Law on Negotiable Instruments

Topics: Negotiable instrument, Promissory note, Bearer instrument Pages: 82 (27327 words) Published: April 26, 2013
2. Negotiable Instruments Law (Act No. 2031)
1. The Negotiable Instrument
Written contract for the payment of money, by its form intended as substitute for money and intended to pass from hand to hand to give the HDC the right to hold the same and collect the sum due. Instruments are negotiable when they conform to all the requirements prescribed by the NIL (Act 2031, 03 February 1911). Although considered as medium for payment of obligations, negotiable instruments are not legal tender (Sec. 60, New Central Bank Act, R.A. 7653); 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. (Art. 1249, CC) BUT a CHECK which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash. Negotiable Contains all the requisites of Sec. 1 of the NIL Transferred by negotiation HDC may have better rights than transferor Prior parties warrant payment Transferee has right of recourse against intermediate parties Non-negotiable Does not contain all the requisites of Sec. 1 of the NIL Transferred by assignment Transferee acquires rights only of his transferor Prior parties merely warrant legality of title Transferee has no right of recourse


TIP: It is advised that one memorizes the two most important provisions of the NIL : Sec. 1 (Forms of negotiable instruments) and Sec. 52 (What constitutes a holder in due course) MICHAEL A. OSMEÑA v. CITIBANK (2004)

The Negotiable Instruments Law was enacted for the purpose of facilitating, not hindering or hampering transactions in commercial paper. Thus, the said statute should not be tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a single case.

3. Life of Instrument
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.



issue negotiation presentment for acceptance in certain bills acceptance dishonor by or acceptance presentment for payment dishonor by nonpayment notice of dishonor protest in certain cases discharge

4. Kinds Instruments



4.1. Promissory note - a promise to pay
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, not complete until indorsed by him (Sec. 184, NIL).

4.2. Bill of exchange - an order made by one
person to another to pay money to a third person. 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 (Sec. 126, NIL). Check: bill of exchange drawn on a bank payable on demand. Promissory Note Unconditional promise Involves 2 parties Maker primarily liable Only 1 presentment Bill of Exchange Unconditional order Involves 3 parties Drawer only secondarily liable Generally 2

2. Negotiable Instruments Law
o The NIL applies only to instruments which conform with the requisites laid down by Sec1 of the law. Should any of said requisites be absent, the instrument would not be negotiable and would therefore not be governed by the NIL but by the general law on contracts.

for payment

presentments acceptance and payment

for for

5. Parties
5.1. As regards promissory note:
1. 2. Promissor/maker Payee - person to whom the promise to pay is made.

5.2. As regards bill of exchange:
1. 2. 3. Drawer - person who gives the order to pay. Drawee - addressee of the order. Payee - person to whom the payment is to be made.

Indorser - the payee of an instrument who transfers it to another by signing it at the back thereof Indorsee - person to whom the indorser negotiates the instrument, who, by such...
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