Negotiable Instruments Law

Negotiable
Instruments Law
Act. 2031
Negotiable Instruments Law
Effectivity – June 2, 1911
The law is applicable only to negotiable instruments or

those instruments which meet the requirements laid
down in Section 1 of the law
Any case not provided in the law shall be governed by

existing legislation or in default thereof, by the rules
of the law merchant
The Civil Code has no effect on its provisions except to

supply any deficiency in cases not provided by the
law.
Functions of Negotiable Instruments

(1) Used as substitute for money
(2) Media of exchange for commercial
transaction
(3) Medium of credit transaction
(4) Used as evidence of the indebtedness of
the parties
Characteristics of Negotiable
Instruments
1. Negotiability - it may pass from one person to another
similar to money
2. Accumulation of secondary contracts -

secondary contracts are created when they are transferred from
one person to another
Forms of Nego Instruments

1. Promissory note (Sec. 184)
2. Bill of Exchange (Sec. 126)
3. Check (Sec. 185)
Instruments (not negotiable)

1. Letter of credit – payable to a specific person
2. Treasury warrant – payable out of a specific fund
3. Postal money order – subject to restrictions
4. Bill of lading – no unconditional promise or order
5. Certificate of stock – no unconditional promise or order
6. Warehouse receipt – no unconditional promise or order
Non-Negotiable Instrument
 does not or not all
 transferred by assignment
 transferee acquires only rights of

transferor
 prior parties merely warrant legality of his
title
 no such right of recourse
Negotiable Documents of Title

 goods
 mere evidence of title
 does not
 intermediate parties are not secondarily liable if
dishonored
 merely steps into the shoes of the transferor
Steps in the execution of a negotiable

instrument
 Act of writing (making or drawing) the instrument

conformably with the requirements of Section1 of NIL;
and
 Delivery or issuance of the instrument with intent to be
bound thereunder to a person who takes it as a holder
Incidents in the Life of a Negotiable Instrument

 Issue – the first delivery of the instrument complete in
form to a person who takes it as a holder.
 Negotiation – transfer of an instrument from one
person to another as to constitute the transferee the
holder thereof.
 Presentment for Acceptance – this is required in
certain kinds of bills of exchange as in the case where

presentment for acceptance by the drawee is necessary
to fix the maturity of an instrument payable after sight.

 Acceptance – this is a signification by the drawee of his assent
to the order of the drawer. In this case, the drawee becomes an
acceptor who is primarily liable under the instrument.
 Dishonor by Non-Acceptance – this takes place when the
bill of exchange is presented for acceptance by the drawee and the
latter refuses to accept the same.
 Presentment for Payment – this takes place when the
holder exhibits the instrument to the drawee or the person liable
thereon and demands payment from him on or after the date of
maturity.

 Dishonor by Non-Payment – this takes place where the
instrument is presented for payment and payment is refused or
cannot be obtained, or where presentment for payment is excused
and the instrument is overdue and unpaid.
 Notice of Dishonor – this takes place when the instrument is
dishonored by non-acceptance or non-payment in order to notify
the parties secondarily liable thereon of the identity of the
instrument, the fact of dishonor and the demand for payment. (In
the case of foreign bills of exchange, the notice must be in the form
of a protest which contains substantially the same matters as a
notice of dishonor but must be notarized.)
Discharge – it takes place when the instrument is paid at

or after maturity by a person who is principally liable
thereon, and also when notice of dishonor or protest is
not given within the time as specified by law. In the
latter case, all parties secondarily liable are discharged
and can no longer be held liable by the holder.
Section 1- Form of Negotiable

Instrument
(a) It must be in writing and signed by the maker
or drawer;
(b) Must contain an unconditional promise or
order to pay 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;
(e) Where the instrument is addressed to the

drawee, he must be named or otherwise
indicated therein with reasonable certainty
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 bearer
Bill of exchange – is an unconditional

order in writing addressed by one
person to another, signed by the person
giving it, and requiring the person to
whom it is addressed to pay upon
demand or a fixed or determinable
future time a sum certain in money to
order or bearer.
Parties to a Promissory Note

