NEGOTIABLE INSTRUMENTS LAW
(ACT NO. 2031)
Applicability of Negotiable Instruments
 Limited application – applies only to negotiable
instruments. Designed to describe the law of
negotiable
 Supplementary application of other laws – case
not provided for by the act shall be governed by
the provision of existing legislation. Civil code
has no effect on its provisions
Function and importance of Negotiable instruments
 As a substitute for money
o Distinctive characteristics: its
negotiability
o Purpose of the law: to make negotiable
instruments freely acceptable
 Negotiable papers
o W/o them more money would be
needed in circulation
o Safe and convenient
 Serve as a medium of credit transaction
o Check: used for immediate payment
o Ordinary bill of exchange & Promissory
note: for circulation of credits
Characteristics/Features of Negotiable Instruments
 Negotiability – may pass from one person to
another similar to money
o When transferability is limited, paper
may be said to be non-negotiable
o Rule that one can pass no better title to
personal property does not apply to n.i.
o Bona fide holder while free from
personal defenses, is subject to real
defenses
 Accumulation of secondary contracts – most
important feature, it is once an instrument is
issued, additional parties can become involved
Forms of Negotiable Instruments
 Common forms
o Promissory notes – issuer has promised
to pay
o Bills of exchange – issuer has ordered a
third person to pay
 Special types
o Certificates of deposits
o Bank notes
o Due bills
o Drafts
o Trade acceptances
o Banker’s acceptances
Doubt resolved in favor of negotiability
Instruments with Limited negotiability
 Widely used in commercial transactions but
have been held to be non-negotiable because
they do not have the requisites, therefore
governed by other law
o Letter of credit
o Trust receipt
o Treasury warrant
o Postal money order
o Bill of lading – without unconditional
promise
o Cert of stock – written instrument
without unconditional promise
o Warehouse receipt – document of title
without an unconditional promise
o Pawn Ticket
CHAPTER 1 – FORM AND INTERPRETATION
Section 1 – Form of negotiable instruments.
An instrument to be negotiable must conform to the ffg.
Requirements:
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 a drawee,
he must be named or otherwise indicated
therein with reasonable certainty
*A-D promissory note
*A-E bill of exchange
*B promissory note is unconditional promise while bill of
exchange is order
*C&D both applicable to each of two kinds
*E is for bill of exchange only
Commercial paper – written promises that arise out of
commercial transactions; all such instrument is either
negotiable or non-negotiable
Formal requirements of negotiability in general
 Form and content
o Whether negotiable or non-negotiable,
it depends entirely on its form and
content
o Valid instrument is not necessarily
negotiable
 Matters to be considered
o Whole of the instrument
o What appears on the face of instrument
o Provisions of n.i. in section 1
Non-negotiable Instrument
 Does not meet the requisites
 Check payable only to a specified person
 May not be negotiated but may be
assigned or transferred
 Transfers are governed by Civil code
Nature of Non-negotiable
 Simple contract in writing
 May not be negotiated but may assigned or
transferred
Promissory Note – unconditional promise in writing
Original properties to a promissory note
 Maker & Payee
 Payee may be specifically designated by name or
office or title
 May seek payment personally or FURTHER
negotiate the instrument
 Contain signature
Promissory Note
1. Amount in figures is not essential but is convenient
2. Place and date are not essential except when date is
necessary to determine when note is due, or interest is
to run
3. “For value received” indicate the consideration given
but is presumed hence may be omitted
4. “I promise to pay” signify an absolute and
unconditional promise to pay, it is essential to
negotiability
5. Not all instruments are payable at a fixed future time
6. Others may be payable on demand
7. Where no time for payment is expressed, instrument
is payable on demand
8. Payee need not be specified if the promise is made to
bearer
9. Place of payment is not essential
10. Note may be signed by several persons

Bill of Exchange – unconditional order in writing, it is an

order made by one person to another to pay money to a
third person
 Check – drawn on bank and payable on demand

Original parties to a bill of exchange

 At least 3 parties – drawer, drawee, payee
 Partied need not be distinct persons
o Drawer may draw on himself payable to
his own order
o 2 parties to the bill can be the same
person

Bill of Exchange
1. “pay to” indicate an unconditional order to pay
2. Drawee is not really a party to the bill. He assumes
liability only when he accepts the bill and signed
(acceptor)
3. “charge the same account of” means that the amount
to be paid by the drawee is to be charged against the
funds of the drawer. BUT these may be omitted

Idea and purpose of a bill of exchange

- Drawer’s funds in hands of drawee
- Liability of drawee for non-payment
o If drawee refuses to accept when he has
funds – he becomes liable to the drawer
o If drawer has no funds in the hands of
the drawee – it is presumed that the
drawer must have made arrangements
with the drawee to honor the bill
o In order for the drawee to be liable,
there must be an arrangement
obligating hi

Section 2 Certainty as to sum

It is to be paid -
a. With interest
b. By stated installments or
c. By stated installments with provision that, upon
default in payment of any installment or of
interest, the whole shall become due or
d. With exchange, whether at a fixed rate or at
current rate
e. With costs of collection or attorney’s fee, in case
payment shall not be made at maturity