NEGOTIABLE INSTRUMENTS LAW RFBT

NEGOTIABLE INSTRUMENTS LAW

(Act No. 2031)

NATURE
Definition

Negotiable Instrument is a written contract for the payment of money which by its form and on its face is
intended as substitute for money and passes from hand to hand as money to give the holder in due course the
right to hold the instrument and collect the sum for himself.

The instrument however, must comply with Section 1 of Negotiable Instruments Law to be considered negotiable.

Functions
1. It operates as a substitute for 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.

Not a Legal Tender

 Although considered as medium for payment of obligations, negotiable instruments are not legal tender.
Section 52 of the New Central Bank Act (NCBA), provides that only notes and coins issued by the Bangko
Sentral shall be legal tender in the Philippines for all debts, both public and private.

 Sec. 60 of the New Central Bank Act, provides that checks representing demand deposits do not have
legal tender power and their acceptance in the payment of debts, both public and private, is at the option
of the creditor. However, a check which has been cleared and credited to the account of the creditor shall
be equivalent to delivery to the creditor of cash in an amount equal to the amount credited to his
account.

 The maximum amount of coins to be considered as legal tender under BSP Circular 537, Series of 2006, is
as follows:
o In amounts not exceeding One thousand pesos (P1,000) for denominations of P1.00, P5.00 and
P10.00 coins;
o In amounts not exceeding One hundred pesos for denominations of 1 – centavo, 5 centavo, 10
centavo and 25 centavo coins.

Features or characteristics of a Negotiable Instrument

A. Negotiability – the negotiable instrument passes from hand to hand as money so as to give the holder in
due course the right to hold the instrument and collect the sum for himself.
B. Accumulation of Secondary Contracts – contracts are created as the instrument passes from one person
to another.

Kinds of Negotiable Instruments

A. Promissory Note

A negotiable promissory note within the meaning of this Act 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. ( Sec. 184, NIL)

The original Parties in a promissory note are:

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a. Maker – the person who writes the promissory note and gives the unconditional promise to pay
the amount stated therein. He is primarily liable to pay the obligation.
b. Payee – the creditor to whom the promise to pay is given. He is the person who shall receive
payment.

B. Bill of Exchange

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. (Sec. 126, NIL)

The original parties in a bill of exchange are:

a. Drawer – the person who draws or writes the bill of exchange. He gives the order to pay a sum
certain in money and his liability on the instrument is secondary.
b. Drawee – the person to whom the order to pay is addressed. He is ordered to pay from his own
pocket, and later reimbursed himself from the funds of the drawer. He has no liability until and
unless he accepts the order to pay. Once he accepts, he becomes the acceptor who is primarily
liable on the instrument.
c. Payee – the creditor in whose favor payment shall be made.

FORMS AND INTERPRETATION

Requisites of Negotiability

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 maker or drawer;
(b) 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 to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.

 It must be in writing and signed by the maker or drawer

 "In writing" - includes print; written or typed. Section 191 of the NIL provides that the word “’written’
includes printed, and ‘writing’ includes print.”
 Signature is binding and may be in one’s handwriting, printed, engraved, lithographed or
photographed so long as it is intended or adopted as the signature of the signer or made with his
authority.
 No person is liable on the instrument whose signature does not appear thereon. One who signs in a
trade or assumed name will be liable to the same extent as if he had signed in his own name (Sec. 18,
NIL)
 Signature of any party may be made by duly authorized agent; no particular form of appointment is
necessary (Sec. 19, NIL)
 It may appear on any part of the instrument. However, if the signature is so placed upon the
instrument that it is not clear in what capacity the person intended to sign, he is deemed an indorser.
(Sec. 17f, NIL)

 Must contain an unconditional promise or order to pay a sum certain in money

 Unconditional promise or order – the promise of the maker or the order of the drawer must be
unconditional, that is, must not be dependent upon a contingent event that is not certain to happen.

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

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

unconditional within the meaning of this Act though 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.

 Payable in a sum certain in money – basically, the note or the bill must be payable in “money”. If
payable in kind, goods, merchandise, services, the instrument is not negotiable.

Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum certain within
the meaning of this Act, although it is to be paid:
(a) with interest; or
(b) by stated installments; or
(c) by stated installments, with a 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 the current rate; or
(e) with costs of collection or an attorney's fee, in case payment shall not be made
at maturity.
 Additional provisions not affecting negotiability

Sec. 5. Additional provisions not affecting negotiability. An instrument which contains an

order or promise to do any act in addition to the payment of money is not negiotable.
But the negotiable character of an instrument otherwise negotiable is not affected by a
provision which –

(a) Authorizes the sale of collateral securities in case the instrument be not paid at
maturity; or
(b) Authorizes a confession of judgment if the instrument be not paid at maturity;
or
(c) Waives the benefit of any law intended for the advantage or protection of the
obligor; or
(d) Gives the holder an election to require something to be done in lieu of
payment of money.

But nothing in this section shall validate any provision or stipulation otherwise
illegal.

 Must be payable on demand, or at a fixed or determinable future time;

 Purpose: to inform the holder of the instrument of the date when he may enforce payment
thereof.
 On demand:

Sec. 7 When payable on demand. - An instrument is payable on demand-

(a) When it is expressed to be so payable on demand, or at sight, or on
presentation; or
(b) In which no time for payment is expressed

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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

Note: Holder may call for payment any time; maker has an option to pay at any time, and the
refusal of the holder to accept payment will terminate the running of interest, if any, but the
obligation to pay the note remains.

 At a fixed time: Only on the stipulated date, and not before, may the holder demand its payment.
Should he fail to demand payment, the instrument becomes overdue but remains valid and
negotiable. It is merely converted to a demand instrument with respect to the person who
issued, accepted, or indorsed it when overdue. (Sec. 7)
 Determinable future time:
Sec. 4 Determinable future time; what constitutes. – An instrument is payable at a
determinable future time within the meaning of this Act, which is expressed to be
payable –
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future time specified therein
(c) On or at a fixed period after the occurrence of a specified event, which is
certain to happen, though the time of happening may be uncertain.
An instrument payable upon contingency is not negotiable and the happening of
the event does not cure the defect.
 Must be payable to order or bearer
 Must contain words of negotiability: For example:
(1) “Pay to the order of Juan Cruz”, or “I promise to pay to the order of Juan Cruz”
(2) “Pay to Juan Cruz or order”, or “I promise to pay Juan Cruz or order”

Note: Need not follow the language of the law, but any term which clearly indicates an intention
to conform to the legal requirements is sufficient.

Negotiability determined from the face of the instrument: The negotiability or non-negotiability
of an instrument is determined from the face of the instrument itself.

 Payable to order:
Sec. 8 When payable to order – The instrument is payable to order where it is drawn
payable to the order of a specified person or to him or his order. It may be drawn payable to the
order of-
(a) A payee who is not the maker, drawer, or drawee or
(b) The drawer or maker; or
(c) The drawee or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or otherwise
indicated therein with reasonable certainty.
 Payable to bearer:
Sec. 9 When payable to bearer – The instrument is payable to bearer
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer or;
(c) When 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
(d) When the name of the payee does not purport to be the name of any person; or

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(e) When the only or last indorsement is an indorsement in blank.

 Omission
Sec. 6. Omission; seal; particular money. – The vailidity and negotiable character of an
instrument are not affected by the fact that –
(a) It is not dated; or
(b) Does not specify the value given; or
(c) Does not specify the place where it is drawn or the place where it is payable; or
(d) Bears the seal; or
(e) Designates a particular kind of current money in which payment is to be made.
But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of
the consideration to be stated in the instrument.

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