1. Maker – one who signs the instrument
2. Payee – party to whom the promise is made
Parties to a Bill of Exchange

1. Drawer – who issues and draws the bill
2. Payee – party to whom the bill is payable
3. Drawee – party upon whom the bill is drawn
Sec. 2 –Certainty as to sum what constitutes
(a) With interest
- whether fixed, compounded, increasing or

decreasing
(b) With stated installments
- 2 important things
1. amount to be paid must be stated

2. date of maturity must also be stated
(c) By stated installments with acceleration clause
if dependent on maker – Negotiable

if dependent of payee/holder – Non-negotiable
(a) With interest
- whether fixed, compounded, increasing or

decreasing
(d) With exchange – (not applicable to inland or domestic

bill)
(e) With costs of collection or attorney’s fee – due to the

fact that it take effect after maturity of the instrument
Sec. 3 – When promise is unconditional
If source of payment – not negotiable

If source of reimbursement – negotiable
Past tense – negotiable

Future tense – non-negotiable
Sec. 4 – Determinable future time; what

constitutes
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable
future time specified therein; or
(c) On or at a fixed period after the
occurrence of a specified event which is
certain to happen
Sec. 5 – Additional provisions not affecting

negotiability
General Rule – the instrument is non-

negotiable if it contains a promise or
order to do any act in addition to the
payment of money
Exceptions –
1. Sale of collateral securities
2. Confession of judgment
3. Waiver of benefit granted by law
4. Election of holder to require some other act
if option is on holder – negotiable

if option is on maker – non-negotiable
Sec. 6 – Omissions
Even if the following are not stated, still negotiable
1. Not dated
2. Omission of value
3. Omission of place
4. Presence of seal
5. Designation of particular kind of current money payable
Sec. 7 – When payable on demand

(a) Where it is expressed to be payable on
demand, or at sight, or on presentation
(b) In which no time for payment is
expressed.
(c) When issued, accepted or indorsed
when overdue
Sec. 8 – When payable to order
-6 instances
Principle
Once bearer, always bearer

Principle –
Order instrument can

become a bearer instrument
Sec. 9 – When payable to bearer

(a) When expressed to be payable;
(b) When payable to a person named therein or bearer;
(c) When 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;
(d) When the name of the payee does not purport to be
the name of any person; or
(e) When the only or last indorsement is an indorsement in
blank
Sec. 10 – Terms , when sufficient
- Mere defect in language or

grammatical error will not invalidate the
instrument
- Substitution is allowed
Sec. 11 – Date, presumption
- whenever there is a date written, it is

the true/correct date
- only a disputable presumption
Sec. 12 – Ante-dated and post-dated
Gen. rule – ante-dating or post-dating is not

per se illegal
Exception – if done for an illegal purpose
Sec. 13 – Date
Gen. rule – not allowed to insert or change
any date (Effect – material alteration)
Exception
1. To fix the maturity
2. To fix the interest
3. To determine whether there is
reasonable period of time
Complete v. Incomplete
Delivered v. Undelivered
HDC v. HnotDC
Personal v. Real defense
Prior v. Remote
Subsequent v. Immediate
Assignment v. Negotiation
Sec. 14 – Incomplete but delivered

instrument – (only a personal defense)
- Doctrine of Comparative Negligence

- Breach of Trust or Authority
 Holder has prima facie authority to complete the

instrument;
 Completion to be done within a reasonable time
and according to the authority given;
 Holder in due course of the instrument
previously completed in breach of instructions
can enforce the same as if regularly completed.
Sec. 15 – Incomplete and Undelivered

Instrument
- a real defense
 Between immediate parties and a remote party not a

holder in due course, delivery to be effectual must be
made by or under the authority of the maker, drawer,
acceptor or indorser, as the case may be;
 If the instrument is in the hands of a holder in due
course, all prior deliveries are conclusively presumed
valid;
 If the instrument is out of the hands of the person who
signed it, a valid and intentional delivery is disputably
presumed.
Sec. 16 – Complete but

undelivered instrument
- a personal defense
Incomplete and Undelivered Instrument

