PRELIMINARY CONSIDERATIONS

GOVERNING LAW The Negotiable

Instruments Law (ACT No. 2031)
Only applies to negotiable instruments
which meet the requirements in Section
1 of the law.
If not provided for by the act, it shall be
governed by existing legislation of in
default thereoh, by the rules of the law
merchant.
o Law of merchant based on
necessity. It originated from Italy,
then France, then England. The
law merchant from which
developed the rules of bills and
notes, sales of goods,
partnerships, guaranty,
insurance, and agency, originated
in the UNWRITTEN CUSTOMS
of merchants in different
commercial countries.
o This law of the merchant shall
not prevail against specific
prohibitions of the Negotiable
Instruments Law
CONCEPT OF NEGOTIABLE
INSTRUMENT
It is a contractual obligation to pay money.
Whether it is negotiable or nonnegotiable
depends entirely on its form and content.
CLASSES OF NEGOTIABLE INSTRUMENT
1. Common forms
a. Promissory notes (those in
which the issuer has promised to
pay) (SEC. 184) 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.
i. A promissory note payable
to the makers own order
is not complete until
indorsed by him. In the
absence of delivery, maker
is not liable to any holder
where his indorsement is
forged.
b. Bills of Exchange (those in
which the issuer has ordered a
third person to pay) (SEC. 126)

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.
c. Bank check (they are really a
special form or kind of bill of
exchange) (SEC 185) - a check is
a bill of exchange drawn on a
bank payable on demand. Except
as herein otherwise provided, the
provisions of this act applicable
to a bill of exchange payable on
demand apply to a check.
PROMISSORY NOTES
Other instruments which are in form and
substance promissory notes:
1. Certificate of deposit a written
acknowledgement by a bank of the
receipt of money on deposit which the
bank promises to repay to the depositor,
bearer, to some other person, to the
order of the depositor, or to him or his
order, at a later date of on demand. It is
negotiable or nonnegotiable. It is only
netoable if drawn with all the essential
elements of a negotiable paper.
2. Bond it is an evidence of indebtedness
issued by a public or private
corporation, promising to pay a sum of
money on a day certain in the future. Its
negotiability is controlled by the same
rules governing promissory notes. It
runs for a longer period of time than a
promissory note and is issued for debts
of substantially larger amounts.
a. Registered bond payable only
to the person whose name
appears on the face of the
certificate and in the books of the
company, so it is not negotiable.
b. Coupon bond entitles the
holder to interest when due. Can
be negotiated just like
promissory notes independent of
the main instrument.
3. Bank note it is an instrument issued
by a bank for circulation as money
payable to bearer on demand.
4. Due bill it is a promissory note which
shows on its face an acknowledgment
by a person of his indebtedness to
another.

5. Mortgage note chattel mortgage note

(secured by personal property) and the
real estate mortgage note (secured by
real property).
6. Title-retaining note secured by
conditional sales contract which
ordinarily provides that title to the
goods shall remain in the payees name
until the note is paid in full. Used to
secure purchase price of goods.
7. Collateral note it is used when the
maker pledges securities (shares of
stocks, bonds, and other personal
property) to the payee to secure the
pay,ent of the amount of the note.
8. Judgment note this is note to which
added a POA enabling the payee to take
ajudgment against the maker without
the formality of a trial if the note is not
paid on its due date
9. Installment note note payable in
specified or period installments at
predetermined times such as for
payment of a registrator over a 12month period.
BILLS OF EXCHANGE
Bills distinguished from noye:
A bill contains an unconditional order
address by one person to another
requiring the latter to pay the
instrument, while a note contains an
unconditional promise made by one
person to another to pay it.
There are three parties in the bill: the
drawer, the drawee, and the payee or
bearer. In a note, there is only the
maker and the payee or bearer.
In a bill, drawer is secondarily liable. In
a note, the maker is primarily liable.
A bill drawn to the drawers own order
is complete without indorsements so
long as it is accepted by the drawee. In
a note, it has to be indorsed first.
A bill must be presented for acceptance
in certain cases, while in a note, there is
no need or presenmtnet for acceptance.
A bill payable on demand must be
presented for payment within a
reasonable time from its last
negotiation.
When a promissort note like a bill of exchange
If a note is indorsed by the payee, it
becomes just like a bill.

The maker corresponds to the acceptor,

the indorser, to the drawer, and the
indorsee, to the payee.
Both the maker and the acceptor are
primarily liable and both the indorsee in
the note and the payee in the bill are the
hoilders.
The holder is the bearer of the instrument
if the note is indorsed payable to bearer
or if the bill os originally payable to
bearer.

