BOBADILLA [LAW 3 PRELIMINARY REVIEWER]
LAW 3 PRELIMS
ACT 2031 Negotiable Instruments Law, the law
governing negotiable instruments under Philippine
jurisdiction enacted on FEBRUARY 3, 1911 took effect
on JUNE 2, 1911
APPLICABILITY OF THE NIL
1. Limited Application only applicable to those
which meet requirements on Sec 1 of NIL
2. Supplementary application of other laws
NEGOTIABLE INSTRUMENT A written contract for the
payment of money, which is intended as a substitute for
money and passes from one person to another as
money, in such a manner as to give a holder in due
course the right to hold the instrument free from
defenses available to prior parties.
FUNCTIONS AND IMPORTANCE OF NI
1. Substitute for Money
2. A medium of Credit Transaction
3. A medium of exchange
FEATURES/CHARACTERISTICS OF NI
1. Negotiability it may be transferred from one
person to another so as to constitute the
transferee to be a holder in due course that is
free from personal defenses.
3 ways where an instrument may lose its
negotiability:
- By restrictive indorsement
- By arrival of maturity
- By discharge of the instrument
2. Accumulation of Secondary Contracts
additional parties can become involved and
more persons are made liable to the holder
3. Presumed Consideration Law presumes that
the instrument was issued for a valuable
consideration / issued or received for value
KINDS OR FORMS OF NI
(COMMON FORMS)
1. Promissory Note
- 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 payable to order, or
bearer
a. Certificate of Deposit a written
acknowledgement of a bank of its receipt of a certain
sum with a promise to repay the same.
b. Bonds a certificate or evidence of a debt on
which the issuing company or governmental body
promises to pay the bondholders a specified amount of
interest for a specified length of time, and to repay the
loan on the expiration date.
c. Bank Note a promissory note of an issuing bank
payable to bearer on demand and intended to circulate
as money
d. Due Bill note whereby a person acknowledges
his debt to another and he promises to pay bearer or to
order a sum owed which is certain in money
e. Debenture a promissory note or bond backed by
the general credit of a corporation and usually not
secured by a mortgage or lien on any specific property
2. Bill of Exchange (Check, Draft, Trade and
Bankers Acceptance, Inland and Foreign Bill,
Clean and Documentary Bill of Exchange, and
Bills in Set )
- 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
- (known as Order paper/Three-Party Paper)
a. Check is a bill of exchange drawn on a
bank payable on demand
- Cashiers Check and Managers Check
drawn by a bank upon itself, and is accepted
already by the act of its issuance. The bank
is he drawer and the Drawee
- Ordinary Checks drawn on a bank by
virtue of checking account opened by
depositors with the bank
- Memorandum Checks an evidence of
debt against the drawer, and although it may
not be intended to be presented, has the
same effect as an ordinary check, and if
passed to a third person, will be valid in his
hands like any other check.
 BOBADILLA [LAW 3 PRELIMINARY REVIEWER]
- Travelers Check an instrument purchased
from a bank, express companies, or the like,
in various denominations, which can be
used like cash upon second signature by the
purchases
- Bank Draf a check drawn by one bank
upon another bank, payable to a third
person in demand.
(OTHER CLASSIFICATIONS OF CHECK)
- Certified Checks one drawn by a
depositor upon funds to his credit in a bank
- Crossed Check one that bears two
parallel lines across its face indicating that
the check is for deposit
- Stale Check one which has not been
presented for payment within a reasonable
time afer its issue. (valueless)
b. Draft bill of exchange used in
documentary exchanges
- Time Draf or Usance Bills draf payable
at a fixed future date or a determinable
future time
- Sight Draf draf payable when the holder
presents it for payment or at sight or on
demand
- Sola Bill a bill of exchange issued only in
one single instrument as distinguished from
bills in set
c. C1. Trade Acceptance a bill of exchange
usually a draf used in contracts of sale
whereby the seller as a drawer orders the
third person (as drawee) to pay a sum
certain to the same seller (payee).
C2. Bankers Acceptance a time draf
across the face of which the drawee is a
bank and has written the word accepted.
The accepting party is the bank itself.
d. D1. Inland Bill both drawn and payable
within the Philippines
D2. Foreign Bill does not purport to be
both drawn and payable within the PH
e. E1. Clean Bill of Exchange a bill to which
no document is attached when presentment
for payment or acceptance is made
E2. Documentary Bill of Exchange a bill to
which a document(s) is attached
1. Documents against Acceptance Bill
documents must be attached when
presented for acceptance
2. Documents against Payment Bill -
documents must be attached when
presented for payment
f. Bills in Set is actually one bill that is drawn
in a set
INSTRUMENTS WITH LIMITED NEGOTIABILITY
1. Treasury Warrant issued by the government
for its official expenditure, non negotiable since
it comes from a gov. fund
2. Trust Receipts is an instrument used in
business transactions by which a bank advances
money to enable a customer to buy goods and
takes the bill of lading for such goods in its own
name
3. Postal Money Order is an order for the
payment of money to the payee named therein
drawn by one post office upon another under
authority of law.
