Negotiable Instrument
Negotiable Instrument
PURPOSE OF CODIFICATION (1), requiring the person to whom it is addressed to
pay on demand or at a fixed or determinable future
Chief purpose was to produce uniformity in
time
the laws of the different states upon this important
subject, so that the citizens of each state might (2) a sum certain in money
know the rules which would be applied to their (3) to order or to bearer”
notes, checks, and other negotiable paper in every other
• General characteristics: the order or command to
state in which the law was
pay; drawer/maker; drawee
enacted, since it is an absolute impossibility for the
commercial purchaser CHECK
Second purpose was to preserve the law as
A bill of exchange drawn on a bank payable on
nearly as possible as it then existed
demand
COMMON FORMS OF NEGOTIABLE
TO WHOM INSTRUMENTS MAY BE PAYABLE
INSTRUMENTS
1. Bearer
1. Promissory notes
2. Order
2. Bills of exchange
3. To a specified person
3. Checks, which are also bills of exchange, but of a
special kind WHEN IS IT PAYABLE TO BEARER?
Essentially a promise in writing to pay a sum When the instrument is payable to a specified
certain in money person named in the
The promise is to pay on demand or on a fixed or instrument and no other
determinable future time PARTIES TO A PROMISSORY NOTE
General characteristics: amount; place where
contract to pay is executed; due date; absolute 1. Maker—the person who executes the written
promise to pay something; payable to order/bearer; promise to pay
payee; maker of the note 2. Payee, if the instrument is payable to order—
the person in whose favor the promissory note is made
BILL OF EXCHANGE, SECTION 126 payable
3. Bearer, if the instrument is payable to bearer
When the negotiation is by indorsement HOW INSTRUMENT PAYABLE TO ORDER IS
completed by delivery, the parties added are the NEGOTIATED
indorser and indorsee
Must be negotiated by indorsement completed by
Indorser—the one who negotiates the instrument
delivery
Indorsee—the one to whom the instrument
Indorsement is necessary to make the
is negotiated by indorsement
transferee the indorsee and delivery is necessary to
place the transferee in possession of the instrument
WHERE INSTRUMENT IS PAYABLE TO
BEARER
INDORSEMENT
• Where the instrument is payable to bearer, it
Legal transaction, effected by the writing of
can be negotiated by mere delivery without necessity
one’s own name on the back of the instrument or
of indorsement
upon a paper attached thereto, with or without
HOLDER additional words specifying the person to whom or
to whose order the instrument is to be payable whereby
The payee or indorsee of a bill or note, who is in
one not only transfers
possession of it, or the bearer thereof
one’s full legal title to the paper transferred but likewise
If the instrument is payable to order, he who is the
enters into an implied guaranty that the instrument will
payee or indorsee and who is in possession thereof
be duly paid
If the instrument is payable to bearer, he who is in
possession thereof SPECIAL INDORSEMENT
Exhibiting the bill to the drawee and demanding IN BILLS OF EXCHANGE
that he accept it, that is, signify his assent to the order or
command of the drawer • The acceptor is the one primarily liable
Where the bill is presented for acceptance, and • The general tenor of the liability of the drawer is
acceptance is refused by the drawee, or cannot be that he will pay the bill if the drawee doesn’t accept or
excused, and the bill is not accepted • In other words, he is not absolutely required to
pay the bill—if the drawee pays, then he is not
required to pay. It is only when the drawee doesn’t
PRESENTMENT FOR PAYMENT pay that he will be required to pay.
