MODULE IN NEGOTIABLE INSTRUMENT LAW

(Act No. 2031)

Discuss the brief history of Negotiable Instrument:

1. Brief History of Negotiable Instrument:
- The Negotiable Instrument Law or NIL is a reproduction of the Uniform
Negotiable Instrument Law of the United States, approved by the National
Conference of Commissioner in 1896. This was adopted and followed by all
states of the union with modification. Later, the law was codified in England and
in the United States purposedly to make uniform the rules and principles
applicable to negotiate paper, and to settle the long existing confusion and
conflict in the common law arising from the numerous decisions of the various
courts.

2. Adoption of law in the Philippines:

- The Negotiable Instrument Law of the Philippines was patterned after the draft
approved by the Commissioners on Uniform State Laws in the United States. It
was enacted as Act No. 2031 on February 3, 1911 and took effect ninety days
after its publication on the Official Gazette of the Philippines. This took effect on
June 2, 1911.

3. Applicability of the Negotiable Instrument Law:

- This law is applicable only to those instruments which conform with the
requisites laid down by Section One of the Law. If any of the requirements failed,
the instruments failed, the instrument is not negotiable and would therefore not
be governed by the Negotiable Instrument Law but by the general rule on
contracts.

- Statement of Section 196 “ Any case not provided for in this Act shall be
governed by the provisions of the existing regulation, or in default thereof, by the
rules of the Law Merchant”

What are the most common forms of Negotiable Instrument?

Most common forms of Negotiable Instruments:
a. Promissory notes
b. Bills of exchange
c. Checks, which are also bills of exchange, but of a special kind.

Brief explanation of these common forms of Negotiable Instruments:

a. Promissory notes – this evidence a promise to pay money.
b. Bill of exchange – This evidences an order made by one person to another
to pay money to third person.
c. Check – this is a form of a bill of exchange issued by a person (drawer)
ordering his bank to pay the person named on the check.
Give the different parties of the Negotiable Instruments and their liabilities.
Parties of the Negotiable Instrument and their liabilities:
a. Parties
1. Promissory note:
a. The promissor, or the one making the promise to pay. He is
called the maker.
b. The person to whom the promise to pay is made. He is
called the payee.
2. Bill of exchange:
a. Drawer, the person drawing or making the instrument, or the
person giving the order to pay.
b. Drawee, the addressee of the order to pay, or the person
required to pay the instrument.
c. Payee, the person to whom payment is to be made.

Be it noted that if the payee of an instrument transfers it to

another by signing it at the back, he is said to have negotiated
or endorsed the same and thereby becomes an indorser, and
to whom it was negotiated is called an indorsee.

b. Liablity:
1. Primary Liable:
a. Maker
b. Accept of a bill
2. Secondarily:
a. Drawer of a bill
b. Indorsers of a bill or a note
3. Not liable:
Drawee until he accepts.

What are the different functions of Negotiable Instruments?

Functions and importance of Negotiable Instruments.
1. Used as substitute for money
2. Media of exchange for most commercial transactions
3. Serve as a medium of credit transactions

Explain why Negotiable Instrument is not legal tender.

Negotiable Instrument not legal tender:
A negotiable instrument although intended to be a substitute for money, is
generally not legal tender. Thus, a creditor is not bound to accept commercial
papers, like a check, in satisfaction of his demand, because a check, even if
good when offered, does not meet the requirements of a legal tender. (Belisario
vs. Natividad, 60 Phil. 156)

Give the incidents in the life of Negotiable Instrument. Explain each.

Incidents in the “life” of negotiable instrument:
The following are the 10 incidents in the “life” of a negotiable instrument:
a. Issue
b. Negotiation
 c. Presentment for acceptance in certain kinds of bills of exchange
d. Acceptance
e. Dishonor by non-acceptance
f. Presentment for payment
g. Dishonor for non-payment
h. Notice of dishonor
i. Protest in some cases
j. Discharge

a. Issue
It is the first delivery of the instrument, complete in form, to a person
who takes it as a holder. (Sec. 191, N.I.L.) Thus, where a promissory
note made by Manuel Cruz payable to Pedro Santos or Bearer is
delivered by the former to the latter who accepts it, the delivery is
called ”issue.”

b. Negotiation
Negotiation is the transfer of a negotiable instrument from one
person to another in such manner as to constitute the transferee the
holder thereof. If payable to bearer, it is negotiated by delivery; if
payable to order, it is negotiated by the indorsement of the holder
completed by delivery. (Sec. 30, N.I.K.)

c. Presentment for acceptance:

