THE NEGOTIABLE

INSTRUMENTS LAW
ACT NO. 2031
Prepared by: Ms. Korine Jade
A. Ambat
 Historical Background of our
Negotiable Instruments Law.

1. The use of commercial paper may be traced back to the

beginning of the Christian era.
• In fact, commercial paper of some type has been present
in nearly every society that has developed a substantial
commercial system.
• During the Medieval period, merchants of Italy
were already using negotiable documents on
broad scale rather than transferring principal
money owing to the inconvenience and danger of
transporting money itself.
• Introduced into France and then into England
where it became part of the Law Merchant.
2. English Bills of Exchange Act- Litigations arising
out of transactions between merchants came under
the jurisdiction of common law courts when the
Law Merchant was absorbed by Kings Court under
the direction of Lord Mansfield.
• Commercial paper had become so persuasive by
the late 19th century that the English Parliament
began to enact special statutes to govern its use.
• In 1882, the English Parliament passed the
Bills of Exchange Act which codified the
law of negotiable instruments as found in
the court decisions of England.
3. U.S Uniform Negotiable Instrument Act-
Following the example of the English Parliaments ,
the National Conference of Commissions on
Uniform State Laws, which was sponsored by the
American Bar Association and the American Bankers
Association, drafted the Uniform Negotiable
Instrument Law for the United States in 1896.
4. U.S Uniform Commercial Code- The Uniform
Negotiable Instrument Act as been replaced in part by
Article 3 and in part by other articles of the Uniform
Commercial Code (U.C.C) prepared under the auspices of
the National Conference of Commissioners on Uniform
State Law and the American Law Institute.
• Proposed for adoption by the legislature of the states, the
first draft of the Code was finished in 1952 although the
Code is revised periodically.
• The code was adopted to comply more readily
with the demands of the modern business
world.
• It seeks to simplify, clarify and standardize the
rules of commercial paper while retaining most
of the traditional rules and views on the subject.
5. Act No. 2031- Our Negotiable Instrument Law was
enacted as Act No. 2031 on February 3,1911.
• It took effect 90 days after its publication on March
4, 1911 in the Official Gazette of the Philippine
Islands was completed. (Sec. 198)
• The act, therefore, took effect on June 2, 1911.
• Our law is patterned with very slight
modifications after the Uniform Negotiable
Instruments Act of the United States of 1896
drafted by the National Conference of
Commissioners on Uniform State Laws.
• The evident purpose of the Act is to facilitate
transactions in commercial paper and to promote
free flow of credit.
6. Code od Commerce- Prior to the passage of Act No. 2031,
the law then existing and in force as to negotiable
instruments could be found in Book II of the Code of
Commerce, from Articles 443 to 556.
• All these articles, with the exceptions of those on crossed
checks, have been replaces. (Sec. 197)
 Application and purpose of the
Negotiable Instruments Law
• The Act applies only to negotiable instruments (Arnold
v Jordan, 215 Ala.693, 112 So. 305) or to those
instruments which meet the requirements laid down
in Section 1 of the law.
• It is designed to describe fully the law of negotiable
instruments.
• It “covers the entire subject of negotiable
instruments and must be treated as a complete body
of law upon the subject and controlling in all cases
to which it is applicable.”
2. The law was enacted for the purpose of
facilitating, not hindering or hampering
transactions in commercial paper.
• Thus, the said statute should not be tampered
with haphazardly or lightly nor should it be
brushed aside in order to meet the
necessities in a single case.
 Function and Importance of
Negotiable Instruments
• Negotiable instruments play an important role in
the business world as a safe and convenient means
of doing business.
1. As a Substitute for Money- although they do
not constitute legal tender (Art. 1249) and are not
money, they are used as a substitute for money,
eliminating the risk of dealing in cash.
 Legal Tender

• is anything recognized by law as a means to

settle a public or private debt or meet a
financial obligation, including tax payments,
contracts, and legal fines or damages.
2. As a medium of exchange for most commercial
transactions- Negotiable papers, particularly Checks,
constitutes, at present, the media of exchange for
most commercial transactions.
• They thus increase the purchasing
medium in circulation, doing away with
the active handling of money and the need
to physically count bills and coins whenever
payment is made in financial transactions
and obligations.
3. As a medium of credit transactions- Negotiable
instruments are also designed to serve as a medium of
credit transaction, or as a credit instrument.

