1. What is Negotiable Instrument?
Section 47 of the NIL: an instrument negotiable in its
It is a written contract for payment of money which is intended as a
substitute for money and passes from one person to another as money,
in such a manner as to give a holder in due course the right to hold the
instrument free from defenses available to prior parties.
2. Requisites of Negotiability
A. It must be in writing and signed by the marker 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 bearer; and
E. When the instrument is addressed to a drawee, he must be named
or otherwise indicated therein with reasonable certainty.
i. What does negotiation mean?
The transfer of an instrument from one person to
another in such a manner as to constitute the transferee a holder
thereof.
ii. Who is a holder?
A holder is the payee or indorsee of a bill or note who is
in possession of it or the bearer thereof.
iii. How does negotiability of instrument determined?
Consider the instrument in its entirety and only what
appears on its face. It must comply with the requirements under
Section 1 of the NIL.
iv. When negotiability ends?
origin continues to be negotiable until (1) it has been
restrictively indorsed or (2) discharged by payment or
otherwise
3. What are the functions of a negotiable instrument?
a. It operates as a substitute for money.
b. It is a means of creating and transferring credit.
c. It facilitates the sale of goods.
d. It increases the purchasing medium in circulation.
4. What are the two important features of a negotiable instrument?
a. Negotiability
b. Accumulation of secondary contract
5. Kinds of Negotiable instrument?
a. Bill of Exchange – 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. (Section 126,
NIL)
b. Promissory Note – an unconditional promise in writing made by one
person to another, signed by the maker, engaging to pay on demand or
a fixed or determinable future time, a sum certain in money to order or
bearer.(Section 184, NIL)
i. When can a Bill of Exchange be treated as a promissory
note?
1. The drawer and the drawee are the same person
2. The drawee is a fictitious person;
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 3. The drawee has no capacity to contract; a. Maker – the person who makes a promissory note and promises to pay
4. The instrument is so ambiguous that there is doubt the amount stated therein.
whether it is a bill or note.
b. Payee – the oblige, that is the person who, by the terms of the note or
ii. Negotiable promissory note vs. Negotiable Bill of Exchange the bill, is to received payment.

Promissory Note Bill of Exchange c. Drawer – the person who draws the bill of exchange and orders the
Unconditional Order Unconditional Promise drawee to pay a sum certain in money.
Involves 2 parties Involves 3 parties
Maker is primarily liable Drawer is secondarily liable d. Drawee – the person to whom the order to pay is addressed in a bill of
Only one presentment Generally 2; acceptance and exchange.
payment
e. Acceptor – a drawee who accepts the order to pay made by the
iii. Ordinary Bill of Exchange vs. Check
drawer. It is only when a drawee becomes an acceptor that he is
primarily liable.
Ordinary Bill of Exchange Check

