NEGOTIABLE INSTRUMENT 1

NEGOTIABLE INSTRUMENT

A. What is a negotiable instrument? – 2005, 1949, 1946 Bar

NEGOTIABLE INSTRUMENT
- Written contracts for the payment of money; by its form, intended as a
substitute for money and intended to pass from hand to hand, to give the
holder in due course the right to hold the same and collect the sum due.

B. Function of negotiable instrument – 1951 Bar

1. Although they do not constitute legal tender, they are used as a
substitute for money.
2. Negotiable papers, particularly checks, constitute, at present, the media
of exchange for most commercial transactions.
3. Negotiable instruments also serve as a medium of credit transactions.
4. Negotiable instruments shall produce the effect of payment only when
they have been encashed or when through the fault of the creditor they
have been impaired. [Article 1249, Civil Code]
5. It facilitates the sale of goods
6. It increases the purchasing medium in circulation.

C. Principal features of negotiable instrument. – 1967 Bar

1. Negotiability - right of transferee to hold the instrument and collect the sum due
2. Accumulation of secondary contracts - instrument is negotiated from person to
person.

D. Differences between negotiable documents from negotiable instrument.

Negotiable Instrument Negotiable Document

Negotiable Instrument have requisites of
Sec. 1 of the NIL, a holder of this instrument
have right of recourse against intermediate
parties who are secondarily liable, Holder in
due course may have rights better than
transferor, its subject is money and the
Instrument itself is property of value.
Negotiable document does not contain requisites
of Sec. 1 of NIL, it has no secondary liability of
intermediate parties, transferee merely steps
into the shoes of the transferor, its subject are
goods and the instrument is merely evidence of
title; thing of value are the goods mentioned in
the document.

E. Differences between a promissory note and a bill of exchange/check (Secs.

184 and 185) – 2002, 1947 Bar
Promissory Note Bill of Exchange
Is an unconditional promise in writing made Is an unconditional order in writing addressed
by one person to another, signed by the by one person to another, signed by the
maker, engaging to pay on demand, or at a person giving it, requiring the person to
fixed or determinable future time, a sum whom it is addressed to pay on demand or at
certain in money to order or to bearer. Where a fixed or determinable future time a sum
a note is drawn to the maker's own order, it is certain in money to order or to bearer. (sec.
not complete until indorsed by him. (sec. 184) 126)

Roberto V. Labe Jr. SSC-R College of Law 1

Check - is a bill of exchange drawn on a bank payable on demand. Except as herein
otherwise provided, the provisions of this Act applicable to a bill of exchange payable on
demand apply to a check. (Sec. 185)

F. Parties to a promissory note and a bill of exchange (Secs. 184 and 185)

Parties to Promissory note: Parties to Bill of exchange:

G. Life stages of a promissory note and a bill of exchange.

II. Form and interpretation

A. Elements/Requisites of negotiability (Sec. 1, correlate with secs. 2, 3, 4, 6,

8 and 9) – 1996,1992,1968,1964,1954,9153 Bar

Elements/Requisites of negotiability:

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 to bearer.

5. Where the instrument is addressed to a drawee, he must be

named or otherwise indicated therein with reasonable
certainty. [Section 1, Negotiable Instruments Law]

Sec. 3. When promise is unconditional. - An unqualified order or

promise to pay is unconditional within the meaning of this Act though
 NEGOTIABLE INSTRUMENT 3

coupled with:
% (a) 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
%  
% (b) A statement of the transaction which gives rise to the instrument.

But an order or promise to pay out of a particular fund is not

unconditional. 

> Postal money order, treasury warrants not negotiable.

- A postal money order is not a negotiable instrument because of the
conditions appearing at the back thereof, thereby making the order
conditional, contrary to Section 1 of the NIL
B.

Roberto V. Labe Jr. SSC-R College of Law 3