• A man does not always have property, or

valuable property, rights which he can turn
into cash at any moment..
• These things, however, measure his credit
instrument his notes to his creditor who, in
turn indorses this to a third person.
• The purpose of negotiability then is to
allow men of undoubted credit to carry on a
business enterprise upon their promissory
notes, bills of exchange and checks
knowing that other businessmen will treat
these promises as a cash.
4. As a means, in the case of check, of making
immediate payment- The check is primarily used for
immediate payment (as a substitute for money), while
ordinary bill of exchange and promissory note are
intended for the circulation of credits. (primarily as a credit
transaction)

• It is used and readily accepted in the

modern world more than any other
instrument of credit as a means of making
payment.
• The use of checks automatically provides a
receipt for payment and serves as
convenient records of financial
transactions.
 WHAT IS NEGOTIABLE
INSTRUMENT?
• It is a written contract for the payment of
money which by its form and on its face is
intended as a substitute for money and
passes from hand to hand as money, so
as to give the holder in due course the
right to hold the instrument and collect
the sum for himself.
 Two Important Features:
1. Negotiability- quality or attribute of a bill or note
whereby it may pass from hand to hand similar
to money, so as to give the holder in due
course the right to hold the instrument and
collect the sum payable for himself free
from any infirmity in the instrument or
defect in the title of any of the prior parties
or defenses available to them among
themselves.
 EXAMPLE
Let us suppose S sells and delivers goods to B who later refuses to pay for them
as they, in fact, are not as ordered.
In a suit by S against B for the price, B can successfully raise breach of contract by S as
a defense. If S assigns the account to X, B can interpose the same defense against X
notwithstanding the fact that X did not know of any dispute between S and B when X
bought B's account. As assignee, X stands in the shoes of S, his assignor.

Assume now that B had issued to S his promissory note for the price of the goods.
If S sues B on the note, the defense of breach of contract is available to B. But if S
negotiates the note to Y who takes the note under such circumstances as to make him a
holder in due course (see Sec. 52.), B can no longer interpose such defense against X.
2. Accumulation of secondary contracts- The
most important feature of negotiable instruments is
the accumulation of secondary contracts as they
are transferred from one person to another.
• Once an instrument is issued, additional parties
can become involved.
 The theory of negotiable
instruments.
• The theory of negotiable instruments, and of their
currency from hand-to-hand, rests upon the
proposition that they appear to belong to the
person having them in possession and to no one
else.
 Forms of negotiable
instruments.
(1)Common forms. - The most common forms of negotiable
instruments in commercial transactions are the promissory
note (Sec. 184.), bill of exchange (Sec. 126.), and bank
check. (Sec. 185.)
• Actually, the Negotiable Instruments Law deals only with
two (2) kinds or types of instruments, namely:
(a) promissory notes or those in which the issuer has
promised to pay; and
(b) bills of exchange or those in which the issuer has
ordered a third person to pay.
• Checks are also discussed in the law
but they are really a special form or
kind of bill of exchange.
• They are the most familiar form of
commercial paper.
• (2) Special types. - There are, to be sure, many various
forms of negotiable instruments.
• An analysis of the many variations will reveal, however,
that they belong to one or the other of the types
mentioned.
• Some other instruments that have been held negotiable
under the Negotiable Instruments Law are: certificates
of deposits, bank notes, due bills, bonds, drafts,
trade acceptances, and banker's acceptances.
• The first four (4) are special types of promissory
notes (see Sec. 184.) while the others are types of
bills of exchange.
 Doubt resolved in favor of
negotiability
• Where the meaning is doubtful, the courts have thus
adopted the policy of resolving in favor of the
negotiability of the instrument.
• The purpose obviously is to encourage the free circulation
of the negotiable papers because of the admittedly
indispensable function they perform in mercantile
business transactions in any given country and the world
at large.
 Commercial paper with limited
negotiability
• There are certain instruments with limited negotiability
which are also widely used in commercial transactions but
they have been held to be non-negotiable in the technical
sense because they do not have the requisites that are
essential under the Negotiable Instruments Law.
• They are beyond the scope of the Law and are, therefore,
governed by other laws.
THANK YOU!
 PLEASE STUDY:

•ACT NO. 2031

Section1-16 (study the
concepts under it)
 SECTION 1. Form of negotiable
instrument.—
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 a 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 to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named
or otherwise indicated therein with reasonable certainty.