Where the instrument is presented for payment SECONDARY LIABILITY OF ONE
and payment is refused or cannot be obtained, or NEGOTIATING BY DELIVERY
where presentment for payment is excused and the
instrument is overdue and unpaid By merely delivering an instrument payable to
To allow bills and notes the effect which The drawee bank acting as “payor” bank is solely liable f
money, in the form of government bills or notes, or acts not done in accordance with the instructions of
supplies in the commercial world the drawer bank or of the purchaser of the draft
> The drawee bank has the burden of proving that it
didn’t violate
TRADE ACCEPTANCE Promissory Note, Defined
1. It must be in writing and signed by the maker > The instrument is not negotiable as it is not
2. It must contain an unconditional order to pay a an order to pay but a mere request to pay
sum certain in money > “Please to let the bearer have P70 and place to my
3. It must be payable on demand, or at a fixed or account and you will oblige”
determinable future time
4. It must be payable to order or to bearer
5. The drawee must be named or otherwise
indicated therein with reasonable certainty EFFECT OF MERE WORDS OF CIVILITY
THE INSTRUMENT MUST BE IN WRITING > The mere fact that it contains words of civility
or courtesy doesn’t make it non-negotiable
> There must be a writing of some kind, for if the
instrument were not in writing, there would be nothing
to be negotiated or passed from hand to hand WHERE INSTRUMENT IS A NOTE, IT MUST
CONTAIN A PROMISE TO PAY
THE INSTRUMENT MUST BE SIGNED BY THE 1. It is enough that words of equivalent meaning are
MAKER OR DRAWER used
2. The promise is implied from promissory words
> Full name must be written
contained in the instrument
> At least the surname should appear and
generally, the signature usually is by writing the
signer’s name THE PROMISE OR ORDER TO PAY MUST BE
> But, where the name is not signed, the holder must UNCONDITIONAL
prove that what is written is intended as a signature of
> It must not be subject to a condition
the person sought to be charged
> It must be unconditional and absolute
> Commonly, it is found in the lower part of
the instrument. It could also be signed anywhere as
long as the maker or drawer acknowledges the signature SUM PAYABLE MUST BE DEFINITE AND
to be his own. CERTAIN
> The amount of money to be paid must be
IF A BILL, IT MUST CONTAIN AN ORDER TO determinable by inspection and must be stated plainly on
PAY the face of the instrument, and like the denomination of
money, must be started in the body of the instrument
• It is an instrument demanding right
• Any words which are equivalent to order or which
show the drawer’s will that the money should be SUM MUST BE PAYABLE IN MONEY ONLY
paid, are sufficient to make the instrument a bill of
> Money is the one standard of value in actual
exchange
business or more stable standard of value
> Legal tender—that kind of money which the law
AN INSTRUMENT WITH AN EFFECT OF MERE compels the creditor to accept in payment of his debt
AUTHORITY TO PAY when tendered by the debtor in the right amount
> But if authorized by law or consent of
> It is not negotiable because it is not an order to pay
creditor, cash may be substituted by other means, or
> “I hereby authorize you to pay P1000 to Pedro
may be check
> Instrument need not be payable in legal tender THE DRAWEE MUST BE NAMED
> Requirement that refers only to bills of exchange
INSTRUMENT MUST SPECIFY > Drawee’s name may be omitted and be filled in
DENOMINATION under implied authority like any other blank
> An acceptance may supply the omission of the
> Instruments should express the specific
designation
denomination of money when it is payable in the money
of a foreign country in order that the courts may be
able to ascertain its equivalent value; otherwise, it IMPORTANCE OF FORMALITIES
is non-negotiable
> Essential for the security of the mercantile
transactions
PAYABLE ON DEMAND OR ON A FIXED OR > Distinguish the negotiable instrument from
DETERMINABLE FUTURE TIME the ordinary non-transferrable written contract
> On demand
> At a fixed or determinable future time
Notes on Section 1:
> An instrument is not negotiable unless made – The Bill must contain an order, something more
than the mere asking of a favor.
payable to a person or his order or bearer or unless
words of the similar or equivalent import are used such – Sum payable must be in money only. It cannot be
as assigns or assignees or holder made payable in goods, wares, or merchandise or in
property.
d. with exchange d. gives option to the holder to require something to
be done in lieu of money (Sec. 5 NIL)
e. costs of collection or attorney’s fees (Sec. 2 NIL)
Notes of Section 5
17. General Rule: The promise or order should not
depend on a contingent event. If it is conditional, it is – Limitation on the provision, it cannot require
non-negotiable. something illegal.
