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Mercantile Law Notes PDF
Mercantile Law Notes PDF
Negotiable Instruments – written contracts for the payment of money; by its form, intended as a
substitute for money and intended to pass from hand to hand, to give the holder in due course the right to
hold the same and collect the sum due.
A. negotiability – right of transferee to hold the instrument and collect the sum due
Holder in due course may have better transferee acquires rights only of his
rights than transferor transferor
a) treasury warrants
b) postal money order
c) warehouse receipt
d) bill of lading
e) certificate of stock
f) dock warrant
g) letter of credit
h) quedan
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NEGOTIABLE INSTRUMENTS
Holder in due course may have rights transferee merely steps into the shoes of
better than transferor the transferor
1. Promissory Note – unconditional promise to pay in writing made by one person to another,
signed by the maker engaging to pay on demand or a fixed determinable future time a sum
certain in money to order or bearer. When the note is drawn to maker’s own order, it is not
complete until indorse by him. (Sec. 184 NIL)
Parties:
1. Maker – the person makes the promise and signs the instrument
2. Payee – the party to whom the promise is made or the instrument is payable
a) certificate deposit
b) bond
c) bank note
d) due bill
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NEGOTIABLE INSTRUMENTS
2. Bill of Exchange – 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. (Sec. 126 NIL)
Parties:
1. Drawer – the person who draws the bill
2. Payee – the party in whose favor the bill is drawn or is payable
3. drawee/ acceptor- the party upon whom the bill is drawn, he becomes the
acceptor upon acceptance
a) draft
b) trade acceptance
c) clean bill of exchange
d) documentary bill of exchange
e) sight bills
f) time bills
g) inland bill
h) foreign bill
3. Check – bill of exchange drawn on a bank and payable on demand. (Sec. 185 NIL)
Kinds of Checks:
a) memorandum check
b) cashier’s check
c) manager’s check
d) crossed check
e) stale check
f) traveller’s check
g) certified check
Note:
If the payee of an instrument transfers it to another by signing it at the back, he is said to have
negotiated or indorsed the same and thereby becomes an indorser and to whom it was negotiated is
called an indorsee.
Holder – the payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof.
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NEGOTIABLE INSTRUMENTS
Liability
1. Primary liable
a) Maker
b) Acceptor of a bill
2. Secondarily Liable
a) Drawer of a bill
b) Indorsers of a bill or a note
3. Not liable
a) Drawee, until he accepts
Drawer Maker
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NEGOTIABLE INSTRUMENTS
CHECK BOE
PN CHECK
there are two (2) parties, the maker and the there are three (3) parties, the drawer,
payee the drawee bank and the payee
Trust Receipt – a security transaction intended to aid in the financing of importers and retailers who do
not have sufficient funds to finance their transaction and acquire credit except to use as collateral the
merchandise imported
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NEGOTIABLE INSTRUMENTS
Requisites of a Negotiable Note (PN): (SUDO)
Notes on Section 1:
In order to be negotiable, there must be a writing of some kind, else there would be nothing to be
negotiated or passed from hand to hand. The writing may be in ink, print or pencil. It may be
upon parchment, cloth, leather or any other substitute of paper.
It must be signed by the maker or drawer. It may consist of mere initials or even numbers, but
the holder must prove that what is written is intended as a signature of the person sought to be
charged.
The Bill must contain an order, something more than the mere asking of a favor.
Sum payable must be in money only. It cannot be made payable in goods, wares, or
merchandise or in property.
A drawee’s name may be filled in under Section 14 of the NIL
Determination of negotiability
*In determining is the instrument is negotiable, only the instrument itself and no other, must be
examined and compared with the requirements stated in Sec. 1. If it appears on the instrument that it
lacks one of the requirements, it is not negotiable and the provisions of the NIL do not govern the
instrument. The requirement lacking cannot be supplied by using a separate instrument in which that
requirement which is lacking appears.
