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DEFINITION OF A
NEGOTIABLE INSTRUMENT
LESSONS
Lesson 1
FUNDAMENTAL AND GENERAL PRINCIPLES OF
NEGOTIABLE INSRUMENTS
A NEGOTIABLE INSTRUMENT is a written contract for
1. Definition of a Negotiable Instrument
2. Laws Governing Negotiable Instruments
3. Characteristics or Features of a Negotiable
Instrument
4. Incidents in the Life of a Negotiable Instrument
5. Negotiable Instruments are not legal tender
the 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.
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LAWS GOVERNING NEGOTIABLE
INSTRUMENTS
CHARACTERISTICS OR FEATURES
OF A NEGOTIABLE INSTRUMENT
Lesson 2
Lesson 3
1. Negotiability
1. Negotiable Instruments Law (NIL)
– the note may pass from hand to hand similar to money so as to give
- for instruments which meet the requisites of negotiability.
the holder in due course (HIDC for brevity) the right to hold the
2. New Civil Code (NCC)
instrument and collect the sum payable for himself free from any
- applies suppletorily in cases of assignment and demand for payment
infirmity in the instrument or defect in the title of any of the prior parties
of an NIL.
or defenses available to them among themselves
3. Code of Commerce (CC)
- applies suppletorily to NIL in cases of crossed checks.
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CHARACTERISTICS OR FEATURES
OF A NEGOTIABLE INSTRUMENT
INCIDENTS IN THE LIFE OF A
NEGOTIABLE INSTRUMENT
Lesson 3
Lesson 4
2.
1. Issue – first delivery of the instrument to the payee;
Accumulation of Secondary Contracts
2. Negotiation – transfer from one person to another so as to constitute
- a characteristic of a negotiable instrument where additional parties
the transferee a holder;
become involved as they are transferred from one person to another.
3. Presentment for acceptance (in certain kinds of Bills of Exchange)
Once an instrument is issued, additional parties can become involved.
4. Acceptance – written assent of the drawee to the order;
5. Dishonor by non-acceptance – refusal to accept by the drawee;
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INCIDENTS IN THE LIFE OF A
NEGOTIABLE INSTRUMENT
NEGOTIABLE INSTRUMENTS ARE NOT
LEGAL TENDER
Lesson 4
Lesson 5
1. Presentment for payment – the instrument is shown to the maker or
Negotiable instruments are neither money nor legal tender; they are mere
drawee/ acceptor for him to pay;
substitutes for money
2. Dishonor by non-payment – refusal to pay by the maker or drawee/
acceptor
General Rule (GR):
3. Notice of dishonor – notice to the persons secondarily liable that the
The delivery of a negotiable instrument does NOT by itself produce the
maker or the drawee/ acceptor refused to pay or to accept instrument;
effect of payment
4. Protest
5. Discharge
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NEGOTIABLE INSTRUMENTS ARE NOT
LEGAL TENDER
Lesson 5
LESSONS
Exceptions (XPNs):
FORMS AND INTERPRETION OF
NEGOTIABLE INSRUMENTS
Negotiable instruments shall produce the effect of payment when:
1. Rules Governing the Use of Phrases in
the Negotiable Instruments
2. Rules of Construction in case of Ambiguities in a
Negotiable Instrument
3. Requisites of Negotiability
4. Kinds of Negotiable Instruments
1. When they have been cashed;
2. When through the fault of the creditor they have been impaired; and
3. If a check representing demand deposit has been cleared and credited
to the account of the creditor, such shall be equivalent to delivery to the
creditor of cash.
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RULES GOVERNING THE USE OF PHRASES IN
THE NEGOTIABLE INSTRUMENTS
RULES GOVERNING THE USE OF PHRASES IN
THE NEGOTIABLE INSTRUMENTS
Lesson 1
Lesson 1
1. As to Promissory Note (PN)
2. As to Bill of Exchange (BOE)
a. The word “promise” need not be used. Any expression equivalent to
a. It must contain an order for payment as distinguished from a mere
a promise is sufficient.
request.
b. Mere acknowledgment of a debt is not a PN.
b. The order is not invalidated because it contains words of civility.
c. Language used must indicate a written undertaking to pay.
