Negotiable Instruments

Topics: Negotiable instrument, Promissory note, Commercial paper Pages: 72 (15487 words) Published: July 13, 2011
Negotiable Instruments Law

Negotiable Instruments, In General

Function and importance of negotiable instruments

• Although they do not constitute legal tender, they are used as a substitute for money.

• Negotiable papers, particularly checks, constitute, at present, the media of exchange for most commercial transactions.

• Negotiable instruments also serve as a medium of credit transactions.

• Negotiable instruments shall produce the effect of payment only when they have been encashed or when through the fault of the creditor they have been impaired. [Article 1249, Civil Code]

Characteristics of negotiable instruments

• Negotiability: That quality or attribute 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 sum payable for himself free from defenses.

• The most important feature of negotiable instruments is the accumulation of secondary contracts as they are transferred from one person to another.

Common forms of negotiable instruments

1.Bill of exchange

2.Promissory note


Bill of exchange

• A bill of exchange is 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, Negotiable Instruments Law]

Promissory note

• A negotiable promissory note is 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. [Section 184, Negotiable Instruments Law]


• A check is a bill of exchange drawn on a bank and payable on demand. [Section 185, Negotiable Instruments Law]

Kinds of bill of exchange


2.Trade acceptance


Inland v. foreign bill of exchange

• An inland bill of exchange is one which, on its face, purports to be both drawn and payable in the Philippines. Any other bill is a foreign bill.

Kinds of promissory notes

1.Certificate of deposit


3.Bank note

4.Due bill

5.Mortgage note

6.Title-retaining note

7.Judgment note

Bill of exchange v. promissory note

• Unconditional order v. unconditional promise

• Three (3) parties in bill while only two (2) in note

• Drawer in a bill is only secondarily liable while maker in a promissory is primarily liable

• A bill drawn payable to drawer's own order is complete without indorsement while a note drawn payable to maker's own order is not complete until indorsed by him

• A bill must be presented for acceptance in some cases while there is no need of presentment for note

• Reasonable time from last negotiation v. reasonable time from issue

Form and Interpretation

Form of negotiable instruments

1.It must be in writing and signed by the maker or drawer.

2.It must contain an unconditional promise or order to pay a sum certain in money.

3.It must be payable on demand, or at a fixed or determinable future time.

4.It must be payable to order or to bearer.

5.Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. [Section 1, Negotiable Instruments Law]

Terms, when sufficient

• The instrument need not follow the language of this Act, but any terms are sufficient which clearly indicate an intention to conform to the requirements hereof. [Section 10, Negotiable Instruments Law]

What constitutes certainty as to sum

• The sum payable is a sum certain within the meaning of this act, although it is to be paid:

1.With interest; or

2.By stated installments; or

3.By stated...
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