NIL-RIEL VILLALON 1

NEGOTIABLE INSTRUMENTS LAWACT No.2031

Brief History of Negotiable Instruments
Law

The law on negotiable instruments was

then embedded in the English common
law and was codified in England in
1882 where it was known as the Bills of
Exchange Act.

In the United States, the codification of

the Negotiable Instruments Law is
found in the California Code of 1372. It
was only din 1895 that the uniformity of
these laws in the US was promoted at
the request of the American bar
Association.

History of Negotiable Instruments Law

in the Philippines

The Negotiable Instruments 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 in the
Official Gazette of the Philippine
Islands. Which was on March 4, 1911,
and therefore, the Act took effect on
June 2, 1911.

Negotiable Instruments 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.
Application:
Applies only to NI that conforms to the
requirements of negotiable instruments
provided for in Sec. 1 of the NIL-Act.
No. 2031

Purpose:
The chief purpose was to produce
uniformity in the laws of the
different states upon this
important subject, so that the
citizens of each state might know the
rules which would be applied to their
notes, checks, and other negotiable
paper in every other state in which the
law was enacted, sine it is an absolute
impossibility for commercial purchaser.
Second purpose was to preserve the
law as nearly as possible as it then
existed
Functions of NI (MEC-IP)
1. It is a Substitute for Money
2. It is a Medium of Exchange
3. It is a Medium of Credit
Instrument
4. It Increases Purchasing Power
5. It is a Proof of Transaction
Notes:
NIL are NOT LEGAL TENDER.
LEGAL TENDER-Notes and coins
issued by the Bangko Sentral ng
Pilipinas
Delivery DOES NOT PRODUCE
PAYMENT
o The obligations are deemed paid
only when the instruments are
ENCASHED.
Creditor may refuse to accept a NI in
payment of obligations
Features of a Negotiable Instrument
1. NEGOTIABILITY
It allows the NI to be
transferred from one
person to another similar
to money as to give the holder
in due course the right to hold
the instrument and to collect the
sum payable for himself free
from personal defenses.

2. ACCUMULATION OF
SECONDARY CONTRACTS
When NI are transferred
through negotiation, the

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secondary contract are

accumulated BECAUSE the
indorser become secondarily
liable not only to their
immediate parties but also to
the holder.
Also called Draft in other
countries.

Kinds of Negotiable Instruments

1. Promissory Note
a) Certificate of Deposits
b) Bonds
c) Debenture
2. Bills of exchange
a) Check
A Bill of exchange drawn on bank or
payable on demand
b) Time Draft
Draft payable at fixed date
c) Sight of Demand draft
Draft payable when holder presents it
for payment
d) Trade acceptance
BoE used in Contracts of Sale
Seller as drawer orders the buyer as
drawee to pay a sum certain to the
seller
e) Draft
Synonymous with BOE
Bill of exchabge in documentary
exchange
f) Inland Bill
Bill on its face purports to be payable
only on the Philippines
g) Foreign Bill
Bill on its face does not show to be
payable in the Philippines
h) Bankers Acceptance
Drawee bank written the word
ACCEPTED on its face.
i) Clean Bill
No Document is attached upon
presentment is made
j) Documentary Bill
A document is attached upon
presentment is made
k) Bill in set
are BoE drawn in a set
Def. and Characteristics:
1. Promissory Note (Sec. 184)
Is an unconditional promise by ine
person to another, signed by the maker

a) Engaging to pay on demand or at a

fixed or determinable future time
b) A sum certain in money
c) To order or to bearer
d) Where a note is drawn to the makers
own order, it is not complete until
indorsed by him.
General Characteristics
1. Amount
o Figures at the upper left portion
of the instrument-It is the
amount of the note
2. Place
o Shows the Place WHERE THE
CONTRACT TO PAY IS
EXECUTED
3. Date
o Inserted either to determine
the note is DUE or to fix the
time when the interest is to run
4. Date of Maturity
o Indicates when the promise is to
be paid
5. The Promise
o Absolute promise to do
something
6. To the order of
o Means the promise to pay as
ordered or commanded by the
payee
7. The Name to whose order or command
the money is promised to be padi
8. Signature
o Signature if the maker
9. Place of payment
o Where the note is to be paid
10. Amount in words
o The sum promised to be padi
o Found in the body
11. The consideration for value received
o This indicates the consideration
was given for the note

