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 impliedly repealed by the NIL.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.
 The NIL can be applied but only
by analogy if the instrument is
not negotiable if there is no law
that can be applied.
 Decisions of the courts in the
United States and in England
based on the American Uniform
Negotiable Instruments Law and
the Bills of Exchange Act of 1882
can be applied in the jurisdiction
because those foreign laws
served as bases of NIL.
FUNCTIONS
1. It operates as a substitute of
money.
2. It is a means of creating and
transferring credit.
3. It facilitates the sale of goods.
4. It increases the purchasing
medium in circulation.
TWO IMPORTANT FEATURES OF
NEGOTIABLE INSTRUMENT
1. Negotiability – it is that
attribute or property whereby a
bill or note or check pass from
hand to hand similar to money,
so as to give the holder in due
course the right to hold the
instrument and to collect the
sum payable for himself free from
defences.
2. Accumulation of Secondary
Contracts – secondary contracts
are picked up and carried along
with them as they are negotiated
from one person to another, or in
the course of negotiation of a
negotiable instrument, a series of
judicial ties between the parties
thereto arise either by law or by
privity.
KINDS OF NEGOTIABLE
INSTRUMENTS
1. Bill of Exchange – 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.
2. Promissory Note – 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 maker’s own order, it is not
complete until indorsed by him.
KINDS OF BILL OF EXCHANGE
1. Draft – used synonymously with
bill of exchange although it
normally refers to a bill or
exchange used on documentary
exchange like letters of credit
transactions.
2. Inland and Foreign Bill – it is a
bill which is, or on its face
purports to be, both drawn and
payable within the Philippines.
Any other bill is a foreign bill.
3. Time draft – draft that is
payable at a fixed date.
4. Sight or Demand draft – draft
that is payable when the holder
presents it for payment.
5. Trade Acceptance – bill that is
used in contracts of sale where
the seller as drawer orders the
 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.

REQUISITES OF NEGOTIABILITY
A. In Writing and Signed By The
Maker or Drawe
a) In writing means it may be
printed, in ink or in pencil and it
may be written in any material
that substitute paper like cloth,
leather or parchment. Sec. 191
of the NIL provides that the word
“written” includes printed, and
“writing” includes print.
b) Signed by the maker or drawer
means that the signature may be
in one’s handwriting, printed,
engraved, lithographed or
photographed so long as they are
adopted as the signature of the
signer. What is important is that
the maker or drawer used what
he affixed as his own signature
for authentication.
B. Contain an Unconditional
Promise or Order to Pay a Sum
Certain in Money
a) The “promise” in a promissory
note is the undertaking made by
the maker to pay a sum certain
in money to the payee or the
holder. The “order” in a bill is a
command made by the drawer
addressed to the drawer ordering
the latter to pay the payee or the
holder a sum certain in money.
b) An unqualified order or promise
to pay is unconditional within
the meaning of NIL though
coupled with:
1. 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
2. A statement of the transaction
which gives rise to the
instrument.
c) A promise or order to pay is
conditional if: 1) an order or
promise to pay out of a particular
fund; or 2) an instrument
payable upon a contingency (the
happening of the event does not
cure the defect).
d) Indication of a particular fund for
payment vs. fund for
reimbursement
Fund for Particular Fund
Reimbursement for Payment
The drawee pays There is only one
the payee from act – the drawee
his own funds, pays directly
thereafter drawee from the
pays himself particularly fund
from the indicated.
particular fund
indicated.
Particular fund Particular fund
indicated is not indicated is the
the direct source direct source of
of payment
reimbursement
Is a promissory note wherein the
maker promises to pay “as soon
as his means permit him to do so”
negotiable?
 No. The phrase “as soon as his
means permit him to do so”
renders the promise conditional,
although under the Civil Code, it
may be considered as an
obligation with a period.
C. Payable in Sum Certain in
Money
a) Money need not be “legal tender.”
An instrument is still negotiable
although the amount to be paid
is expressed in currency that is
not legal tender so long as it is
expressed in money. Under RA
8183, the agreement to pay in
foreign currency is valid.
