The Negotiable Instrument

Definition

A negotiable instrument is a written instrument signed by the maker/drawer that contains an unconditional promise or order to pay a certain sum of money which must be payable on demand or at a fixed or determinable future time. It must be payable to the bearer or order (read: sequence) and if it is addressed to a drawee, the drawee must be identified or indicated with reasonable certainty. The drawee requirement applies in case the instrument is a negotiable bill of exchange (like a check.) If there is no mention of a drawee, the instrument will pertain to a negotiable promissory note.

Two important features of a negotiable instrument are negotiability and accumulation of secondary contracts. Negotiability, simply put, means the instrument can be transferred from one person to another with the recipient being given the right to collect. As the instrument is negotiated from person to person, juridical ties (secondary contracts) are created between the parties involved in the transaction.

Functions:

1.) Operates as a substitute for money

2.) Means of creating and transferring credit

3.) Facilitates the sale of goods

4.) Increases the purchasing medium in circulations

Kinds:

A.) Bills of Exchange

Unconditional written orders addressed by the maker to another person (the payee,) signed by the person giving it and requires the payor to pay the payee on demand or on the date indicated a sum certain in money to the bearer or order.

Types

1.) Draft: sometimes called a bill of exchange and normally refers to bills of exchange used in documentary exchanges, like letters of credit transactions.

2.) Inland and Foreign Bill: inland bills are bills that are drawn and payable in the Philippines. If the bill is drawn and payable elsewhere, it's a foreign bill.

3.) Time Draft: drafts payable at a fixed date.

4.) Sight/Demand Draft: draft payable when the holder presents is for payment.

5.) Trade Acceptance: bill used in sales contracts where the seller (as drawer) orders the buyer (as drawee) to pay the seller a certain sum (as payee.)

6.) Banker's Acceptance: time draft where the drawee has written "accepted" on its face.

7.) Check: the most common negotiable instrument. Bill of exchange drawn on a bank and payable on demand.

B.) Promissory Notes

An unconditional written promise made by one person to another, signed by the maker and to be paid a certain sum of money to the bearer, or order, on demand or at a fixed  or determinable future time. If it's drawn to the maker's own order, it's not complete until he endorses it.

Types

1.) Certificate of Deposit: written acknowledgement of a bank of its receipt of a certain sum of money with a promise to pay it.

2.) Bond: certificate/evidence of debt where the issuing company (or the government body) promises to pay the bondholder a specified amount of interest for a specified period of time and pay the loan when the period expires.

3.) Debenture: promissory note/bond backed by a corporation's general credit and usually not secured by a mortgage or lien on specific property.