2. Bills of exchange (Sec. 126)

Is an unconditional order in writing
addressed by one person to another
signed by the person giving it
1. Requiring the person to whom it is
addressed to pay on demand or at fixed
or determinable future time
2. A sum certain in money
3. To order or to bearer
Characteristics

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1. The order or command to pay

2. Signature of the drawer
3. The name of the drawee
The one ordered or commanded to
pay a sum certain in money
3. Check
A check is a bill of exchange drawn
on a bank payable on demand
Characteristics
1. A check is similar to Bill of exchange
because it is a bill of exchange.

payable to orderthe person in whose favor

the promissory note is made payable
3.

Bearer, if the instrument is payable to

bearer
PARTIES TO A BILL OF EXCHANGE
1. Drawerthe person who executes the
written order to pay
2.

Payee, if the instrument is payable to

order-the person in whose favor a bill of

TO WHOM INSTRUMENTS MAY BE

exchange is drawn payable

PAYABLE

3.

1.

Bearer

2.

Order

3.

To a specified person

Bearer-if the instrument is payable to

bearer
4.

Acceptor-the drawee who signifies his

assent to the order of the drawer. It is only

when he accepts the bill that he becomes a
party thereto and liable thereon.

WHEN IS IT PAYABLE TO BEARER?

1.

When it is expressed to be so payable

2.

When it is payable to a person named

therein or bearer

WHEN IS IT PAYABLE TO ORDER?

1.

When it is expressed to be payable to

OTHER PARTIES TO NEGOTIATED

INSTRUMENTS
1.

Indorser and

2.

Indorsee, in the case of instruments

payable to order
3.

Persons negotiating by mere delivery

the order of a specified person

4.

Persons to whom the instrument is

2.

negotiated by delivery

To a specified person or his order

WHEN IS IT PAYABLE TO A SPECIFIED

PERSON?
When the instrument is payable to a
specified person named in the instrument
and no other
PARTIES TO A PROMISSORY NOTE
1. Makerthe person who executes the
written promise to pay
2.

Payee, if the instrument is

INDORSER AND INDORSEE

When the negotiation is by indorse

ment completed by delivery, the parties

added are the indorser and indorsee

Indorserthe one who negotiates the

instrument

the

Indorsee
one

to

whom

the

instrument

is

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negotiated

by indorsement

Transfer of an instrument from one

person to another as to constitute the

transferee the holder of the instrument
WHERE INSTRUMENT IS PAYABLE TO
BEARER

Where the instrument is payable to

Mode of transferring an instrument

Effect is to make the transferee the

holder of the instrument

bearer, it can be negotiated by mere

delivery without necessity of indorsement

HOW INSTRUMENT PAYABLE TO BEARER

IS NEGOTIATED

HOLDER

May be negotiated by mere delivery

The payee or indorsee of a bill or note,

who is in possession of it, or the bearer

HOW INSTRUMENT PAYABLE TO ORDER

thereof

If the instrument is payable to order,

IS NEGOTIATED
Must be negotiated by indorsement

he who is the payee or indorsee and who is

in possession thereof

completed by delivery

If the instrument is payable to bearer,

Indorsement is necessary to make t

he transferee the indorsee and

he who is in possession thereof

delivery is necessary to place the transfer

ee in possession of the instrument
ISSUE

First delivery of the instrument, co

mplete in form to a person who takes it

INDORSEMENT

as a holder

Legal transaction, effected by the w

riting of ones own name on the

back of the instrument or upon a paper
DELIVERY

attached thereto, with or

Consists principally of placing the t

without additional words specifying the p

ransferee in possession of the instrument,

erson to whom or to whose order the

but it must be accompanied by the intent to

instrument is to be payable whereby one not

transfer title

only transfers

every

instrument

contract
is

on

incomplete

negotiable

and

revocable until delivery of the instrument

ones full legal title to the paper transferred

but likewise enters into an implied guaranty
that the instrument will be duly paid

for the purpose of giving effect thereto

SPECIAL INDORSEMENT
NEGOTIATION

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Specifies the person to whom or to

whose order the instrument is to be payable

by the drawee, or cannot be obtained,

or where presentment for acceptance is
excused, and the bill is not accepted
PRESENTMENT FOR PAYMENT