Thus, insertion of polite words like “please” does not alter the
character of the instrument; as long as the language expresses the
drawer’s will that the money be paid.
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RULES OF CONSTRUCTION IN CASE OF
AMBIGUITIES IN A NEGOTIABLE INSTRUMENT
RULES OF CONSTRUCTION IN CASE OF
AMBIGUITIES IN A NEGOTIABLE INSTRUMENT
Lesson 2
Lesson 2
1. Words prevail over figures.
5. If there is doubt whether it is a bill or note, the holder may treat it as
2. If date from which interest is to run is unspecified, interest runs from the
either at his election.
date of the instrument; if undated, from the issue thereof.
6. When not clear in what capacity it was signed, deemed signed as an
3. If undated, instrument is considered dated as of the time it was issued.
indorser.
4. Written provisions prevail over printed.
7. When two or more persons signed a negotiable instrument stating "I
promise to pay," in case of liability, they shall be deemed to be jointly
and severally liable.
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Lesson 3
1. Words that appear on the Face of negotiable instrument
2. Requirements enumerated in Section 1 of NIL
3. Intention of the parties by considering the whole of the
instrument
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BASIS
NEGOTIABLE INSTRUMENT
NON-NEGOTIABLE INSTRUMENT
Governing Law
NIL
Manner of
Can be transferred by negotiation or by Can be transferred only by assignment.
Transfer
assignment.
Status of
The transferee can be a holder in due The transferee can never be a holder in
Transferee
course if all the requirements of Section due course but remains to be an
52 of the NIL are complied with.
NCC or special laws
assignee and acquires only the rights
pertaining to the transferor
Defenses
A holder in due course of a negotiable All defenses available to prior parties
Available
instrument may enforce payment of the may be raised against the last transferee
full amount thereof against all the parties
liable thereon
Lesson 4
FACTORS TO DETERMINE THE NEGOTIABILITY
NEGOTIABLE INSTRUMENT VS.
NON-NEGOTIABLE INSTRUMENT
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Warranties
Right
Recourse
Prior parties warrant payment
Prior parties warrant legality of title
of Transferee has right of recourse against Transferee has no right of recourse.
intermediate parties.
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REQUISITES OF NEGOTIABILITY
REQUISITES OF NEGOTIABILITY
Lesson 5
Lesson 5
An instrument to be negotiable must conform to the following requirements:
a. The instrument must be in writing
1. It must be in writing and signed by the maker or drawer;
It must be reduced in writing or in tangible form. The
2. Must contain an unconditional promise or order to pay a sum certain in money;
3. Must be payable on demand, or at a fixed or determinable future time;
negotiability
4. Must be payable to order or to bearer; and
determined from the writing on the face of the instrument
5. Where the instrument is addressed to a drawee, he must be named or
non-negotiability
of
an
instrument
is
itself
otherwise indicated therein with reasonable certainty.
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or
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REQUISITES OF NEGOTIABILITY
REQUISITES OF NEGOTIABILITY
Lesson 5
Lesson 5
b. Unconditional promise or order to pay
The instrument must be signed by the maker or drawer
An unqualified order or promise to pay is unconditional though
It is placed at the lower right-hand corner of the instrument.
coupled with:
i.
Nonetheless, it may appear in any part of the instrument
An indication of particular fund out of which reimbursement is to
be made or a particular account to be debited with the amount;
whether at the top, middle or bottom or at the margin.
or
ii. statement of the transaction which gave rise to the instrument.
But an order or promise to pay out of a particular fund is
conditional.
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REQUISITES OF NEGOTIABILITY
REQUISITES OF NEGOTIABILITY
Lesson 5
Lesson 5
Certainty as to sum
The promise or order to pay must not be subject to any
The sum payable is a sum certain within the meaning of this Act, although it is to
condition or contingency.
be paid:
An instrument payable upon a contingency is not negotiable
1. With interest;
2. By stated installments;
even if the condition thereon has been fulfilled.
3. By stated installments, with a provision upon default in payment of any
installment or of interest, the whole shall become due (acceleration clause);
4. With exchange, whether at a fixed rate or at the current rate; or
5. With cost of collection or an attorney’s fees, in case payment shall not be
made at maturity.
