ATTY.
OLIVER CACHAPERO
NEGOTIABLE INSTRUMENTS LAW
Introduction
A. Main source
 Negotiable Instruments Law act No. 2031
Other sources
 Code of Commerce, which were not impliedly repealed by
NIL.
 Civil Code RA 386, applies supplementary
B. Effectivity
 June 2, 1911
NIL part of the Commercial law or mercantile law
Amendments, none. However, before the effectivity of the code
the Code of commerce Book 2 Art. 443-556 governs the
negotiable instruments.
C. Types of Negotiable Instrument
 Promissory note, 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 bearer. (Sec. 184)
Which the issuer has promised to pay.
Ex. Certificates of deposits, bankers notes, due bills, bonds
 Bills of exchange, an unconditional order in writing
addressed by one 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 bearer.(Sec. 126)
Which the issuer ordered a third person to pay.
Ex. Drafts, trade acceptances, and baker’s acceptances
D. Definition and concepts of Negotiable Instruments
Negotiable Instruments, written contract for the payment of
money and passes from one person to another as money, in such
a manner as to give the holder in due course the right to hold the
instrument free from defenses available to the prior parties. Also,
are written statements signed by the maker or drawer containing
an unconditional promise or order to pay a sum certain in money,
payable on demand or t a fixed determinable future time, to order
or bearer.
E. Functions
 Substitute for money, although they are not considered legal
tender. One of its distinct characteristics is its negotiability
which allows it to go from hand to hand in the commercial
markets and to take the part of money in commercial
transactions free from all personal defenses available against
the original owner.
 Media of exchange for most commercial transactions, they
thus increase the purchasing medium in circulation. They are
a safe and convenient means of doing business that eliminate
the risk of dealing in cash.
 Medium of credit transaction, they allow men of undoubted
credit (such as those with illiquid properties) to carry on
business enterprise upon their promissory notes, bills of
exchange and checks knowing that other businessmen will
treat these promises as cash.
Note: Checks are primarily used for immediate payment
(substitute for money); while ordinary bill of exchange and the
 promissory note are intended for the circulation of credits Sec. 191. Definition and meaning of terms. – In this Act,
(credit instruments) unless the context otherwise requires: “Issue” means the first delivery of
 Proof of transaction the instrument, complete in form, to a person who takes it as a holder;
F. Distinctive Features
G. Negotiable Instrument not a legal tender
 Negotiability, is that quality or attribute of a bill or note
 Legal tender is the amount which the creditor can be
whereby it may pass from one person to another similar to
compelled to accept as payment.
money, so as to give the holder in due course the right to
 Legal tender power, All notes and coins issued by the Bangko
collect on the instrument the sum payable for himself free from
Sentral shall be fully guaranteed by the Government of the
any defect in the title of any of the prior parties or defenses
Republic of the Philippines and shall be legal tender in the
available to them among themselves. (Sec. 52 and 57)
Philippines for all debts, both public and private. (Sec. 52 of
Sec. 52. What constitutes a holder in due course. – A holder
in due course is a holder who has taken the instrument New Central Bank Act)
under the following conditions: H. Difference between assignability to negotiability.
(a) That it is complete and regular upon its face; NEGOTIABILITY ASSIGNMENT
(b) That he became the holder of it before it was overdue, Applicable Law Governed by the Governed by the
and without notice that it has been previously dishonored, if NIL civil code
such was the fact; Type of Transaction Pertains to Pertains to contract
(c) That he took it in good faith and for value; negotiable in general or
(d) That at the time it was negotiated to him, he had no instrument assignable rights
notice of any infirmity in the instrument or defect in the title of Nature of Transferee The transferee is The transferee is
the person negotiating it. a holder who may the mere assignee
Sec. 57. Rights of holder in due course. – A holder in due be a holder in
course holds the instrument free from any defect of title of due course
prior parties, and free from defenses available to prior As to possibility of Transferee can The transferee can
parties among themselves, and may enforce payment of the becoming a holder in be a holder in never be a holder a
instrument for the full amount thereof against all parties due course due course in due course
liable thereon. accordance with
Sec. 52
 Accumulation of secondary contracts, as they are Holder in due Assignee takes the
transferred from one person to another. Once an instrument course may be instrument subject
is issued, additional parties can become involved.(Sec. 191) free from to defenses
personal obtaining among
defenses the original parties
 available among to petitioner, the latter prayed for a reversal of the trial court's decision
the parties so that she may be absolved from the obligation under the contract.
Rights Acquired Holder in due Assignee steps into
course may the shoes of the Petitioner assigns twelve (12) errors which focus on the alleged fraud,
acquire a better assignor and merely bad faith and misrepresentation of VMS Corp. in the conduct of its
right than the acquires whatever business and which fraud, bad faith and misrepresentation supposedly
