NEGOTIABLE INSTRUMENTS be studying for the purpose of this
subject.
INTRODUCTION
Negotiable instruments is a rather
technical, legal term. We dont
usually use the term Negotiable
Instruments in our daily lives. However,
you will be surprised that Negotiable
Instrument as a concept is familiar to
all of us. In fact I can say for sure that
once in our lives, you have all
encountered and dealt with
Negotiable Instruments.
So to begin, let us first not define what
a Negotiable Instrument is because if
I read to you the technical definition
of NI, you will all you scratch your
heads and not understand a thing,
because thats what happened to
me the first time I read its definition in
the book.
Let understand what NI is by starting
at the basics. Let us begin with history.
Negotiable Instruments Law
Negotiable Instruments Law is Act No.
2031. It was enacted on February 3,
1911 and it took effect 90 days after
its publication on March 4, 1911 in the
Official Gazzette of the Philippines.
Therefore it took effect on June 2,
1911. This law has never been
amended.
So, the NIL studied by my great great
great grandfather when he studied
law is the same NIL I studied when I
studied law, and the same NIL you will
Our NIL was patterned from the US
Uniform Negotiable Instruments Act,
which in turn was patterned from the
English Bill of Exchange Act 0f 1882
Then US Uniform Commercial Code
replaced the US Uniform Negotiable
Instruments Act. Our law, Act No.
2031 during the time of American
occupation is exactly patterned from
those laws.
So what is the importance about the
history? US decisions even the
decisions in Common Law England
interpreting similar related provisions
of our NIL will have persuasive effect.
In our law, prior to the passage of Act
No 2031, we were following the Code
of Commerce.
Functions and Importance of NI
1. Substitute for Money but NOT
legal tender
2. Medium of Commercial
Transactions
3. Evidence of Indebtedness and
proof of payment
4. Enhances security
5. It is specie of property
(1) As a substitute for money, BUT not
legal tender
MONEY - Act No. 7653 or the New
Central bank Act particularly Sec. 52.
Defines money as all notes and coins
issued by the Bangko Sentral.
Considered as legal tender.
LEGAL TENDER - That kind of money
which the law compels a creditor to
accept in payment of his debt when
tendered by the debtor in the right
amount.
Example: A owes B P1M, with no
interest and no term (pay when
able). A mortgaged his house to B as
security. After 1 year, A came back to
B with an attach case full of P1000
bill, amounting to P1M.
Q: Can B refuse to receive the
money? Because he wants to
foreclose the house?
A: No. B cannot refuse. A can even
force B to receive the payment
because the money he brought is
legal tender.
Q: What if A brought P1M in P10
coins? Can B refuse to receive the
payment?
A: Yes, because coins can only be
legal tender to a certain amount.
TRIVIA: Coins shall be legal tender in
amounts not exceeding Fifty pesos
(P50.00) for denominations of Twenty-
five centavos and above, and in
amounts not exceeding Twenty
pesos (P20.00) for denominations of
Ten centavos or less.
Anyway, that is just a trivia. What I
want you to remember is the
concept of Legal Tender.
Going back to NI being a substitute
for money but is not legal tender, let
us have an example for that.
Example: A owes B P1M, with no
interest and no term (pay when
able). A mortgaged his house to B as
security. After 1 year, A came back to
B with a check worth P1M.
Q: Can B refuse to receive the
check?
A: Yes. Because it is not legal tender.
You cannot force the creditor to
accept the check as payment of the
debt.
Q: But is B accepted the check and
encashed it. Is it a valid payment?
A: Yes. Because a check can be a
substitute for money.
(2) As a medium of exchange for
most commercial transactions.
This just means that you can use NI, for
example a check, to pay for your
groceries, your tuition fee, or if you
are an employer, you can use check
in paying the salary of your
employees.
(3) Evidence of Indebtedness and
proof of payment
Let us use an example to better
understand this. Let us use a check.
Example: *Draw* To Metrobank, pay
to Pedro or the order of Pedro the
amount of P2Million. Signed, Jose.