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NEGOTIABLE INSTRUMENTS
Certainty as to sum:
Rule: The sum payable is a sum certain when it is stated in terms of a fixed amount of money.
a) interest
b) in installments
c) in installments with acceleration clause
d) with exchange
e) costs of collection or attorney’s fees (Sec. 2 NIL)
General Rule: The promise or order should not depend on a contingent event. If it is conditional, it is
non-negotiable.
Exceptions:
a) Indication of particular fund from which the acceptor disburses himself after payment
b) Statement of the transaction which gives rise to the instrument. (Sec. 3 NIL)
Note:
1. A mere request or authorization to pay does not constitute an order. However, the mere use of
polite word like “please” does not convert the order into a request.
2. A mere acknowledgement of a debt is not sufficient to impart a promise to pay as it merely
evidences an old obligation. A promissory note imports a new obligation.
Notes on Section 3
The particular fund indicated should not be the direct source of payment; else it becomes
unconditional and therefore non-negotiable. The fund should only be the source of
reimbursement.
A statement of the transaction does not destroy the negotiability of the instrument. Exception:
Where the promise to pay or order is made subject to the terms and conditions of the transaction
stated.
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NEGOTIABLE INSTRUMENTS
Instrument is payable upon a determinable future time if:
Notes on Section 4
If the instrument is payable upon a contingency, the happening of the event does not cure the
defect (still non-negotiable)
General Rule: If some other act is required other than the payment of money, it is non-negotiable.
Exceptions:
Notes of Section 5
The validity and negotiability of an instrument is not affected by the fact that:
1. it is not dated
2. does not specify the value given or that any had been given
3. does not specify the place where it is drawn or payable
4. bears a seal
5. designates the kind of current money in which payment is to be made (Sec. 6 NIL)
Where an instrument is issued, accepted or indorsed when overdue, it is, as regards to the person
so issuing, accepting, or indorsing it, payable on demand.
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NEGOTIABLE INSTRUMENTS
Notes on Section 7
if the time for payment is left blank (as opposed to being omitted), it may properly be considered
as an incomplete instrument and fall under the provisions of Sec. 14, 15, or 16 depending on how
the instrument is delivered.
Notes on Section 8
The payee must be named or otherwise indicated therein with reasonable certainty.
If there is no payee, there would be no one to indorse the instrument payable to order. Therefore
useless to be considered negotiable.
Joint payees in indicated by the conjunction “and”. To negotiate, all must indorse.
Being several payees is indicated by the conjunction “or”.
“Fictitious person” is not limited to persons having no legal existence. An existing person may
be considered fictitious depending on the intention of the maker or the drawer.
“Fictitious person” means a person who has no right to the instrument because the maker or
drawer of it so intended. He was not intended to be the payee.
Where the instrument is drawn, made or prepared by an agent, the knowledge or intent of the
signer of the instrument is controlling.
Where the agent has no authority to execute the instrument, the intent of the principal is
controlling
Effects:
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NEGOTIABLE INSTRUMENTS
Incomplete but Delivered Instrument:
a) It was delivered by the person making it in order that it may be converted into a negotiable
instrument
b) The holder has prima facie authority to fill it up as such for any amount. (Sec. 14 NIL)
Notes on Section 14
If the instrument is wanting in material particular, mere possession of the instrument is enough to
presume prima facie authority to fill it up.
Material particular may be an omission which will render the instrument non-negotiable (e.g.
name of payee), an omission which will not render the instrument non-negotiable (e.g. date)
In the case of the signature in blank, delivery with intent to convert it into a negotiable
instrument is required. Mere possession is not enough.
General Rule: Where an incomplete instrument has not been delivered, it will not, if completed and
negotiated without authority, be a valid contract in the hands of any holder against any person who
signed before delivery. (Sec. 15 NIL)
Notes on Section 15
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NEGOTIABLE INSTRUMENTS
Complete but Undelivered:
General Rule: Every contract on a negotiable instrument is incomplete and revocable until delivery for
the purpose of giving effect thereto.
a) If between immediate parties and remote parties not holder in due course, to be effectual there
must be authorized delivery by the party making, drawing, accepting or indorsing. Delivery may
be shown to be conditional or for a special purpose only
b) If the holder is a holder in due course, all prior deliveries conclusively presumed valid
c) If instrument not in hands of drawer/maker, valid and intentional delivery is presumed until the
contrary is proven (Sec. 16 NIL)
General rule: a person whose signature does not appear on the instrument in not liable.