– to a specified person or his order – Where the agent has no authority to execute the
instrument, the intent of the principal is controlling
It may be drawn payable to the order of:
24. The date may be inserted in an instrument
1. a payee who is not a maker, drawer, or
when:
drawee
1. an instrument expressed to be payable at
2. the drawer or maker
a fixed period after date is issued undated
3. the drawee
2. where acceptance of an instrument
4. two or more payees jointly
payable at a fixed period after sight is
5. one or some of several payees
undated (Sec. 13 NIL)
6. the holder of an office for the time being
(Sec. 8 NIL)
Effects:
Notes on Section 8 – any holder may insert the true date of issuance or
acceptance
– The payee must be named or otherwise indicated
therein with reasonable certainty. – the insertion of a wrong date does not avoid the
instrument in the hands of a subsequent holder in due
– If there is no payee, there would be no one to
course
indorse the instrument payable to order. Therefore
useless to be considered negotiable. – as to the holder in due course, the date inserted
(even if it be the wrong date) is regarded as the true date.
– Joint payees in indicated by the conjunction
“and”. To negotiate, all must indorse. 25. Subsequent Holder in Due Course not affected
by the following deficiencies:
– Being several payees is indicated by the
conjunction “or”. a. incomplete but delivered instrument (Sec. 14 NIL)
23. Instrument is payable to bearer : b. complete but undelivered (Sec. 16 NIL)
a. when it is expressed to be so payable c. complete and delivered issued without
consideration or a consideration consisting of a promise
b. when payable to the person named or bearer
which was not fulfilled (Sec 28 NIL)
c. payable to order of fictitious or non-existent
26. Holder in Due Course Affected by
person and this fact was known to drawer
Abnormality/Deficiency:
d. name of payee not name of any person
a. incomplete and undelivered instrument (Sec. 15
e. only and last indorsement is an indorsement in NIL)
blank (Sec. 9 NIL)
b. maker/drawer’s signature forged (Sec. 23 NIL)
Notes on Section 9
1. he must be duly authorized – Forms of forgery are a) fraud in factum b) duress
2. he must add words to his signature amounting to fraud c) fraudulent impersonation
indicating that he signs as an agent
3. he must disclose his principal (Sec. 20 – Only the signature forged or made without
NIL) authority is inoperative, the instrument or other
signatures which are genuine are affected
Notes on Section 20
– The instrument can be enforced by holders to
– if an agent does not disclose his principal, the whose title the forged signature is not necessary
agent is personally liable on the instrument.
– Persons who are precluded from setting up the
32. Per Procuration – operates as notice that the forgery are a) those who warrant or admit the
agent has a limited authority to sign. genuineness of the signature b) those who are estopped.
33. General rule: Infants and corporations incur no – drawee bank is not conclusively presumed to
liability by their indorsement or assignment of an know the signature of the indorser. The responsibility
instrument. (Sec. 22 NIL) falls on the bank which last guaranteed the indorsement
and not the drawee bank.
Effects:
– Where the payee’s signature is forged, payments
– no liability attached to the infant or the made by the drawee bank to collecting bank is
corporation ineffective. No debtor/creditor relationship is created.
An agency to collect is created between the person
– the instrument is still valid and the indorsee
depositing and the collecting bank. Drawee bank may
acquires title
recover from collecting bank who may in turn recover
34. General rule: a signature which is forged or made from the person depositing.
without authority is wholly inoperative.
Rules on liabilities of parties on a forged instrument
Effects: In a PN
– the drawer has no right to recover from the Notes on Section 28
collecting bank
– absence of consideration is where no
– the drawee bank can recover from the collecting consideration was intended to pass.
bank
– failure of consideration implies that
– the payee can recover from the drawer consideration was intended by that it failed to pass
– the payee can recover from the recipient of the – the defense of want of consideration is
payment, such as the collecting bank ineffective against a holder in due course
– the payee cannot collect from the drawee bank – a drawee who accepts the bill cannot allege want
of consideration against the drawer
– the collecting bank bears the loss but can recover
from the person to whom it paid
– if payable to bearer, the rules are the same as in 38. An accommodation party is one who signs the
PN. instrument as maker, drawer, acceptor, or indorser
without receiving value therefor and for the purpose of
– if the drawee has accepted the bill, the drawee lending his name to some other person.
