. Inland and Foreign Bill it 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 drawer orders the
buyer (as drawee) to pay a sum
certain to the same seller (payee).
6. Bankers Acceptance a time
draft across the face of which the
drawee has written has written
the word accepted.
7. Check a bill of exchange drawn
on a bank payable on demand.
KINDS OF PROMISSORY NOTES
1. Certificate of Deposit a form
of promissory notes which is a
written acknowledgment of a
bank of its receipt of a certain
sum with a promise to repay the
same.
2. 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.
3. Debenture a promissory note
or bond backed by the general
credit of a corporation and
usually not secured by a
mortgage or lien on any specific
property.
When can a bill of exchange be
treated as a promissory note by
the holder?
1. When the drawer and the drawee
are the same person.
2. When the drawee is a fictitious
person.
3. When the drawee has no capacity
to contract.
4. When the instrument is so
ambiguous that there is doubt
whether it is a bill or a note.
Negotiable Promissory Note Vs.
Negotiable Bill Of Exchange
Promissory
Bill of Exchange
Note
Unconditional
promise
Involves

Unconditional

order
two Involves

three

parties
parties
Maker primarily Drawer
liable
Only
presentment

secondarily liable
one Generally,
two
(or presentments:

payment)

acceptance

and

for payment
Bill of Exchange Vs. Check
Bill of Exchange
Check
Not drawn on a It is necessary
deposit. It is not that

check

is

on

necessary that a drawn

drawer of a BOE deposit.
should

have Otherwise, there

funds

in

the would be fraud.

hand

of

the

drawee.
Death
of

the Death

of

drawer of a BOE drawer

with

the

of

the check, with the

knowledge of the knowledge by the

bank, does not bank,
revoke
author

revokes

the the authority of

of

the the

banker

to

banker to pay.
pay.
May
be Must

be

presented

for

for presented

payment within a payment within a

reasonable
after

its

time reasonable

time

last after its issue.

negotiation.
Are the following commercial
papers negotiable instruments?
1. Cross Check usually negotiable
as it normally complies with the
requirements under Sec. 1, NIL,
but issued for a special purpose
and can be negotiated only once.

2. Trade Acceptance negotiable,

it is a Bill of Exchange addressed
by the seller of the goods to the
buyer. However, Sec. 1 must be
complied with.
3. Money Order non-negotiable
as it is governed by postal rules
and regulations which may be
inconsistent with the NIL and it
can only be negotiated once.
4. Warehouse Receipt nonnegotiable as it represents goods,
not money.
5. Pawn Ticket non-negotiable as
it does not represent money but
the pawned articles.
6. Treasury
warrant

nonnegotiable being payable out of

particular fund.
7. Bill of Lading non-negotiable
as it represents goods, not
money.
8. Trust Receipt non-negotiable
as it is an evidence of ownership
of goods, not money.
PERSONS INVOLVED IN NIL
1. Maker the person who makes a
promissory note and promises to
pay the amount stated therein.
2. Payee the oblige, that is, the
person who, by the terms of the
note or the bill, is to receive
payment.
3. Drawer the person who draws
the bill of exchange; he orders
the drawee to pay a sum certain
in money.

4. Drawee the person to whom

the order to pay is addressed in a
bill of exchange.
5. 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.
6. Holder the person who is in
possession
of
a
bearer
instrument or an indorse of an
order instrument who is in
possession thereof. A holder is
the obligee, a person who can
enforce
payment
of
the
instrument.
7. 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.
Negotiable Instruments Vs. NonNegotiable Instruments
Negotiable
Non-negotiable
Instruments
Instruments
Governed by the NIL
does
not
NIL

apply.

It only

applies
Can

analogy.
be Can

transferred

by transferred

by
be
only

negotiation or by by assignment.
assignment.
A transferee of a A transferee of a
negotiable
instrument

non-negotiable
can instrument

can

be a holder in never be a holder

due course if all in

due

course

the requirements but remains to

under Sec. 52 of be an assignee.
the

NIL

are

complied with.
A holder in due All

defenses

course has the available to prior

right to hold the parties may be
instrument
from

free raised

against

defences the

last

available to prior transferee.

parties.
REQUISITES OF NEGOTIABILITY
A. In Writing and Signed By The
Maker or Drawe
a) In writing means it may be
printed, in ink or in pencil and it
may be written in any material
that substitute paper like cloth,
leather or parchment. Sec. 191
of the NIL provides that the word
written includes printed, and
writing includes print.
b) Signed by the maker or drawer
means that the signature may be
in ones handwriting, printed,
engraved,
lithographed
or
photographed so long as they are
adopted as the signature of the
signer. What is important is that
the maker or drawer used what
he affixed as his own signature
for authentication.

