MMCO Continuing Professional Development Training Center (CPDTC)

2F MMCO Building, 8000 Lakeview Ph3 Angela Street, Halang Calamba City Laguna, Philippines
Tel No. (02) 330-8617, (049) 523-6031; (02) 330-6057
CPA REVIEW
RFBT Atty. David Aquino

NEGOTIABLE INSTRUMENTS LAW HDC can have A transferee acquires

(Act No. 2031) rights better than his no better right than
transferor his transferor
I. General Concepts Prior parties warrant Prior parties do not
payment. warrant payment but
merely the legality of
Negotiable Instrument (2005 Bar Exam) – a
his title
written contract for the payment of money which
Governed by NIL NIL only applies by
complies with the requirements of Sec. 1 of the
analogy
NIL, which by its form and on its face, is
intended as a substitute for money and passes Transferee can be a Transferee is assignee
from hand to hand as money, so as to give the HDC only and cannot be
holder in due course (HDC) the right to hold the HDC
instrument free from defenses available to prior HDC takes the NI free All defences available
parties. (Reviewer on Commercial Law, Sundiang from personal to prior parties may
and Aquino) defenses be raised against the
last transferee

Functions of Negotiable Instrument:

1. Substitute for money
Kinds of Negotiable Instruments: (2002 Bar
2. Medium of exchange
Exam)
3. Credit instrument which increases credit circulation
4. Increase purchasing medium in circulation
1. Promissory Note (PN) – an unconditional
5. Evidence of transaction
promise in writing made by one person to
another, signed by the maker, engaging to pay
Two Distinctive Features/Characteristics of NI: on demand, or at a fixed or determinable
(2005 Bar Exam) future time, a sum certain in money to order or
to bearer (Sec. 184).
1. Negotiability - it is that attribute or property
2. Bill of Exchange (BE) - an unconditional order
whereby a bill or note or check may pass from hand
in writing addressed by one person to another,
to hand similar to money, so as to give the holder in
signed by the person giving it, requiring the
due course the right to hold the instrument and to person to whom it is addressed to pay on
collect the sum payable for himself free from demand or at a fixed or determinable future
defenses. time a sum certain in money to order or to
bearer (Sec. 126).
2. Accumulation of Secondary Contracts -
secondary contracts are picked up and carried along 3. Check - a bill of exchange drawn on a bank
with Negotiable Instruments as they are negotiated payable on demand (Sec. 185).
from one person to another; or in the course of
negotiation of negotiable instruments, a series of
juridical ties between the parties thereto arise either
by law or by privity. The indorsers become Kinds:
secondarily liable to the holder. • Manager’s / Cashier’s Check – drawn
by a bank on itself and therefore, it is
a primary obligation of the bank.
o It is accepted in advance by
Negotiable Instruments and Non- the act of its issuance and is
Negotiable Instruments not subject to countermand
by the payor after
NEGOTIABLE NON-NEGOTIABLE indorsement.
INSTRUMENTS INSTRUMENTS o The bank’s manager signs
Must contain all Does not contain all manager’s check while
requisites of Sec.1 requisites of Sec.1 cashier’s check is signed by
the bank cashier.
Transferable by Transferable by • Memorandum Check – it is like an
negotiation and assignment only ordinary check except that the word
assignment “memorandum,” “mem” or “memo” is
written upon the face of the check,
signifying that the drawer engages to
pay the bona fide holder absolutely,
and not upon a condition to pay upon
presentment at maturity and if due
notice of the presentment and non-
 payment should be given. This check is not to be 2. But the person who accepts or pays in due course
presented for payment, but will be redeemed by shall not be prejudiced.
the drawer himself.
• Certified Check – one drawn by a depositor upon Obligations of holder who indorses 2 or more parts of the
funds to his credit in a bank which a proper Bill in Set:
officer of the bank certifies will be paid when duly 1. The person shall be liable on every such part.
presented for payment 2. Every indorser subsequent to him is liable on the
• Traveler’s check – one upon which the part he has himself indorsed, as if such parts were
purchaser’s signature must appear twice separate bills.
– at the time he buys it and also at the time he
uses it. It has the characteristics of a cashier’s Distinctions between a Negotiable Instrument and a
check of the issuer. Negotiable Document of Title (2005 Bar Exam)
• Crossed check (1995, 1996, 2004, 2005 Bar
Exams) – when 2 parallel lines are drawn across NEGOTIABLE NEGOTIABLE
its face or across a corner thereof. If the name of INSTRUMENTS DOCUMENTS OF
a bank appears between the parallel lines, the TITLE
check is said to be specially crossed, and Subject is money Subject is goods
payment should be made only if presented by the
named bank. If no name appears between the Is itself the property The document is a
parallel lines, the check is said to be generally with value mere evidence of title
crossed, and payment should be made only upon – the things of value
presentment by some bank. being the goods
o Effects of crossing a check: mentioned in the
a. That the check may not be encashed but document
only deposited in the bank; Has all the requisites Does not have these
b. That the check may be negotiated only of Sec. 1 of NIL requisites
once to one who has an account with a
bank; and A holder of NI may Intermediate parties
c. That the act of crossing the check serves run after the are not secondarily
as a warning to the holder that the check secondary parties for liable if the document
has been issued for a definite purpose so payment if is dishonored
that he must inquire if he has received dishonored by the
the check pursuant to party primarily liable
that purpose.
• Stale check – one which has not been PROMISSORY NOTE BILLS OF
presented for payment within a EXCHANGE
reasonable time after its issue. Unconditional Unconditional Order
promise
Iron Clad Rule: Prohibits the countermanding Involves 2 parties on Involves 3 parties on
of payment of certified checks (Republic of the its face its face
Philippines v. PNB. GR No. 16106. December 1,
1961). But the holder must be a HIDC (Mesina Person who issues is Person who issues is
v. IAC, 145 SCRA 497) the maker the drawer