bears the loss and his remedy is to go after the forger
Effects:
– if the drawee has not accepted the bill but has
paid it, the drawee cannot recover from the drawer or the – an accommodation party is liable to the holder
recipient of the proceeds, absence any act of negligence for value notwithstanding that such holder knew that of
on their part. the accommodation. (Sec. 28 NIL)
36. Where value has at any time been given for the – he may do this even without first proceeding
instrument, the holder is deemed a holder for value in against the debtor provided:
respect to all parties who become such prior to that time.
(Sec. 26 NIL) a. he paid by virtue of judicial demand
For payable to order – by indorsement and delivery (Sec. – the transferee acquires the right to have the
30 NIL) indorsement of the transferor
– the person indorsing is liable as indorser to such c. takes the instrument for value and in good faith
persons as to make title through his indorsement (Sec. 40
d. at time he took the instrument, no notice of
NIL)
infirmity in instrument or defect in the title of the person
Notes on Section 40 negotiating it (Sec. 52 NIL)
Personal Defenses Real Defenses 49. A instrument not in the hands of a HDC is subject
1. absence or failure to the same defenses as if it were non-negotiable.
of consideration Alteration
Exception:
2. want of delivery
of complete Want of delivery of – a holder who derives his title through a HDC and
instrument incomplete instrument
is not a party to any fraud or illegality affecting the
3. insertion of wrong instrument, has all the rights of such HDC in respect to
date where payable all parties prior. (Sec. 58 NIL)
at a fixed period
after date and issued
Rights of a holder not a HDC
undated; or at a fixed
period after sight and
acceptance is Duress amounting to – may sue in his own name
undated forgery
– may receive payment and if it is in due course,
4. filling up the the instrument is discharged
blanks contrary to
authority given or
– holds the instrument subject to the same defenses
not within Fraud in factum or in esse
reasonable time contractus as if it were non-negotiable
– the warranty is to the capacity of prior parties at – presentation for payment – production of a BOE
the time the instrument was negotiated. Subsequent to the drawee for his acceptance, or to a drawee or
incapacity does not breach the warranty. acceptor for payment. Also presentment of a PN to the
party liable for payment of the same.
– lack of knowledge of the indorser as to any fact
that would impair the validity or the value of the – consists of a) a personal demand for payment at a
instrument must be subsisting all throughout. proper place b) the bill or note must be ready to be
exhibited if required and surrendered upon payment.
– a person Negotiating by Delivery warrants same
as those of qualified indorser and extends to immediate – parties primarily liable – persons by the terms of
transferees only the instrument are absolutely required to pay the same.
E.g maker and acceptors. They can be sued directly.
56. Warranties of a general indorser:
1. the instrument is genuine and in all – if payable at the special place, and the person
respect what it purports to be liable is willing to pay there at maturity, such
2. the he has good title to it willingness and ability is equivalent to tender of
3. all prior parties had the capacity to payment.
contract
4. that the instrument at the time of his – presentment is necessary to charge persons
indorsement was valid and subsisting secondarily liable otherwise they are discharged
(Sec. 66 NIL)
– Acts needed to charge persons secondarily liable:
In addition: a) presentment for payment/acceptance b) dishonor by
non-payment/non-acceptance c) notice of dishonor to
– engages that the instrument will be accepted or secondary parties
paid or both according to its tenor on due presentment
– Acts needed to charge persons secondarily liable
– engages to pay the amount thereof if it be in other cases: a) Protest for non-payment by the drawee
dishonored and the necessary proceedings on dishonor b) protest for non-payment by the acceptor for honor
are taken
58. Proper presentment:
Notes on Section 66 1. by the holder or an authorized person
2. at a reasonable hour on a business day
– the indorser under Section 66 warrants the 3. at a proper place
solvency of a prior party 4. to the person primarily liable or if absent
to any person found at the place where
– the indorser warrants that the instrument is valid
presentment is made (sec. 72 NIL)
and subsisting regardless of whether he is ignorant of
that fact or not.
