NEGOTIABLE INSTRUMENT LAW

APPLICABILITY OF THE NIL

1. Limited Application- The NIL applies only to negotiable instruments or those
instruments or those instruments which meet the requirements laid down in Section 1 of
the law. It is designed to describe fully the law on negotiable instruments. It governs all
matters comprehended within its terms.
2. Supplementary Application of other laws- 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
law on merchant. The Civil Code has no effect on its provisions except to supply any
deficiency in cases not covered by the Act. (Art 18, Civil Code)
FUNCTIONS AND IMPORTANCE OF NEGOTIABLE INSTRUMENTS
1. Although they do not constitute legal tender they are used as substitute for money. The
Negotiability of the instruments allows it to go from one hand to another in the
commercial markets and to take the part of money in commercial transactions free from
all personal defenses available against the original owner.
The purpose of NIL is to make negotiable instruments freely acceptable in
financial transactions and thereby facilitate trade.

2. Negotiable papers, particularly checks, constitute, at present, the media of exchange for
most commercial transactions.
They increase the purchasing medium in circulation and they do away with the
need to physically count coins and bills whenever payment is made in financial
transactions and obligations.

3. Negotiable Instruments also serve as a medium of credit transaction.

CHARACTERISTICS OR FEATURES OF NI

1. Negotiability is that quality or attribute of a bill or note whereby it may pass from one
person to another similar to money, so as to give the holder in due course the right to
collect on the instrument the sum payable for himself free from any defect in the title of
any of the prior parties or defenses available to them among themselves.
2. The most important feature of negotiable instruments is the accumulation of secondary
contracts as they are transferred from one person to another.

FORMS OF NI
1. Common Forms- the most common forms of negotiable instruments in commercial
transactions are the promissory note, bill of exchange and bank check.
2. Special types- there are, to be sure, many various forms of negotiable instrument. An
analysis of the many variations reveal, however, that they belong to one or the the other
types mentioned.
DOUBTS SHOULD BE RESOLED IN FAVOR OF NEGOTIABILITY
Where the meaning is doubtful, the courts have adopted the policy of resolving in favor
of the negotiability of the instrument.
The purpose is to encourage the free circulation of the negotiable papers because of the
admittedly indispensable function that they perform in the commercial business transactions in
any given country and the world at large.

FORM AND INTERPRETATION

Section 1. Form of Negotiable Instruments- An instrument to be negotiable must conform to the
following requirements.
a. It must be in writing and signed by the maker or drawer;
b. Must contain an unconditional promise or order to pay sum certain in money;
c. Must be payable on demand or at a fixed or determinable future time;
d. Must be payable to order or bearer; and
e. Where the instrument is addressed to a drawee, he must be named or otherwise indicated
with reasonable certainty.
The requisites enumerated in section 1 enable one to tell at a glance whether an instrument is
negotiable or not and accordingly, to gauge the risks involved in taking it as security for an
obligation.