right of the rights the assignor released petitioner from any liability to private respondent who should
transferor may have instead proceed against VMS. 3
Modes of transfer By negotiation or By assignment only
assignment Petitioner argues that in the light of the provision of the law on sales by
description 4 which she alleges is applicable here, no contract ever
existed between her and VMS and therefore none had been assigned in
I. Distinctions of negotiable instruments and non- favor of private respondent.
negotiable instruments. She contends that it is not necessary, as opined by the appellate court,
SALAS V. CA to implead VMS as a party to the case before it can be made to answer
for damages because VMS was earlier sued by her for "breach of
Facts: contract with damages"
Juanita Salas bought a motor vehicle from the Violago Motor Sales Private respondent in its comment, prays for the dismissal of the petition
Corporation for P58,138.20 as evidenced by a promissory note. This and counters that the issues raised and the allegations adduced therein
note was subsequently endorsed to Filinvest Finance & Leasing are a mere rehash of those presented and already passed upon in the
Corporation which financed the purchase. court below, and that the judgment in the "breach of contract" suit cannot
be invoked as an authority as the same is still pending determination in
Petitioner defaulted in her installments allegedly due to a discrepancy in
the appellate court.
the engine and chassis numbers of the vehicle delivered to her and
those indicated in the sales invoice, certificate of registration and deed Issue:
of chattel mortgage, which fact she discovered when the vehicle figured
in an accident. Whether the promissory note in question is a negotiable instrument
which will bar completely all the available defenses of the petitioner
This failure to pay prompted private respondent to initiate civil case for against private respondent.
a sum of money against petitioner. Imputing fraud, bad faith and
misrepresentation against VMS for having delivered a different vehicle Ruling:
Yes, the promissory note is a negotiable instrument.
in the case of Consolidated Plywood Industries Inc. v. IFC Leasing and
Acceptance Corp., 6 this Court had the occasion to clearly distinguish
between a negotiable and a non-negotiable instrument.
Among others, the instrument in order to be considered negotiable must
contain the so-called "words of negotiability — i.e., must be payable to
"order" or "bearer"". Under Section 8 of the Negotiable Instruments Law,
there are only two ways by which an instrument may be made payable
to order. There must always be a specified person named in the
instrument and the bill or note is to be paid to the person designated in
the instrument or to any person to whom he has indorsed and delivered
the same. Without the words "or order or "to the order of", the instrument
is payable only to the person designated therein and is therefore non-
negotiable. Any subsequent purchaser thereof will not enjoy the
advantages of being a holder of a negotiable instrument, but will merely
"step into the shoes" of the person designated in the instrument and will
thus be open to all defenses available against the latter. Such being the
situation in the above-cited case, it was held that therein private
respondent is not a holder in due course but a mere assignee against
whom all defenses available to the assignor may be raised. 7
In the case at bar, however, the situation is different. Indubitably, the
basis of private respondent's claim against petitioner is a promissory
note which bears all the earmarks of negotiability.
The questioned promissory note shows that it is a negotiable instrument,
having complied with the requisites under the law as follows: [a] it is in
writing and signed by the maker Juanita Salas; [b] it contains an
unconditional promise to pay the amount of P58,138.20; [c] it is payable
at a fixed or determinable future time which is "P1,614.95 monthly for 36
months due and payable on the 21 st day of each month starting March
21, 1980 thru and inclusive of Feb. 21, 1983;" [d] it is payable to Violago
Motor Sales Corporation, or order and as such, [e] the drawee is named
or indicated with certainty. 9
It was negotiated by indorsement in writing on the instrument itself
payable to the Order of Filinvest Finance and Leasing
Corporation 10 and it is an indorsement of the entire instrument. 11
Under the circumstances, there appears to be no question that Filinvest
is a holder in due course, having taken the instrument under the
following conditions: [a] it is complete and regular upon its face; [b] it
became the holder thereof before it was overdue, and without notice that
it had previously been dishonored; [c] it took the same in good faith and
for value; and [d] when it was negotiated to Filinvest, the latter had no
notice of any infirmity in the instrument or defect in the title of VMS
Corporation. 12
Accordingly, Respondent Corporation 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. 13 This being so, petitioner cannot
set up against respondent the defense of nullity of the contract of sale
between her and VMS.
Negotiable Instruments
It must contain the so-called "words of negotiability — i.e., must be
payable to "order" or "bearer"". Under Section 8 of the Negotiable
Instruments Law, there are only two ways by which an instrument may
be made payable to order. There must always be a specified person
named in the instrument and the bill or note is to be paid to the person
designated in the instrument or to any person to whom he has indorsed
and delivered the same. (Sec. 1 NIL)