When a bill of exchange like a promissory note

After a bill of exchange has been
accepted, it becomes very similar to a
promissory note. The acceptance is a
promise to pay, and the position of the
acceptor is that of promisor, principal
debtor, or marker, while the drawer is in
the position of first indorser or surety of
the acceptor.
A certified check is practically a
promissory note with the bank as the
maker and it discharges the drawer
thereon.
Other classes of bills of exchange
an order by R (drawer) on W (drawee) for
payment of a specified sum of money to the
order of P (payee) is a bill of exchange.
1. Foreign bill of exchange 0 bill drawn in
one state or country and payable in
another state or country. If it is drawn
within the same state, it is known as
inland bill of exchange.
2. Draft is a bill of exchange payable a) on
demand or at sight (sight or demand
draft) (this is only payable on
acceptance), or b) at a definite future
time or some future determinable time
(time draft). Can also be bank draft if
drawn by a bank against its branch or
another bank.
3. Trade acceptance a draft or bill of
exchange drawn by the seller on the
purchaser of goods and accepted by the
latter by signing it as drawee. Unlike an
ordinary bill of exchange, it has a
definite date of maturity. If drawn
against a bank instead of the purchaser,
its called bankers acceptance.
Check differs from bill of exchange as follows:
A check is always drawn on a bank or
banker

A check is always payable on demand,

while ordinary bill is either payable on
demand or at a fixed determinable
future time
Check is supposed to be drawn against
previous deposit of funds, while an
ordinary bill need not to be drawn
against a deposit.
Check need not be presented for
acceptance; while BOE need to be
presented for acceptance in certain
cases.
Check is ordinarily intended for
immediate payment, while an ordinary
bill, for circulation as an instrument of
credit.
The death of the drawer of a check with
the knowledge of the bank revokes the
authority of the bank to pay, while the
death of the drawer of an ordinary bill
does not revoke the authority of the
drawee to pay.
A check must be presented within a
reasonable time after its issue, while an
ordinary bill must be presented for
payment within a reasonable time after
its last negotiation
The drawer of a check not presented
within a reasonable time after its issue
is discharged from liability thereon
When a check is accepted or certified,
the drawer and indorsers are
discharged from liability thereon.

2. Special Types
a. Certificates of deposits (PN)
b. Bank notes (PN)
c. Due bills (PN)
d. Bonds (PN)
e. Drafts (BOE)
f. Trade acceptances (BOE)
g. Bankers acceptances (BOE)
FUNCTIONS OF NEGOTIABLE
INSTRUMENT
1. Does not constitute legal tender but
used as a substitute for money
a. Allows it to go from hand to hand in the
commercial markets
b. Purpose of law make negotiable
instruments freely acceptable in
financial transactions to facilitate trade.
2. Negotiable papers, particularly checks,
constitute the media of exchange most
commercial transaction

a. Increase purchasing medium in

circulation
b. They do away with the need to physically
count coins and bills. It is a safe and
convenient means of doing business that
eliminate the risk of dealing in cash.
3. Serves as a medium of credit
transaction
CHARACTERISTICS/FEATURES OF
NEGOTIABLE INSTRUMENT
a. Negotiability (Sec. 52,57) that
quality or attribute of a bill or note
whereby it may pass from one person
to another similar to money, so as to
give the holder in due course the
right to collect on the instrument
the sum payable for himself free
from any defect in the title of any of
the prior parties or defenses
available to them among themselves.
What constitutes a holder in due course?
He/she is a holder who took the instrument
under the following conditions:
That it is complete and regulat upon its
face
o It is incomplete when it is wanting in
any material particular or particular
proper to be inserted in a negotiable
instrument without which the same
will not be complete.
o It is incomplete if there is any
alteration which must be visible or
apparent o the fact of the
instrument, for if it is not apparent,
the matter is governed solely by
section 124 which renders the
instrument void.
That he became the holder of it before it
was overdue, and without notice that it
had been previously dishonored, if such
was the fact
o Date of maturity is the time fixed
therein. If payable on demand, DOM
is determined by the date of
presentment. If payable on the
occurrence of a specified events
which is certain to happen, the date
of maturity is fixed by the happening
of the event.
o If acquiried on the same date of
maturity, the holder still has a whole
day to receive payment so it does
not render the instrument as
dishonored.