(Section 15)
 If the completed and delivered without

authority, the instrument is not a valid contract
against any person who signed before delivery.
Sec. 17 – Rules of construction in case

of ambiguity or omission
(a) Gen rule – Words v. Figures = Words
Exception – Words
(b) Payment of interest
Rule – date of interest
Exception – date of instrument
Exception to exception – date of issuance
(c) Date required (but no date) – date of issuance
(d) Written provisions v. Printed provisions = written
(e) PN or BE = the holder may treat it either at his election
(f) Doubt on signature – deemed as an indorser
(g) I promise to pay – Solidary

We promise to pay - Joint
Sec. 18 – Liability of person signing in

trade or assumed name
Gen rule – Only persons whose signature appears on the
instrument are liable thereon
Exception – LIABLE (even if signature does not appear)
1. person signs in a trade or assumed name
2. principal is liable if a duly authorized agent signs in
his own behalf
3. In case of forgery
4. Where the acceptor makes his acceptance

of a bill on a separate paper (Sec. 134)
5. Where a person makes a written promise to
accept a bill before it is drawn (Sec. 135)
Secs. 19/20 Signature by Agent

Requisites to apply
1. Duly authorized
2. Signs in a representative capacity
3. Discloses the principal
If one is absent – agent is personally liable

Sec. 21 – Signature by procuration
e.g. pp, PP
- The agent has limited authority to sign the

instrument
Sec. 22 – Infancy and Ultra

vires act of the corporation
- Both are real defenses

- Minor can negotiate but not liable
Sec. 23 – FORGERY (real

defense)
 Forgery – is the counterfeit making or fraudulent
alteration of any writing.
 b. Effect – The signature is wholly inoperative, and no
right to retain the instrument, or to give a discharge
therefore, or to enforce payment thereof against any
party to it, is acquired through or under such signature.
Sec. 23 – FORGERY (real

defense)
a. Forgery in Order instrument

b. Forgery in bearer
c. Forgery in check/bill of exchange (liability of the
drawee)
Sec. 24 – Consideration
- Presumption of consideration
- Presumption to have been a party
thereto for value
 Absence of consideration – is the total lack of

consideration, no consideration or illegal consideration.
 Failure of consideration – is failure of the agreed
consideration to materialize.
 Both absence and failure of consideration are defenses
personal to the prejudiced party, and available against
any person not a holder in due course.
Sec. 25. Value – any consideration

sufficient to support a simple contract.
An antecedent or pre-existing debt

constitutes value
Sec. 26 – Holder for value
- one who has given valuable

consideration for the instrument issued
or negotiated to him
Sec. 28 – Effect of want or failure of

consideration
– BOTH are personal defenses

Sec. 29 – Liability of the accommodation

party
Accommodated party – Primarily liable

Accommodation party – Surety
Regular party v. Accommodation party

Sec. 30 – Negotiation
- is the transfer of a negotiable instrument from one

person to another as to constitute the transferee the
holder thereof
Methods of transfer of negotiable instrument

1. Issue
2. Negotiation
3. Assignment
How is instrument negotiated?
If order instrument – indorsement plus

delivery
If bearer – mere delivery
Sec. 31 – How indorsement is made?
- On the back of the instrument itself
- On a separate piece of paper attached to

the instrument (Allonge)
Sec. 32 –
Gen Rule – Indorsement must be of the
entire instrument (if not, not negotiable)
Exception – if already partially paid

