PART I - NEGOTIABLE INSTRUMENTS – GENERAL PROVISIONS

Applicability of Negotiable Instruments Law (Act. 2031, NIL – Negotiable Instruments Law)
- NIL is only applicable if the Instrument is Negotiable; (Civil Code will govern, otherwise)

What is a Negotiable Instrument?

- A document that can guarantee the payment of a specific amount to a specified person;
- A contractual obligation to pay money.

What is the Purpose/Function of a Negotiable Instrument? (Importance of NI)

(1) It serves as a Substitute for Money;
(2) It serves as Credit Instruments;
(3) It serves as a Medium of Exchange;
(4) It Increases Purchasing Power in circulation;
(5) It serves as a Proof of Transaction;

What is Legal Tender?

- Kind of “money” recognized by law as a means of settling financial obligations;

Are Negotiable Instruments Legal Tender?

- NO. Law provides that only NOTES and COIN issued by the Banko Sentral are Legal
Tender;

Are “Checks” Legal Tender?

- NO. Checks are considered Negotiable Instruments and are therefore not legal tender;
> These instruments are not deemed as payment UNTIL THEY ARE ENCASHED;
> There is no valid tender of payment until there is actual deposit of money;

What are the Two Important Characteristics of Negotiable Instruments?

(1) Negotiability: The quality of a Note or Bill to pass from one hand to another similar to
money.
> Since they are similar to money, “one who honestly takes coin from a thief or finder
without knowledge of theft or loss, giving value for it, can hold it against the world,
including the true owner;
> Therefore, when said rule does not exist, or when transferability is limited, the
instrument or paper may not be a negotiable one; or HAS NO VALUE;

(2) Accumulation of Secondary Contracts: When Negotiable Instruments are transferred from
one to another, secondary contracts are created because the indorses become secondarily liable
not only to their immediate transferees, but also to any holder;

What are the Two Basic Types of Negotiable Instruments?

(1) Bills of Exchange – an (i) Unconditional Order (ii) in writing, (iii) addressed by one person
to another, (iv) signed by the person giving it, (v) requiring the person to whom it is addressed
to pay on demand or at a fixed determinable time a sum certain in money to order or to bearer;

(2) Promissory Notes – an (i) Unconditional Promise (ii) in writing (iii) made by one person to
another, (iv) signed by the maker, (v) engaging to pay on demand or at a fixed determinable
future time, (vi) a sum certain in money to order or to bearer.
> When a Note is drawn to the maker’s own order, it is not complete until indorsed by
him;
 > In a Bill, the person who signs it (the drawer) is secondarily liable, while in a Note, the
person who signs it (the maker) is primarily liable;
> In a Bill, there are two presentments; for acceptance and for payment;
> In a Note, there is only one presentment; for payment;

Form of Negotiable Instruments – ESSENTIAL REQUISITES

(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) 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;

How can an Instrument be Non-Negotiable?

- If it does not meet the Essential Requisites stated above;
- It is possible that the instrument was first negotiable, but later loses its quality of negotiability;
> A negotiable instrument ceases to be negotiable if the indorsement prohibits further
negotiation; (ex. Payable to X only)

Who are the Parties to a Negotiable Instrument?

(I) Promissory Note:
1) Maker: Person who promises to pay;
2) Payee: Person who is to receive payment from the maker;

(II) Bill of Exchange:

1) Drawer: Person who draws the bill & orders drawee to pay the payee;
2) Drawee: Person being commanded to pay the instrument;
3) Payee: Person who is to receive payment from the drawee;

> In reality, the drawee does not become a party unless he accepts the bill

(III) Other Parties:

1) Indorser: Person who transfers the instrument through indorsement and completed by
delivery;
2) Holder: Payee/Indorsee of a bill/note who is in possession of the instrument;
3) Bearer: Person in possession of bill/note which is payable to bearer.

Who is a “Holder” of a Negotiable Instrument?

