NEGOTIABLE INSTRUMENTS LAW (NIL) the sum payable for may be raised against the

himself free from last transferee

What is a Negotiable Instrument?
It is a written contract for 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. The instrument
must comply with Section 1 of the NIL to be considered
negotiable.
It is a contract in writing, signed by the maker (in the case
of a promissory note) or the drawer (in the case of a bill of
exchange), containing an unconditional promise (note) or
order (bill) to pay a sum certain in money payable to
bearer or to order on demand or at a fixed or
determinable future time.
Basically, it is an instrument which possesses all the
elements of negotiability in Sec. 1 of NIL.
defenses.
FUNCTIONS
1) As a substitute for money, eliminating the risks of
dealing in cash.
2) As a medium of exchange for most commercial
transactions – increase the purchasing medium in
circulation, doing away with active handling on money
and the need to physically count bills and coins
whenever payment is made in financial transactions
and obligations.
3) As a medium of credit transactions – creating and
transferring credit by using notes, bills and checks
treated by businessmen as cash.
4) As a means, in the case of check, of making immediate
payment.
GOVERNING LAW

What is a Non-negotiable Instrument?  In addition to Act No. 2013 (NIL), the provisions of the
Code of Commerce that were not impliedly repealed
It is an instrument which is not negotiable, that is, an by the NIL governs.
instrument which does not meet the requirements laid o E.g. the provisions on crossed checks
down to qualify an instrument as a negotiable one, or an  The NCC applies suppletorily.
instrument which in its inception was negotiable but has o E.g. Art. 1216
lost its quality of negotiability.
KINDS OF NEGOTIABLE INSTRUMENTS
It is merely a simple contract in writing and is evidence of
such intangible rights as may have been created by the A. Bill of Exchange (Bill)
assent of the parties. It is thus covered by the general - A bill of exchange is an unconditional order in writing
provisions of the Civil Code, not by NIL. addressed by one person to another, signed by the person
Distinction between Negotiable Instruments and Non- giving it, requiring the person to whom it is addressed to
Negotiable Instruments pay on demand or at a fixed or determinable future time a
sum certain in money to order or to bearer. (Sec. 126)
Negotiable Non-Negotiable
Governed by NIL NIL does not govern but - It is essentially a written order made by one person to
apply only by analogy another to pay money to a third person or his order or to
Can be transferred by Only by assignment bearer.
negotiation or by
assignment. - Also knows as order paper, or three-party paper.
A transferee of a The transferee can never Parties to a Bill of Exchange
negotiable instrument be a holder in due course
can be a holder in due but remains to be an  A bill requires in its inception at least three parties –
course if all the assignee the drawer, the drawee, and the payee
requirements under Sec.  The parties need not all be distinct persons. Indeed, a
52 of the NIL are bill will be valid where there is only one party to it, for
complied with. one may draw on himself payable to his own order,
The transferee who is a Since the transferee is that is, the two parties to the bill can be the same
holder in due course has not a holder in due
person (drawer-drawee or drawer-payee).
the right to hold the course, all defenses
instrument and collect available to prior parties
 a) The person who issues and draws the order bill is called
the drawer. He gives the order to pay money to a third
party. He does not pay directly.
b) The party upon whom the bill is drawn is called the
drawee. He is the person to whom the bill is addressed
and who is ordered to pay.
 He becomes an acceptor when he indicates a
willingness to accept responsibility for the
payment of the bill.
 The drawee is a bank in the case of a check.
c) The party in whose favor the bill is originally drawn or
is payable is called the payee.
 the payee may be specifically designated, or may
be an office or title, or unspecified.
TN: (See note in parties to a promissory note)
Idea and Purpose of the Bill
The drawer has funds in the hands of the drawee of which
the drawer wishes to avail himself.
The drawer is the party primarily interested in, and
benefitted by, the transaction. By this instrument, the
drawer, appropriates the fund, actual or anticipated, in the
drawee’s hands and received the consideration for the