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REQUISITES OF NEGOTIABILITY
REQUISITES OF NEGOTIABILITY
Lesson 5
Lesson 5
Payment with interest
Payment by installment
Interest at fixed rate or at increased or reduced rate will not
Payment by installment is certain if the dates of each
destroy negotiability because the presence of such interest
installment are fixed and the amount to be paid for each
does not make uncertain the sum payable. In the absence of
installment is stated
a date as to which interest is to run, it shall be from the date
of instrument, or in the absence thereof, at the date of issue.
In the absence of interest rate, it shall be the legal rate
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REQUISITES OF NEGOTIABILITY
REQUISITES OF NEGOTIABILITY
Lesson 5
Lesson 5
Negotiability of an instrument with an acceleration clause, depends on who has the
Payment with an acceleration clause
option to exercise the same.
Acceleration clause is a provision, that upon default in
1. If the option to accelerate the maturity is on the maker, whether such option is
payment of any installment or interest, the whole shall
absolute or conditional – NEGOTIABLE
2. Where acceleration is at the option of the holder and can only be exercised
become due.
upon the happening of the specified event – NEGOTIABLE
3. Where the holder’s right to accelerate is unconditional, the time of payment is
rendered uncertain – NON-NEGOTIABLE
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REQUISITES OF NEGOTIABILITY
REQUISITES OF NEGOTIABILITY
Lesson 5
Lesson 5
Extension Clause
Sum to be paid with exchange
Extension Clauses are provisions extending the time of payment.
The exchange is the charge for the expense of providing
funds at the place where the instrument is payable to cover
GR: An extension clause does not affect the negotiability of the instrument.
such instrument which is issued at another place. It may be
XPN: Where a note with a fixed maturity provides that the maker has the
at a fixed rate or at the current rate. It is applicable only to
option to extend time of payment until the happening of a contingency, the
foreign bills.
date is uncertain and the instrument is nonnegotiable. The time for payment
may never come at all.
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REQUISITES OF NEGOTIABILITY
REQUISITES OF NEGOTIABILITY
Lesson 5
Lesson 5
Payable in Philippine Peso
Sum to be paid with costs of collection
The “money” referred into may be our legal tender or foreign
and/or attorney’s fees
currency. An instrument is still negotiable although the
It does not affect the certainty of the amount payable at
amount to be paid is expressed in currency that is not legal
maturity since the increase in the amount due, even if
tender so long as it is expressed in money.
uncertain, takes place after maturity when the instrument
ceases to be negotiable in the full commercial sense.
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REQUISITES OF NEGOTIABILITY
REQUISITES OF NEGOTIABILITY
Lesson 5
Lesson 5
XPNs: Negotiability is not affected if the note contains an additional provision
Effect if a bill or note is payable other than in money
which:
1. Authorizes the sale of collateral securities in case the instrument be not
paid at maturity;
GR: The note or bill must be payable in money. If payable in
2. Gives the holder an election to require something to be done in lieu of
goods, wares, or merchandise, or in property, the same is
payment of money;
not negotiable.
3. Authorizes a confession of judgment if the instrument be not paid at
maturity; or
4. Waives the benefit of any law intended for the advantage or protection
of the obligor.
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REQUISITES OF NEGOTIABILITY
REQUISITES OF NEGOTIABILITY
Lesson 5
Lesson 5
c. Payable on demand or at a fixed or determinable future
An instrument is payable on demand:
time
i.
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a. When it is so expressed to be payable on demand, or at
Payable on demand - The holder may call for payment
sight, or on presentation; or
any time, likewise, the maker may also pay any time and
b. In which no time for payment is expressed
the refusal of the holder to accept payment shall stop the
c. Where an instrument is issued, accepted, or indorsed
running of interest should there be any, but obligation to
when overdue, it is, as regards the person so issuing,
pay the note subsist.
accepting, or indorsing it, payable on demand.
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REQUISITES OF NEGOTIABILITY
REQUISITES OF NEGOTIABILITY
Lesson 5
Lesson 5
iii. At a determinable future time – An instrument is payable at a
ii. At a fixed time – A term or time instrument is payable
determinable future time which is expressed to be payable:
only upon the arrival of the time for payment.
a. At a fixed period after date or sight;
b. On or before a fixed or determinable future time specified
therein; or
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.