Not drawn on deposit. It is not It is necessary that a check is drawn f. Holder – the person who is in possession of a bearer instrument or an
necessary that a drawer of a BOE on a deposit. Otherwise there would indorsee of an order instrument who is in possession thereof. A holder
should have funds in the hands of be fraud. is the obligee, a person who can enforce payment of the instrument.
the drawee
Death of the drawer of a BOE with Death of the drawer of a BOE with g. Referee in case of need – A person who may be designated in the
the knowledge of the bank, does not the knowledge of the bank, revokes
instrument as the person who may be resorted to by parties in case of
revoke the authority of the banker to the authority of the banker to pay
pay dispute.
Must be presented for payment Must be presented for payment
within a reasonable time after its within a reasonable time after its 7. Requisites of Negotiability
last negotiation (Sec. 71) issue (Sec. 186) a. It must be in writing and signed by the marker or drawer;
b. Must contain an unconditional promise or order to pay a sum certain in
*Crossed Check – Not negotiable, because it issued for a special money;
purpose and can be negotiated only once. c. Must be payable on demand, or at a fixed or determinable future time;
d. Must be payable to order or bearer; and
6. Persons Involved e. When the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
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 i. in writing and signed by the marker or drawer;
Must be in writing
May be printed, in ink or in pencil, and it may be written in
any material that substitute paper like cloth, leather or parchment.
iii.
Must be signed by the maker or drawer
The signature may be in one’s handwriting, printed, engraved,
lithograph, or photograph so long as they are adopted as the signature
of the signer. What is important is that the maker or the drawer used
what he affixed as his own signature for authentication.
ii. Must contain an unconditional promise or order to pay a sum
certain in money
Promise or Order to Pay
The promise in a promissory note is the undertaking made by
the maker to pay a sum certain in money to the payee or the holder.
The order in a bill is a command made by the drawer addressed to the
drawee ordering the latter to pay the payee or the holder a sum certain
in money.
Promise or Order to Pay must be unconditional
An unqualified order or promise to pay in unconditional within
the meaning of NIL though coupled with:
A. An indication of particular fund out of which
REIMBURSEMENT is to be made or particular account to
be debited with the amount.
B. A statement of the transaction which gives rise to the
instrument.
Conditional
a. An order to promise to pay out of a particular fund.
b. An instrument payable upon a contingency (the happening
of the event does not cure the defect.
Must be payable on demand, or at a fixed or determinable future
time
 Money need not be legal tender. An instrument is still
negotiable although the amount to be paid is expressed in
currency that is not legal tender so long as it is expressed in
money.
 If the obligor like the maker is given the option to deliver
something in lieu of money, the instrument is not
negotiable.
 If the instrument gives the holder an election to require
something to be done in lieu of money, the instrument is
negotiable.
 A sum is certain within the contemplation of Section 1 (b)
of the NIL if the amount that is to be unconditionally paid
by the maker or drawee can be determined on the face of
the instrument even if it requires mathematical
computation.
 The sum payable is a sum certain within the meaning of
this act, although it is to be paid (Sec 2, NIL)
1. With interest;
2. By stated installments;
The dates of each installment must be fixed or
atleast determinable and the amount to be paid
for each installment must be stated.
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 3. By stated installments, with a provision that, upon
default in payment of any installment or of interest,
the whole shall become due.
4. With exchange, whether at a fixed rate or at the
current rate;
5. With costs of collection or an attorney’s fee, in case
payment shall not be made at maturity.
Payable on demand
The instrument should be paid the moment it is presented for
Payment. An instrument is payable on demand (Sec 7, NIL)
A. When it is so expressed to be payable on demand, or at
sight, or on presentation
B. In which no time for payment is expressed;
C. 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.
Payable at a determinable future time
An instrument is payable at a determinable future time if it is
expressed to be payable (Sec. 4, NIL)
A. At a fixed period after date or sight.
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 be uncertain. (e.g. payable within 5 days from
death of Mr. X)
Acceleration Clauses
The negotiability of the instrument is not affected even if it is
to be paid by stated installments, with a provision that, upon default in
payment of any installment or of interest, the whole shall become due
(Sec 2, NIL)
Insecurity Clauses
Provisions in the contract which allows the holder to accelerate
payment, if he deems himself insecure. The instrument is rendered
non-negotiable.
Extension Clauses
An instrument is payable at a definite time if by its terms it is
payable at a definite time subject to extension at the option of the
holder, or to extension to a further definite time at the option of the
maker or acceptor or automatically upon or after a specified event.
iv. Must be payable to order or bearer
A. An instrument that is payable to a specified person or entity is
NOT negotiable because the NIL requires that the instrument
must be payable to order or bearer.
B. When is an instrument payable to bearer (Sec 9, NIL)
1. When it is expressed to be so payable; or
2. When it is payable to a person named therein or bearer;
or
3. 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
4. When the name of the payee does not purport to be the
name of any person; or
5. When the only or last indorsement is an indorsement in
blank.
C. Order Instruments
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 There are only two ways by which an
instrument can be made payable to order under Section
8 of the NIL. The instrument can either be payable to
the order of a specified person or to a specified person
or his order.
Section 8 of the NIL likewise identifies the
person who can be designated as payees in an order
instrument – the persons to whose order the instrument
may be made payable. The instrument may be payable
to the order of:
 A payee who is not the maker, drawer or
drawee;
 The drawer or maker;
 The drawee;
 Two or more payees jointly;
 One or some of several payees;
 The holder of an office for the time being.
D. Identification of the drawee
When the instrument is addressed to a drawee, he must
be named or otherwise indicated therein with reasonable
certainty. The holder must know to whom he should
present it for acceptance and / or for payment, otherwise
the purpose of negotiable instrument as a tool in
commercial dealings will be greatly hampered.
A bill may be addressed to more than one drawee
jointly, but not in alternative.
8. OMISSIONS AND PROVISIONS THAT DO NOT AFFECT
NEGOTIABILITY
The validity and negotiable character of an instrument are not
affected by the fact that (Sec 6, NIL)
