Credit Management

Negotiable Instrument
Selected Provisions

RESEARCHED AND PREPARED BY:

RONALYN V. CABALLERO, MBA
PROFESSOR

I. Brief History
Act No. 2031, the negotiable Instrument Law, took

effect on June 1, 1911 and is patterned after the U.S.

Uniform Negotiable Instrument Law, which in turn
is copied from the English Bill of Exchange Act of
1882

II. Nature of Negotiable Instruments

A. Definition
A negotiable instrument is a written contract for the
payment of money which by its form and on its face
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 and
collect the sum for himself.

II. Nature of Negotiable Instruments

B. Functions

1. To supplement the currency of the government;

and
2. To substitute for money and increase the
purchasing medium

II. Nature of Negotiable Instruments

C. Principal Features and Characteristics

1. Negotiability the right of transferees to hold

the instrument and to collect the sum payable; and
2. Accumulation of secondary contract
secondary contracts are picked up and carried
along by the instrument as it is negotiated from
person to person.

II. Nature of Negotiable Instruments

D. Classes of Instrument
1. Principal Classes
a. Promissory Note, Bill of Exchange, and
Check
Negotiable Promissory Note is an unconditional
promise in writing by one person to another signed by
the maker, engaging to pay on demand or a fixed
determinable future time, a sum certain in money, to
order or to bearer.

II. Nature of Negotiable Instruments

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.

II. Nature of Negotiable Instruments

Check is a bill of exchange drawn on a bank payable
on demand. Thus, a check is a written order
addressed to a bank or persons carrying on the
business of banking, by a party having money in
their hands, requesting them to pay on presentment,
to person named therein or to bearer of order, a
named sum of money.

II. Nature of Negotiable Instruments

Other Forms

a) certificate of deposit issued by banks, payable to the

depositor or his order, or to bearer;
b) trade acceptance;
c) bonds, which are in the nature of promissory notes;
d) drafts which are bills of exchange drawn by one
bank upon another; and
e) letter of credit

III. Forms & Interpretation of Negotiable Instruments

A. Requisites of Negotiability

1. Of a Negotiable Instruments in General

An instrument to be negotiable must conform to the following
requirements:
(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 e payable on demand or 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 (Sec 1 NIL).

Mind Exercise

What is the test to

determine whether an
instrument is negotiable
or not?

Answer
The test is whether or not the instrument contains

all the requisites enumerated in Sec 1 of the NIL.

Among others, the instrument should contain words
or terms of negotiability which consists of the
instrument being so worded that it is payable to
bearer ( or its variations) or that it is payable to the
order of a specified person, or made payable to him
or order

III. Forms & Interpretation of Negotiable Instruments

A. Requisites of Negotiability

2. Of a Promissory Note
the requisites of a promissory note are:
(a) it must be in writing and signed by the maker,
(b) it must contain an unconditional promise to pay
a sum certain in money;
(c) it must be payable on demand or a fixed or
determinable future time;
(d) it must be payable to order or to bearer

Mind Exercise: Discuss the negotiability or non-negotiability of

the following notes:

Manila, Philippines
January 28, 2014
PhP 2,500.00
I promise to pay Shu Li or order the sum of PhP.
2,500.00
(Sgd)
Mo Tao

Answer:
The promissory note is negotiable since all the

requirements of Section 1 of NIL are present. It is

signed by the maker, there is unconditional promise
to pay;
It is payable on demand, since no date of maturity

appears; and
It is payable to order

Mind Exercise: Discuss the Negotiability or non-negotiability of

the following notes:

Manila, Philippines
January 21, 2014
PhP 10,000.00
For value received, I promise to pay John Dee or order the sum
of PhP 10,000.00 in five installments, with the first installment
payable on June 20, 2014 and the other installments on or
before the fifth of the succeeding month thereafter.
(Sgd.)
Jackie Lee

Answer
The promissory note is also negotiable since all the

requirements of Sec 1, NIL are present

It is signed y the maker,
There is an unconditional promise to pay;
It is payable at a determined future time, that is June
20, 2014 up to on or before October, 20, 2014; and
It is payable to order

III. Forms & Interpretation of Negotiable Instruments

A. Requisites of Negotiability

3. Of a Bill of Exchange
The requisites of a bill of exchange are:
(1) it must be in writing and signed by the drawer;
(2) it must contain an unconditional 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) the drawee must be named or otherwise indicated with
reasonable certainty.