Notes on Section 72
61. General rule: Presentment for payment necessary to – an immediate right of recourse to all parties
charge persons secondarily liable otherwise they are secondarily liable accrues to the holder. (Sec. 84 NIL)
discharged:
Notes on Section 84
Exception:
– parties cease to be secondarily liable and become
– Section 79 and 80 principal debtors.
Notes on Section 79 and 80 – Liability becomes the same as that of the original
obligors.
– only the drawer or indorser are not discharged.
All other parties secondarily liable are discharged. 66. Requisites for payment in due course:
1. made at or after the maturity of the
62. Presentment for payment excused if:
instrument
2. to the holder
a. after due diligence, presentment cannot be made
3. in good faith
4. without notice of any defect in the
b. presentment is waived
holder’s title (sec. 88 NIL)
c. the drawee is a fictitious person (Sec 82 NIL) Notes on Section 88
– deemed a waiver of presentment and notice of 75. Protest only necessary for a foreign bill of
dishonor as well (Sec. 111 NIL) exchange. Protest for other negotiable instruments is
optional. (Sec. 118 NIL)
Notes on Section 111
76. Causes of Discharge of the Instrument
– Where notice is waived, presentment is not
waived a. payment by the debtor
– Where presentment is waived, notice is also b. payment by accommodated party
waived
c. intentional cancellation by holder of instrument
– Where protest is waived, notice and presentment
d. any other act discharging a simple monetary
is waived
obligation
71. Notice of Dishonor – given by the holder to the
e. debtor becomes holder of the instrument at/after
parties secondarily liable, drawer and each indorser, that
maturity in his own right ( Sec 119 NIL)
the instrument was dishonored by non-acceptance or
non-payment by the drawee/maker
d. tender of payment by prior party – if in the hands of a HDC, may be enforced
according to its original tenor
e. release of principal debtor
Notes on Section 124
f. extension of payment by the holder/postponement
of right to enforce without assent of secondary parties – there is no distinction between fraudulent and
and without reservation of right of recourse against innocent alteration
secondary parties (Sec 120 NIL)
80. Material Alteration – an alternation is said to be
78. Rights of a party secondarily liable who pays: material if it alters the effect of the instrument.
– the instrument is not discharge Under Section 125 the following changes are considered
material alterations:
– the party is remitted to his former rights as to all
prior parties 1.dates
2.the sum payable
– the party may strike out his own and all 3.time and place of payment
subsequent indorsements 4.number or relations of the parties
5.medium or currency for payment
– the party may negotiate the instrument again 6.adding a place of payment where no place
is specified
Exception: 7. any other which alters the affect of the
instrument
– an instrument cannot be renegotiated where it is
81. Instances where a BOE may be treated as a PN:
payable to order of a 3rd person and has been paid by the 1. where the drawer and the drawee are one
drawer and the same
2. where the drawee is a fictitious person
– and instrument cannot be renegotiated where is 3. where the drawee has no capacity to
was made or accepted for accommodation and it has contract (Sec. 130 NIL)
been paid by the party accommodated.
The holder has the option to treat it as a BOE or a PN
78. Renunciation by a holder discharges an
instrument when:
1. it is absolute and unconditional
2. made in favor of a person primarily liable 82. Acceptance is the signification by the drawee of his
3. made at or after maturity of the assent to the order of the drawer. It is an act by which a
instrument person on whom the BOE is drawn assents to the request
4. in writing or the instrument is delivered of the drawer to pay it. (Sec. 132 NIL)
up to the person primarily liable (Sec. 122
NIL) Acceptance may be:
Notes on Section 122 1. actual
2. constructive
– if renounced in favor of a party secondarily 3. general (Sec. 140)
liable, only he is exonerated from liability and all parties 4. qualified (Sec. 141)
subsequent to him
79. General rule: When materially altered, without the – in writing
consent of all parties liable, the instrument is avoided
except as against: – signed by the drawee
– mere retention is equivalent to acceptance – Protest – formal statement in writing made by a
notary under his seal of office at the request of the
9. When presentment for acceptance is
holder, in which it is declare that the some was presented
necessary:
for payment or acceptance (as the case may be) and such
1. if necessary to fix the maturity of the bill
was refused.