Presentment for acceptance is the production of the bill of exchange
to the drawee for his acceptance. (Ogden, p. 384) It is required only
in certain kinds of bills of exchange. (Sec. 143, N.I.)

d. Acceptance:
The acceptance of a bill of exchange is the signification by the
drawee of his assent to the order of the drawer. It must be in writing
and signed by the drawee. (Sec. 132, N.I.L.)

e. Dishonor by non-acceptance:
A bill of exchange is dishonored by non-acceptance when it is duly
presented for acceptance and such acceptance is refused or cannot
be obtained, or when presentment for acceptance is excused and the
bill of exchange is not accepted. (Sec. 149, N.I.L.)

f. Presentment for payment:

Presentment for payment is the production of a bill of exchange to
the drawee or acceptor for payment; or the production of a
promissory note to the party liable for payment of the same. (Ogden,
p.384)

g. Dishonor by non-payment:
The negotiable instrument is dishonored by non-payment when it is
duly presented for payment and payment is refused or cannot be
obtained, or when presentment for payment is excused and the
negotiable instrument is over-due and unpaid. (sec. 83, N.I.L.)
h. Notice of dishonor:
Notice of dishonor is bringing either verbally or by writing to the
knowledge of the drawer or the indorser of an instrument, the fact
that a specified negotiable instrument, upon proper proceedings
taken, has not been accepted, or has not been paid, and that the
party notified is expected to pay it.(Ogden, p. 414). When a
negotiable instrument has been dishonored by non-acceptance or
non-payment, notice of dishonor must be given to the drawer and to
each indorser, and any drawer or indorser to whom such notice is not
given is discharged. (Sec. 89, N.I.L.)

i. Protest:
Protest is a formal statement in writing made by a notary public under
the seal of his office at the request of the holder of a foreign bill of
exchange, in which it is declared that the same was on certain day
presented for acceptance, and such acceptance was reused or
where such foreign bill of exchange which has not previously been
dishonored by non-acceptance is dishonored by non-payment,
whereupon the notary public protests against all parties to such
instrument and declares that they will be held responsible for all loss
or damage arising from its dishonor. In its technical sense, it means a
formal declaration of the fact of non-payment or non-acceptance
usually executed by a notary, but in its popular sense it means all the
steps accompanying the dishonor of a bill or note necessary to
charge the drawer or an indorser. (10 C.J.S. 887) if it is not so
protested, the drawer and indorsers are discharged. (Sec. 152,
N.I.L.)

j. Discharge:
A negotiable instrument is discharged by any of the five (5) causes
provided for by section 119. The methods how negotiable
instruments may be discharged as provided for by section 119 are
exclusive. (Young vs. Carr, 44 Ariz, 223, 36 P. (2d) 555) (From issue
up to discharge of the instrument notes were taken from the book of
B. Paulino, Law on Negotiable Instruments)
 THE NEGOTIABLE INSTRUMENTS LAW
WITH EXPLANATIONS
(Act No. 2031)

Title I
NEGOTIABLE INSTRUMENTS IN GENERAL

Give the different requirements which conform the Negotiable Instruments be

negotiable:
Section 1: Form of negotiable instruments – An instrument to be negotiable
must conform to the following requirements:
a. It must be in writing and signed by the marker or drawer:
b. It must contain an unconditional promise or order to pay a 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; and
e. Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.

1. When an instrument is negotiable?

When it conforms to the following requirements:
1. It must be in writing and signed by the maker or drawer.
2. It must contain an unconditional promise or order to pay a sum certain in
money.
3. It must be payable on demand, or at a fixed or determinable future time.
4. It must be payable to order or bearer.
5. Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.

Note: The first four (4) requirements are applicable to a promissory note, while
all the five (5) requirements are applicable to a bill of exchange.

2. Promissory note defined and its characteristics:

A negotiable 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 time, a sum certain in money to
order or to bearer.
There are two (2) parties in a Promissory Note:
1. Maker – the one making the instrument.
2. Payee – to whom the instrument is payable.

