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NEGOTIABLE INSTRUMENT  In determining the negotiability

 It is a written contract for the of an instrument, consider the


payment of money which is instrument in its entirety and
intended as a substitute for only what appears on its face. It
money and passes from one must comply with the
person to another as money, in requirements under Sec. 1 of the
such a manner as to give a NIL.
holder in due course the right to
hold the instrument free from When negotiability ends?
defences available to prior  Sec. 47 of the NIL provides that
parties. The instrument must “an instrument negotiable in its
comply with Section 1 of the origin continues to be negotiable
Negotiable Instruments Law to be until:
considered negotiable. 1. It has been restrictively
indorsed; or
REQUISITES OF NEGOTIABILITY 2. Discharged by payment or
(Sec. 1) W-U-D-O-A otherwise.
1. Must be in writing and signed by Note however, that restrictive
the maker or drawer; indorsement makes the
2. Must contain an unconditional instrument non-negotiable only if
promise or order to pay a sum it is the first type – it prevents
certain in money; further negotiation of the
3. Must be payable on demand, or instrument – and not the two
at a fixed or determinable future other types (constitutes the
time; indorsee the agent or trustee).
4. Must be payable to order or
bearer; and GOVERNING LAW
5. When the instrument is  In addition to Act No. 2031
addressed to a drawee, he must otherwise known as the
be named or otherwise indicated Negotiable Instruments Law,
therein with reasonable negotiable instruments are
certainty. governed by the provisions of the
Code of Commerce that were not
What does negotiation mean? impliedly repealed by the NIL.
 The transfer of an instrument The New Civil Code applies
from one person to another in suppletory.
such a manner as to constitute
the transferee a holder thereof. A Applicability of the Negotiable
holder is the payee or indorsee of Instruments Law
a bill or note who is in  The provisions of the NIL can be
possession of it, or the bearer applied only to negotiable
thereof. instruments. If the instrument is
not negotiable, the pertinent
How is negotiability of an provisions of the Civil Code or
instrument determined?
pertinent special laws should
apply. KINDS OF NEGOTIABLE
 The NIL can be applied but only INSTRUMENTS
by analogy if the instrument is 1. Bill of Exchange – it is an
not negotiable if there is no law unconditional order in writing
that can be applied. addressed by one person to
 Decisions of the courts in the another, signed by the person
United States and in England giving it, requiring the person to
based on the American Uniform whom it is addressed to pay on
Negotiable Instruments Law and demand or at a fixed or
the Bills of Exchange Act of 1882 determinable future time a sum
can be applied in the jurisdiction certain in money to order or to
because those foreign laws bearer.
served as bases of NIL. 2. Promissory Note – it is an
unconditional promise in writing
FUNCTIONS made by one person to another,
1. It operates as a substitute of signed by the maker, engaging to
money. pay on demand, or at a fixed or
2. It is a means of creating and determinable future time, a sum
transferring credit. certain in money to order or to
3. It facilitates the sale of goods. bearer. Where a note is drawn to
4. It increases the purchasing the maker’s own order, it is not
medium in circulation. complete until indorsed by him.

TWO IMPORTANT FEATURES OF KINDS OF BILL OF EXCHANGE


NEGOTIABLE INSTRUMENT 1. Draft – used synonymously with
1. Negotiability – it is that bill of exchange although it
attribute or property whereby a normally refers to a bill or
bill or note or check pass from exchange used on documentary
hand to hand similar to money, exchange like letters of credit
so as to give the holder in due transactions.
course the right to hold the 2. Inland and Foreign Bill – it is a
instrument and to collect the bill which is, or on its face
sum payable for himself free from purports to be, both drawn and
defences. payable within the Philippines.
2. Accumulation of Secondary Any other bill is a foreign bill.
Contracts – secondary contracts 3. Time draft – draft that is
are picked up and carried along payable at a fixed date.
with them as they are negotiated 4. Sight or Demand draft – draft
from one person to another, or in that is payable when the holder
the course of negotiation of a presents it for payment.
negotiable instrument, a series of 5. Trade Acceptance – bill that is
judicial ties between the parties used in contracts of sale where
thereto arise either by law or by the seller as drawer orders the
privity.
buyer (as drawee) to pay a sum Negotiable Promissory Note Vs.
certain to the same seller (payee). Negotiable Bill Of Exchange
6. Banker’s Acceptance – a time Promissory Bill of Exchange
draft across the face of which the Note
drawee has written has written Unconditional Unconditional
the word accepted. promise order
7. Check – a bill of exchange drawn Involves two Involves three
on a bank payable on demand. parties parties
Maker primarily Drawer
KINDS OF PROMISSORY NOTES liable secondarily liable
1. Certificate of Deposit – a form Only one Generally, two
of promissory notes which is a presentment (or presentments:
written acknowledgment of a payment) acceptance and
bank of its receipt of a certain for payment
sum with a promise to repay the
same. Bill of Exchange Vs. Check
2. Bonds – a certificate or evidence Bill of Exchange Check
of a debt on which the issuing Not drawn on a It is necessary
company or governmental body deposit. It is not that check is
promises to pay the bondholders necessary that a drawn on a
a specified amount of interest for drawer of a BOE deposit.