Non-negotiable Instruments
Without the words "or order or "to the order of", the instrument is payable
only to the person designated therein and is therefore non-negotiable.
Any subsequent purchaser thereof will not enjoy the advantages of
being a holder of a negotiable instrument, but will merely "step into the
shoes" of the person designated in the instrument and will thus be open
to all defenses available against the latter. Such being the situation in
the above-cited case, it was held that therein private respondent is not
a holder in due course but a mere assignee against whom all defenses
available to the assignor may be raise.
J. Are pawn tickets, bill of lading, and money order and
warehouse receipts negotiable instruments?
Ph Educ Corp., Inc. v. Soriano
Facts:
Enrique Montinola sought to purchase from the Manila Post Office ten
(10) money orders of P200.00 each payable to E.P. Montinola
withaddress at Lucena, Quezon. After the postal teller had made out
money ordersnumbered 124685, 124687-124695, Montinola offered to
pay for them with a private checks were not generally accepted in
payment of money orders, the teller advised him to see the Chief of the
Money Order Division, but instead of doing so, Montinola managed to
leave building with his own check and the ten (10) money orders without
the knowledge of the teller.
Upon discovery of the disappearance of the unpaid money orders, an
urgent message was sent to all postmasters, and the following day
notice was likewise served upon all banks, instructing them not to pay
anyone of the money orders aforesaid if presented for payment. The
Bank of America received a copy of said notice three days later.
One of the above-mentioned money orders numbered 124688 was
received by appellant as part of its sales receipts. The following day it
deposited the same with the Bank of America, and one day thereafter
the latter cleared it with the Bureau of Posts and received from the latter
its face value of P200.00.
Mauricio A. Soriano, Chief of the Money Order Division of the Manila
Post Office, acting for and in behalf of his co-appellee, Postmaster
Enrico Palomar, notified the Bank of America that money order No.
124688 attached to his letter had been found to have been irregularly
issued and that, in view thereof, the amount it represented had been
deducted from the bank's clearing account. For its part, on August 2 of
the same year, the Bank of America debited appellant's account with the
same amount and gave it advice thereof by means of a debit memo.
Appellant requested the Postmaster General to reconsider the action
taken by his office deducting the sum of P200.00 from the clearing
account of the Bank of America, but his request was denied. So was
appellant's subsequent request that the matter be referred to the
Secretary of Justice for advice. Thereafter, appellant elevated the matter
to the Secretary of Public Works and Communications, but the latter
sustained the actions taken by the postal officers.
In connection with the events set forth above, Montinola was charged
with theft in the Court of First Instance of Manila (Criminal Case No.
43866) but after trial he was acquitted on the ground of reasonable
doubt.
Issue:
Whether or not that the postal money order in question is a negotiable
instrument; that its nature as such is not in any way affected by the letter
dated October 26, 1948 signed by the Director of Posts and addressed
to all banks with a clearing account with the Post Office, and that money
orders, once issued, create a contractual relationship of debtor and
creditor, respectively, between the government, on the one hand, and
the remitters payees or endorses, on the other.
Ruling:
No, it is not a negotiable instrument.
It is not disputed that our postal statutes were patterned after statutes in
force in the United States. For this reason, ours are generally construed
in accordance with the construction given in the United States to their
own postal statutes, in the absence of any special reason justifying a
departure from this policy or practice. The weight of authority in the
United States is that postal money orders are not negotiable instruments
(Bolognesi vs. U.S. 189 Fed. 395; U.S. vs. Stock Drawers National
Bank, 30 Fed. 912), the reason behind this rule being that, in
establishing and operating a postal money order system, the
government is not engaging in commercial transactions but merely
exercises a governmental power for the public benefit.
It is to be noted in this connection that some of the restrictions imposed
upon money orders by postal laws and regulations are inconsistent with
the character of negotiable instruments. For instance, such laws and
regulations usually provide for not more than one endorsement;
payment of money orders may be withheld under a variety of
circumstances (49 C.J. 1153).
K. Promissory note, 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 bearer (Sec. 184). Which
the issuer has promised to pay.
a. Parties to a Negotiable Promissory Note are;
1. Maker, one who makes the promise and signs the
instrument.
2. Payee, the party to whom the promise is made or the
instrument payable to.