FORMAL REQUISITES EXPLAINED

1. The instrument must be in writing- the term instrument indicates a writing. The
instrument must be in writing or reduced to tangible form; otherwise, nothing could be
negotiated or passed from hand to hand.
a. Writing includes not only that which has been written on paper and with a pen or
pencil but also that which is in print or has been typed. The usual way is to have the
instrument written or printed in durable paper.
b. There is no such thing as an oral negotiable instrument. An oral promise can make it
difficult to determine and create the danger of fraud.
2. The instrument must be signed by the maker or drawer. Although the signature of the
maker or drawer, as a general rule, is placed at the lower right hand corner of the
instrument, it may appear in any part thereof whether at the top, middle, bottom or at the
margin. It will be valid and binding as long as it appears that the person intended to make
the instrument his own.
a. His 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 and not a
maker or drawer.
b. The signature of the maker or drawer is usually written. It is preferable that the 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.
c. Where the genuineness of the signature of the maker or drawer is denied, the party
against whom it operates must provide some evidence of its invalidity because the
signature is presumed valid. The party asserting its validity must then provide proof
of its genuineness in long hand.
d. What is important is that the signer has intended to adopt the signature on the
instrument as his own and to obligate himself for its payment. 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.
3. The instrument must contain an unconditional promise or order to pay. A commercial
paper or instrument involving the payment of money must contain either a promise to pay
or an order to pay. Thus, negotiable instruments may be classified as either promises or
orders to pay.
4. The instrument must be payable in a sum certain in money. The promise or order must
call for the payment of a sum certain in money.
a. The reason for the requirement is that money is either the one standard of value in
actual business. All other commodities may rise and fall in value but in theory, at
least, money always measures this rise and fall, and remains the same. But the
promise or order may designate “a particular kind of current money in which
payment is to be made.”
b. Money is the medium of exchange authorized of adopted by a domestic or foreign
government as part of its currency. In a literal sense, the term means “cash.” It
includes all legal tender which has been defined as “that accept in payment of a debt
 in money when tendered by the debtor in the right amount. Thus, gold and silver and
bank notes are not money.
5. The instrument must be payable at a fixed or determinable future time or on demand.
6. The instrument must be payable to order.

Section 8. When payable to order.- The instrument is payable to order where it is drawn
payable to the order of specified person or to him or his order. It may be drawn payable
to the order of :
a. A payee who is not maker, drawer, or drawee; or
b. The drawer or maker; or
c. The drawee; or
d. Two or more payees jointly; or
e. One or more several payees; or
f. The holder of an office for the time being.
Where the instrument is payable to order, the payee must be named or otherwise
indicated therein with reasonable certainty.

7. The instrument must be payable to bearer.

Sec. 9. Where payable to bearer.- The instrument is payable to bearer.

a. When it is expressed to be so payable; or
b. When it is payable to a person named therein or bearer; or
c. 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
d. When the name of the payee does not purport to be the name of any person; or
e. When the only or last indorsement is an indorsement in blank.

8. The drawee must be named. The provision applies only to bills and checks.
a. Obviously, an order which is not addressed to any person cannot be a bill. But the bill
would be sufficient if the drawee is indicated therein with reasonable certainty though
he is not named. Thus, where a bill is addressed to the “ treasurer” of a corporation,
the drawee is sufficiently indicated.
b. The reason for this element of negotiability is to enable the payee or holder to know
upon whom he is to call for acceptance or payment.
c. A promissory note has no drawee. Like the drawee, the payee must be named with
reasonable certainty.

ANTE-DATED and POST-DATED

Sec. 12. Ante-dated and post-dated- the instrument is not invalid for reason only that it is ante-
dated or post-dated, provided this is not done for an illegal or fraudulent purpose. The person to
whom an instrument so dated is delivered acquires the title thereto as of the date of delivery.

WHEN DATE MAY BE INSERTED (Sec. 13, NIL)

1. Two cases- this provision which authorizes the holder to put a date in an instrument
refers to two (2) cases namely:
a. Where an instrument is payable at a fixed period after date but is issued undated;and
b. Where an instrument is payable at a fixed period after sight but the acceptance is
undated.
2. Date of issue or acceptance to be specified.- any holder may insert therein the true date of
issue or acceptance and the instrument shall be payable accordingly. It is necessary that
the date of issue or acceptance, as the case may be, be specified so as to determine the
date of maturity. The reason is that unless the true date is inserted, one will not know
when the instrument will be due.
3. It is obvious that this section does not apply to an instrument payable on demand
although undated, for its maturity is already fixed, being due immediately.
EFFECT OF INSERTION OF WRONG DATE

1. As to holder with knowledge- the insertion of a wrong date in an undated instrument by

one having knowledge of the true date of issue or acceptance will avoid the instrument as
to him but not as to subsequent holder in due course who may enforce the same
notwithstanding the improper date.
2. As to subsequent holder in due course- the insertion of a wrong date constitutes a
material alteration. Nevertheless, in the hands of a holder in due course, the date inserted,
even if wrong, is to be regarded as true date.

