Notes on Negotiable Instruments.

What is a negotiable instrument?

A negotiable instrument, is a written contract for the payment of money, which
complies with the requirements of Section 1, of the Negotiable Instruments Law. By its
form and its face, it is intended as a substitute for money, and passes from hand to hand,
as money so as to give the holder in due course, the right to hold the instrument, free
from the personal defenses, available to prior parties.

What are the stages in the life of a negotiable instrument?

The stages in the life of a bill of exchange are:
1. Mechanical act of writing the instrument;
2. Issuance or the first delivery to the payee;
3. Negotiation, or the transfer from one person, to another, so as to
constitute the transferee, as a holder;
4. Presentment for acceptance this is applicable only to certain types of
bills of exchange; presentment to the drawee, in order for him to
signify his assent, to the order of the drawer;
5. Acceptance or dishonor, by non-acceptance in this stage, the drawee
either accepts, or dishonors the bill;
6. Presentment for payment, or dishonor by non-payment in this stage,
the drawee either pays the bill, or refuses to pay it;
7. Notice of dishonor in case of dishonor, notice of dishonor is required,
to be given to the persons secondary liable, informing them that the
maker, or the drawer or acceptor, has refused to pay, or to accept the
instrument;
8. Protest this is a stage that is required only for foreign bills of
exchange;
9. Discharge of the instrument;

The stages in the life of a promissory note are:

1. Preparation and signing, or the writing of the instrument;

2.
3.
4.
5.
6.

Issuance or the first delivery of the instrument, to the payee;

Negotiation;
Presentment for payment, or dishonor by non-payment;
Notice of dishonor;
Discharge;

Note that in promissory notes, the presentment for acceptance is not necessary.
This is because the drawer already knows that he is liable to pay, and his liability is
primary in character.

What are the primary kinds of negotiable instruments?

They are:
1. Promissory Notes;
2. Bills of Exchange;
3. Checks;

What is a promissory note?

A 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 determinable
future time, a sum certain in money, to order or to bearer.

What is a bill of exchange?

A bill of exchange, is an unconditional order in writing, addressed by one person
to another, signed by the person giving the order, requiring the person to whom it is
addressed, to pay on demand, or at a fixed determinable future time, a sum certain in
money, to order or to bearer.

What is a check?
A check is a special kind of bill of exchange, drawn on a bank, payable upon
demand.

Are negotiable instruments legal tender?

No, negotiable instruments are not legal tender. They are not fully guaranteed by
the government, to be used for the payment of debts. This is required by Section 52 of
the Negotiable Instruments Law.
Article 1249 of the New Civil Code, specifically states that negotiable papers, and
other mercantile documents, do not produce the effect of payment, until and unless they
are encashed, or when through the fault of the creditor, they have been impaired.

What are the distinctions between a bill of exchange, and a promissory note?
A bill of exchange is an unconditional order to pay. A promissory note is an
unconditional promise to pay.
A bill of exchange is always signed by a drawer. The promissory note is always
signed by a maker.
The bill of exchange requires acceptance, before presentment for payment. The
acceptance prior to presentment, for payment is not necessary, for promissory notes.

What are the distinctions between bill of exchange and a check?

The bill of exchange may, or may not be drawn, on a bank. The check is always
drawn from a bank.
The bill of exchange is payable upon demand, or at a fixed and determinable
future time. The check is always payable upon demand.
The bill of exchange requires presentment for acceptance. Presentment for
acceptance is not necessary in the case of checks.
The bill of exchange may, or may not be drawn against a deposit of funds. The
check is always drawn against a deposit of funds.
The death of the drawer, does not revoke the drawees authority to pay, in a bill of
exchange. The death of the drawer, revokes the banks authority to pay.

The bill of exchange must be present for payment, within a reasonable time, after
its last negotiation. The check must be presented for payment, within a reasonable time,
after its issue. Checks expire 180 days after their issuance.
What are the essential requisites of a negotiable instrument?
Section 1 of the Negotiable Instruments Law provides that, an instrument, to be
negotiable, must conform to the following requirements:
1. It must be in writing, and signed by the maker or the drawer;
2. It must contain an unconditional promise, or order to pay, a sum
certain in money;
3. It must be payable upon demand, or at a fixed, determinable future
time;
4. It must be payable to order, or to bearer;
5. Where the instrument is addressed to a drawee, he must named
therein, with reasonable certainty.

How is negotiability determined?

Negotiability is determined by:
1. By considering only what appears on the face of the instrument;
2. By ascertaining the presence, or absence of the requisites, under
Section 1 of the Negotiable Instruments Law;
3. By considering the whole of the instrument.
In case of ambiguity on the face of the instrument, Section 17 of the Negotiable
Instruments Law shall apply.

Is the phrase, sum certain in money, the same as, certain sum of money?
No, they do not mean the same thing. A sum certain in money, refers to a fixed
amount. Whereas, a certain sum of money, makes no reference to fixed amount.