As for the dishonor an instrument

may be dishonored either by
nonacceptance or nonpayment.
Dishonor by nonacceptance refers
only to a bill of exchange. While
dishonor by nonpayment can only
trke place at the time of maturity,
dishonor by nonacceptance can
happen before date of maturity.
o An overdue or dishonored
instrument may still be negotiated
either by indorsement or by delivery
to the same extent as before
maturity but in the case of the
roemer, the holder cannot be a
holder in due course, while in the
latter, the holder without notice can
be a holder in due course.
That he took it in good faith and for value
o Good faith honesty in fact in the
transaction concerned.
o Bad faith 0 it means that he must
have knowledge of fact which render
it dishonest for him to tahe a
particular piece of negotiable paper.
o Proof of bad faith to show
knowledge of such facts that the
taking would amount to bad faith, it
is not necessary to show knowledge
of the exact truth.
o Holder for value any consideration
sufficient to support a simple
contract is value.
That at the time it was negotiated to him
he had no notice of any infirmity in the
instrument or defect in the title of the
person negotiating it.
o In order to constitute notice, the
holder must have had actual or
chargeable knowledge of the
infirmity or defect
o Bad faith of agent 0 knowledge on
an agent acting within the scope of
his authority is a constructive
knowledge of the principal.
o

*holders of a nonnegotiable instrument such

as a simple contract cannot attain the status of
a holder in due course.
*a holder who is not a holder in due course has
all the rights of the latter except that the
instrument is subject to every available
defense as if it were non-negotiable.
When does it become nonnegotiable?
SEC. 36 restrictive indorsement. Divided into
three classes:

Prohibits further negotiation

Constitutes indorsee agent of indorser
Vests title in indorsee for the benefit of
the indorser of a third party

Payee as holder in due course

1. Contrary view those who hold the
negative view contend that under
subsection (d) of sec. 52, the holder in
due course must have acquired the
instrument through negotiation and an
instrument is issued and not negotiated
to a payee.
2. Affirmative view holds that a payee
may be a holder in due course under
any o the circumstrances in section 52.
Drawee as holder in due course
A drawee does not, by paying a bill,
become a holder in due course
Rights of a holder in due course:
1. He may sue on the instrument in his own
name
2. He may receive payment and if they
payment is in due course, the instrument
is discharged
3. He holds the instrument free from any
defect of title of prior parties
4. He holds the instrument free from
defenses available to prior parties among
themselves
5. He may enforce payment of the
instrument for the full amount thereof
against all parties liable theroen.
Personal defenses or equties cannot be
held against a holder in due course.
b. Accumulation of secondary contracts
(Sec 191)
NEGOTIABLE INSTRUMENTS COMPARED
WITH OTHER PAPERS (document of title,
letter of credit, certificate of stock, pawn
ticket, postal money order, treasury
warrant)
-

They usually hlimited negotiability

so they are held nonnegotiable.
They are governed by other laws.

Documents of title
Refer to goods and not to money. They all have
this in common: that they are receipts of a
bailee, or orders upon a bailee. This is a

symbol of the goods covered by it. Examples

include:
Bill of lading contract otr receipt for
transport of goods
Dock warrant instrument given by dock
owners to an importer of goods
warehoused on the dock recognizing the
importers title to the said goods
Warehouse receipt contract or receipt
for goods deposited with a warehouseman
containing the latters undertaking to
hold and deliver the said goods to a
specified person, to his order, and to
bearer.
Letters of credit
Loan agreements made by a bank (or other
person) at the request a customer that the
bank (issuer) will pay or honor drafts drawn by
the seller (creditor) on the buyer (debtor) up
to a stated amount on compliance with the
conditions specified in the credit. Neither
drafts nor notes. This is frequently used by
buyers in inthernational commerce.
Certificate of Stock
A written instrument signed by a proper
officer if a corporation stating that the person
named therein is the owner of a designated
number of shares of its stock.
Postal Money Order
It is an order for the payment of money to the
payee named therein drawn by one post office
upon another under authority of law.
-

That currency which a debtor can

legally compel a creditor to
accept in payment of a debt in
money when tendered by the
debtor in the right amount.
Treasury Warrant
A government warrant for the payment of
miney such as that issued in favor of a public
officer or employee covering payment or
replenishment of cash advances for official
expenditures.

LEGAL TENDER CHARACTER

FORMS AND INTERPRETATIONS OF

NEGOTIABLE INSTRUMENTS

REQUISITIES FOR NEGOTIABILITY (Sec. 1,

NIL)
a. Must be in writing and signed by the
marker or the drawer
i. As a general rile, signature is placed
at the lower right hand corner of the
instrument. His signature is a prima
facie evidence of intention to be
bound as either maker or drawer. If
not, he is deemed as an indorser.
b. Must contain an unconditional
promise or order to pay a sum certain
in money
i. Promise or order to pay must be
unconditional
1. Reference to transaction (Sec. 3,
NIL)
a. An unqualified order or promise to pay is
unconditional within the meaning of this
act though coupled with a) 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 b) statement of the
transaction which gives rise to the
instrument. However, an order or
promise to pay out of a particular fund is
not unconditional.
2. Source or payment or account to
be debited
a. An instrument which mentions a
particular fund out of which
reimbursement is to be made iis
ngotiable because the order to pay is not
rendered conditional. The drawee is not
limited to the money in his hands
belonging to the drawer.
b. An instrument payable out of a
particular or specified fund is
nonnegotiable because the amount to
be paid is made to depend upon the
adequacy or existence of the fund
designated.
ii. Payable in sum certain in money
- Its essential that its payment will
certainly become due and
demandable one time or other,
though it may be uncertain when
that time will come.
1. Provisions which do not affect
certainty of sum payable
a. Payment of interest (Sec. 2, NIL)
b. Payment by installments (Sec. 2, NIL)
*stated installments means that
a) the interest of each
installment, and b) the due date