APPLICATIONS SECT. 14, 15, 16

RULES WHERE INSTRUMENT INCOMPLETE BUT DELIVERED (Sec. 14)

1. Authority to fill up in blanks- the holder or the person in possession has a prima facie
authority to complete an incomplete instrument by filling up the blanks therein.
a. The law speaks of material particular. It may be defined as any particular proper to be
inserted in a negotiable instrument to make it complete, and the power to fill in blanks
extends, therefore, to every complete feature of the instrument. Thus, blanks for date,
due date, name of payee, amount, or rate of interest may be filled in. It has been held
that even the blank for the name of the drawer may be filled up.
b. The authority to complete, however, is not an authority to alter. So, the holder has no
authority to alter. So, the holder has no authority to change the amount after it has
been filled in, or to insert the words “or order” or “or bearer” after the name of the
payee.
2. Authority to put any amount.- A signature on a blank paper delivered in order that may
be converted into negotiable instrument operates as a prima facie authority to fill up as
such for any amount.
3. Right against party prior to completion. The instrument may be enforced only against a
party prior to completion if filled up strictly in accordance with the authority given and
within reasonable time.
a. If an instrument is incomplete when delivered, the holder has prima facie authority to
fill out the blanks thereon. If a blank paper is delivered by the person making the
signature, the holder has prima facie authority to fill it up for any amount if the
person making the signature intended to convert it into a negotiable instrument.
b. In either case, the presumption is that the blank was filled out in accordance with the
authority given and within a reasonable time.
4. Right of a holder in due course. The defense that the instrument had not been filled up in
accordance with the authority given and within reasonable time is not available against a
holder in due course.

RULES WHERE INSTRUMENT INCOMPLETE AND UNDELIVERED

1. Defense even against a holder in due course.- the fact that an incomplete instrument,
completed without authority, had not been delivered, is a defense even against a holder in
due course.
2. Defense available to parties prior to delivery. The invalidity of the above instrument is
only with reference to the parties whose signatures appear on the instrument before and
not after delivery.

RULES WHERE INSTRUMENT MECHANICALLY COMPLTE

1. Undelivered- every contract of negotiable instrument even if it is completely written is
incomplete and revocable until its delivery for the purpose of giving it effect.
 a. Delivery means transfer of possession, actual or constructive, from one person to
another. It may be made either by the maker or drawer himself or through a duly
authorized agent.
b. Issue is defined as the first delivery of an instrument, complete in form, to a person
who takes it as holder.
c. Holder means the payee or indorsee of a bill or note who is in possession of it, or
bearer thereof.
2. Delivered- the place where the instrument was written, signed, or dated does not
necessarily fix or determine the place where it was executed. What is of decisive
importance is the delivery thereof. The delivery of the instrument is the final act essential
to its consummation as an obligation
Delivery may be made either by the maker or drawer himself or through a duly
authorized agent.
3. In possession of party other than the holder in due course. If complete instrument is found
in the possession of an immediate party or a remote party other than a holder in due
course, there is a prima facie presumption of delivery but subject to rebuttal.
An undelivered instrument is inoperative because delivery is a prerequisite to
liability. However, if the instrument is no longer in the possession of the person who
signed it and it is complete in its terms, “a valid and intentional delivery by him is
presumed until contrary is proved.”
4. Delivered conditionally or for a special purpose. If delivery was made or authorized, it
may be shown to have been conditional, or for special purpose only and not for the
purpose of transferring the property to the instrument.
When delivery is made, it is presumed to be made with the intention to transfer
ownership of the instrument to the payee.
5. In the hands of a holder in due course- if a complete instrument is in hands of holder in
due course, a valid delivery thereof by all parties prior to him is conclusively presumed.
A presumption is said to be conclusive when admission of evidence to the
contrary is not allowed.