2. if it is expressly stipulated that it shall be
presented for acceptance
– it means all steps or acts accompanying the
3. if the bill is drawn payable elsewhere
dishonor of a bill or note necessary to charge an indorser
than the residence or place of business of
the drawee (Sec. 143 NIL)
– required when the instrument is a foreign bill of
Notes on Section 143
exchange.
– Presentment is the production of a BOE to the
– it must be made on the same date of dishonor, by
drawee for his acceptance
a notary/respectable citizen of the place in the presence
of 2 credible witnesses so recourse to secondary parties
– in on order case is presentment necessary to
make parties liable. 1. Acceptance for Honor (Sec. 161 NIL)–
an acceptance of a bill made by a stranger
90. Summary on presentment for acceptance of Bills
to it before maturirty, where the drawee
of Exchange: of the bill has:
1. refused to accept it
a. to make the drawee primarily liable and for the
2. and the bill has been protested for non-
accrual of secondary liability (Sec. 144)
acceptance
3. or where the bill has been protested for
b. necessary to fix maturity date, where bill expressly
better security
stipulates presentment, bill payable other than place of
Requisites for acceptance for honor:
drawee (Sec. 143)
– the bill must have been previously protested a)
c. when presentment is excused: drawee is dead,
for non-acceptance b) or for better security
hides, is fictitious, incapacitated person, after due
diligence presentment cannot be made, presentment is – the bill is not overdue at the time of the
refused on another ground although presentment is acceptance for honor
irregular (Sec. 148)
– the acceptor for honor must be a stranger to the
1. General rule: Protest is required only for bill
foreign bills
– the holder must give his consent
Notes on Acceptance for Honor 5. intentional cancellation by holder
if unintentional or under mistake or
– Purpose: to save the credit of the parties to the without authority of holder, inoperative.
instrument or some party to it as the drawer, drawee, or Burden of proof on party which alleges it
indorser or somebody else. was unintentional, etc.
1. any other act which discharges a simple
– Acceptor for honor is liable to the holder and to contract
all the parties to the bill subsequent to the party for 2. principal debtor becomes holder of
whose honor he has accepted (Sec. 164) instrument at or after maturity in his own
right
2. How acceptance for honor is made: 3. renunciation of holder:
1. in writing and indicated that it is an holder may expressly renounce his rights
acceptance for honor vs. any party to the instrument, before or
2. signed by the person making the after its maturity
acceptance (Sec. 162 NIL) absolute and unconditional renunciation
of his rights vs. principal debtor made at
or after maturity discharges the
instrument
3. Payment for Honor – payment made renunciation does not affect rights of
through a notarial act of honor of a party HDC w/o notice.
liable/stranger to the bill after bill has Renunciation must be in writing unless
been dishonored by non-payment by the instrument delivered up to person
acceptor and protested for non-payment primarily liable thereon
by the holder 1. material alteration (sec. 124: material
alteration w/o assent of all parties liable
Requisites:
avoids instrument except as against party
to alteration and subsequent indorsers)
a. protest for non-payment
1. nature of instrument General rule: to drawer and to each indorser, and any
2. usage of trade or business with respect to drawer or indorser to whom such notice is not given is
instrument discharged
3. facts of each case
Form, Contents, Time Sec. 95, 96, 102, 103, 104, 105,
How and When Made Sec. 145, 146, 147 106, 108, 113
Parties:
1. maker
Difference between Negotiable Instruments from 2. payee
Non-Negotiable Instruments: 6. 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 – may be drawn against
pay on demand or at a fixed or determinable future time any person, not – always drawn
a sum certain in money to order or to bearer. (Sec. 126 necessarily a bank against a bank
NIL) – may be payable on
demand or at a fixed or -always payable on
Parties: determinable future time demand
CHECK BOE
– may be payable on
– always payable on demand or at a fixed or
demand determinable future time
PN CHECK