Exception:
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NEGOTIABLE INSTRUMENTS
General rule: an agent is not liable on the instrument if he were duly authorized to sign for or on behalf
of a principal.
Requisites:
Notes on Section 20
If an agent does not disclose his principal, the agent is personally liable on the instrument.
Per Procuration – operates as notice that the agent has a limited authority to sign.
Effects:
1. The principal in only bound if the agent acted within the limits of the authority given
2. The person who takes the instrument is bound to inquire into the extent and nature of the
authority given. (Sec. 21 NIL)
General rule: Infants and corporations incur no liability by their indorsement or assignment of an
instrument. (Sec. 22 NIL)
Effects:
a. no liability attached to the infant or the corporation
b. the instrument is still valid and the indorsee acquires title
General rule: a signature which is forged or made without authority is wholly inoperative.
Effects:
1. no right to retain
2. no right to give a discharge
3. no right to enforce payment can be acquired. (Sec. 23 NIL)
Exception:
a. The party against whom it is sought to be enforced is precluded from setting up the
forgery or want of authority.
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NEGOTIABLE INSTRUMENTS
Notes on Section 23
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NEGOTIABLE INSTRUMENTS
Rules on liabilities of parties on a forged instrument
In a PN
a. a party whose indorsement is forged on a note payable to order and all parties prior to
him including the maker cannot be held liable by any holder
b. a party whose indorsement is forged on a note originally payable to bearer and all parties
prior to him including the maker may be held liable by a holder in due course provided
that it was mechanically complete before the forgery
c. a maker whose signature was forged cannot be held liable by any holder
In a BOE
a. the drawer’s account cannot be charged by the drawee where the drawee paid
b. the drawer has no right to recover from the collecting bank
c. the drawee bank can recover from the collecting bank
d. the payee can recover from the drawer
e. the payee can recover from the recipient of the payment, such as the collecting bank
f. the payee cannot collect from the drawee bank
g. the collecting bank bears the loss but can recover from the person to whom it paid
h. if payable to bearer, the rules are the same as in PN.
i. if the drawee has accepted the bill, the drawee bears the loss and his remedy is to go after
the forger
j. if the drawee has not accepted the bill but has paid it, the drawee cannot recover from the
drawer or the recipient of the proceeds, absence any act of negligence on their part.
Every negotiable instrument is deemed prima facie to have been issued for a valuable
consideration. (Sec. 24 NIL)
Effects:
Where value has at any time been given for the instrument, the holder is deemed a holder for
value in respect to all parties who become such prior to that time. (Sec. 26 NIL)
Consideration – every negotiable instrument is deemed prima facie to have been issued for a valuable
consideration and every person whose signature appears thereon to have become a party thereto value.
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NEGOTIABLE INSTRUMENTS
Value – any consideration sufficient to support a simple contract
1. Absence or failure of consideration may be set up against a holder not a holder in due
course (personal defense)
2. Partial failure of consideration is a defense pro tanto (Sec 28 NIL)
Notes on Section 28
An accommodation party is one who signs the instrument as maker, drawer, acceptor, or indorser
without receiving value therefor and for the purpose of lending his name to some other person.
Effects:
a) An accommodation party is liable to the holder for value notwithstanding that such holder
knew that of the accommodation. (Sec. 28 NIL)
Notes on Section 28
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NEGOTIABLE INSTRUMENTS
For a bearer instrument – by delivery
1. written
2. on the instrument itself or upon a piece of paper attached (Sec. 31 NIL)
Notes on Section 31
The paper attached with the indorsement is an allonge (must be attached so that it becomes a part
of the instrument, it cannot be simply pinned or clipped to it)
Kinds of Indorsements:
1. Special (Sec. 34) – specifies the person to whom or to whose order the instrument is payable
2. Blank (Sec. 35) – specifies no indorsee, making the instrument payable to the bearer and
negotiable by delivery
3. Restrictive (Sec. 36)- prohibits the further negotiation of the instrument or constitutes tge
indorsee the agent of the indorser or vests the tide in the indorsee in trust or for the use of some
other person.
