Negotiable Instruments Law

Reference: Agbayani
Section 1

INTRODUCTION
 The Negotiable Instruments Law of the Philippines was patterned after the draft approved by the
Commissioners of Uniform State Laws in the United States. It was enacted as Act No. 2031 on
February 3, 1911 and took effect ninety days after the publication in the Official Gazette of the
Philippine Islands was completed. This was on March 4, 1911, and therefore, the Act took effect
on June 2, 1911.
 The Negotiable Instruments Law deals with three kinds of Negotiable Instruments, namely” (1)
Promissory Notes, (2) Bills of Exchange, and (3) Checks, which are also bills of exchange, but of a
special kind.
 An instrument which does not comply with the requirements of Negotiable Instruments Law is a
simple contract in writing and is merely in evidence of such intangible rights. If it is not a
negotiable instrument, it is governed by the general law on contracts.
 Function of negotiable instruments. They are a substitute for money and increase the purchasing
medium in circulation. Otherwise, mere specie or paper money would be needed in circulation to
take care of everyday business transactions.
 Payment by negotiable instruments. “The delivery of promissory notes payable to order, or bills
of exchange or other mercantile documents shall produce the effect of payment only when they
have been cashed, or when, through the fault of the creditor, they have been impaired.”

Promissory Note Bill of Exchange

A promissory note is essentially a promise to A Bill of Exchange is essentially an order or a
pay a sum certain in money. command in writing addressed to someone
requiring him to pay a sum certain in money.

(1) The place, “Manila, Philippines.” It shows
the place where the contract to pay is
executed.
(2) The date, “August 1, 1949.” It is usually
inserted either to determine when the note is
due or to fix the time when the interest is to
run, when the payment for interest is
stipulated, or whether or not the collection of
the instrument is barred by the statute of
limitations.
(3) The date of maturity, “on or before
December 31, 1949.” This indicates the time
when the promise to pay is to be fulfilled.
(1) The order or command to pay, “Pay to.”
This is an order or command to pay. Thus,
instead of a promise, the bill of exchange
contains a command or order to pay money.
(2) The signature, “Ernesto Reyes.” Ernesto
Reyes is the drawer. He corresponds to the
maker of a promissory note.
(3) The name, “Augusto Tolentino.” Augusto
Tolentino is the drawee. He is the one ordered
or commanded to pay a sum certain in money.
(4) “Thirty days after sight” is the period of thirty
days to start from the time the drawee “sees”
Where, however, the date of maturity is not the bill at the time it is exhibited to him for
stated, the instrument is payable on demand. acceptance.
(4) The promise, “I promise to pay.” It consists
of an absolute promise to do something, that
is, to pay. It is not subject to the fulfillment of a
condition.
(5) The words, “to the order of.” It means that
the promise is to pay as ordered or as
commanded by the payee. But an instrument
may be payable to bearer.
(6) The name, “Pedro Reyes” is the payee.
(7) The signature “Exequiel Ferrer.” Exequiel
Ferrer is the maker of the note. He is the one
who promises to pay it at the first instance. A
note may be signed by more than one person
either jointly, or jointly and severally.
(8) The place of payment, “at the Philippine
National Bank.” It indicates where the note is to
be paid. However, that is not necessary. An
instrument may be made payable at any other
place agreed upon by the parties.
(9) The consideration, “for value received.” This
indicates that a consideration was given for the
note. The consideration may be specified. But
the words “for value received” may be omitted
and the consideration not specified, as
consideration is presumed.
2 parties: 3 parties:
Maker and payee/ bearer Drawer, drawee/ acceptor, payee/ bearer
Liabilities: Liabilities:
 Maker is primarily liable.  Drawee/ acceptor is primarily liable.
 The qualified or general indorser and  Drawer and Indorsers are secondarily
person negotiating by mere delivery liable.
are secondarily liable.
Examples: Promissory Notes Examples: 1) draft, (2) trade acceptance, (3)
banker’s acceptance, (4) treasury warrant, (5)
Special Kinds of PNs: (1) certificate of deposit; money orders, (6) clean bills of exchange, (7)
(2) bonds, (3) bank notes; and (4) due bills. documentary bills of exchange, (8) D/A bills of
exchange, (9) D/P bills of exchange, (10) time
or usance bills, (11) bills in set, (12) inland bills,
and (13) foreign bills.