We will be discussing Checks more
deeply in the next meetings but
suffice it for now that you know that
this is how a basic check is written.
When we discuss this, you will know
the person who draws the check from
his account is what we call the
DRAWER. This is Jose. The person or
the institution upon which Jose
technically has a deposit from where
he draws his funds from is called the
DRAWEE, in this case, the Metrobank.
And the person to whom Jose has
paid the check is called the PAYEE. In
this case, Pedro.
What happened in this case is that
Jose issued a check for 2M to Pedro.
Why? Because maybe Pedro sold his
House and Lot. Now, if you are Pedro,
the owner of the house, what will you
do to the check? You will present it for
payment to Metrobank. What will
Metrobank do? It depends.
Metrobank can go either of these:
a. Honor it and therefore pay 2M
to Pedro. In common parlance,
Metrobank will encash it.
In this case, the bank will get the
check and it will give Pedro 2 Million.
Metrobank will then deduct or debit
from the account of Jose the amount
of 2M. After that, Metrobank will
return the check to Jose stamped
PAID. So, it will be going back to the
hands of Jose.
Now, let us assume that after several
months after Pedro encashed the
check he went back to Jose to
collect the 2M as purchase price of
the house. What is now the proof of
Jose that he really paid? The check
that is in his possession. In this case,
the check is a proof of payment.
b. Dishonor it or reject it and so
Metrobank will not pay.
i. Drawn against
insufficient funds (DAIF).
Joses deposit in Metrobank is only
P300.
ii. Drawn against closed
account
In this case, Jose does not have an
existing account with Metrobank.
In these cases, where does the check
go? After it is dishonored, Metrobank
will stamp on the face of the check
that is it drawn on a closed account,
drawn against insufficient funds, and
the check will be given back to
Pedro.
Now Pedro will now go back to Jose
to collect. If Jose will say that he has
already paid, what is the proof of
Pedro that there is still an outstanding
debt? What is now the proof of Pedro
that indeed Jose did not pay? The
check that was marked DAIF by the
bank.
That is the meaning of NI being an
evidence of indebtedness and a
proof of payment
(4) Enhances security
Again let us use an example for this
 I have here P1,000 pesos. I will leave
this P1,000.00 atop this table. Now let
us bet. If the P1,000.00 will still be in this
table tomorrow evening, I will pay
you with passing grades for this
semester. But if we will return
tomorrow evening and the P1,000.00
is no longer here, we will have a
surprise quiz. Will you accept the bet?
Nobody will accept that bet because
this P1000.00 is not secure. It can be
taken away, and we will have no way
of finding out who took it. But if it is a
negotiable instrument, a check
payable to you alone for example,
even if you leave it here, and even if
somebody will take it, that person will
not be able to encash it. All you have
to do is to call the bank to cancel the
check because you lost. So, if you are
that negligent, its more secure to
have a check than actual money.
(5) It is a specie of property
This just simply means that you can
own it like any other property. If a
check is made payable to me, I own
that check and I can do anything
that is well within my rights as an
owner.
Features of Negotiable NI
1. Negotiability Negotiability is the
fundamental characteristic of NI. This
means that it has the ability of being
transferred from one person to
another up to its infinity. It still is valid.
It can be transferred from one person
to another ad infinitum, until the
amount is monetized or the
instrument is dilapidated already will
not be considered as legal tender. If
NI, like a check, functions like money,
it must have to be negotiable--
capable of being transferred from 1
person to another. Why? If it is only up
to the 3rd transfer, it could not have
been its purpose.
2. Accumulation of Secondary
Contracts
Example: I am a lawyer and if you
engage me as your counsel, you
have to pay my legal fees. Most of
the time, I receive checks as
payment. Now, I am renovating my
house. As payment to one of my
contractor, I endorsed the check I
received. Said contractor has
suppliers, and so he endorsed the
same check to one of his suppliers.
We are already part of the
transaction, and are liable of the
instrument. If I paid in cash, there will
be no way of knowing where the
money will go after I pay it to the
contractor. It does not accumulate
secondary contract but a NI has that
feature. It accumulates secondary
contracts.