4. Qualified (Sec. 38) – constitutes the indorser a mere assignor of the instrument
5. Absolute – the indorser binds himself to pay upon no other condition than the failure of prior
parties to do so, and due notice to him of such failure
6. Conditional (Sec. 39 NIL) – the indorser annexes some other condition to his liability in his
indorsement
7. Joint – one which requires the indorsement of all the payees or indorsees to whom the
instrument is payable
8. Successive – consists of two or more indorsements made in succession
9. Irregular – made by a person not otherwise a party to an instrument, who places thereon his
signature in blank before delivery
10. Facultative – the indorser enlarges his liability by waiving the usual demand and notice of
dishonor
A holder may strike out any indorsement which is not necessary to his title.
Effects:
Rights of a holder:
Effects:
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NEGOTIABLE INSTRUMENTS
Notes on Section 52
A holder is not a HDC where an instrument payable on demand is negotiated at an unreasonable length
of time after its issue (Sec. 53 NIL)
Rights of a HDC:
a. holds the instrument free from any defect of title of prior parties
b. free from defenses available to prior parties among themselves (personal/ equitable
defenses)
c. may enforce payment of the instrument for the full amount against all parties liable(Sec.
57 NIL)
Notes on Section 57
Personal or equitable defenses are those which grow out of the agreement or conduct of a
particular person in regard to the instrument which renders it inequitable for him through legal
title to enforce it. Can be set up against holders not HDC
Legal or real defenses are those which attach to the instrument itself and can be set up against
the whole world, including a HDC.
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NEGOTIABLE INSTRUMENTS
Personal Defenses Real Defenses
1. absence or failure of consideration Material Alteration
Want of delivery of incomplete
2. want of delivery of complete instrument
instrument
3. insertion of wrong date where payable at a
fixed period after date and issued undated; or at a Duress amounting to forgery
fixed period after sight and acceptance is undated
4. filling up the blanks contrary to authority given
Fraud in factum or in esse contractus –
or not within reasonable time
5. fraud in inducement Minority
6. acquisition of the instrument by force, duress
Forgery
or fear
7. acquisition of the instrument by unlawful Insanity where the insane person has a
means guardian appointed by the court
Ultra vires acts of a corporation where its
8. acquisition of the instrument for an illegal
charter or by statue, it is prohibited from
consideration
issuing commercial paper
9. negotiation in breach of faith Want of authority of agent
10. negotiation under circumstances amounting to Execution of instrument between public
fraud enemies
11. Mistake Illegality of contract made by statue
12. intoxication
13. ultra vires acts of corporations
14. want of authority of the agent where he has
apparent authority
15. illegality of contract where form or
consideration is illegal
16. insanity where there is no notice of insanity
FRAUD INDUCEMENT- relates to quality, quantity, value or character of the consideration or terms
of the instrument
An instrument not in the hands of a HDC is subject to the same defenses as if it were non-
negotiable.
Exception:
A holder who derives his title through a HDC and is not a party to any fraud or illegality
affecting the instrument, has all the rights of such HDC in respect to all parties prior. (Sec. 58
NIL)
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NEGOTIABLE INSTRUMENTS
Rights of a holder not a HDC
General rule: every holder is deemed prima facie to be a holder in due course.
Exception:
- where it is shown that the title of any person who has negotiated the instrument is defective, the
burden is on the holder to prove that he is a HDC or that a person under whom he claims is a HDC (Sec.
