INTRODUCTION
I). APPLICATION OF THE NEGOTIABLE INSTRUMENT
Limited Application – The act only governs the negotiable instruments such as: Promissory notes, Bills
of exchange, and check, Duties and Responsibilities of the instrument.
Supplementary Application of other law – If Act No. 2031 does not provide specific rules, lateral laws
should be applied, Examples:
1. Civil Code - Subject related to Contracts and obligations
2. Mercantile Laws - Commercial transactions, that may not expressly be covered
3. Special Laws - Banking laws (RA8791), by BSP
II). FUNCTION AND IMPRTANCE OF NEGOTIABLE INSTRUMENT
1. NOT legal tender, but used as substitute (As to purpose)
a. Negotiable instrument is to substitute as cash.
b. To make the instrument freely negotiable that is equivalent to money. Negotiable application
is flexible rather limited person to person.
2. Negotiable Papers (As to physical medium)
a. Allows the medium to have more circulation rather than cash. Why? Less production of cash
b. No need to count the physical coins and bills when transacting. Convenient as a medium.
3. Negotiable Instrument in credit (Debt) transactions
a. Property allows the person to establish credit score:
Examples:
i. Property or Valuable, such as Land title as a collateral credit instrument, mediated by
the third party (The bank).
ii. Cheque that are rediscounted by the bank.
b. Bill of exchange and the promissory notes are used in circulation of credits (Credit
Instrument)
III). CHARACTERISTICS OR FEATURES OF NEGOTIABLE INSTRUMENT
1. Negotiability – Instrument can be freely transferred to another person the rights to pay.
2. Accumulation of Secondary contact – Transferable to other parties both Responsibilities
and Liabilities. Ex.: Rediscounting Cheque.
IV). FORMS OF NEGOTIABLE INSTRUMENTS
1. Common forms –
i. Promissory Notes: Issuer has promised to pay
ii. Bills of Exchange: Issuer has ordered a third person to pay
2. Special Types –
Special Type of Promissory notes:
1. Certificate of Deposit: issued by a bank to a person depositing money for a
specified length of time. Common Example: Time deposit accounts
2. Bank Notes: Philippine Peso
3. Due Bills: written document that acknowledges a debt and specifies when it is
due for payment. It serves as proof of the obligation.
4. Bonds: typically used by Corp. or Gov., fixed income instrument that
represents a loan made by investor to a borrower
Special type of bills of exchange
1. Drafts: Function similar to cheque, however draft are guaranteed by the bank
to pay the entity (Present cash is certain), meanwhile cheque are to order the
bank to pay an entity (Cash depends on the availability of the clients savings)
2. Trade Acceptances: instrument where the buyer agrees to pay the seller a
specified amount at a future date by signing a bill of exchange, making it a
legally binding promise to pay.
3. Banker’ Acceptance: Backed by a bank, used to guarantee payment in trade
transactions, typically with a short-term maturity.
Cheques – are special form or kind of bill of exchange
V). DOUBT RESOLVED IN FAVOR OF NEGOTIABILITY
When there is doubt, it must be in favor of its negotiability of the instrument.
VI). INSTRUMENT WITH LIMITED NEGOTIABILITY
1. Letter of Credit: A bank guarantee for payment.
2. Trust Receipt: Goods given by a bank with the condition of payment later.
3. Treasury Warrant: A government payment order.
4. Postal Money Order: A safe way to send money via the postal service.
5. Bill of Lading: Proof of goods shipped.
6. Certificate of Stock: Proof of ownership of company shares.
7. Warehouse Receipt: Proof of goods stored in a warehouse.
8. Pawn Ticket: A receipt for items pawned for a loan.