a specified length of time, and to should have Otherwise, there
repay the loan on the expiration funds in the would be fraud.
date. hand of the
3. Debenture – a promissory note drawee.
or bond backed by the general Death of the Death of the
credit of a corporation and drawer of a BOE drawer of a
usually not secured by a with the check, with the
mortgage or lien on any specific knowledge of the knowledge by the
property. bank, does not bank, revokes
revoke the the authority of
When can a bill of exchange be author of the the banker to
treated as a promissory note by banker to pay. pay.
the holder? May be Must be
1. When the drawer and the drawee presented for presented for
are the same person. payment within a payment within a
2. When the drawee is a fictitious reasonable time reasonable time
person. after its last after its issue.
3. When the drawee has no capacity negotiation.
to contract.
4. When the instrument is so Are the following commercial
ambiguous that there is doubt papers negotiable instruments?
whether it is a bill or a note. 1. Cross Check – usually negotiable
as it normally complies with the
requirements under Sec. 1, NIL,
but issued for a special purpose drawer. It is only when a drawee
and can be negotiated only once. becomes an acceptor that he is
2. Trade Acceptance – negotiable, primarily liable.
it is a Bill of Exchange addressed 6. Holder – the person who is in
by the seller of the goods to the possession of a bearer
buyer. However, Sec. 1 must be instrument or an indorse of an
complied with. order instrument who is in
3. Money Order – non-negotiable possession thereof. A holder is
as it is governed by postal rules the obligee, a person who can
and regulations which may be enforce payment of the
inconsistent with the NIL and it instrument.
can only be negotiated once. 7. Referee in case of need – a
4. Warehouse Receipt – non- person who may be designated in
negotiable as it represents goods, the instrument as the person
not money. who may be resorted to by the
5. Pawn Ticket – non-negotiable as parties in case of dispute.
it does not represent money but
the pawned articles. Negotiable Instruments Vs. Non-
6. Treasury warrant – non- Negotiable Instruments
negotiable being payable out of Negotiable Non-negotiable
particular fund. Instruments Instruments
7. Bill of Lading – non-negotiable Governed by the NIL does not
as it represents goods, not NIL apply. It only
money. applies by
8. Trust Receipt – non-negotiable analogy.
as it is an evidence of ownership Can be Can be
of goods, not money. transferred by transferred only
negotiation or by by assignment.
PERSONS INVOLVED IN NIL assignment.
1. Maker – the person who makes a A transferee of a A transferee of a
promissory note and promises to negotiable non-negotiable
pay the amount stated therein. instrument can instrument can
2. Payee – the oblige, that is, the be a holder in never be a holder
person who, by the terms of the due course if all in due course
note or the bill, is to receive the requirements but remains to
payment. under Sec. 52 of be an assignee.
3. Drawer – the person who draws the NIL are
the bill of exchange; he orders complied with.
the drawee to pay a sum certain A holder in due All defenses
in money. course has the available to prior
4. Drawee – the person to whom right to hold the parties may be
the order to pay is addressed in a instrument free raised against
bill of exchange. from defences the last
5. Acceptor – a drawee who accepts available to prior transferee.
the order to pay made by the parties.
or a particular account to be
REQUISITES OF NEGOTIABILITY debited with the amount; or
2. A statement of the transaction
A. In Writing and Signed By The which gives rise to the
Maker or Drawe instrument.
c) A promise or order to pay is
a) In writing means it may be conditional if: 1) an order or
printed, in ink or in pencil and it promise to pay out of a particular
may be written in any material fund; or 2) an instrument
that substitute paper like cloth, payable upon a contingency (the
leather or parchment. Sec. 191 happening of the event does not
of the NIL provides that the word cure the defect).
“written” includes printed, and d) Indication of a particular fund for
“writing” includes print. payment vs. fund for
b) Signed by the maker or drawer reimbursement
means that the signature may be Fund for Particular Fund
in one’s handwriting, printed, Reimbursement for Payment
engraved, lithographed or The drawee pays There is only one
photographed so long as they are the payee from act – the drawee
adopted as the signature of the his own funds, pays directly
signer. What is important is that thereafter drawee from the
the maker or drawer used what pays himself particularly fund
he affixed as his own signature from the indicated.
for authentication. particular fund
indicated.
