THE NEGOTIABLE INSTRUMENTS LAWACT No. 2031

Historical Background of our Negotiable Instruments Law (NIL)

U.S. Uniform Negotiable Instruments Act – our NIL was patterned with slight modification with the Uniform Negotiable Instruments Act of the United States of 1896 drafted by the National Conference of Commissioners on Uniform State Laws. This law was in turn was based upon and largely copied from the English Bill of Exchange Act of 1882, a codification of the laws of England governing bills of exchange, promissory notes and checks.

U.S. Uniform Commercial Code – The Uniform Negotiable Instruments Act has been replaced in part by Art. 3 and in part other articles of the Uniform Commercial Code prepared under the auspices of the National Conference of Commissioners on United State Law and the American Law Institute. This code was finished in 1952, and periodically revised. The objective of the code is to simplify and modernize the law of commercial transactions.

Act No. 2031 – The Negotiable Instruments Law of the Philippines, enacted on Feb. 3, 1911, took effect 90 days after its publications on March 4, 1911 in the Official Gazette of the Philippines. The Act therefore took effect of June 2, 1911.

Code of Commerce – Prior to the passage of Act No. 2031, the law then existing and governing the negotiable instruments is found in Book II of the Code of Commerce, from Art. 443 to 556. All these articles with the exception of those governing crossed checks, have been repealed. (Sec. 197 NIL)

R.A. No. 386 – The New Civil Code has suppletory effect in case of defficiency in the provisions of the NIL. In one ruling of the SC, Art. 1216 of the NCC was applied. Said article provides that “the creditor may proceed against anyone of the solidary creditors or some or all of them simultaneously” and that “demand made against one of them shall not be an obstacle to those which may subsequently be directed against the others, so long as the debt has not been fully collected.”

APPLICABILITY OF THE NEGOTIABLE INSTRUMENT LAW

1.The NIL applies only to negotiable instruments or to those instruments which meet the requirements laid down in Section of the NIL.

2.The NIL was enacted for the purpose of facilitating, not hampering or hindering transactions in commercial paper. It should not be tampered with haphazardly or lightly or should it be brushed aside in order to meet the necessities in a single case.

3.Any case not provided for by the NIL shall be governed by the provisions of existing legislation or in default thereof, by the rules of the Code of Commerce (Sec. 196 NIL). The NCC has no effect on its provisions except to supply any deficiency in cases not covered by NIL. (Art. 18 NCC).

4.If at all, the NIL can be applied only by analogy. For example, the SC applied Sec. Of the NIL in case involving a Deed of Assignment of shares of stocks which was signed in blank to facilitate future assignment of the same shares. The Court observed that the situation is similar to Sec. 14, where the blanks in an instrument may be filled up by the holder, the signing in blank being with the assumed authority to do so. (Federico O.

Borromeo, et al., vs. Amancio Sun, G.R. No. 75908, Oct. 22, 1999, 114 SCAD 616, 317 SCRA 176, 183).

FUNCTION & IMPORTANCE OF NEGOTIABLE INSTRUMENTS

1.As substitute for money – although they do not constitute legal tender (Art. 1249, NCC; Sec. 52, R.A. No. 7653 New Central Bank Act), and are not money, it is used as substitute for money. One of its distinctive characteristic is its negotiability which allows it to pass freely from hand to hand in the commercial markets and to take the place of money in commercial transactions free from all personal defenses available against the original holder.

A negotiable instrument differs from money in that NI is valuable or worthless depending upon the financial ability of the parties to them. The purpose of the law is to place NI on such footing that it would be freely accepted without question in commercial transactions and thus facilitate trade.

2.As a medium of exchange for most commercial transactions – Negotiable papers, particularly checks, constitute at present, the media of exchange for most commercial transactions. It increases the purchasing medium without it circulating among business houses and individuals, more money either in coins or bank bills would be needed in circulation to take care of the ever increasing everyday business transactions.

3.As a medium of credit transaction – NI serves as a medium of credit transactions. A man does not always have property, or valuable property rights which he can turn into cash at any moment. NI however, measures his credit and he avails himself of his credit by executing his note to his creditor who, in turn indorses this to a third person. Thus, in this way men without cash in hand are enabled by means of credit to conduct and carry to completion business and commercial enterprise. The purpose of negotiability then is to allow men of undoubted credit to carry on business enterprise upon their promissory note notes, bills of exchange and checks knowing that other businessmen will treat these promises as cash.”