59 NIL)
Notes on Section 60
Notes on Section 61
Irregular Indorser – a person not otherwise a party to an instrument places his signature in blank
before delivery is liable as an indorser in the following manner:
1. if payable to order of a third person – liable to the payee and to all subsequent parties
2. if payable to order of the maker or drawer – liable to all parties subsequent to the maker or
drawer
3. if payable to bearer – liable to all parties subsequent to the maker or drawer
4. if signs for an accommodation party – liable to all parties subsequent to the payee (Sec. 64 NIL)
Limitations of warranties:
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NEGOTIABLE INSTRUMENTS
Notes on Section 65
In addition:
a. Engages that the instrument will be accepted or paid or both according to its tenor on due
presentment
b. Engages to pay the amount thereof if it be dishonored and the necessary proceedings on
dishonor are taken
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NEGOTIABLE INSTRUMENTS
Notes on Section 66
General rule: Presentment for payment is not necessary to charge persons primarily liable on the
instrument. Presentment for payment is necessary to charge the drawer and indorsers. (Sec 70 NIL)
Notes on Section 70
Presentation for payment – production of a BOE to the drawee for his acceptance, or to a
drawee or acceptor for payment. Also presentment of a PN to the party liable for payment of the
same.
consists of a) a personal demand for payment at a proper place b) the bill or note must be
ready to be exhibited if required and surrendered upon payment.
parties primarily liable – persons by the terms of the instrument are absolutely required to pay
the same. E.g maker and acceptors. They can be sued directly.
If payable at the special place and the person liable is willing to pay there at maturity, such
willingness and ability is equivalent to tender of payment.
Presentment is necessary to charge persons secondarily liable otherwise they are discharged.
Acts needed to charge persons secondarily liable:
a. Presentment for payment/acceptance
b. Dishonor by non-payment/non-acceptance
c. Notice of dishonor to secondary parties
Acts needed to charge persons secondarily liable in other cases:
a. Protest for non-payment by the drawee
b. Protest for non-payment by the acceptor for honor
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NEGOTIABLE INSTRUMENTS
Proper presentment:
Notes on Section 72
Only the holder or one authorized by him has the right to make presentment for payment
presentment cannot be made on a Sunday or holiday
Presentment for payment is made to the maker, or acceptor. Not to the person secondarily liable.
if the instrument is payable on demand – a) if it is a note – presentment must be made within
reasonable time after issue b) if it is a bill – presentment must be made within reasonable time
after last negotiation.
General rule: Presentment for payment necessary to charge persons secondarily liable otherwise they
are discharged:
Only the drawer or indorser is not discharged. All other parties secondarily liable are discharged.
What is excused is the failure to make presentment. There is no need to make any presentment
versus under section 81 (delay in presentment) presentment for payment is still required after the
cause of delay has ceased.
1. The instrument was duly presented but payment is refused or cannot be obtained
2. presentment is excused and the instrument is overdue and unpaid (Sec. 83 NIL)
Effects of dishonor by non-payment: An immediate right of recourse to all parties secondarily liable
accrues to the holder. (Sec. 84 NIL)
Notes on Section 84
Notes on Section 88
Notice:
Effects: deemed a waiver of presentment and notice of dishonor as well (Sec. 111 NIL)
Notice of Dishonor – given by the holder to the parties’ secondarily liable, drawer and each indorser,
that the instrument was dishonored by non-acceptance or non-payment by the drawee/maker
General rule: Any drawer or indorser to whom such notice is not given is discharged.
Exceptions:
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NEGOTIABLE INSTRUMENTS
Instances when Notice of Dishonor Not Necessary to Drawer
1. drawee was a fictitious/incapacitated person and the indorser was aware of such at the time
of indorsement
2. indorser is the person to whom instrument was presented for payment
3. instrument made/accepted for his accommodation (Sec. 115 NIL)
Omission to give notice of dishonor by non-acceptance do not prejudice a HDC (Sec. 117 NIL)
Protest is only necessary for a foreign bill of exchange. Protest for other negotiable instruments is
optional. (Sec. 118 NIL)
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NEGOTIABLE INSTRUMENTS
e. release of principal debtor
f. extension of payment by the holder/postponement of right to enforce without assent of
secondary parties and without reservation of right of recourse against secondary parties (Sec
120 NIL)
Exception:
if renounced in favor of a party secondarily liable, only he is exonerated from liability and all
parties subsequent to him
discharge by novation is allowed
General rule: When materially altered, without the consent of all parties liable, the instrument is
avoided except as against:
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NEGOTIABLE INSTRUMENTS
Exception: if in the hands of a HDC, may be enforced according to its original tenor
Material Alteration – an alternation is said to be material if it alters the effect of the instrument.