4. Certificate of Stock a written instrument
signed by a proper officer of a corporation
stating that the person named therein is the
owner of a designated number of shares of
stock
5. Letter of Credit a letter requesting one person
to make advances to a third person on the credit
of the writer.
6. Bill of Lading document issued by the carrier
whereby receipt of goods is acknowledged and
the carrier promises to deliver the goods to
whoever is validly holding it
7. Warehouse Receipt a written
acknowledgement by a warehouseman that he
has received and holds certain goods
8. Withdrawal Slip document used to withdraw
from a savings account, does not contain any
promise or order to pay
9. Negotiable Orders of Withdrawals (NOW
Accounts) savings account from which funds
may be withdrawn by means of negotiable
orders of withdrawal
Bill of Exchange treated as Promissory Note
1. When the drawer and the drawee of the bill are
the same person
2. When the drawee is fictitious person
3. When the drawee has no capacity to contract
 BOBADILLA [LAW 3 PRELIMINARY REVIEWER]
4. When the instrument is so ambiguous that
there is a doubt whether it is a bill or a note
PARTIES TO A NEGOTIABLE INSTRUMENT
1. PROMISSORY NOTE
A. MAKER person who promises to pay the
amount stated in the instrument
B. PAYEE/THE BEARER person who is
supposed to be paid by the maker
2. BILL OF EXCHANGE
A. DRAWER person who draws or takes out
and signs the instrument; orders the drawee
to pay
B. DRAWEE person who is being ordered to
pay
C. PAYEE/THE BEARER the one to whom
payment should be made by the drawee or
the acceptor
D. ACCEPTOR drawee who already accepted
the order of the drawer to pay in the bill of
exchange
3. OTHER PARTIES
A. INDORSER persons who transfer or
negotiate an instrument by indorsement
completed by delivery
B. HOLDER payee or indorsee of a bill or note
who is in possession of a bill or note,
payable to order, or person in possession of
a bill or note payable to bearer
C. BEARER person in possession of a bill or
note which is payable to bearer
INCIDENTS IN THE LIFE OF NEG. INSTRUMENT
1. ISSUE 1st delivery of the instrument, complete
in form, to the holder
2. NEGOTIATION transfer from one person to
another so as to constitute the transferee the
holder
*payable to bearer = delivery (delivery =
negotiation)
*to order - indorsement + delivery
3. PRESENTMENT FOR ACCEPTANCE (in certain
kinds of bill of exchange) instrument shall be
presented to the drawee so that the drawee will
signify his agreement to the order of the drawer
to pay
4. ACCEPTANCE signification by the drawee of his
assent to the order of the drawer
5. DISHONOR BY NON ACCEPTANCE
*when presented and acceptance is refused by
the drawee or CANNOT be obtained or
*where the presentment for acceptance is
excused and the bill is NOT accepted
6. PRESENTMENT FOR PAYMENT when the
instrument is placed or exhibited before a
person required or who may be required to pay
it coupled with the request that he honor the
obligation represented by the instrument
7. DISHONOR BY NON PAYMENT non acceptance
of a bill or nonpayment of the bill or note
8. NOTICE OF DISHONOR one given orally or in
writing, personally, by mail or otherwise, to all
parties secondarily liable identifying the
instrument and advising that it has been
dishonored
9. PROTEST (in certain cases) make a solemn
written declaration, in due form, on behalf of
the holder, against all parties liable for any loass
or damage to be sustained by the non
acceptance or nonpayment of a bill or note
10. DISCHARGE when instrument loses its force
and effect as a legal obligation
MODULE 2 NEGOTIABLE INSTRUMENTS IN GENERAL
COMMERCIAL PAPER - refers to written promises or
obligations that arise out of commercial transactions from
the use of such instruments as promissory notes and bills of
exchange.