Sec. 33 – Kinds of indorsement
Special v. Blank
Restrictive v. non-restrictive
Qualified v. unqualified
Conditional v. unconditional
Joint v. successive v. irregular v. facultative
Sec. 34 – Special indorsement;

indorsement in blank
Special indorsement
e.g. Pay to B
Pay to B or order
Blank indorsement
e.g. (mere signature)
Sec. 35. Blank indorsement; how changed to

special indorsement
BI to Special Indorsement – allowed

BI to RI, QI, CI or any other – not
allowed (material alteration)
Sec. 36 – Restrictive indorsement
a. Pay to A only
b. Pay to A for collection
c. Pay to A, in trust for B
Effects of restrictive indorsement
a. Destroys the negotiability of the

instrument
b. All subsequent indorsees acquire only the
title of the first indorsee under the
restrictive indorsement
Sec. 37 – Effects of restrictive
a. to receive payment
b. to bring any action thereon
c. transfer his rights as such indorsee
Sec. 38 – Qualified Indorsement

e.g. – “without recourse”
Effects –
1. Does not affect the negotiability of the
instrument
2. Indorser’s liability is limited
3. Does not bar negotiation
Sec. 39 – Conditional Indorsement
If condition is on the face – non-negotiable
If condition is at the back – holder may

collect but maker may choose to pay or
not
Sec. 40 – Indorsement of instrument

payable to bearer
Effects –
- Once bearer, always bearer
- The person indorsing specially is liable as an
indorser to only such holders as make title
through his indorsement
Sec. 41 – Indorsement where payable to 2

or more persons
e.g.
Pay to A and B (Joint)
G.R. - Both must indorse
Exception –
1. Partnership
2. Authorization
Pay to A or B (Solidary)
Sec. 42 – Effect of instrument drawn

or indorsed to a person as cashier
Sec. 43 – Indorsement where name is

misspelled
Sec. 44 – Indorsement in
representative capacity
Sec. 45 – Time of indorsement
Sec. 46 – Place of indorsement

Sec. 47 –
Gen rule – An instrument negotiable in origin is
always negotiable
Exceptions
1. if restrictively indorsed
2. discharged by payment or otherwise
Sec. 48 – Striking out indorsements
Effect on bearer instrument –

Effect on order instrument –
Effect if stricken – no longer liable

Sec. 49 – Transfer without

indorsement
Effect – non-negotiable
Remedy – ask that it be indorsed
Sec. 50 – Reacquirer
- A holder who negotiates an instrument

and then subsequently reacquires it
Sec. 51 – Rights of the holder
a. to sue on the instrument

b. to receive payment
Sec. 52 – Holder in due course

a. Complete and regular upon its face
b. Became the holder of it before it was overdue
c. Took it in good faith and for value
d. 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 the instrument
Material Alteration of Instrument

(Section 124)
Material alteration – Any alteration which changes

the date, the sum payable, the time or place of
payment, number or relation of the parties, or
medium or currency of payment, or adds a
place of payment where none is specified, or
which alters the effect of the instrument in any
respect.
 Effect – It avoids the instrument except as against the

party who made, authorized or assented to the
alteration, and subsequent indorsers.
 Where the altered instrument, however, is in the hands

of a holder in due course, not a party to the alteration,
he may enforce payment thereof according to its
original tenor.
Holder in due course (Section 52)
 Rights – He may enforce the instrument and

sue thereon in his own name. He holds the
instrument free from any defect of title of prior
parties, free from defenses of prior parties
among themselves and he may enforce
payment of the instrument for full amount
against all parties liable thereon.
Holder not in due course – is one who became

a holder of the instrument without any, some or
all of the requisites under Sec. 52 of NIL.
 Rights – He can enforce the instrument and sue

under it in his own name. Prior parties,
however, even though remote, can avail against
him any defense among these prior parties and
prevent the said holder from collecting in whole
or in part the amount stated in said instrument.
Holder for value – is one who has all the

requisites for a holder in due course
except notice of want of consideration. He
is not necessarily a holder in due course;
hence, prior parties may avail of defenses
against said holder. (Prudencio v. CA, 143
SCRA 596)
Real / Absolute / Legal Defense – a defense which

attaches to the instrument irrespective of the parties
and is predicated on the principle that the right sought
to be enforced has never existed or has ceased to exist.
 Examples – forgery or unauthorized signature (Sec. 23);