b. Kinds of Promissory Notes are;
1. Certificates of deposits, a written acknowledgment by
a bank of the receipt of money on deposit which the
bank promises to repay to the depositor, bearer, to
some other person, to the order of the depositor, or to
him or to his order, at a late date or at demand.
2. Banker’s notes, it is an instrument issued by a bank for
circulation as a money payable to bearer on demand.
3. Due bills, a promissory note which shows on its face
an acknowledgment by a person of his indebtedness
to another. The word “due” is usually used.
4. Bonds, an evidence of indebtedness, issued by a
public or private corporation, promising to pay a sum of
money, on a day certain in the future. Its negotiability
is controlled by the same rules governing promissory
notes. Runs longer than promissory notes and is
issued for large amounts debts.
 Bills of exchange, an unconditional order in writing
addressed by one person to whom it is addressed to pay on
demand, or t a or determinable future time, a sum certain in
money to order or bearer (Sec. 126). Which the issuer ordered
a third person to pay.
a. Parties to a Bill of Exchange are;
 1. Drawer, who issues or draws the bill. He gives the
order to pay money to a third party. He does not pay
directly.
2. Payee, whose favor the bill is originally issued or is
payable.
3. Drawee, whom the bill is drawn. He is the person
expected to pay. He becomes the acceptor when he
indicates his willingness to pay the bill. (Sec. 62)
Sec. 62. Liability of acceptor. – The acceptor, by
accepting the instrument, engages that he will pay it
according to the tenor of his acceptance; and admits:
(a) The existence of the drawer, the genuineness of his
signature, and his capacity and authority to draw the
instrument; and
(b) The existence of the payee and his then capacity to
indorse.
b. Kinds of Bill of Exchange are;
1. Drafts, payable by (a) on demand or at sight, that is,
when the holder presents it for payment, or stated time
after sight (sight or demand draft), or (b) at a definite
future time or some future determinable time (time
draft). A sight draft may be payable upon acceptance.
2. Trade acceptances, is drawn by the seller on the
purchaser of goods and accepted by the latter by
signing it as a drawee. It has definite date of maturity.
3. Banker’s acceptance, same as trade acceptances,
however it is drawn against a bank instead of a
purchaser. It is not a loan, but merely lending credit to
the buyer.
 Check, a check is a bill of exchange drawn on a bank payable
on demand. Except as herein otherwise provided, the
provisions of this Act applicable to a bill of exchange payable
on demand apply to a check (Sec 184). Also a written order
addressed to a bank or persons carrying on the business of
banking by a party having money in their hands requesting
them to pay on presentment to a person named therein or to
his order, or to bearer, a named sum of money.
a. Parties to a Check are;
1. Drawer, who issues and draws the check.
2. Payee, whose order the check is made out.
3. Drawee, the bank
b. Kinds of Check are;
1. Memorandum check,
2. Cashier’s check,
3. Manager’s check, it is one drawn by the bank’s
manager upon the bank itself. It is similar to the
cashier’s check both as to effect and use.
4. Traveler’s check, it is one upon which the holder’s
signature must appear twice, one to be affixed by him,
at the time it is issued and the second o counter
signature, to be affixed by him in the presence of the
payee before it is paid, otherwise, it is incomplete.
5. Certified check, it is one which bears upon its face an
agreement by the drawee bank that the check will be
paid on presentation. Similar to a certificate of
deposits. (Sec. 184)
6. Crossed-check, it is one which bears across its face
two parallel lines drawn diagonally, usually on the
 upper left side. A check may be crossed either specially Dishonor by non-acceptance
or generally. Presentment for payment
7. Stale check, it is one which has not been presented for Dishonor by Non-payment
payment within the reasonable time after its issue. It is Notice of Dishonor
valueless and, therefore, should not be paid. (Sec. 71, Payment
186) Discharge

Sec. 71. Presentment, where instrument is not payable

on demand; and where payable on demand. – Where Bills of exchange, perfected by indorsement, completed by delivery.
the instrument is not payable on demand, presentment Promissory notes, perfected by mere delivery.
must be made on the day it falls due. Where it is
payable on demand, presentment must be made within
a reasonable time after its issue, but in the case of a
bill of exchange, presentment for payment will be
sufficient if made within a reasonable time after the last
negotiation thereof.

Sec. 186. Within what time a check must be presented.

– A check must be presented for payment within a
reasonable time after its issue or the drawer will be
discharged from liability thereon to the extent of the
loss caused by the delay.

L. Incident in the life of a negotiable instrument.

Promissory note Bill of Exchange
Preparation and signing
Issuance
Negotiation
Presentment for acceptance
Acceptance