Features and Characteristics:

1. The figures appearing at the upper left hand corner of the instrument,
“₱10,000”, is the amount of the note to be paid and can easily be determined
if written in words.
2. The place, “Manila, Philippines”, is the place where the contract to pay is
executed.
 3. The date, “January 1, 1998”, is usually inserted either to determine when the
note is due or to fix the time when interest is to run, when the payment of
interest is stipulated, or whether or not the collection of the instrument is
barred by the statute of limitations.
4. The date of maturity , “on or before December 25, 1998,” This indicates the
time when the promise to pay is to be fulfilled. Where, however, the date of
maturity is not stated, the instrument is payable on demand.
5. 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.
6. 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.
7. The name, “P.” He is the person to whose order or command the money is
promised to be paid. He is known as the payee.
8. The name, “M.” M 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.
9. The place of payment, “at the Security Bank.” It indicates where the note is to
be paid. However, that not necessary. An instrument may be made payable at
any other place agreed upon by the parties.
10.The amount, “Ten Thousand Pesos.” It indicates as the figures do, the sum
promised to be paid. As it is written in words, it cannot be easily altered and,
since it takes longer to write the words than the figures, the words are more
likely to be accurate.
11.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 consideration not specified, as
Consideration is presumed under Sec. 24.

What are the different types of Promissory Note? Explain each.

Special types of Promissory Note.
The following are the special types of a promissory note:
1. Certificate of deposit, which is a written acknowledgment by a receipt of
money engaging to pay to the lawful holder upon proper indorsement;
2. Bond, which is a promissory note under seal, involving a public
borrowing on a usually long-term basis, unlike an ordinary promissory
note;
3. Bank note, which is a promissory note of an issuing bank payable to
bearer on demand and intended to circulate as money; and
4. Due bill, which is a note whereby a person acknowledges his debt to
another and he promises to pay bearer or to order a sum owed which is
certain in money.

Define Bill of Exchange. Give its characteristics:

Bill of exchange defined and its characteristics.
A bill of exchange 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.

Who are the parties involved in a Bill of Exchange?

There are 3 parties in a Bill of Exchange?
1. Drawer – the one drawing the instrument
 2. Payee – to whom the instrument is payable
3. Drawee – to whom the instrument is addressed

Features and Characteristics:

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, “D”. D is the drawer. He corresponds to the maker of a
promissory note.
3. The name, “X”. X is the drawee. He is the one ordered or commanded to pay
a sum certain in money.

What are the special types of a Bill of Exchange? Explain each.

The special types of a bill of exchange are:
1. Draft, which is a bill of exchange drawn usually by a bank against its
branch or another bank.
2. Trade acceptance, which is a bill of exchange drawn by a seller on the
purchaser of goods and accepted by the purchaser.
3. Banker’s acceptance, which is a bill of exchange drawn against bank
and accepted by the latter.
4. Clean bill of exchange, which is a bill of exchange to which no
document is attached when presented for payment or acceptance.
5. Documentary bill of exchange, which is a bill of exchange to which
documents like shipping documents or invoices are attached when
presented for acceptance or payment.
6. Sight bills, which are bills of exchange which are payable upon
presentation or at sight or on demand.
7. Time or usance bills, which are bills of exchange which are payable at a
fixed future time or at a determinable future time.

Distinguish Promissory note from a Bill of Exchange:

Promissory note distinguished from a bill of exchange:
Note and bill distinguished:
1. Note – contains an unconditional promise.
Bill – contains an unconditional order.
2. Note - there are two parties, the maker and the payee.
Bill – there are three parties, the drawer, payee and the drawee.
3. Note – the one who issues the note is primarily liable.
Bill – the one who issues the bill is secondarily liable.
Check defined and its characteristics:
A check is a bill of exchange drawn on a bank payable on demand. As already
stated, a check is a bill of exchange of a special kind.

Give the different kinds of Check? Explain each.

Kinds of Check:
Checks may be:
1. Memorandum check, where the drawer agrees to absolutely pay the
bon fide holder of the check.
 2. Cashier’s check, where the check is drawn by the bank upon itself and
is accepted already by the act of issuance; it is really the bank’s own
check.
3. Crossed check, one which bears two parallel lines across its face,
indicating that the check is for deposit.

4. Manager’s check, one drawn by the bank’s manager upon the bank.
5. Stale check, one that is valueless because it was presented for payment
after a lapse or reasonable length of time from its issuance.

Distinguish a check from a bill of exchange:

Distinctions between a check and a bill of exchange:
1. Check is always drawn upon a bank; whereas an ordinary bill may or
may not be drawn against the bank.
2. Check is always payable on demand; while an ordinary bill may be
payable on demand or at a fixed or determinable future time.
3. Check is drawn on a deposit; while a bill of exchange is not.
4. Check must be presented for payment within a reasonable time after its
issue; while a bill of exchange may be presented for payment within a
reasonable time after its last negotiation.
5. 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.
6. The death of a drawer of a check, with knowledge by the bank, revokes
the authority of the banker to pay, while the death of the drawer of the
ordinary bill of exchange does not.