- Other persons who become parties after the issuance of the instrument are the “indorsers” and
the “holders”
1) Holder: simply means the payee or indorsee of a bill/note who is in possession of it; the
BEARER thereof;
> The Bearer simply means the person in possession of the bill/note which is payable to
order or bearer, (to him, the possessor)

Can a Bill be Valid even if there is only One Party?

- YES. One may draw on himself payable to his own order – the two parties to a bill can be the
same person;

What is the Purpose and Idea of a Bill of Exchange?

(1) The Drawer’s Funds is in the Hands of the Drawee – By this instrument, the drawer
appropriates funds in the drawee’s hands and receives the consideration for the appropriation
from the payee to whom the instrument is delivered;
(2) Liability of Drawee for non-payment – Only if the drawee refuses to accept when he has
funds for the purpose; he becomes liable to the drawer for any damage done to his credit;
> What if the Drawer has NO FUNDS in the hands of the Drawee?
- Presumption: arrangements were made by the parties to honor the bill;
- Drawee must look to the drawer for reimbursement, not to a bona fide holder;

What are the Stages in the Life of a Negotiable Instrument?

1) Preparation and Signing – Simply complete all the requisites of a Negotiable Instrument;
2) Issuance – First delivery of the instrument to the payee (from maker to payee/bearer);
3) Negotiation – Transfer from one person to another so as to constitute the transferee a Holder;
4) Presentment for Acceptance – Present the instrument to the Drawee so that the latter may
signify his agreement to the order of the Drawer to pay the Payee;
5) Acceptance – written assent of the Drawee to the Order; (Drawee becomes Acceptor)
6) Dishonor by Non-Acceptance – refusal to accept by the drawee of the order;
7) Presentment for Payment – Instrument is shown to the Maker or Drawee/Acceptor so that
said Maker/Drawee will pay;
8) Dishonor by Non-Payment – Refusal to pay by the Maker/Drawee;
9) Notice of Dishonor – Notice to persons secondarily liable that the Maker/Drawee refused to
pay or to accept the instrument;
10) (in some cases) Protest;
11) Discharge of the Instrument;

PART II – NEGOTIABILITY OF INSTRUMENTS

How is Negotiability Determined?

- Return to Section 1 of NIL –“Form of Negotiable Instruments – Essential Requisites”;
> It is determined from the FACE OF THE INSTRUMENT whether or not it has complied
with the essential requisites of Negotiability;
1) Entirety of the Instrument;
2) What Appears on the Face of the Instrument;
3) Section 1 of NIL;

Is Acceptance of a Bill of Exchange Important in Determining Negotiability?

- NO. Only Section 1 is Important; the significance of Acceptance only refers to the LIABILITY
of the parties thereto;

What about an Indorsement?

- NO. Indorsement does not affect the negotiability of an instrument;
XPN: Promissory Notes payable to Order of the Maker himself; (must be indorsed by
him)

What is the Importance of these Formalities? (Sec. 1 of NIL)

- These formalities make Negotiable Instruments effective substitutes for money and desirable
tools for credit transaction;

What are the Requisites of Negotiability? (Sec. 1 of NIL)

(I) It must be IN WRITING and SIGNED by the MAKER or DRAWER;
> otherwise, the instrument cannot effectively be a substitute for money;
> As for the Signature, as long as it is adopted as the signature of the signer, it’s
acceptable;

(II) It must Contain an UNCONDITIONAL PROMISE or Order to pay a SCIM;

 > The Promise in a promissory note is the undertaking by the maker to pay a SCIM;
> The Order in a bill is a command made by the drawer ordering the drawee to pay the
payee or holder a SCIM;
> Any terms which can clearly signify an order or promise is sufficient;
> It must be Unconditional, otherwise, it becomes an ordinary contract or obligation;
> An order/promise to pay out of a particular fund is NOT UNCONDITIONAL;
> If in reference to another transaction, it must be Descriptive, NOT RESTRICTIVE;

(III) Payable in Sum Certain in Money;