NEGOTIABLE INSTRUMENT are instruments that conform
to the requirements of ACT 2031 Section 1 and said
conformity should all appear on the face of the instrument
NON-NEGOTIABLE INSTRUMENT instrument that does not
meet the requirements laid down to qualify an instrument as
a negotiable one
LEGAL TENDER kind of money which the law compels a
creditor to accept in payment of his debt
*P1, P5, P10 maximum of P1,000
*1,5,10 and 25 cents maximum of P100
INTEREST indemnity for damages when debtors incurs in
delay (6% per annum in case no stipulation)
ACCELERATION CLAUSE when there is a clause or a
provision in the instrument that states that payment can be
demanded earlier than the original fixed date
COST AND ATTORNEYS FEES judicial costs recoverable by
winning party
CONDITION future and contingent event, or past event
unknown to the parties, happening or non-happening of
which will either give rise or extinguish an obligation
*Suspensive happening or non happening will give rise to
an obligation
*Resolutory if happening or non happening will extinguish
obligation
MATERIAL PARTICULAR a particular the omission of which
will render the instrument non negotiable
ANTEDATING instrument contains a date earlier than true
date of issuance
 BOBADILLA [LAW 3 PRELIMINARY REVIEWER]
POST-DATING - instrument contains a date later than true
date of issuance
DELIVERY transfer of possession, actual or constructive
ISSUE 1st delivery of instrument to holder
PROCURATION act by which a principal gives power to
another to act in his place as he could himself
FORGERY counterfeit-making or fraudulent alteration of
any writing
FORMAL REQUIREMENTS OF NEGOTIABILITY IN GENERAL
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 Negotiable Instruments Law
especially Section 1 thereof which gives the requirements of
negotiability.
EXCHANGE charge for the expense of providing funds at
the place where the instrument is payable to meet the
instrument which is issued at another place
CONTINGENCY an event which is possible but which may
or may not occur
TIME INSTRUMENTS instruments that are not payable on
demand
ADDITIONAL PROVISIONS NOT AFFECTING NEGOTIABILITY:
1. SALE OF COLLATERAL SECURITY is a separate
obligation attached to another contract or
instrument to guarantee its performance
2. CONFESSION OF JUDGEMENT signifies an
acknowledgement of indebtedness, upon which it is
contemplated that a judgement may and will be
rendered and therefore any provision that
authorizes such do not affect negotiability
3. WAIVER OF BENEFIT GRANTED BY LAW
4. ELECTION OF HOLDER TO REQUIRE SOME OTHER
ACT
ITEMS THAT MAY BE OMITTED IN AN INSTRUMENT
WITHOUT AFFECTING NEGOTIABILITY
- Date
- Value
- Place
- It bears a Seal
- It designates a particular kind of current money payable
MATERIAL PARTICULAR are generally items or requisites as
provided for under Section 1 of NIL. It may also include any
important detail that affects the tenor of the instrument
*INCOMPLETE and DELIVERED instrument = person holding
it has prima facie authority to complete it within the given
authority / personal defense
*INCOMPLETE and UNDELIVERED instrument = inoperative
(delivery is essential), revocable / real defense
ISSUE/DELIVERY the transfer of the possession of the
instrument by the maker or drawer with intent to transfer
title to the payee and recognize him as the holder thereof
IMMEDIATE PARTIES parties who are proximate to the
maker or the drawer and are privy to the conditions or
limitations placed upon the delivery of the instrument.
REMOTE PARTIES parties who are not in direct contractual
relation to each other
JOINT LIABILITY two or more debtors are bound to pay
their proportionate share in the obligation
JOINT AND SEVERAL OR SOLIDARY LIABILITY two or more
persons are bound to and can be made to comply with the
entire obligation
*FORGERY = REFERS TO SIGNATURE
*MATERIAL ALTERATION DATE, SUM PAYABLE, TIME
OR PLACE OF PAYMENT
FRAUD ON NEGOTIABLE INSTRUMENTS:
1. FRAUD IN FACTUM (FRAUD IN ESSE
CONTRACTUS) type of fraud in which bills and
notes are given through trick or device causing
the parties giving the same to believe that the
instrument they are giving is f a different
character
2. FRAUD IN INDUCEMENT type of fraud by
which deception and misinterpretation of facts
induced the desirability of signing the contract
MODULE 3 CONSIDERATION AND NEGOTIATION
CONSIDERATION inducement to a contract; the
cause, motive, price or impelling influence which
induces a contracting party to enter into a contract
HOLDER FOR VALUE one who has acquired title to a
negotiable instrument in the usual course of business,
for valuable consideration, in good faith
LIEN a charge against or interest on property to
secure payment of a debt or performance of an
obligation
ACCOMMODATION BILL OR NOTE one to which the
accommodation party has put his name, without
consideration, for the purpose of accommodating some
other party who is to use it, and is expected to pay it
ACCOMMODATION PARTY one who lends his name,
without consideration, for the purpose of enabling the