 Bill of exchange and promissory note distinguished. The fundamental distinction between a
bill of exchange and a promissory note is that the first is an order or a command, while the
second is a promise. Where a promissory note may be payable to bearer, it is a “promise to
pay to order.” It does not become a bill by reason of the fact that it is payable to order.
o Other words for promise: “agree”, “will pay” “shall pay” and the like.
  Distinctions between check and bill of exchange.
(1) A check is always drawn upon a bank or banker, whereas, an ordinary bill may or may
not be drawn against a bank.
(2) A check is always payable on demand, whereas, an ordinary bill may be payable on
demand or at a fixed or determinable future time.
(3) It is not necessary that a check be presented for acceptance as in the case of a bill of
exchange. Checks are not to be accepted but presented at once for payment.
However, if the holder requests, and the banker desires, he may accept.
(4) A check is drawn on a deposit while the ordinary bill of exchange is not. In other
words, it is not necessary that a drawer of a bill of exchange should have funds in the
hands of the drawee, but in the case of the check, it would be fraud.
(5) The death of the drawer of a check, with the knowledge of the banks, revokes the
authority of the banker to pay, while the death of the drawer of the ordinary bill of
exchange does not. But there are some decisions to the contrary.
(6) An ordinary bill of exchange may be presented for payment within a reasonable time
after its last negotiation. But a check must be presented for payment for payment
within a reasonable time after its issue (Note: 6 months for a check to become stale)
 Negotiation, defined and explained. Negotiation is such transfer of an instrument from one
person to another as to constitute the transferee the holder of the instrument. In other words,
negotiation is a mode of transferring an instrument.
o Payable to bearer  May be negotiated by mere delivery (Delivery is sufficient because
by delivery, the transferee is placed in possession of the instrument, and the moment the
transferee is in possession, he constitutes the holder thereof since the holder of an
instrument is payable to bearer is one on possession of it.)
o Payable to order  Must be negotiated by indorsement completed by delivery.
Indorsement is necessary to make the transferee the indorsee, and delivery is also
necessary to place the transferee in possession of the instrument.
 Indorsement, defined and explained. Indorsement is a legal transaction, effected by writing of
one's own name on the back of the instrument or upon a paper attached thereto, with or without
additional words specifying the person to whom or to whose order the instrument is to be payable
whereby one not only transfers one's full legal title to the paper transferred but likewise enters
into an implied guaranty that the instrument will be duly paid.

SECTION 1

For notes:
(1) It must be in writing and signed by the marker
 The writing may be in ink, print, or pencil. It may be upon parchment, cloth, leather, or
any other substitute of paper.
 The full name may be written. At least, the surname should appear and, generally, the
signature usually is by writing the signer’s name. But it consists of mere initials or even
 numbers such as 1, 2, 8. But, where name is not signed, the holder must prove that what
is written is intended as a signature of the person sought to be charged.
 The name may be printed, typewritten, stamped, engraved, photographed or
lithographed. But in such case, it must be shown to have been adopted and used by the
party as his signature.
 The location of the signature is not material.

(2) it must contain an unconditional promise to pay a sum certain in money

 It is not enough that there be a promise or order. The promise or order must also be
unconditional or absolute. This means that it must not be subject to condition. Based on
Article 1179 of New Civil Code, a condition is: (1) a future event that may or may not
happen, or (2) a past event which is unknown to the parties. It is distinguished from an
event that is certain to happen, even though the time of its happening is not known.
 Example of a conditional promise to pay: Pay to X or bearer P1,000.00 if he marries Z.
 If it is an event certain to happen, like death, would still make the instrument negotiable.
 Must be sum certain. Example of not certain: “I promise to pay to B or order P1,000.00
together with all sums that may be due to him on December 31, 1950”  this is not
negotiable.
 Accordingly, a bill or note, if it is to be negotiable, cannot be made payable in goods,
wares, or merchandise, or in property, or in labor or services. So also, an instrument is
not negotiable if it is made payable in bonds, corporate stocks, state paper, scrip, checks,
foreign bills.
 Must be in legal tender (check BSP definition!); but if authorized by law or consent of
creditor, cash may be substituted by other means, or may be check.
 A bill or note may be made payable in denominations of foreign money, currency, or
coins, such as pounds or lire. But the courts have held that the instrument should express
the specific denomination of money when it is payable in the money of a foreign country
in order that the courts may be able to ascertain its equivalent value; otherwise, it is not
negotiable.

(3) it must be payable on demand, or at a fixed or determinable future time

 Where no year is specified, it is neither payable on demand nor at a fixed or determinable
future time.

(4) it must be payable to order or to bearer.

 Where the instrument is payable only to a specified person (regardless of principal or
agent), it is not payable to order; hence, not negotiable.
For bills (additional requisite):

(5) the drawee must be named or otherwise indicated therein with reasonable certainty.
 This requirement refers only to bill of exchange but not to promissory notes. The name
of the person on whom a bill is drawn should appear on its face. Otherwise, the
instrument would not be negotiable.
 Drawee’s name may be omitted and be filled in under implied authority. An acceptance
may supply the omission of a designation.
 If a bill, it must be contain an “Order to pay”. A bill is something more than the mere
asking of a favor. It is an instrument demanding right. It is, however, not necessary that
the word “order” be used.
 “I hereby authorize you to pay” is not negotiable. It is not negotiable because not is not
an order to pay. It is mere authorization to pay. By the terms, the bill gives a discretion
to the drawee to pay or not to pay.
 “Request to pay” is not negotiable.