NEGOTIABLE INSTRUMENT
the American Uniform Negotiable
Negotiable Instrument
- a written contract for the payment of
money which complies with the
requirements of Sec. 1 of the NIL, which
by its form and on its face, is intended
as a substitute for money and passes
from hand to hand as money, so as to
give the holder in due course (HDC) the
right to hold the instrument free from
defenses available to prior parties.
A. GOVERNING LAW
Negotiable Instrument (Act No. 2031)
- The law that governs negotiable
instruments
Art. 439-566 of Code Commerce
- Before NIL was enacted, this was the
governing law on negotiable
instruments
- Most of these provisions were impliedly
repealed by the provisions of NIL.
Section 197:
All acts and laws and parts
thereof inconsistent with this
Act are hereby repealed
New Civil Code
- Has suppletorily effect in case of
deficiency in the provisions of the NIL
Applicability
- Provisions of NIL are not applicable if
the instrument involved is not
negotiable
- Before the provisions of the NIL can
come into operation, there must be a
document in existence of the charter
described in Sec. 1 of that law
HISTORY
 Provisions of the NIL were copied from
Instruments Law.
 American Uniform Negotiable
Instruments Law was based on the Bill
of Exchange Act of 1882
 Decisions of the courts in US and
England based on American Uniform
Negotiable Instruments Law and on the
Bill of Exchange Act of 1882 can be
applied in this jurisdiction
Interpretation of the Law
- Its words are to be given their natural
and common meaning and the
prevailing principles of statutory
interpretation are to be applied.
Functions of NIL
Two main functions of negotiable instruments
1. They serve as substitute for money
2. They serve as credit instruments
Can be considered proof of the existence of
transaction- because they may state
transaction that gave rise to the issuance of the
instrument.
Functions of negotiable instrument
1. Substitute for money
2. Medium of exchange
3. It is a credit instrument which increases
credit circulation
4. Increases the purchasing power in
circulation
5. Proof of transaction
SUBSTITUTE FOR MONEY
- A negotiable instrument is a medium of
exchange; it is a tool that is used in
commercial transaction
CREDIT TRANSACTION
 - Example is promissory note
NEGOTIABLE INSTRUMENT AS EVIDENCE
KINDS OF NEGOTIABLE INSTRUMENTS
- Possession of a check by drawee gives
rise to presumption of payment
- A check may be evidence of
indebtedness or prove loan transaction
NOTES AND COINS ISSUED BY BANGKO
SENTRAK NG PILIPINAS
- Only considered as legal tender
GR: checks are declared to be not legal tender
and creditors cannot be compelled to accept
checks in payment of obligations
A negotiable instruments like a checks is only a
substitute of money and not money, deliver of
itself does not constitute as a payment
EXPN: where the check is impaired due to the
fault of the creditor, in these cases, the
obligation is deemed paid even if the check is
not encashed
BILLS OF EXCHANGE
Delivery of checks is sufficient in the exercise of
the right of redemption.
FEATURES OF NEGOTIABLE INSTRUMENT
1. NEGOTIABILITY
- Allows negotiable instruments to be
transferred from one person to another
so as to constitute the transferee of a
holder.
2. ACCUMULATION OF SECONDARY
CONTRACTS
- When NI are transferred through
negotiation, secondary contracts are
accumulated because the indorsers
become secondarily liable not only to
their immediate transferees but also to
any holder.
- Unless they have valid defenses against
the holder or any party, theses
indorsers are liable to said holder or
whoever may be compelled to pay the
instruments.
1. 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 of NIL)
2. 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 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 insdorsed by him.
a. DRAFT AND ACCEPTANCES
Draft
- What a bill of exchange is commonly
called
- A signed order by one party, the
drawer, addressed to another, the
drawee, directing the drawee to pay
specified sum of money to the order of
a third person, the payee.
- Often used to designate bills of
exchange that are used in trade of
goods
Bill of exchange or draft may be a time
draft - one that is payable at fixed date
Slight or demand draft
- payable when the holder presents it
for payment
 Trade acceptance- type of bill, the BILL OF EXCHANGE CHECK
seller as drawer orders the buyer (as Drawee may or may The drawee is always
drawee) to pay a sum certain to the not be a bank a bank
same seller (payee). It may be payable on It is always payable
demand, or at a fixed on demand
Banker’s acceptance- is a time draft or determinable
across the face of which the drawee future time
bank has written the word accepted It is not necessarilyIt is necessary that a
drawn on deposit or check is drawn on a
If the seller does not trust the credit of
checking account deposit or checking
the buyer or is not familiar with him account
- the seller may wish to require the Death of a drawer of Death of the drawer
bank of the buyer to accept the bill or BOE with the of a check, with the
draft. knowledge of the knowledge by the
bank, does not bank. Revokes the
revoke the author of authority of the
the bank to pay banker to pay

b. INLAND AND FOREIGN BILL

d. CLEAN AND DOCUMENTARY BILL OF
Inland bill EXCHANGE
- A bill which is, or on its face purports to Clean Bill of Exchange
be, both drawn and payable within the
Philippines - Is a bill to which no document is
- Need protested attached when presentment for
payment or acceptance is made.
Foreign bill
Documentary Bill of Exchange
- Any other bill
- Must be protested in case of dishonor - Is a bill exchange to which a document
is/are attached when presented for
Unless the contrary appears on the face of the payment or acceptance
bill, the holder may treat it as an inland bill.
PROMISSORY NOTES
c. CHECKS
- Is a bill of exchange drawn on a bank a. Bank Certificate
payable on demand Certificate of deposit
- a form of promissory note which is a
Checks written acknowledgment of a bank of
- used primarly as a tool for the payment its receipt of a certain sum with a
of obligation promise to repay the same
- a written acknowledgment by a bank or
Banks banker of the receipt of a sum of money
on deposit which the bank or banker
- serve as intermediaries in effecting
promises to pay to the depositor, to the
satisfaction of obligations through
order of the depositor, or to some other
checks
person or his order, whereby the
 relation of debtor and creditor between (f) Guaranteed bond -a bond which has interest
the bank and the depositor is created. of principal or both guaranteed by a company
other than thf issuer.