Would an additional fee to the principal amount, payable and stated on the face of
the instrument affect negotiability?

No, the instrument is still negotiable, as per Section 2 of the Negotiable

Instruments Law.

What are the requirements for the said installments?

The requisites are:
1. The number of the installments must be stated;
2. The maturity dates for each installment must be stated.

Suppose the second installments maturity date is not fixed?

The instrument is still negotiable. The instrument shall be payable on demand.

The instrument says, I promise to pay Peter, the sum of 100,000 from my salary in
the San Beda College of Law. Is the instrument negotiable?
No, the instrument is not negotiable. It becomes a conditional promise to pay,
premised on the availability of the funds. This is contrary to Section 1 of the Negotiable
Instruments Law.

Is there a difference between the phrase, bearer, Margaret Thatcher and Margaret
Thatcher, or bearer?
Yes, the first phrase employs the bearer as an adjective. The second denotes the
bearer as a noun. Thus, the first phrase makes the instrument non-negotiable.

What are the differences between a negotiable, and a non-negotiable instrument?

Negotiable instruments are governed by the Negotiable Instruments Law. Nonnegotiable instruments are governed by the New Civil Code.
Negotiable instruments may be transferred by negotiation, and assignment. Nonnegotiable instruments may be transferred only by assignment.

A holder of a negotiable instrument, may become a holder in due course,

provided the requisites of Section 25 of the Negotiable Instruments Law are present. In
non-negotiable instruments, the holder is a mere assignee. There is no due course
holding.
In negotiable instruments, only real defenses may be raised against the holder in
due course. In non-negotiable instruments, all manners of defenses real or personal
may be raised against the assignee or the transferee.
In negotiable instruments, the holder in due course acquires a clean title to the
instruments, free from the infirmities of the instruments, and defects in the title of the
prior endorsers. The shelter rule may apply. In non-negotiable instruments, the
assignee, by virtue of subrogation, merely acquires a derivative title to the instrument.
In negotiable instruments, the solvency of the debtor is guaranteed by the
endorsements made by the prior endorsers, because they guarantee that the instrument
will be accepted, paid or both; and that they will pay if the same is dishonored. In nonnegotiable instruments, the solverncy of the debtor is not deemed guaranteed, unless
there is an express stipulation to that effect, in accordance to Article 1628 of the New
Civil Code.

What is the effect of failure of the payee, to give notice of dishonor to an endorser?
The failure of the payee, to give notice of dishonor, discharges the endorser.

Is there a drawee in the promissory note?

No, there is no drawee on the promissory note. Section 1, paragraph E of the
Negotiable Instruments Law does not apply.

Suppose the instrument give the holder, an option to require something to done,
instead of demanding payment in money. Is the instrument still negotiable?
It depends. If the holder is given the option, then the instrument is still
negotiable. If the drawer or maker is given the option to do anything, other than the
payment of money, the instrument is not negotiable. When the maker, instead of

fulfilling his promise to pay, has the option of painting the bearers house, it no longer
becomes an unconditional promise to pay.

When can we say, that the instrument is still negotiable, even when it states a source
of funds, for the payment of the instrument?
The general test, is to ascertain whether or not the source of the funds so states,
carries the general credit of the maker or the drawer. If it refers to the general credit, it is
negotiable. If it refers to the credit of the maker, or the drawer, out of a particular fund,
the instrument is no longer negotiable. Remember, one of the essential requisites of a
negotiable instrument is the unconditional promise, or order to pay. If it is conditional,
it is a non-negotiable instrument.

If an instrument states a particular fund out of which, reimbursement is to be made

by the drawee, is the instrument non-negotiable?
No, what renders the instrument non-negotiable, is when the fund for payment is
particularly specified; not one for reimbursement. There is a difference between, funds
for payments and a funds for reimbursements.
Note here that the negotiability is not affected, because the order to pay is still
unconditional. The drawee must pay; and then later on reimburse himself. If there are
insufficient funds for reimbursements, that is an issue between the drawer and the
drawee. The important thing is that, the obligation to pay the payee or holder, has been
met unconditionally.

When do we say that the sum payable is certain?

The sum payable is certain, when the amount that is to be paid, is sufficiently
determinable, on the face of the instrument, in accordance with Section 2, of the
Negotiable Instruments Law.

When is the instrument payable on demand?

Section 7, of the Negotiable Instruments Law provides that, An instrument is

payable on demand when:
1. When it is so expressed to be payable on demand, or at sight, or on
presentation; or;
2. In which no time for payment is expressed.
Where an instrument is issued, accepted, or indorsed when overdue, it is, as
regards the person so issuing, accepting, or indorsing it, payable on demand.
When is the negotiable instrument payable to bearer?
Section 9 of the Negotiable Instruments Law provides that, the instrument is
payable to bearer:
1. When it is expressed to be so payable; or;
2. When it is payable to a person named therein or bearer; or;
3. When it is payable to the order of a fictitious or non-existing person,
and such fact was known to the person making it so payable; or;
4. When the name of the payee does not purport to be the name of any
person; or;
5. When the only or last indorsement is an indorsement in blank.