> This is not equivalent to legal tender – an instrument is still negotiable as long as the
amount to be paid is expressed in money – this means that any form of payment other
than money or in addition to money is not negotiable – UNLESS:
> There is an OPTION to the HOLDER to choose between either;
> A Sum is Certain if the amount can be determined on the face of the instrument;
> Can payment be made by Installments? YES. BUT FOLLOW THESE RULES:
1) Dates of EACH installment must be DETERMINABLE;
2) Amount to be paid must also be determinable;

Acceleration Clause: Demand payment in FULL for failure to pay installment;

> Valid for the MAKER ONLY; Non-negotiable if Holder;

(IV) Payable on Demand or at a Fixed Determinable Future Time;

> An instrument is not negotiable if the maturity date is uncertain;

When is an Instrument Payable in Demand?

1) When so expressed to be payable on demand/sight/presentation;
2) When no time is expressed for payment, it is understood to be on demand;
3) Where an instrument is issued, accepted, or indorsed when overdue;

When is it Payable at a Determinable Future?

1) At a Fixed Period after date or sight;
2) On or Before a fixed or determinable future time specified therein;
3) On or at a fixed period after the occurrence of a specified event certain to happen,
though its time of happening be uncertain;

Extension Clause: Extension of time to pay under certain circumstances;

> Valid for HOLDER ONLY; Non-negotiable if Maker;

(V) Payable to Order or Bearer;

> An instrument that is payable to a specified person only is not negotiable because NIL
requires that the instrument must be payable to bearer or to order;

When is it Payable to Bearer?

> The person who is in possession of the instrument that is payable to bearer is the
HOLDER thereof – An instrument is payable to bearer when:
1) When expressed to be so payable;
2) When payable to a person named therein or bearer;
3) When payable to the order of a fictitious person, and such fact was known to maker;
4) When name of payee does not purport to be the name of any person;
5) When the indorsement is left blank;

Fictitious Payee Rule: Valid only if Maker knew that fact of fictitiousness
> Burden of Proof: Rests on the Maker;
 Only or Last Indorsement is in Blank;
- This means that the instrument was originally an Order instrument, or designated a
specific person as the payee – and is later on converted into a BEARER instrument upon
leaving the Indorsement as blank;
> Note: Bearer instruments will ALWAYS be bearer instruments;

How can an Instrument be made Payable to Order?

1) Payable to the order of a specified person; or
2) Payable to a specified person or his order;
> Simply; it requires the words of negotiability: “or Order/to the Order of”;

When is it Payable to Order? When drawn payable to the order of:

1) Payee who is not maker, drawer, or drawee;
2) Drawer or maker;
3) Drawee;
4) Two or more payees jointly;
5) One or some of several payees;
6) Holder of an office for the time being;
- in ALL cases, name of payee must be indicated with reasonable certainty;

(VI) Identification of the Drawee; (applies only to BILLS)

> Drawee is being commanded by drawer to pay the payee, and therefore becomes
primarily liable upon acceptance – thus the requirement of Reasonable Certainty;
- Payee MUST KNOW the person who will be primarily responsible under the
instrument or bill of exchange;

Can a Bill be Addressed to More than One Drawee?

- YES. But only to two or more drawees JOINTLY; the link between them is AND, not
OR;

Omissions and Provisions that DO NOT Affect Negotiability;

- Validity and Negotiability of an Instrument are not affected by these:
1) Not Dated;
2) Value was not specified or that any value had been given;
3) Does not specify the place where it is drawn or where it is payable;
4) Bears a seal;
5) Designates a particular kind of current money in which payment is to be made;

Are there Instances when an Instrument MUST be “Dated?”

- YES. When?
1) Where an instrument expressed to be payable at a fixed period after the date issued; or
2) Where acceptance of an instrument payable at a fixed period after sight;
> in both cases, the instrument is UNDATED, and ALLOWS insertion of a date;
> Insertion of a wrong date does not VOID the instrument in the hands of a subsequent
holder in due course, but as to him, the date inserted is regarded as the true date;