Checks are intended for immediate payment while promissory notes or bills of exchanges are intended for the circulation of credit.

FEATURES OF NEGOTIABLE INSTRUMENTS

1. Negotiability – an attribute of a bill or note whereby it may pass from hand to hand similar to money, so as to give holder in due course the right to hold the instrument and collect the sum payable to himself free from any infirmity in the instrument or defect in the title of any prior parties, or defenses available to them among themselves.

2. Accumulation of secondary contracts – it is the most important feature of the NI, the accumulation of secondary as they pass from one person to another.

EXAMPLE:

Suppose X issues a promissory note payable to the order of Y for the sum stated therein. In this case, the contract is only between X and Y. X is primarily liable. If Y transfers his right to Z, Y thereby enters into a new contract with Z, whereby Y binds himself to pay Z in case X, the maker does not pay the note. Here, Y is secondarily liable. The primary contract is that between X and Y. The transfer of the note to Z makes a secondary contract between Y and Z. If W buys or discounts the note from Z, a similar contract is entered into and goes on and on as it passes from person to person.

From the above it could be seen that it is more advantageous for the holder of the NI, if the more debts are added, as he can proceed not only against the maker of the note but also against all transferor.

FORMS OF NEGOTIABLE INSTRUMENTS

There are two (2) basic types of NI, a promissory note (Sec. 184 NIL)) and a bill of exchange (Sec. 126 NIL).

Sec. 184. – Promissory note, defined. – A negotiable promissory not within the meaning of this Act 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. Where a note is drawn to the maker’s own order, it is not complete until endorsed by him.

Sec. 126. – Bill of exchange, defined. – A bill of exchange is unconditional order in writing addressed by one to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or determinable future time a sum certain in money to order or to bearer.

EXAMPLES OF SPECIAL TYPES PROMISSORY NOTE

1.Certificate of deposits

2.Bank notes

3.Due bills

4.Bonds

EXAMPLES OF BILLS OF EXCHANGE

5.Bank drafts

6.Trade acceptances

7.Banker’s acceptance

8.Checks

Commercial Papers with Limited Negotiability

There are certain instruments which are widely used in commercial transactions with limited negotiability but they have been held to be non-negotiable in the technical sense as they do not conform with the essential requisites stated under the NIL. They are therefore beyond the scope of the NIL and governed by other laws, these are:

1. Document of Title – it a receipt or order for the delivery of goods. Examples are: Bill of Lading, Dock Warrant, Quedan, or Warehouse Receipt. Although termed as “negotiable” when the goods are deliverable to the bearer or order, it is without unconditional promise or order to pay a sum certain in money;

2. Letter of Credit – it is favor of a specified person and not to order (Art. 568, Code of Commerce). Drafts issued in connection with LC are negotiable instruments

3. Trust Receipt – is a documnet of security pursuant which a bank acquires a “security interest” in the goods under trust receipt.

4. Certificate of Stock – it is muniment of a title to a given share in the assets of a corporation. Also without an unconditional promise or order to pay a sum certain in money

5. Pawn Ticket – not negotiable instrument under the NIL nor a negotiable documents under Art. 1507 of the NCC.

6. Treasury Warrant – a government warrant for the payment of money such as issued in favor of public officer or employee covering payment or replenishment of cash advances for official expenditures. It is payable out of specific fund or appropriation.

7. Postal Money Order – is an order for the payment of money to the payee named therein by one post office upon another under authority of law.

CONTRACTS AND NEGOTIABLE INSTRUMENTS COMPARED

Bills of exchange and promissory notes in their various forms are written contracts, and the fundamental rules governing the law of contracts are applicable to the determination of the legal questions which may arise over such instruments. However, bills and notes are capable of being cast in such form as to have the quality of negotiability, and instruments having this quality, while their nature as contracts is unimpaired, are distinguished from ordinary contracts by incidents having their foundation in the law of merchant (Sec. 196 NIL), which, so far as it has been codified by statute, now known as NIL. Between ordinary contracts and negotiable instruments there is the difference between “assignability” and “negotiability” (Sec. 30 NIL).