III. Forms & Interpretation of Negotiable Instruments

B. Meaning of Particular Requisites

1. Unconditional Promise or Order

where the promise or order to pay is made to

depend on a contingent event, it is conditional,
and makes the instrument non-negotiable.

III. Forms & Interpretation of Negotiable Instruments

B. Meaning of Particular Requisites

2. Certainty of Sum
the sum is certain if the amount is fixed. The
certainty is however not affected although to be paid
(a) with interest; (b) by stated installments ; (c) by
stated installment with acceleration in case of
default;
(d) with exchange; (f) with costs of
collection of attorneys fees.

III. Forms & Interpretation of Negotiable Instruments

B. Meaning of Particular Requisites

3. In Money
General Rule: if some other act besides payment of money is
promised or ordered, the instrument becomes non-negotiable.
the following additional act however, do not affect negotiability
- authorizes the sale of collateral securities on default
- authorizes confession of judgment on default
- waives the benefit of law intended to protect to debtor
- allows the creditor the option to require something in lieu of
money.

III. Forms & Interpretation of Negotiable Instruments

B. Meaning of Particular Requisites

4. Payable on Demand
an instrument is payable on demand
(a) where expressed to be payable on demand; at
sight or on presentation;
(b) where no period of payment is stated;
(c) where issued, accepted or indorsed after
maturity.

III. Forms & Interpretation of Negotiable Instruments

B. Meaning of Particular Requisites

5. Determinable Future Time
future time is determinable in the following cases:
(a) at a fixed period after date of sight
(b) on or before a specified fixed or determinable future
time;
(c) on or at a fixed period after the occurrence of a specified
event, certain to happen, although the exact date is not
certain.

III. Forms & Interpretation of Negotiable Instruments

B. Meaning of Particular Requisites

6. Payable to Order
the instrument is payable to order where drawn
payable to the order of a specified person, or to him
or his order

III. Forms & Interpretation of Negotiable Instruments

B. Meaning of Particular Requisites

7. Payable to Bearer
an instrument is payable to bearer: (a) when
expressed to be so payable; (b) when payable to a
person named therein or bearer; (c) when payable to
the order of a fictitious or non-existing person, and
such fact was known to the drawer or maker; when
the only and last endorsement is an endorsement in
blank.

Problem Tickler 2

Perla bought a motor car payable in installments

from Automotive Company for PhP 250,000.00.
She made a down payment of PhP 50,000.00 and
executed a promissory note for the balance. The
company the company subsequently indorsed the
note to Reliable Finance Corporation which
financed the purchase. The promissory note
reads:

Problem Tickler 2 continuation

For value received, I promise to pay Automotive Company or
order at its office in Makati City, the sum of PhP 200,000.00
with interest at twelve (12%) percent per annum, payable in
equal installments of PhP 20,000.00 monthly for ten (10)
months starting February 01, 2014.
Manila, January 02, 2014.
(sgd) Perla
Pay to the order of Reliable Finance Corp.
Automotive Company
by:
(sgd) Manager

Problem Tickler 2 continuation

Because Perla defaulted in the payment of her
installments, Reliable Finance Corporation initiated a
case against her for a sum of money. Perla argued that
the promissory note is merely an assignment of credit,
a non-negotiable instrument open to all defenses
available to the assignor and therefore, Reliable
Finance Corporation is not a holder in due course.
Is the promissory note a mere assignment of credit or
a negotiable instrument. Why? Justify your answer
with reasons.