ON LINE DISCUSSION/NOTES
AC COLLEGE-NEGOINS 2020
- the law that basically governs Negotiable instruments is ACT NO. 2031- A special law. in the event that
no provision is available in the law that would apply to specific circumstances... the law that can be
applied in suppletory manner is the CIVIL CODE OF THE PHILIPPINES or the remaining provisions of the
CODE OF COMMERCE.
*** when the Instrument/document is considered a NEGOTIABLE INSTRUMENT since it complies with
the requirement of ACT 2031 for its negotiability particularly SECTION 1--- THE LAW THAT GOVERNS IS
ACT 2031. IF THE INSTRUMENT IS NON-NEGOTIABLE -- CIVIL CODE WILL APPLY, SUPPLETORILY ACT 2031
AND CODE OF COMMERCE.
importance of negotiable instruments- in the modern commercial world, business transactions
are conducted with the use of negotiable instruments. functions of negotiable instrument
include:
a. SUBSTITUTE FOR MONEY---- one can purchase goods/services using neg. instruments
such as promissory notes/bills of exchanges ( CHECKS)
b. It is a medium of exchange- instead of using cash, Negotiable instruments are used. safe
and convenient.
c. It is a credit instrument which increased purchasing capacity.
d. proof of transaction
ARE NEG. INSTRUMENTS LEGAL TENDER -- NO. ONLY PAPER BILLS AND COINS ARE LEGAL
TENDER. BY LEGAL TENDER WE MEAN THAT WHEN OFFERED FOR PAYMENT ONE CANNOT
REFUSE ACCEPTANCE. A PERSON WHO PAYS A PURCHASE OR ACCOUNT USING PROMISSORY
NOTE OR CHECK CAN REFUSE PAYMENT. HOWEVER, IF ONE PAYS HIS PURCHASES USING PAPER
BILLS/COINS(MONEY) IT CANNOT BE REFUSED PAYMENT. THIS IS WHAT IS MEANT BY LEGAL
TENDER.
*** TWO IMPORTANT FEATURES OF NEGOTIABLE INSTRUMENTS
A. NEGOTIABILITY -- the ability of negotiable instruments to be transferred from one person
to another freely as though it is like money.
B. ACCUMULATION OF SECONDARY CONTRACTS- when an instrument is initially
issued/made and delivered to the payee, a contract is created between maker/drawer and
payee. when the payee indorses it to another person, another contract is created. as the
instrument is passed on to other persons, contracts are thereby created. this is what is meant
by accumulation of secondary contracts.
TWO KINDS OF NEGOTIABLE INSTRUMENTS AS DEFINED IN THIS LAW:
1. PROMISSORY NOTES-- unconditional promise IN WRITING made by one persons to
another , signed by the maker, engaging to pay on DEMAND, OR AT A FIXED OR DETERMINABLE
FUTURE TIME , a sum certain in MONEY TO ORDER OR TO BEARER.
2. BILL OF EXCHANGE - iT 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. common example of bill of exchange is a CHECK or DRAFT.
PARTIES TO A PROMISSORY NOTE:
a. MAKER- one who promises to pay
B. PAYEE- party to whom payment is made
c. CO-MAKER- TECHNICALLY NOT A PARTY. SECONDARILY LIABLE ONLY IF MAKER DOES NOT
PAY.
PARTIES TO A BILL OF EXCHANGE:
A. DRAWER- the person who issues/makes the bill of exchange . in the case of check the
depositor in the bank whose money is deposited in the current/demand deposit account where
the amount of the check is debited.
B. DRAWEE(SOMETIMES KNOWN AS ACCEPTOR) - the person or bank who is ordered by the
drawer to pay the payee.
C. PAYEE- the person to whom payment is to be made
PNB-DUMAGUETE
October 10,2020
PAY TO THE ORDER OF juan de la cruz the sum of PESOS: TWENTY THOUSAND
ONLY (P20,000.00).
MR. PEDRO SANTOS
above is a simple example of a CHECK. PNB-DUMAGUETE is the DRAWEE BANK. juan de la
cruz the PAYEE WHILE pedro santos is the DRAWER.
when the check is indorsed, a signature will appear on the back side of the check. the signature
is the person who is CALLED AN INDORSER.
p20,000.00 Dumaguete City
October 10, 2020
I, promise to pay to the order of Juan de la cruz the amount of PESOS: p20,000.00
on November 20, 2020.
PEDRO SANTOS
Above is a simple example of a promissory note. juan de la cruz is the payee while PEDRO
SANTOS is the Maker.
NOTICE THAT IN BOTH INSTANCES THE WORD ORDER IS PRESENT. this makes it negotiable. IF
THE WORD ORDER IS ABSENT. BOTH INSTRUMENTS - BILL OF EXCHANGE AND PROMISSORY
NOTE ARE NON-NEGOTIABLE.
IF BILL OF EXCHANGE IS A CHECK - THE DRAWEE is ALWAYS A BANK.