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Indication of particular fund for reimbursement
vs. Indication of particular fund for payment
FUND FOR REIMBURSEMENT
REQUISITES OF NEGOTIABILITY
Lesson 5
FUND FOR PAYMENT
The drawee pays the payee from his There is only one act - the drawee pays
d. Payable to order
own funds. The drawee pays himself directly from the particular fund indicated.
The instrument is payable to order where it is drawn payable to the order of a
from the particular fund indicated
specified person or to him or to his order. It may be drawn payable to the order of:
1. A Payee who is not a maker, drawer, or drawee;
Particular fund indicated is not the Particular fund indicated is the direct
2. The drawer or maker;
direct source of payment.
source of payment.
Instrument is negotiable.
Instrument is nonnegotiable. The fund
4. Two or more payees jointly;
specified is the direct source of payment;
5. One or some of several payees; or
therefore, it is subject to the availability of
6. The holder of an office for the time being
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3. The drawee;
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REQUISITES OF NEGOTIABILITY
REQUISITES OF NEGOTIABILITY
Lesson 5
Lesson 5
Payable to bearer
5. When the only or the Last indorsement is an indorsement in blank
Illustration:
1. When it is Expressed to be so payable;
Back of Negotiable Instrument
(e.g. I promise to pay to bearer P10,000.00)
2. When it is payable to a person Named therein or bearer;
(e.g. Pay to P or bearer P10,000.00)
3. When it is payable to the order of a Fictitious person or non-existing person, and
such fact was known to the person making it so payable
Pay to A
Sgd. P
Pay to B
Sgd. A
Sgd. B
(e.g. Pay to John Doe or order)
4. When the name of the Payee does not purport to be the name of any person
A promissory note which does not have the words "or order" or "or bearer" will render the
(e.g. Pay to cash)
promissory note non-negotiable, and therefore the note can still be assigned and the maker
made liable.
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REQUISITES OF NEGOTIABILITY
REQUISITES OF NEGOTIABILITY
Lesson 5
Lesson 5
Difference between having a check payable to a
2. If a check is payable to the order of fictitious or non-
fictitious payee and payable to a specified payee
existing person – it shall be considered as a bearer
instrument, provided such fact is known to the person
1. If a check is payable to a specified payee – it as an order
making it so payable. Thus, checks issued to “Prinsipe
instrument, which requires indorsment from the payee or
Abante” or “Si Malakas at si Maganda”, who are well-known
holder before it may be validly negotiated.
characters in Philippine mythology, are bearer instruments
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REQUISITES OF NEGOTIABILITY
REQUISITES OF NEGOTIABILITY
Lesson 5
Lesson 5
Fictitious-Payee rule
GR: In case of controversy, the drawer is liable and the drawee bank is
The fictitious-payee rule contemplates that the payee is fictitious or not
absolved from liability.
intended to be true recipient of the proceeds. The check is considered
a bearer instrument negotiable by delivery alone. The underlying
XPN: When there is commercial bad faith, whereby the drawee bank
theory is that the maker of the check knew that the fictitious payee
acts dishonestly and is a party to the fraudulent scheme. The check is
cannot indorse the instrument so that he must have intended for it to be
deemed payable to order, and consequently, the drawee bank bears
negotiated by mere delivery
the loss.
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REQUISITES OF NEGOTIABILITY
PROVISIONS THAT DO NOT AFFECT THE
NEGOTIABILITY OF AN INSTRUMENT
Lesson 5
Lesson 6
e. When drawee must be named with reasonable certainty
1. Omission of Date
1. In a bill of exchange, the drawee must be named or otherwise designated with
reasonable certainty.
2. Non-specification of Value given or that any value had been given
2. A bill may be addressed to two or more drawees jointly, but not to two or more
3. Non-specification of Place where it is drawn or payable
drawees in the alternative or in succession.
4. Bears a seal
Eg. An instrument may be addressed “to A and B” but not “to A or B”.