Bills in Set: one composed of several parts, Party primarily liable Party primarily liable
each part numbered and containing a reference is the maker is the acceptor
to the
other parts, the whole of the parts constituting One presentment Could be two
but one bill. only: for payment presentments: for
acceptance and for
Rights of holders where parts are negotiated payment
separately:
1. If both are HIDC, the holder whose title
first accrues is considered the true
owner of the bill.
When a BILL may be treated as a NOTE: Legal Tender Power of:
1. Drawer and drawee are the same person. Notes – no limit as to amount
2. Drawee is a fictitious person. Coins –
3. Drawee has no capacity to contract. a. P1, P5 & P10 – up to P1,000
4. When instrument is so ambiguous, the b. P0.25, P0.10, P0.05 & P0.01 – up to P100
holder may treat it either as a BILL or a (BSP Circular No. 537, Series of 2006)
NOTE.
Note: A negotiable instrument (including check)
although intended to be a substitute for money,
BILLS OF CHECK is not legal tender.
EXCHANGE
Not necessarily Not necessarily SEC. 60. Legal Character. _ Checks representing
drawn on a deposit. drawn on a deposit. demand deposits do not have legal tender power
The drawee need The drawee need and their acceptance in the payment of debts,
not be a bank not be a bank. both public and private, is at the option of the
Death of a drawer Death of the drawer creditor: Provided, however, That a check which
of a BOE, with the of a check, with the has been cleared and credited to the account of
knowledge of the knowledge of the the creditor shall be equivalent to a delivery to
bank, does not bank, revokes the the creditor of cash in an amount equal to the
revoke the authority authority of the amount credited to his account. (RA 7653)
of the drawee to pay banker
to pay Incidents in “Life” of Negotiable Instrument
May be presented Must be presented 1. Preparation and signing
for payment within a for payment within a 2. Issue
reasonable time after reasonable time after 3. Negotiation
its last negotiation its issue. 4. Presentment for acceptance, in certain kinds
because it may be of bills of exchange
further negotiated 5. Acceptance
May be payable on Always payable on 6. Dishonor by non-acceptance
demand or at a fixed demand 7. Presentment for payment
or determinable 8. Dishonor by non-payment
future time 9. Notice of dishonour
Presentment for Need not be 10. Protest, in some cases
acceptance may be presented for 11. Discharge
required (Sec. 143) acceptance
Issue - the first delivery of the instrument,
complete in form, to a person who takes it as a
Other Forms of Negotiable Instruments holder.
1. Certificate of deposit issued by banks,
payable to the depositor or his order, or to Delivery - transfer of possession, actual or
bearer constructive, from one person to another
2. Trade acceptance Holder – refers to the:
3. Bonds, which are in the nature of a. If ORDER instrument - The payee or
promissory notes indorsee of a bill or note who is in
4. Drafts, which are bills of exchange drawn by possession of it, or
one bank upon another b. If BEARER instrument - The bearer
All of these must comply with Sec. 1, NIL thereof (sec.191)

Note: Postal Money Order, Treasury Warrant, Bearer - the person in possession of a bill or
Certificate of Stock, Letter of Credit, Bill of note which is payable to bearer.
Lading and Warehouse Receipts are not
negotiable instruments.

Legal Tender
That kind of money that the law compels a
creditor to accept in payment of a debt when
tendered by the debtor in the right amount.
Under Sec. 52 of RA 7653, all notes and coins
issued by the BSP shall be legal tender in the
Philippines.