BLANK INDORSEMENT

One that doesnt specify the perso

n to whom or to whose order the

instrument is to be payable

Consists of exhibiting the instrumen

t to the person primarily liable thereon

and demanding payment form him on the
date of maturity

NEGOTIATION, INDORSEMENT, DELIVERY,

DISHONOR BY NON-PAYMENT

COMPARED.
1. Indorsement is merely the first step in the
process of negotiating an instrument which is
payable to order

Where the instrument is presented

for payment and payment is refused or

cannot be obtained, or where presentment
for payment is excused and the instrument
is overdue and unpaid

2.
Where the instrument is payable to orde
r, neither is delivery equivalent to

NOTICE OF DISHONOR

negotiation

3.

onored by non-payment or non-

But where the instrument is payable to

acceptance

When an instrument has been dish

bearer, delivery is equivalent to negotiation

DISCHARGE
PRESENTMENT FOR ACCEPTANCE

Exhibiting the bill to the drawee and

demanding that he accept it, that is, signify

An instrument is discharged by

payment in due course by or on behalf of

the principal debtor

his assent to the order or command of the

drawer
ACCEPTANCE

PARTIES PRIMARILY AND SECONDARILY

Signification of the drawee of his

assent to the order of the drawer

DISHONOR BY ACCEPTANCE

Where the bill is presented for

acceptance, and acceptance is refused

LIABLE

Law, the person primarily liable on an in

strument is the
person who by the terms of the instrum
ent is absolutely required to pay the
same

11

Under the Negotiable Instruments

NIL-RIEL VILLALON 6

All other parties are secondarily liable

of liability is similar to that of an indorser

IN BILLS OF EXCHANGE

IN PROMISSORY NOTES

The acceptor is the one primarily liable

The maker is primarily liable

He is absolutely required to pay the

Agreement of the maker is that he will

instrument as he engages that he will pay it

pay the instrument according to the tenor

according to the tenor of his acceptance

FUNCTION OF NEGOTIABLE
SECONDARY LIABILITY OF DRAWER

INSTRUMENTS

1.

Substitute for money

ment, the drawer assumes the liability

2.

Increase the purchasing medium in

stated in Section 61

circulation

By the mere drawing of the instru

The general tenor of the liability of the

drawer is that he will pay the bill if the

drawee doesnt accept or pay the bill.

PAYMENT BY NEGOTIABLE INSTRUMENTS

In other words, he is not absolutely

required to pay the billif the

drawee pays, then he is not required to

pay.

It is only when the drawee doesnt

pay that he will be required to pay.

W/N the giving and taking of a

promissory note or bill of exchange is

prima facie absolute payment as in the
case of money or merely a prima facie
conditional payment?

The delivery of the promissory note

s payable to order, or bills of

SECONDARY LIABILITY OF INDORSER

He will pay the instrument if the

person primarily liable will not pay.

exchange or other mercantile documents

shall produce the effect of payment only
when they have been cashed, or when,
through the fault of the creditor, they have
been impaired

SECONDARY LIABILITY OF ONE

NEGOTIATING BY DELIVERY

By merely delivering an instrument

PRINCIPAL FEATURES OF NEGOTIABLE

payable to bearer, without saying anything

INSTRUMENTS

more, the person negotiating by mere

1.

Negotiability

delivery assumes the liability mentioned in

2.

Accumulation of secondary contracts as

Section 65.

they are transferred from one person to

Under said section, the general tenor

another

NIL-RIEL VILLALON 7
NEGOTIABILITY

Attribute or property whereby a bill,

note or check passes or may pass from hand

to hand similar to money, so as to give the
holder in due course the right to hold the
instrument and collect the sums payable for
himself free from defense.

PRIMARY PURPOSE OF NEGOTIABILITY

To allow bills and notes the effect

which money, in the form of

government bills or notes, supplies in the
commercial world
ACCUMULATION OF SECONDARY
CONTRACTS

Most

negotiable

important
instruments

characteristic
is

of

the

accumulation of secondary contracts which

they pick up and carry with them as they are
negotiated from one person to another

Advantage: they improve as they p

ass from hand to hand, as more debtors

are added