B. Contain an Unconditional Particular fund Particular fund
Promise or Order to Pay a Sum indicated is not indicated is the
Certain in Money the direct source direct source of
of payment
a) The “promise” in a promissory reimbursement
note is the undertaking made by
the maker to pay a sum certain Is a promissory note wherein the
in money to the payee or the maker promises to pay “as soon
holder. The “order” in a bill is a as his means permit him to do so”
command made by the drawer negotiable?
addressed to the drawer ordering  No. The phrase “as soon as his
the latter to pay the payee or the means permit him to do so”
holder a sum certain in money. renders the promise conditional,
b) An unqualified order or promise although under the Civil Code, it
to pay is unconditional within may be considered as an
the meaning of NIL though obligation with a period.
coupled with:
1. An indication of a particular C. Payable in Sum Certain in
fund out of which Money
reimbursement is to be made
a) Money need not be “legal tender.” 5. With costs of collection or an
An instrument is still negotiable attorney’s fee, in case
although the amount to be paid payment shall not be made at
is expressed in currency that is maturity.
not legal tender so long as it is f) Stated Installments – the dates
expressed in money. Under RA of each installment must be fixed
8183, the agreement to pay in or at least determinable and the
foreign currency is valid. amount to be paid for each
Ex. Payable in Yen. installment must be stated.
b) If the obligor like the maker is Ex. The instrument is not
given the option to deliver negotiable if “payable in 5
something in lieu of money the installments in the amount of
instrument is not negotiable. P1,000 per installment” without
Ex. A note where the maker stating the dates of each
“promises to deliver P1,000 or a installments.
sack of rice” at his option.
c) If the instrument gives the holder D. Payable on Demand or at a
an election to require something Fixed or Determinable Future
to be done in lieu of payment of Time
money, the instrument is still
negotiable. a) Payable on Demand – The
Ex. Where the maker promises to instrument should be paid the
pay P1,000 or a sack of rice at moment it is presented for
the option of the holder. payment. An instrument is
d) A sum is certain with the payable on demand:
contemplation of Sec. 1 (b) of the 1. When it is so expressed to be
NIL if the amount that is to be payable on demand, or at
unconditionally paid by the sight, or on presentation; or
maker or drawee can be 2. In which no time for payment
determined on the face of the is expressed;
instrument even if it requires 3. Where an instrument is
mathematical computation. issued, accepted, or indorsed
e) The sum payable is a sum when overdue, it is, as regards
certain within the meaning of the person so issuing,
this Act, although it is to be paid: accepting, or indorsing it,
1. With interest’; payable on demand.
2. By stated installment; or b) Payable at Determinable
3. By stated installment, with a Future Time – an instrument is
provision that upon default in payable at a determinable future
payment of any installment or time if it is expressed to be
of interest, the whole shall payable:
become due; or 1. At a fixed period after date or
4. With exchange, whether at a sight; (Ex. Twenty days after
fixed rate or at the current date)
rate; or
2. On or before a fixed or b. An instrument is payable to
determinable future time bearer when:
specified therein; (Ex. Payable 1. It is expressed to be so
on or before January 1, 2016) payable; or
3. On or at a fixed period after 2. It is payable to a person
the occurrence of a specified named therein or bearer; or
event which is certain to 3. It is payable to the order of a
happen, though the time of fictitious or non-existing
happening be uncertain (Ex. person, and such fact was
Payable within 5 days from known to the person making
death of Mr. X). it so payable; or
c) Acceleration Clauses – the 4. The name of the payee does
negotiability of the instrument is not purport to be the name of
not affected even if it is to be paid any person (Ex. “pay to case”);
by statement installments, with a or
provision that, upon default in 5. The only or last indorsement
payment of any installment or of is an indorsement in blank.
interest, the whole shall become c) Order Instruments – instrument
due. can either be made payable to
d) Insecurity Clauses – provisions the order of a specified person
on the contract which allow the (“pay to the order of Juan Dela
holder to accelerate payment “if Cruz”) or to a specified person or
he deems himself insecure.” The his order (“pay to Juan Dela Cruz
instrument is rendered non- or order”).
negotiable. d) Section 8 of NIL likewise
e) Extension Clauses – an identifies the persons who can be
instrument is payable at a designated as payees in an order
definite time if by its terms it is instrument – the persons to
payable at a definite time subject whose order the instrument may
to extension at the option of the be made payable. The
holder, or to extension to a instrument may be payable to
further definite time at the option the order of:
of the maker or acceptor or 1. A payee who is not maker,
automatically upon or after a drawer, or drawee; or
specified act or event. 2. The drawer or maker; or
3. The drawee; or
E. Payable to Order or Bearer 4. Two or more payees jointly; or
5. One or some of several
a. An instrument that is payable to payees; or
a specified person or entity is not 6. The holder of an office for the
negotiable because the NIL time being.
requires that the instrument
must be payable to order or to
bearer.