Detailed discussions of the requisites of negotiability.

a. It must be in writing signed by the maker or drawer:
1. How written – with a pen or pencil, or that which is print or printed.
2. Material upon which instrument written - It may be written upon
parchment, cloth, leather, or any substitute for paper. This is an
indespensable requirement otherwise there would be an absence of the
thing to be negotiated or passed from hand to hand. (Ogden, p. 65)
3. Signature of the maker or drawer – The full name may be written, or at
least the surname should appear, or initial are sufficient, or any mark
which the party uses to indicate his intention to bind himself. The party
may even signed in an assumed or trade name. (10 C.J.S. 505).
The signature appearing maybe I pencil or ink. It may be printed or
typewritten as well as written. It may be rubber stamped or typed,
printed, engraved, photographed or lithographed, or in any form
so long as the signer has adopted and issued the signature as his own
name. (Ogden, p. 69)
4. Position or where signature appears - Usually the signature of the
maker or drawer is at the lower right-hand corner of the instrument. The
place of the signature is less important, whether it appears at the top, in
the middle, or at the bottom, at the back, provided it is placed as his
signature. (C.J.S. 506). This signature referred to may be made by a
duly authorized agent.
b. It must contain an unconditional promise or order to pay a sum certain
in money:
1. Unconditional promise – any form of expression sufficient which can be
deduced as a direct promise to pay a sum certain in money will suffice
as a promise. The word ”promise” need not be used. Any of the
following expressions has been held sufficient as a promise to pay.
a. “I agree to pay”
b. “I guarantee to pay”
c. “this is to certify that I am to pay”
d. “We certify that we are bound to pay”
e. “Obliges himself to pay”
f. “Payable”
g. “Paid when called for “(10 C.J.S. 521-522)
Be it noted that a mere acknowledgement of a debt is not a promissory
note. Thus, a bill worded as follows “I owe you” is not a promise to pay.
However, an acknowledgment may become a promise by the addition of
the word by which a promise of payment is naturally implied, such as,
“payable on Dec. 25”, payable on demand, paid when called for”, or due
₱10,000 on demand”.(10 C.J.S/ 523)

2. Unconditional order – the bill of exchange or draft must contain an order

for payment as distinguished from a mere request. It is something more
than the mere asking of a favor. Hence, a mere request or supplication
made or authority given to pay a certain amount of money has been
held not to be a bill. The expression “let the bearer have” is held
sufficient to important order to pay. Let it be noted that the order is not
invalidated because it contains word of civility. Thus, the insertion of the
word “please” does not alter the character of the instrument.

Likewise, an authority given to a person is not an order to pay. Thus, : I

hereby authorize you to pay ₱10,000 to P or order “ is not negotiable
because by its terms, the bill gives a discretion to the drawee to pay or
not to pay.

3. Unconditional promise or order – the promise of the maker or the order

of the drawer must be unconditional. The moment it is made conditional
the instrument is not negotiable, and the happening of the event will not
cure the defect.

The event upon which the instrument is to become payable must be

fixed and certain, or one which must inevitably happen. If the terms of
the instrument leave it uncertain whether the money will even become
payable, it cannot be considered as a negotiable instrument. (7 Am. Jur.
847). Likewise, an instrument acknowledging a certain sum to be due
and payable when a suit is settled is not a negotiable promissory note.
(7 Am. Jur. 848)

4. Payable in a sum certain in money - The note or the bill must be

payable in “money”. If payable in goods, wares, or merchandise, or in
property, labor, or services, the same is not negotiable. (10 C.J.S.
5421). The “money” referred to in this section may be our legal tender or
foreign currency. If payable in foreign currency there is no need to
convert the amount into legal tender because under Republic act No.
 8183, repealing Article 1249 of the Civil Code, payment of foreign
currency is a valid stipulation in obligations and contracts.

The amount payable in a note or a bill must be certain and definite, and
ascertainable prior to maturity. (10 C.J.S. 560). The amount to be paid
or the amount which the paper represents should be stated plainly on
the face of the instrument, or else it is a defective instrument.

c. It must be payable on demand, or at a fixed or determinable future time.

The instrument to be negotiable must be payable on demand, or at a
fixed, or determinable future time, and at a time morally certain to
occur. Ambiguous expression of time payment does not invalidate an
instrument for the ambiguity can be resolved by construction (10
C.J.S. 544). But when there is an attempt to fix a due date which is
not complete, as when the instrument is payable on December 25,
but the year is not given and the instrument itself is not dated, the
instrument is irregular and not negotiable, notwithstanding the
statutory provision that an instrument specifying no date of payment
is deemed payable on demand.

Prepared and Submitted by:

ATTY. ROGELIO A. AJES