IF OTHER KINDS OF BILL OF EXCHANGE NOT A CHECK - DRAWEE maybe an individual person or
corporation or partnership.
When a document is negotiable it does not necessarily mean that such is a NEGOTIABLE
INSTRUMENT UNDER THIS LAW for there are only two kinds of Negotiable instruments
under Act 2031. these are Bill of Exhange and Promissory notes which are negotiable as
they conform with the provisions of Section 1. THUS, A BILL OF LADING, WAREHOUSE
RECEIPTS, POSTAL MONEY ORDERS , CERTIFICATE OF STOCKS, LETTER OF CREDIT -- ARE
NOT NEGOTIABLE INSTRUMENTS IN CONTEMPLATION OF ART. 2031, EVEN IF THEY ARE
NEGOTIABLE. THEY ARE CONSIDERED NEGOTIABLE DOCUMENTS OF TITLE not
negotiable instruments since they either cover GOODS or negotiability is limited . THE
LAW THAT GOVERNS THEM IS THE CIVIL CODE OF THE PHILIPPINES AND CODE OF
COMMERCE.
Section 1- form/requirements for negotiability
a. it must be in writing signed by maker or drawer
b. must contain an unconditional promise or order to pay a sum certain in money
c. must be payable on demand, or to bearer
d. must be payable to order or to bearer
e. where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.
*** the words of negotiability is PAY TO ORDER or to bearer. When the instrument is payable
to a specific person it must be accompanied with the words, pay to order of ( name of person)
or PAY TO (name of person) OR ORDER; OR PAY TO BEARER WITHOUT SPECIFYING THE NAME
OF THE PERSON.
*** if it is payable to I.E. JUAN DE LA CRUZ without the words ORDER. THE iNSTRUMENT IS
NON-NEGOTIABLE.
EVERY INSTRUMENT ( PN OR BILL OF EXCHANGE) WHEN ISSUED IS PRESUMED TO BE
ISSUED FOR VALUE OR WITH A CONSIDERATION. Meaning, the person who issued such
instrument has received something of value which is the very reason why he/she is
executing a PN or Bill of Exchange.
examples: a. when one buys goods or services and pays in the form of check or promissory
note. the goods or service acquired is valuable consideration.
b. a pre-existing debt is valuable consideration i.e. suppose you were indebted previously
and later pays it with a check. the previous indebtedness is a valuable consideration.
c. when check or bill of exchange is executed as a gift or donation or out of love and
affection(generosity) there is no valuable consideration. hence you cannot sue the
maker/drawer for payment.
post- dated and ante -dated instruments:
* instruments are post-dated when it is made/executed and payable at a future date.
for example today is October 10,2020 and the instrument today is payable or dated
Nov. 10, 2020. This means that the instrument is payable only when Nov. 10,2020 comes
and not before.
* Instrument is ante-dated when it is made/executed and payable on the date prior to
the date of making or execution. for example: today is October 10,2020 and you make
out a check or PN dating it September 30,2020.
FORGERY- is the counterfeit making or copying of another person's signature whether, drawer,
drawee, payee or indorser. the instrument is wholly inoperative against the person whose
signature is forged.
NEGOTIATION-- the transfer of negotiable instrument from one person to another .
stages in the life of negotiable instrument:
1. preparation - complete and adherence to section 1
2. Issuance - first delivery of negotiable instrument to payee
3. transfer - negotiation of instrument so as to make the transferee the owner of
instrument.
4. Extinguishment either by payment or other modes of extinguishment of
obligation
TAKE NOTE: transfer of instrument is made in THREE (3) ways:
1. NEGOTIATION - WHEN INSTRUMENT IS NEGOTIABLE INSTRUMENT- PERSON TO WHOM
INSTRUMENT IS NEGOTIATED IS KNOWN AS INDORSEE--- THE PERSON TRANSFERRING IS
KNOWN AS INDORSER
2. ASSIGNMENT - when instrument is non-negotiable.-- PERSON TRANSFERRING IS KNOWN
AS ASSIGNOR WHILE PERSON TO WHOM IT IS TRANSFERRED IS KNOWN AS ASSIGNEE
3. SUCCESSION- inheritance- whether negotiable or non-negotiable. PERSON WHO
TRANSFER THRU SUCCESSION IS THE DECEASED PERSON KNOWN AS DECEDENT WHILE THE
PERSON RECEIVING IT IS KNOWN AS HEIR.
HOW IS INDORSEMENT MADE? - must be written on instrument itself. or upon a separate
paper attached thereto. WHEN INDORSEMENT IS MADE ON A SEPARATE PAPER, THIS IS CALLED
ALLONGE.
***INDORSEMENT COMES FROM LATIN WORD "indorsa" which literally means writing at the
back. INDORSEMENT IS CUSTOMARILY MADE AT THE BACK OF THE INSTRUMENT.