appropriation from the payee to whom the instrument is
delivered.
Kinds of Bill of Exchange
Draft – normally refers to a bill of exchange used in
documentary exchange like letters of credit transactions
Inland and Foreign Bill – An inland bill is a bill which is, or on
its face purports to be, both drawn and payable within the
Philippines. Any other bill is a foreign bill.
Time Draft – draft that is payable at a fixed date
Sight or Demand Draft – draft that is payable when the holder
presents it for payment
Trade Acceptance – bill that is used in contracts of sale where
the seller as drawer orders the buyer (as drawee) to pay a
sum certain to the same seller (payee)
Banker’s acceptance – a time draft across the face of which
the drawee has written the word accepted.
Check – a bill of exchange drawn on a bank payable on
demand
B. Promissory Note (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 to bearer. Where a note is drawn to the
maker's own order, it is not complete until indorsed by him.
(Sec. 184)
- It is a written promise to pay a definite sum of money to
another at a definite time.
- Also called as promise paper, or two-party paper
Parties to a Promissory Note
 There are originally two parties in a note.
a) The one who makes the promise and signs the
instrument is called the maker. He assumed the liability
to pay to the payee or to the holder
b) The party to whom the promise is made or the
instrument is payable is called the payee.
 The payee may be specifically designated by name
or by office or title. It may be unspecified like
“bearer”.
TN: (For bill and note) Every person to whom an instrument
is delivered is a holder. Such holder may be the payee or any
subsequent person receiving the note or bill by delivery or
by delivery and indorsement.
- If the payee endorses the note, to a third party, he
becomes an indorser and the party to whom the instrument
is endorsed is called the indorsee.
Distinction of Note and Bill
Note Bill
Unconditional promise Unconditional order
Involves 2 parties Involves 3 parties
Maker primarily liable Drawer secondarily liable
Only one presentment (for Generally, 2 presentments:
payment) acceptance and for
payment
BASIC CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS
A. Negotiability – It is that quality or attribute of a bill or
note whereby it 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 sum payable for
himself free from any infirmity in the instrument or
defect in the title of any of the prior parties, or defenses
available to them.
 The rule that one can pass no better title to
personal property than he himself has, does not
apply to negotiable instruments.
B. Accumulation of Secondary Contracts – Secondary -Identification of the Drawee
contracts are picked up and carried along with them as
a. Sec 14
they are negotiated from one person to another, or in
the course of negotiation of a negotiable instrument, a b. Sec. 17 e
series of juridical ties between the parties thereto arise
either by law or by privity. c. Sec. 128
C. Utility – The instrument is used mainly as a supplement d. Sec. 129
or as a substitute currency in payments. It may also be
used for some other purposes, such as to exercise one’s TN. (For the bill of exchange only)
right of redemption. -Analogy to note see Sec. 8(2)
Negotiability Omissions and Provisions that do not affect negotiability
What does negotiation mean? -Sec. 2
Distinguish from Assignability -Sec. 3
What are the requisites of Negotiability? -Sec. 5
-In Writing and Signed by the maker or drawer -Sec. 6
a. Sec. 191 (a) It is not dated (Sec. 11)
b. Sec. 17(f) …Sec. 13, 17, 11,
-Unconditional Promise or Order to pay a sum certain in (b) Sec.24
money
(c) 73
a. In money
How is negotiability of an instrument
-legal tender
Made?
b. Promise or order to pay
31
c. Unconditional (Sec. 3)
41
-vs conditional
32
c. sum certain in money (Sec. 2 )
determined?
-Payable on Demand or at a fixed determinable future
time 32

a. on Demand (Sec. 7) When ends?

b. Determinable future time (Sec. 4) 47

-Payable to Order or Bearer (Sec. 8 & 9) 36 a

a. When is an instrument payable to bearer?

Sec. 9 Transfer and Negotiation

b. When is an instrument payable to order? Negotiation and Assignment

Sec. 8 Sec. 30 – bearer/ order

-Sec 8 (2) – Sec. 184 Bearer (Sec. 40)

-include Sec. 1(e) -Sec. 49

Order
 -Indorsement Sec. 31, Sec. 32

Sec. 33 – Sec. 35, Sec. 39, Sec. 36, Sec. 37

Sec. 50

Holders

Who Sec. 191

Requisites Sec. 52

- Demand Instruments Sec. 53

- Notice of Infirmity and Defect Sec. 57
- Good faith
- Holder for value

Rights of HDC