Under Section 125 the following changes are considered material alterations:
1. dates
2. the sum payable
3. time and place of payment
4. number or relations of the parties
5. medium or currency for payment
6. adding a place of payment where no place is specified
7. any other which alters the effect of the instrument
1. where the drawer and the drawee are one and the same
2. where the drawee is a fictitious person
3. where the drawee has no capacity to contract (Sec. 130 NIL)
Acceptance is the signification by the drawee of his assent to the order of the drawer. It is an act by
which a person on whom the BOE is drawn assents to the request of the drawer to pay it. (Sec. 132 NIL)
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NEGOTIABLE INSTRUMENTS
Requisites of actual acceptance:
1. in writing
2. signed by the drawee
3. must not express the drawee will perform his promise by any other means than payment of
money
4. communicated or delivered to the holder
1. require that acceptance be written on the bill and if refused, treat it as if dishonored
(Sec. 133)
2. refuse to accept a qualified acceptance and may treat it as dishonored (Sec. 142)
Constructive Acceptance:
1. where the drawee to whom the bill has been delivered destroys it
2. the drawee refuses within 24 hrs after such delivery or within such time as is given, to
return the bill accepted or not. (Sec. 137 NIL)
Presentment is the production of a BOE to the drawee for his acceptancein on order case is
presentment necessary to make parties liable.
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NEGOTIABLE INSTRUMENTS
Summary on presentment for acceptance of Bills of Exchange:
To make the drawee primarily liable and for the accrual of secondary liability (Sec. 144)
necessary to fix maturity date, where bill expressly stipulates presentment, bill payable
other than place of drawee (Sec. 143)
When presentment is excused: drawee is dead, hides, is fictitious, incapacitated person,
after due diligence presentment cannot be made, presentment is refused on another
ground although presentment is irregular (Sec. 148)
Protest is required:
Protest – formal statement in writing made by a notary under his seal of office at the request of
the holder, in which it is declare that the sum was presented for payment or acceptance (as the
case may be) and such was refused.
It means all steps or acts accompanying the dishonor of a bill or note necessary to charge an
indorser
Required when the instrument is a foreign bill of exchange.
It must be made on the same date of dishonor, by a notary/respectable citizen of the place in the
presence of 2 credible witnesses so recourse to secondary parties
Acceptance for Honor (Sec. 161 NIL)– an acceptance of a bill made by a stranger to it before
maturity, where the drawee of the bill has:
1. refused to accept it
2. and the bill has been protested for non-acceptance
3. or where the bill has been protested for better security
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NEGOTIABLE INSTRUMENTS
Requisites for acceptance for honor:
1. The bill must have been previously protested a) for non-acceptance b) or for
better security
2. The bill is not overdue at the time of the acceptance for honor
3. The acceptor for honor must be a stranger to the bill
4. The holder must give his consent
Purpose: to save the credit of the parties to the instrument or some party to it as the drawer,
drawee, or indorser or somebody else.
Acceptor for honor is liable to the holder and to all the parties to the bill subsequent to the party
for whose honor he has accepted (Sec. 164)
There can be acceptors in the alternative There may be several acceptors for
or in succession honors
Bill is discharged upon payment by the Bill is not discharged upon payment by
acceptor the acceptor for honor
Payment for Honor – payment made through a notarial act of honor of a party liable/stranger to the bill
after bill has been dishonored by non-payment by the acceptor and protested for non-payment by the
holder
There can be only one payer for honor There may be several acceptors for honors
4. Bills in Set – bill of exchange drawn in several parts, each part of the set being numbered and
containing a reference to the other parts, the whole of the parts just constituting one bill (Sec 178
NIL)
PURPOSE: To avoid the difficulties of which would arise in the case of loss or miscarriage
on the way of a bill.
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