of each installment must be fixed

in the instrument.
c. Acceleration clause (Sec. 2, NIL)
*acceleration clause a promise
that if any installment or interest
is not paid as agreed, the whole
shall become due. The
instrument becomes
nonnegotiable if a note provies
for acceleration at the option of
the holder.
d. Payment with exchange (Sec. 2, NIL)
e. Payment of attorneys fees (Sec. 2, NIL)
*attorneys fee in case payment
shall not be made at maturity,
there shall be added to the mount
due on the note costs of
collection or an attorneys fee.
c. Payable on demand or at a fixed date
or determinable future time
- Instrument only payable upon a
contingency is not negotiable
because it does not appear on its
face whether or not it will be paid.
i. When payable on demand (Sec. 7,
NIL). An instrument is payable on
demand
1. Where it is expressed to be payable
on demand, or at sight, or on
presentation, or
2. In which no time for payment is
expressed.
ii. When payable at determinable future
time (Sec. 4, NIL). An instrument is
payable at a determinable future time,
within the meaning of this act, which
is expressed to be payable:
1. At a fixed period after date or
sight; or
2. On or before a fixed or
determinable future time specified
therein; or
3. On or at a fixed period after the
occurrence of a specified event
which is certain to happen, though
time of happening be uncertain
d. Payable to order or bearer
i. When payable to bearer (Sec. 9, NIL).
The instrument is payable to bearer
when
1. When it is expressed to be so
payable
2. When it is payable to a person
named therein or bearer
3. When it is payable to the otder of a
fictitious or non-existing person,

and such fact was known to the

person making it so payable
4. When the name of the payee does
not purport to be the name of any
person; or
When the only or last indorsement
is an indorsement in blank
*Rule when instrument is payable to a
fictitious person a fictitious person is
mean to be one who, though named as
payee in an instrument, has no right to
it because the maker or drawer so
intended and it matters not, whether
the name of the payee used by him be
that one living or dead, or one who
never existed.
ii. When payable to order
1. To whose order the instrument may
be made payable
e. Omissions that do not affect
negotiability (Sec. 6, NIL). The validity
and negotiable character of an instrument
are not affected by the fact that
i. It is not dated
ii. Does not specify the value givenl or
that any value has been given therefor
iii. Does not specify the place where it is
drawn or the place where it is
payable. If this is not indicated,
payment is presumed to be payable at
the place of residence or business of
the maker or the drawer.
iv. Bears a seal
v. Designated a particular kind of
current money in which payment is to
be paid.
However, nothing in section 6 shall alter
or repeal any statute requiring in
certain cases the nature of the
consideration to be state din the
instrument.
f. Additional provisions not affecting
negotiability (Sec. 5, NIL)
i. Sale of collateral securities in case the
instrument be not paid at maturity
ii. Confession of judgment if the
instrument be not paid at maturity.
Confession of judgment is a written
acknowledgment by the defendant of
his indebtedness or liability to the
plaintiff.
iii. Waiver of benefit of any law intended
for the advantage or protection of the
obligor

iv. Gives the holder an election to require

something to be done in lieu of
payment of money
RULES TO BE FOLLOWED IN INTERPRTING
NEGOTIABLE INSTRUMENTS (Sec. 17, NIL)
a. Where the sum payable is expressed in
words and also in figures and there is a
discrepancy between the two, the sum
denoted by the words is the sum
payable; but if the words are ambiguous
or uncertain, reference may be had to
the figures to fix the amount
b. If there is interest without a date
specified from which the interest is to
run, it will run from the date of the
instrument, and if undated, from date
of issue.

c. If undates, date is date of issue.

d. Written will prevail over printed
provsions of the instrument
e. If the instrument is so ambiguous that
there is doubt whether it is a bill or note,
the holder may treat it as either at his
election
f. Where a signature is si placed in which
is is not clear in what capacity the
person making the same intended to
sign, he is deemed as an indorser
g. Where an instrument containing the
words I promise to pay is signed by
two or more persons, they are deemed
to be jointly and severally liable thereon.