Unlike contracts, a negotiable instrument is not in force until it is delivered (Sec. 16 NIL).

Bills and notes, while usually negotiable, are not necessary so, and non-negotiable instruments generally are governed by the rules of law applicable to ordinary contracts, except as there is applicable to them, by analogy or by express provisions, NIL.

Doubt Resolved in Favor of Negotiability

Negotiable instrument enjoys immunities and privileges which are extended to no other species of contracts.

Where the meaning is doubtful, the policy of resolving in favor of negotiability is adopted by the court. This is to encourage the free circulation of the negotiable instruments because of the indispensable function they perform in mercantile business transactions in any given country and the world at large.

FORM AND INTERPRETATIONSection 1 – 23 NIL

SECTION 1.

Formal Requirements of Negotiability

A negotiable instrument is a contractual obligation to pay money. Whether or not an instrument is negotiable depends entirely on its form and content. To determine the negotiability of an instrument, the following must be considered:

1.The whole of the instrument;

2.Only what appears on the face of the instrument;

3.The provisions of the NIL especially Sec. 1 which gives the requirements of negotiability;

Take note that a valid instrument is not necessarily negotiable.

Definition of Negotiable Instrument

In effect Sec. 1 of the NIL gives the definition of a negotiable instrument. The NIL is inoperative if the document in existence does not conform with the requirement of Sec. 1 of the law.

The requisites stated therein are essential for the security of commercial transactions as they enable one to tell at a glance whether or not the instrument is negotiable and to gauge the risks involved in taking it as security.

EXPLANATION OF FORMAL REQUIREMENTS

The requirements indicated in sub-sections (a), (b), (c) and (d) are necessary in order that a promissory note may be negotiated, while all the sub-sections from (a) to (e) are necessary in order that a bill of exchange may be negotiable.

Under sub-section (a), the maker refers to the person issuing a note, while the drawer, to the person issuing a bill of exchange.

In sub-section (b), the instrument must contain an “unconditional promise” if it is a promissory note and “an unconditional order” if it is a bill of exchange.

Sub-section (c) and (d) are applicable to both kinds of instruments, but sub-section (e) is applicable only to bills of exchange.

1.The instrument must be writing

The term “instrument” indicates writing. The instrument must be in writing otherwise, nothing could be negotiated or passed from hand to hand. There is no such thing as oral negotiable instrument.

Writing includes not only which has been written on paper and with pen or pencil but also that which is in print (Sec. 191 NIL) or has been typed. It may written on leather, cloth or any other substitute for paper as long as it is movable in nature.

The accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing that is from the face of the instrument itself.

2. The instrument must be signed by the maker or drawer

The signature of the maker or drawer as a general rule is placed at the lower right hand corner of the instrument, it may however appear in any part thereof, whether at the top, middle or bottom or at the margin.

A handwritten statement on the body of the instrument, such as:

“I, Juan dela Cruz, promise to pay Maria dela Cruz....”

will be considered as Juan’s signature. It will be valid and binding as long as it appears that a person intended to make the instrument his own. The signature is prima facie evidence of his intention to be bound as either maker or drawer. However, if the signature is so placed upon the instrument that it is not clear in what capacity the person intended to sign, he is deemed an indorser (Sec. 71(f)) and not a maker or a drawer.

The signature of the maker or drawer is usually written, preferably in full name or at least the surname should appear. But initials or any mark will be sufficient, provided that such signature be used as a substitute and the maker or drawer intends to be bound by it. However, an unusual signature may limit the acceptability of an instrument.

The use of pencil is undesirable as it is easy to tamper the writing. Where the signature is denied by the maker or drawer, the burden of proof is on the holder to show it.

3.The instrument must contain an unconditional promise or order to pay – Section 3

1.Implied Promise to pay – it is not essential that the word “promise” be used. Any words equivalent to a promise or assumption of full responsibility for the payment of the note on the face of an instrument are sufficient to constitute a “promise to pay”. Words like “payable to”, “to be paid to”, “I agree to pay”, I guaranty to pay” may be used and such words imply a “promise to pay.”