(g) income bond - bond on which interest is

b. Bonds and dentures
payable only when cared after payment of
Bonds
interest upon pride mortgages.
- defined as a certificate or evidence of a
debt on which the issuing company or (h) Joint and several bond - a bond the
governmental body promises to pay the principal and interest of which is guaranteed by
bondholders a specified amount of two or more persons.
interest for a specified length of time,
(i) Joint bond - bond secured by two or more
and to repay the loan on the expiration
obligors who must be joined in any action on
date
such bond.
- Bonds may also partake the nature of
negotiable promissory (j) Mortgage bond - bond secured by a
mortgage on a property.

Debenture
- is a promissory note or bond backed by
the general credit of a corporation and
usually not secured by a mortgage or
BILLS ARE TREATED AS NOTES WHEN
lien on any specific property
KINDS OF BONDS
c. Bank Notes
- are promissory notes of the issuing
bank which are payable to bearer on
demand
1. the drawer and the drawee are the
same person
2. the drawee has no capacity to contract

a) Bottomry bonds ships- bonds secured by POMISSORY NOTE BILL OF EXCHANGE

mortgage of ships It contains an It contains an
unconditional unconditional order
(b) Chattel mortgage bonds- bonds secured by promise
mortgage on chattels of business. There are two parties There are three
(c) Collateral trust bonds -_ bonds secured by on its face parties on its face
The person who signs The person who signs
collateral deposited with a trustee.
it is the maker it is the drawer, is
(d) Convertible bonds - bonds that can, at the secondarily liable
option of the holder, be converted into stocks. The person primarily The person primarily
liable is the maker liable is the drawee-
(e) Coupon bonds - bonds with interest acceptor
coupons attached; it consists of an obligation to There is only one There are two
pay a certain amount of money at a future day presentment: for presentments:
and annexed to it is a series of coupons each payment a. for
one of which is a promise for the payment of acceptance
periodic installment of interest.* b. for payment
 INSTRUMENT INSTRUMENT
negotiable NIL does not apply
instruments are
PARTIES TO NEGOTIABLE INSTRUMENTS governed by the NIL. Application of the NIL
a. Promissory Note to non-negotiable
instruments is only
 Maker- is the person who promise to
by analogy.
pay according to the tenor of the note
can be transferred by can be transferred
 Payee- is the person who is to receiver negotiation or by only by assignment.
assignment
A transferee of a transferee of a non-
b. Bill of Exchange negotiable negotiable
 Drawer- is the person who draws the instrument can be a instrument can never
bill and orders the drawee to pay the holder in due course be a holder in due
payee a sum certain in money (HDC). course but remains
 Drawee- the one being commanded to to be an assignee
pay the instrument Must contain all the Does not contain all
- is not a party unless he accepts the bill requisites of NIL Sec. the requirements
1
which will now be called acceptor
HDC can have rights A transferee acquires
better than his no better right than
transferor his transferor
c. Parties After Issuance Prior parties warrant Prior parties do not
 Indorsers- persons who transfer or payment warrant payment but
negotiate an instrument by merely the legality of
indorsement completed by delivery his title
 Holder- means the payee or indorse of HDC take the NI free All defenses available
a bill or note who is in possession of it from personal to prior parties may
or the bearer thereof defenses be raised against the
 Bearer- the person in possession of a last transferee
bill or note which is payable to bearer

d. Referee in Case of Need INCIDENTS OR STAGES IN LIFE OF A

- The person, where drawer of a bill and
any indorser may insert thereon the
name of a person to whom the holder
may resort in case of need; that is to
say, in case the bill is dishonored by
non- accpetance or non-payment.
DISTINGUISHED FROM NON-NEGOTIABLE
INSTRUMENTS
NEGOTIABLE NON-NEGOTIABLE
NEGOTIABLE INSTRUMENT
1. Preparation and signing complete with
all the requisites provided for in Sec. 1
of NIL
2. Issuance – first delivery of the
instrument to the payee (from maker to
payee/bearer or from the drawer to the
payee/bearer)
3. Negotiation- transfer from one person
to another so as to constitute the
transferee a holder
4. Presentment for acceptance for certain
kinds of Bills of Exchange- the bill of
exchange shall be presented to the
drawee so that the latter will signify his
agreement to the order of the drawer
to pay
5. Acceptance- written assent of the
drawee to the order
6. Dishonor by non-acceptance- refusal to
accept by the drawee
7. Present for payment- the instrument is
shown to the maker or
drawee/acceptor so that the said maker
or drawee/acceptor will pay
8. Dishonor by non-payment- refusal to
pay by the maker or drawee/acceptor
9. Notice of dishonor- notice to the
person secondarily liable that the
marker or the drawee/acceptor refused
to pay or to accept the instrument
10. Protest (in some cases)
11. Discharge