accommodated party to obtain credit or to raise money
ACCOMMODATED PARTY one in whose favor a
person without receiving value thereof, signs an
instrument for the purpose of lending his credit and
enabling said party to raise money upon it
NEGOTIATION transfer of negotiable instrument from
one person to another
INDORSEMENT writing of the name of the name of
the payee on the instrument with intent either to
 BOBADILLA [LAW 3 PRELIMINARY REVIEWER]
transfer the title to the same, or to strengthen the
security of the holder by assuming a contingent liability
for the future payment or both (Latin word INDORSA
meaning written on the back)
*Indorsement normally appears at the back of the
instrument or the DORSAL PORTION
*It may also be written on a separate paper or as
ALLONGE
SPECIAL INDORSEMENT one where the name of the
payee is specified
RESTRICTINVE INDORSEMENT one so worded that
either restricts or prohibits entirely the further
negotiation, or modifies the rights of the holder or
assignor of the title to the instrument
QUAIFIED INDORSEMENT one which constitutes the
indorser a mere assignor of the title to the instrument
CONDITIONAL INSTRUMENT one by which the
indorser imposes some other condition to his liability
REACQUIRER refers to a holder who negotiates an
instrument and then subsequently reacquires
MODE OF TRANSFERRING TITLE TO A NEGOTIABLE
INSTRUMENT
1. BY ASSIGNMENT the transferee merely steps
into the shoes of the assignor and is generally
done by transferring it without indorsement
2. BY OPERATION OF LAW by death of holder, by
the bankruptcy or insolvency of holder, upon
death of a joint payee or indorsee
3. BY INDORSEMENT
4. BY DELIVERY mere delivery of the instrument
payable to bearer
KINDS OF TRANSFER OF NI
1. ISSUE first delivery of instrument complete in
form by maker or drawer to payee
2. NEGOTIATION transfer of instrument
3. ASSIGNMENT transfer of title to the
instrument
METHODS OF NEGOTIATION
1. For instrument payable to BEARER mere
delivery is sufficient
2. For instrument payable to ORDER
Indorsement (by payee or present holder) and
delivery (to the next holder or indorsee)
INDORSEMENT TO MULTIPLE PAYEES OR INDORSEES
1. JOINT PAYEES an instrument purporting to
transfer the instrument to two or more persons
severally does not operate as a negotiation of
the instrument for the cause of action is split or
divided
2. ALTERNATIVE PAYEES instruments are
sometimes payable to two or more alternative
payees
CLASSIFICATION OF INDORSEMENT
1. SPECIAL INDORSEMENT indorsement where
name of payee is specified
2. BLANK INDORSEMENT specifies no indorsee
and it generally consists only of the signature of
the indorser
3. RESTRICTIVE INDORSEMENT restricts or
prohibits entirely the further negotiation of an
instrument, or modifies the rights of the holder
or the liabilities of then indorser
4. QUALIFIED INDORSEMENT constitutes the
indorser a mere assignor of the title to the
instrument
*RECOURSE means resort to a person who is
secondarily liable under the default of the
person who is primarily liable
5. CONDITIONAL INSDORSEMENT indorse
imposes some other condition to his liability, or
on the indorsers right to collect the proceeds of
the instrument
STRIKING OUT INDORSEMENT is when the
indorsement/s are removed and the persons who made
the instrument are no longer indorsers. Liabilities are
relieved
MODULE 4 RIGHTS AND LIABILITIES OF PARTIES
CLASSES OF HOLDERS
1. Holder
2. Holder for Value
3. Holder in Due Course
RIGHTS OF HOLDER
1. To sue in his own name
2. To receive payment
3. To transfer his right through negotiable or
assignment
DEFECTS OF TITLE covers all those situations, which
are known as personal or equitable defenses, and to
over those equities or ownership where there is breach
of faith in negotiation
CIRCUMSTANCES THAT MAKES THE TITLE DEFECTIVE
(where the party obtained instrument or signature by:
1. Fraud
2. By Duress, force or fear
3. Any other lawful means
4. Illegal consideration
5. Negotiation in breach of faith
6. Circumstances amounting in fraud
INFIRMITIES include things that are wrong with the
instrument itself as distinguished from things that are
lacking in the contracts on the instruments
KINDS OF DEFENSES
1. REAL OR ABSOLUTE DEFENSES available
against all parties, both immediate and remote,
including holder in due course
 BOBADILLA [LAW 3 PRELIMINARY REVIEWER]

2. PERSONAL OR EQUITABLE DEFENSES those

that grow out of the agreement or conduct of a
particular person concerning the instrument,
which renders it inequitable for him, though,
holding the legal title, to enforce it against a
holder in due course
CLASSIFICATION OF PARTIES
1. PRIMARY LIABLE
- Maker (Prom.Note)
- Acceptor (Bill of ex)
- Certifier of check
PRIMARY LIABILITY liability of a person who
has absolute obligation to pay the instrument
2. SECONDARILY LIABLE
- Drawer (Bill)
- Indorser (Note or bill)
SECONDARY LIABILITY liability of a person
who becomes liable only if the person primarily
liable fails or refuses to pay
3. NOT LIABLE
- Drawee, until he accepts instrument