2.Bare acknowledgement of indebtedness – a bare admission or acknowledgement of indebtedness, (like “I.O.U.”, “due Php 1,000,000.00”, “for value received”)alone is not a negotiable instrument as it does not import an express promise to pay or show that the parties intend the to be paid. A mere promise implied by law from the existence of an indebtedness, and not from any promissory language is not sufficient. An acknowledgement of an old debt evidences an old obligation but a promissory note imports a new obligation.

3.Use of words of negotiability – the language used must be such that the written undertaking to pay may fairly be deduced therefrom. If words of negotiability or payment are to added as indicating a promise to pay (like words “due P or order”, or “due P or bearer”, or “due P or demand”, or “I.O.U. Php 10,000.00 to be paid on June 30, 2012”) the instrument is negotiable although it contains no express promissory words.

When bill of exchange contains an order to pay

1.Words equivalent to an order to pay – it is also not necessary to use the word “order” in a bill of exchange to satisfy the requirement. Any other words which are equivalent to an order or which show the drawer’s will that the money should be paid (like words “let the bearer”, or “W (drawee) will oblige R (drawer) to pay P or order”) are sufficient.

2.Mere request to pay – an order is a command or imperative direction and, therefore, a mere request which merely asks a favor (like “I request you to pay”, or “I wish you would pay” or “I authorize you to pay”) supplication, or authority does not constitute an order for it does not import a right to ask and a duty to obey. However, the use of polite words like “please” does not convert an order into a request, such is in the nature of a polite command.

3.Liability of drawer – it is immaterial whether the drawee obeys the order to pay or not. The negotiability of a bill depends upon the terms of the order. The drawer has the liability under the law (Sec. 61 NIL).

When promise or order to pay unconditional

4.Instrument payable absolutely – it must not be subject to any condition or contingency ( Sec. 4 last par. Art. 1179 NCC) except implied conditions of presentment (Sec. 70, 143 NIL), protests (Sec. 152, 165, 167,170 NIL) and notice of dishonor (Sec. 89) as provided in the law. Therefore, the note or the bill must be payable absolutely.

5. Reason for requisite – the fact that liability is unconditional greatly enhances the ability of the instrument to circulate freely from one person to another. No one would accept a paper for a debt if the right to recover is not absolute.

Thus an instrument is not negotiable if it contains a promise or order to pay “if X marries” for X may never marry, or “if certain property is sold” for the property may never be sold, or “if after two years I am still living” for if the maker should die within two years, no payment is to be made, or “out of the rent which may be collected from my apartment” for the rent may not be collected. These constitute a simple contract rather than a negotiable instrument.

3.Terms not affecting unconditional liability – the indication of the particular fund out of which reimbursement is to be made, or an indication of particular account to be debited with the amount does not render a promise or order conditional. This has reference to bills of exchange only since reimbursement and debiting can only take place where payment made by another has been made.

Additional terms appearing on the instrument (like statement of the purpose for which the instrument is issued or the collateral securing it) do not make the promise or order conditional if the duty to pay is unaffected by such terms.

Indication of a particular fund out of which reimbursement is to be made

EXAMPLE:

“Pay to the order of W Php 10,000.00 and reimburse yourself from the rentals of my house.”

SIGNED: MR T.

TO: MR. X

In the given example, the drawee (Mr. X) may pay the amount out of any fund. It is only the reimbursement that is to come out from the rentals. An instrument which mentions a particular fund out of which reimbursement is to be made is negotiable because the order is not rendered conditional. The drawee is not limited to the money in his hands belonging to the drawer. Meaning, the fund indicated is not the direct source of payment but only the source of reimbursement which is an act subsequent to the payment.

Indication of a particular fund out of which payment is to be made

EXAMPLE:

1.“I promise to pay P or order the sum of Php 10,000.00 out of my salary in the governmenr”

2.“Pay to the bearer the sum of Php 10,000.00 out of the dividends which i receive from X Corporation.”

3.“Pay to the bearer the sum of Php 10,000.00 out of my money in your hands or out of my share of the profits”

In each of the above cases, the maker or drawee is limited to the fund indicated and is not supposed to pay if that fund should prove insufficient, thus above examples are non-negotiable papers.

An instrument payable out of a particular fund is non-negotiable (Sec. 3 par. 2 NIL) as it is not payable “in any event” because the amount to be paid is made dependent upon the adequacy or existence of the fund designated.