5. Designation of particular kind of Currency in which payment is to be
3. An instrument payable “to the order of the bearer” has been held to be an
made
instrument payable to “order”
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NEGOTIABLE INSTRUMENT
A
written
contract
which
NEGOTIABLE DOCUMENT
is Held to be non-negotiable in the
KINDS OF NEGOTIABLE INSTRUMENTS
intended as a substitute for technical sense because they do not
Lesson 8
money like promissory notes and have the requisites under the NIL.
bill of exchange
Forms
1. Promissory notes (PN)
It may either be a bill of exchange It has various forms such as but not
or a promissory note.
limited
to
bill
of
lading,
 an unconditional promise in writing made by one person
stock
certificates, warehouse receipts and
to another, signed by the maker, engaging to pay on
pawn tickets
Subject Matter
demand, or at a fixed or determinable future time, a sum
The subject matter is a sum Actually stands for the goods it covers.
certain in money.
Lesson 7
NEGOTIABLE INSTRUMENT VS.
NEGOTIABLE DOCUMENT
BASIS
Substitute for money
Capability of
Capable
of
Accumulating
secondary
contracts
Secondary Contracts
from indorsements at the back at the back thereof.
certain in money to order or to bearer.
accumulating Not capable of accumulating secondary
resulting contracts resulting from indorsements
thereof.
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KINDS OF NEGOTIABLE INSTRUMENTS
KINDS OF NEGOTIABLE INSTRUMENTS
Lesson 8
Lesson 8
2. Bill of exchange (BOE)
3. Check
 an unconditional order in writing addressed by one person
 A bill of exchange drawn on a bank payable on demand.
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.
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INLAND BILL OF EXCHANGE VS. FOREIGN BILL
OF EXCHANGE
PROMISSORY NOTE vs. BILL OF EXCHANGE
Lesson 9
Lesson 10
BASIS
Undertaking
PN
Promise to pay
As to number of 2 parties
BOE
Order to pay
An inland bill of exchange is one which is, or on its face
3 parties (upon acceptance of the
original parties
drawee)
purports to be, both drawn and payable within the Philippines.
As to liability of Maker is primarily liable
Drawer is secondarily liable
Any other bill is a foreign bill.
parties
As to number of
Only
presentments
payment) is needed
1
presentment
(for 2 presentments (for acceptance and
Unless the contrary appears on the face of the bill, the holder
for payment) are generally needed
needed
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may treat it as an inland bill.
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WHEN A BILL OF EXCHANGE MAY BE TREATED
AS PROMISSORY NOTE
WHEN A BILL OF EXCHANGE MAY BE TREATED
AS PROMISSORY NOTE
Lesson 11
Lesson 11
1. Where in a bill the drawer and the drawee are the same person
1. Where in a bill the drawer and the drawee are the same person
2. The drawee is a fictitious person
2. The drawee is a fictitious person
3. The drawee does not have the capacity to contract
3. The drawee does not have the capacity to contract
4. When the instrument is so ambiguous that there is doubt whether it
4. When the instrument is so ambiguous that there is doubt whether it
is a bill or a note, the holder may treat it either at his election.
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is a bill or a note, the holder may treat it either at his election.
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PARTIES TO A NEGOTIABLE INSTRUMENT AND
THEIR LIABILITIES
REFEREE IN CASE OF NEED
Lesson 13
Lesson 12
BASIS
PN
PARTIES
Maker
Payee
Drawer
BOE
Drawee
Payee
Acceptor
FUNCTION
LIABILITY
One who makes the promise and Primarily liable; cannot limit his
signs the instrument.
liability.
Referee in case of need is the person named by the drawer or
The party to whom payment is
originally payable.
indorser in the Negotiable Instrument as the one to whom the
The person who issues and Secondarily liable, except when
draws the bill.
drawee refused to accept; can
limit his liability by putting
“without recourse.”
The party upon whom the bill is Not liable until he becomes
drawn.
acceptor.
The party to whom payment is The party to whom payment is
originally payable.
originally payable.
holder may resort in case the BOE is dishonored by nonacceptance or nonpayment. It is the option of the holder to refer
to the referee in case of need or not as he may see fit.
The acceptor is the drawee who Primarily liable.
accepts the bill.
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WHEN ACCEPTANCE OF THE BILL
EXCHANGE BY THE DRAWEE IS
IMPORTANT REQUISITE
OF
AN
Lesson 14
The acceptance of a BOE is not important in the determination
of its negotiability. The nature of acceptance is important only in
the determination of the kind of liabilities of the parties involved.
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