the payee from act the drawee

B. Contain
an
Unconditional
Promise or Order to Pay a Sum
Certain in Money
a) The promise in a promissory
note is the undertaking made by
the maker to pay a sum certain
in money to the payee or the
holder. The order in a bill is a
command made by the drawer
addressed to the drawer ordering
the latter to pay the payee or the
holder a sum certain in money.
b) An unqualified order or promise
to pay is unconditional within
the meaning of NIL though
coupled with:
1. An indication of a particular
fund
out
of
which
reimbursement is to be made
or a particular account to be
debited with the amount; or
2. A statement of the transaction
which gives rise to the
instrument.
c) A promise or order to pay is
conditional if: 1) an order or
promise to pay out of a particular
fund; or 2) an instrument
payable upon a contingency (the
happening of the event does not
cure the defect).
d) Indication of a particular fund for
payment
vs.
fund
for
reimbursement
Fund for
Particular Fund
Reimbursement
for Payment
The drawee pays There is only one

his own funds, pays

directly

thereafter drawee from

the

pays
from

himself particularly fund

the indicated.

particular

fund

indicated.
Particular

fund Particular

fund

indicated is not indicated is the

the direct source direct source of
of

payment

reimbursement
Is a promissory note wherein the
maker promises to pay as soon
as his means permit him to do so
negotiable?
No. The phrase as soon as his
means permit him to do so
renders the promise conditional,
although under the Civil Code, it
may be considered as an
obligation with a period.
C.

Payable in Sum Certain in

Money

a) Money need not be legal tender.

An instrument is still negotiable
although the amount to be paid
is expressed in currency that is
not legal tender so long as it is
expressed in money. Under RA
8183, the agreement to pay in
foreign currency is valid.
Ex. Payable in Yen.
b) If the obligor like the maker is
given the option to deliver

c)

d)

e)

f)

something in lieu of money the

instrument is not negotiable.
Ex. A note where the maker
promises to deliver P1,000 or a
sack of rice at his option.
If the instrument gives the holder
an election to require something
to be done in lieu of payment of
money, the instrument is still
negotiable.
Ex. Where the maker promises to
pay P1,000 or a sack of rice at
the option of the holder.
A sum is certain with the
contemplation of Sec. 1 (b) of the
NIL if the amount that is to be
unconditionally paid by the
maker
or
drawee
can
be
determined on the face of the
instrument even if it requires
mathematical computation.
The sum payable is a sum
certain within the meaning of
this Act, although it is to be paid:
1. With interest;
2. By stated installment; or
3. By stated installment, with a
provision that upon default in
payment of any installment or
of interest, the whole shall
become due; or
4. With exchange, whether at a
fixed rate or at the current
rate; or
5. With costs of collection or an
attorneys
fee,
in
case
payment shall not be made at
maturity.
Stated Installments the dates
of each installment must be fixed

or at least determinable and the

amount to be paid for each
installment must be stated.
Ex. The instrument is not
negotiable if payable in 5
installments in the amount of
P1,000 per installment without
stating the dates of each
installments.
D. Payable on Demand or at a
Fixed or Determinable Future
Time
a) Payable on Demand The
instrument should be paid the
moment it is presented for
payment.
An instrument is
payable on demand:
1. When it is so expressed to be
payable on demand, or at
sight, or on presentation; or
2. In which no time for payment
is expressed;
3. Where an instrument is
issued, accepted, or indorsed
when overdue, it is, as regards
the
person
so
issuing,
accepting, or indorsing it,
payable on demand.
b) Payable
at
Determinable
Future Time an instrument is
payable at a determinable future
time if it is expressed to be
payable:
1. At a fixed period after date or
sight; (Ex. Twenty days after
date)

2. On or before a fixed or
determinable
future
time
specified therein; (Ex. Payable
on or before January 1, 2016)
3. On or at a fixed period after
the occurrence of a specified
event which is certain to
happen, though the time of
happening be uncertain (Ex.
Payable within 5 days from
death of Mr. X).
c) Acceleration Clauses the
negotiability of the instrument is
not affected even if it is to be paid
by statement installments, with a
provision that, upon default in
payment of any installment or of
interest, the whole shall become
due.
d) Insecurity Clauses provisions
on the contract which allow the
holder to accelerate payment if
he deems himself insecure. The
instrument is rendered nonnegotiable.
e) Extension
Clauses

an
instrument is payable at a
definite time if by its terms it is
payable at a definite time subject
to extension at the option of the
holder, or to extension to a
further definite time at the option
of the maker or acceptor or
automatically upon or after a
specified act or event.
E. Payable to Order or Bearer

a. An instrument that is payable to

a specified person or entity is not
negotiable because the NIL
requires that the instrument
must be payable to order or to
bearer.
b. An instrument is payable to
bearer when:
1. It is expressed to be so
payable; or
2. It is payable to a person
named therein or bearer; or
3. It is payable to the order of a
fictitious
or
non-existing
person, and such fact was
known to the person making
it so payable; or
4. The name of the payee does
not purport to be the name of
any person (Ex. pay to case);
or
5. The only or last indorsement
is an indorsement in blank.
c) Order Instruments instrument
can either be made payable to
the order of a specified person
(pay to the order of Juan Dela
Cruz) or to a specified person or
his order (pay to Juan Dela Cruz
or order).
d) Section 8 of NIL likewise
identifies the persons who can be
designated as payees in an order
instrument the persons to
whose order the instrument may
be
made
payable.
The
instrument may be payable to the
order of:
1. A payee who is not maker,
drawer, or drawee; or

2.
3.
4.
5.

The drawer or maker; or

The drawee; or
Two or more payees jointly; or
One or some of several payees;
or

6. The holder of an office for the

time being.