Ex. Payable in Yen.
b) If the obligor like the maker is
given the option to deliver
something in lieu of money the
instrument is not negotiable.
Ex. A note where the maker
“promises to deliver P1,000 or a
sack of rice” at his option.
c) If the instrument gives the holder
an election to require something
to be done in lieu of payment of
money, the instrument is still
negotiable.
Ex. Where the maker promises to
pay P1,000 or a sack of rice at
the option of the holder.
d) A sum is certain with the
contemplation of Sec. 1 (b) of the
NIL if the amount that is to be
unconditionally paid by the
maker or drawee can be
determined on the face of the
instrument even if it requires
mathematical computation.
e) The sum payable is a sum
certain within the meaning of
this Act, although it is to be paid:
1. With interest’;
2. By stated installment; or
3. By stated installment, with a
provision that upon default in
payment of any installment or
of interest, the whole shall
become due; or
4. With exchange, whether at a
fixed rate or at the current
rate; or
5. With costs of collection or an
attorney’s fee, in case
payment shall not be made at
maturity.
f) Stated Installments – the dates
of each installment must be fixed
or at least determinable and the
amount to be paid for each
installment must be stated.
Ex. The instrument is not
negotiable if “payable in 5
installments in the amount of
P1,000 per installment” without
stating the dates of each
installments.
D. Payable on Demand or at a
Fixed or Determinable Future
Time
a) Payable on Demand – The
instrument should be paid the
moment it is presented for
payment. An instrument is
payable on demand:
1. When it is so expressed to be
payable on demand, or at
sight, or on presentation; or
2. In which no time for payment
is expressed;
3. Where an instrument is
issued, accepted, or indorsed
when overdue, it is, as regards
the person so issuing,
accepting, or indorsing it,
payable on demand.
b) Payable at Determinable
Future Time – an instrument is
payable at a determinable future
time if it is expressed to be
payable:
1. At a fixed period after date or
sight; (Ex. Twenty days after
date)
 2. On or before a fixed or
determinable future time
specified therein; (Ex. Payable
on or before January 1, 2016)
3. On or at a fixed period after
the occurrence of a specified
event which is certain to
happen, though the time of
happening be uncertain (Ex.
Payable within 5 days from
death of Mr. X).
c) Acceleration Clauses – the
negotiability of the instrument is
not affected even if it is to be paid
by statement installments, with a
provision that, upon default in
payment of any installment or of
interest, the whole shall become
due.
d) Insecurity Clauses – provisions
on the contract which allow the
holder to accelerate payment “if
he deems himself insecure.” The
instrument is rendered non-
negotiable.
e) Extension Clauses – an
instrument is payable at a
definite time if by its terms it is
payable at a definite time subject
to extension at the option of the
holder, or to extension to a
further definite time at the option
of the maker or acceptor or
automatically upon or after a
specified act or event.
E. Payable to Order or Bearer
a. An instrument that is payable to
a specified person or entity is not
negotiable because the NIL
requires that the instrument
must be payable to order or to
bearer.
b. An instrument is payable to
bearer when:
1. It is expressed to be so
payable; or
2. It is payable to a person
named therein or bearer; or
3. 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; or
4. The name of the payee does
not purport to be the name of
any person (Ex. “pay to case”);
or
5. The only or last indorsement
is an indorsement in blank.
c) Order Instruments – instrument
can either be made payable to
the order of a specified person
(“pay to the order of Juan Dela
Cruz”) or to a specified person or
his order (“pay to Juan Dela Cruz
or order”).
d) Section 8 of NIL likewise
identifies the persons who can be
designated as payees in an order
instrument – the persons to
whose order the instrument may
be made payable. The
instrument may be payable to
the order of:
1. A payee who is not maker,
drawer, or drawee; or
2. The drawer or maker; or
3. The drawee; or
4. Two or more payees jointly; or
5. One or some of several
payees; or
6. The holder of an office for the
time being.