i. It is not dated (Date of issuance);
ii. Does not specify the value given, or that any value had been
given therefor; or
iii. Does not specify the palace where it is drawn or the place
where it is payable; or
iv. Bears a seal; or
v. Designates a particular kind of current money on which
payment is to be made;
vi. Addressed to more than one drawee jointly.
When date may be inserted by holder?
When date is necessary in order to determine the
maturity date of the instrument. Under Section 11 of the NIL,
where the instrument or an acceptance or any indorsement
thereon is dated. Such date is prima facie to be the true date of
the making, drawing, acceptance or indorsement, as the case
may be.
Additional Provisions
An instrument is still negotiable even if the following
are present (Sec 5, NIL):
 Authorizes the sale of collateral securities in
case the instrument be not paid at maturity;
 Authorizes the confession of judgment if the
instrument be not paid at maturity;
 Waives the benefit of any law intended for the
advantage or protection of the obligor; or
 Gives the holder an election to require
something to be done in lieu of payment of
money.
9. TRANSFER AND NEGOTIATION
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 If the instrument is negotiable, transfer thereof can be effected either
through:
a. Negotiation – transfer from one person to another in such a manner as
to constitute the transferee the holder thereof.
 If payable to bearer, it is negotiated by delivery.
 If payable to order, it is negotiated by the indorsement
of the holder completed by delivery.
b. Assignment – if the instrument is merely assigned, the transferee does
not become a holder and he merely steps into the shoe of the
transferor. Any defense available against the transferee (how?
Delivery without indorsement)
*a bearer instrument is always a bearer instrument.
Incomplete negotiation of order instrument.
Where the holder of an instrument payable to his order transfer
it for value without indorsing it, the transfer vests in the transferee
such title as the transferor had therein, and the transferee acquires in
addition, the right to have the indorsement of the transferor. (Sec 49,
NIL)
For the purpose of determining whether the transferee is a
holder in due course, the negotiation takes effect as of the tome when
the indorsement is actually made. (Sec 49, NIL)
INDORSEMENT
1. Where indorsement should be placed?
 On the instrument itself; or
 Separate piece of paper attached to the
instrument called allonge (Sec 31, NIL)
2. Indorsement must be of the entire instrument.
Exception: when there was previous partial payment.
3. Section 32 of the NIL disallows negotiation to two or
more indorsees severally.
4. Kinds of Indorsement
A. Blank Indorsement – no indorsee is specified
and it is done by affixing the indorser’s
signature.
B. Special Indorsement – designates the indorsee.
The holder may convert a blank indorsement
into a special indorsement by writing over the
signature of the indorser in blank any contract
consistent with the character of the indorsement.
C. Qualified Indorsement – constitute the
indorser a mere assignor of the title to the
instrument. It may be made by adding to the
indorser’s signature the words without recourse
or any words of similar import. Such an
indorsement does not impair the negotiable
character of the instrument.
D. Conditional Indorsement – the party required
to pay the instrument may disregard the
condition and make the payment to the indorsee
or his transferee whether the condition has been
fulfilled or not.
E. Restrictive Indorsement – Prohibits the further
negotiation of the instrument; Constitute the
indorsee the agent of the indorser; Vest the title
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 in the indorsee in trust for or to the use of some
other persons.
F. Rights of Restrictive Indorsee
i. To receive payment of the instrument;
ii. To bring any action thereon that the
indorser could bring;
iii. To transfer his rights as such indorsee
where the form of the indorsement
authorizes him to do so. In case of
transfer, all subsequent indorsees acquire
only the title of the first indorsee under
the restrictive indorsement.
5. Negotiation by prior party
Where an instrument is negotiated back to a
prior party, such party may reissue and further
negotiate the same. But he is not entitled to
enforce payment thereof against any intervening
party to whom he was personally liable.
However, he may strike out the intervening
indorsement because they are not necessary for
his title and he is liable to them because of his
initial indorsement.
10. HOLDERS
The payee or indorsee of a bill or note who is in possession of
it or the bearer thereof. In other words, the payee or indorsee is the
holder of an order instrument while the payee or the bearer is the
holder of bearer instrument.
REQUISITES (Sec 52, NIL)
A holder in due course is a holder who has taken the instrument
under the following conditions:
i. That it is complete and regular upon its face;
ii. That he became the holder of it before it was overdue and
without notice that it has been previously dishonored, if such
was the fact;
iii. That he took it in good faith and for value;
iv. That at the time it was negotiated to him, he had no notice of
any infirmity in the instrument or defect in the title of the
person negotiating it;
Notes:
i. Where the instrument payable on demand is negotiated after an
unreasonable length of time after its issue, the holder is not
deemed a holder in due course.
ii. Infirmity in the instrument means any irregularity in the
instrument. Thus, notice of an alteration which is apparent is
notice of an infirmity in the instrument. Notice of forgery in the
maker or the drawer’s signature is also notice of infirmity in
the instrument. On the other hand, a title of a prior party is
defective when he obtained the instrument or any signature
thereto, by fraud, duress or force and fear or other unlawful
means, or for an illegal consideration, or when he negotiates it
in breach of faith, or under such circumstances as amount to a
fraud.
Holder for Value
VALUE – a consideration sufficient to support a simple
contract. These include antecedent debts and a lien on the instrument.
 The holder is a holder for valie only to the extent that the
consideration agreed upon has been paid, delivered or
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 performed. Nonperformance of the obligation will give rise to
partial or full defense of failure of consideration as the case
may be.
 Where the transferee receives notice of any infirmity in the
instrument or defect in the title of the person negotiating the
same before he has paid the full amount agreed to be paid
therefor, he will be deemed a holder in due course only to the
extent of the amount paid therefor by him.

RIGHTS OF A HOLDER IN DUE COURSE

A holder in due course holds the instrument free from
any defect of title of prior parties and free from defenses
available to prior parties among themselves, and may enforce
payment of the instrument for the full amount thereof against
all parties liable thereon.
o A holder in due course is free from personal defenses
o A holder in due course is not free from real defenses
o A holder not in due course is subject to personal and
real defenses.
 Exception: a holder who is not a holder in due
course but he derived his title from a holder in
due course.

-End of Part I-