What is the effect if the last, and only indorsement is an indorsement in blank?
Section 9, paragraph E of the Negotiable Instruments Law provides that, such
negotiable instrument shall be payable to bearer.

If you correlate Section 9 and Section 40 of the Negotiable Instruments Law, what
conclusion can be drawn?
The cardinal rule in negotiable instruments is that, once a bearer instrument,
always a bearer instrument.
Section 9 provides that if the last or only indorsement is in blank, the instrument
is a bearer instrument. Section 40 provides that, where an instrument, payable to bearer,
is endorsed specially, it may nevertheless be further negotiated by delivery.

This means that once an instrument, is indorsed in blank, it becomes payable to

bearer, even if a subsequent endorser, endorses it specially. The instrument is no
converted to an order instrument. It remains a bearer instrument, which can be further
negotiated by delivery.

Who is a holder?
The holder, is a payee or endorsee, in possession of the instrument. Depending
on the type of the instrument, the holder is:
1. In an order instrument, the holder is the payee, or endorsee, who is in
possession of the order instrument.
2. In a bearer instrument, the holder is the one in possession of the order
instrument.

What are the distinctions between negotiability and assignability?

Negotiability refers to special kinds of contracts, i.e. those that involve negotiable
instruments. Assignability refers to all manners of contracts in general.
The holder in due course is free from personal defenses. The assignee is not
immune from defenses, between and among the prior parties.
In both instances, the cause of the contract is presumed.
In negotiability, the endorser is not liable, unless there be presentment for
payment or acceptance.
A general endorser warrants the solvency of the principal debtor. An assignor
does not warrant the solvency of the principal debtor.
A holder may acquire a better right, than the prior endorser, as in the case of a
holder in due course, under the shelter rule. The assignee cannot acquire better rights
than his assignor, under the principle of subrogation. He merely steps into the shoes of
the assignor.

If there is no stipulation, as to the time of payment, when is the instrument payable?

When there is no stipulation as to the time of payment, the instrument is payable

upon demand. This is provided for by Section 7, of the Negotiable Instruments Law.

If an instrument has a stipulation as to the currency, which would be used for

payment, is the instrument negotiable?
No, the sum certain in money, in Section 1 of the Negotiable Instruments Law,
does not equate money with legal tender. Thus, parties can validly agree, that the
instrument may be paid in currency, other than pesos.

Is the phrase pay to X or order, the same as, pay to the order of X?
No, because pay to X, or order means that the instrument is payable first, to X
and then, to whoever X might want to pay thus, his order.
Pay to the order of X, simply means that the instrument must be paid, to the
specified payee of X. On face value alone, it does not include X as a valid payee.
The terms, however, are completely interchangeable as long as X intends the
instrument to pay himself.

If the instrument is ambiguous on its face, or bears omissions, how is the instrument
construed?
The instrument is construed according to Section 17, of the Negotiable
Instruments Law. The following rules are observed:
1. Where the sum payable is expressed in words and also in figures and
there is a discrepancy between the two, the sum denoted by the words
is the sum payable; but if the words are ambiguous or uncertain,
reference may be had to the figures to fix the amount;
2. Where the instrument provides for the payment of interest, without
specifying the date from which interest is to run, the interest runs from
the date of the instrument, and if the instrument is undated, from the
issue thereof;
3. Where the instrument is not dated, it will be considered to be dated as
of the time it was issued;

4. Where there is a conflict between the written and printed provisions of

the instrument, the written provisions prevail;
5. Where the instrument is so ambiguous that there is doubt whether it is
a bill or note, the holder may treat it as either at his election;
6. Where a signature is so placed upon the instrument that it is not clear
in what capacity the person making the same intended to sign, he is to
be deemed an indorser;
7. Where an instrument containing the word "I promise to pay" is signed
by two or more persons, they are deemed to be jointly and severally
liable thereon.

If it is not clear, whether the instrument is a bill of exchange, or promissory note

what is the remedy of the holder?
The remedy of the holder is to treat the instrument as either one, or the other, at
his election.

Suppose there is ambiguity, as to whether the instrument is a bill of exchange or a

promissory note what is more advantageous to the holder?
The promissory note is more advantageous. In a promissory note, the liability of
the maker is primary in nature. There are fewer steps towards obtaining the discharge of
the promissory note.

May a holder treat a bill, as a promissory note, even when there is actually no
ambiguity on the face of the instrument?
Yes, there are three instances when, notwithstanding the lack of ambiguity, the
holder may elect to treat a bill of exchange, as promissory note. The instances are:
1. When the drawer, and the drawee are the same person. This is the case
when a bank issues a check against itself as in a managers or
cashiers check.
2. Where the drawee is a fictitious person;
3. Where the drawee does not have capacity to act, as provided in Section
130, of the Negotiable Instruments Law.