material alteration (Sec. 124), incomplete and
undelivered instrument (Sec. 15)
 Against whom available – a real defense is available

against all holders, whether in due course or not.
Personal or Equitable Defense – a defense

growing out of an agreement or conduct of a
particular person in regard to an instrument
which renders it inequitable for him although
owner of it, to enforce it against the defendant.
 Examples – complete but undelivered

instrument (Sec. 16), incomplete but delivered
instrument (Sec. 14), absence or failure of
consideration, defect of title
Rights of Holder in General (Section 51)

a) He may sue on the instrument in his own
name; and
b) He may receive payment and if the payment
is in due course, the instrument is discharged.
Rights of Holder in Due Course

a) He may sue on the instrument in his own name
(Section 51);
b) He may receive payment and if payment is in due
course, the instrument is discharged;
c) He holds the instrument free from any defect of title
of prior parties;
d) He holds the instrument free from defenses available
to prior parties among themselves; and
e) He may enforce payment of the instrument for the
full amount thereof against all parties liable thereon.
Rights of Holder NOT in Due Course

 He may sue on the instrument in his own name (Sec 51);
 He may receive payment and if the payment is in due
course, the instrument is discharged;

 He is entitled to the instrument but holds it subject to
the same defenses as if it were non-negotiable (Section

58); and
 He has all the rights of the holder in due course from
whom he derives his title in respect of all parties prior to
such holder, provided he is not himself a party to any
fraud or illegality affecting the instrument (Section 58).

Negotiable Instruments Law

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Negotiable Instruments Law

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Negotiable

The law is applicable only to negotiable instruments or

Any case not provided in the law shall be governed by

The Civil Code has no effect on its provisions except to

Functions of Negotiable Instruments

2. Accumulation of secondary contracts -

Forms of Nego Instruments

Instruments (not negotiable)

 transferee acquires only rights of

Negotiable Documents of Title

Steps in the execution of a negotiable

 Act of writing (making or drawing) the instrument

Incidents in the Life of a Negotiable Instrument

certain kinds of bills of exchange as in the case where

Incidents in the Life of a Negotiable Instrument

Incidents in the Life of a Negotiable Instrument

Incidents in the Life of a Negotiable Instrument

Discharge – it takes place when the instrument is paid at

Section 1- Form of Negotiable

(d) Must be payable to order or bearer;

(e) Where the instrument is addressed to the

Promissory note – is an unconditional

Bill of exchange – is an unconditional

Parties to a Promissory Note

Parties to a Bill of Exchange

Sec. 2 –Certainty as to sum what constitutes

(a) With interest

- whether fixed, compounded, increasing or

Sec. 2 –Certainty as to sum what constitutes

(b) With stated installments

1. amount to be paid must be stated

Sec. 2 –Certainty as to sum what constitutes

(c) By stated installments with acceleration clause

if dependent on maker – Negotiable

Sec. 2 –Certainty as to sum what constitutes

(a) With interest

- whether fixed, compounded, increasing or

Sec. 2 –Certainty as to sum what constitutes

(d) With exchange – (not applicable to inland or domestic

(e) With costs of collection or attorney’s fee – due to the

Sec. 3 – When promise is unconditional

If source of payment – not negotiable

Past tense – negotiable

Sec. 4 – Determinable future time; what

Sec. 5 – Additional provisions not affecting

General Rule – the instrument is non-

if option is on holder – negotiable

Sec. 7 – When payable on demand

Sec. 8 – When payable to order

Once bearer, always bearer

Order instrument can

Sec. 9 – When payable to bearer

Sec. 10 – Terms , when sufficient

- Mere defect in language or

Sec. 11 – Date, presumption

- whenever there is a date written, it is

Sec. 12 – Ante-dated and post-dated

Gen. rule – ante-dating or post-dating is not

Sec. 14 – Incomplete but delivered

- Doctrine of Comparative Negligence

 Holder has prima facie authority to complete the

Sec. 15 – Incomplete and Undelivered

 Between immediate parties and a remote party not a

Sec. 16 – Complete but