Professional Documents
Culture Documents
NEGOTIABLE INSTRUMENT
•Written contract for the payment of money, by its form intended as 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
PROMISSORY NOTE
•unconditional promise in writing made by one person to another signed by the maker
•engaging to pay on demand, or at a fixed or determinable future time a sum certain in
money to order or to bearer
•where a note is drawn to the maker’s own order, it is not complete until indorsed by him
Parties:
1. Maker—one who makes a promise and signs the instrument
2. Payee—party to whom the promise is made or the instrument is payable
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’s addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to bearer
Parties:
1. Drawer—one who gives the order to pay money to a 3rd party
2. Drawee—person to whom the bill is addressed and who is ordered to pay
3. Payee—party in whose favor the bill is drawn or is payable
Note: It is the ENTRUSTEE NOT the ENTRUSTER is the real owner of the
trust receipt.
Inland Bill of Exchange – is a bill which is or on its face purports to be BOTH drawn
and payable within the Philippine Islands.
Foreign Bill of Exchange- is a bill which is, or on its face purports to be, drawn or
payable outside the Philippine Islands.
Referee in case of need – is the person whose name was inserted by the drawer of the
bill and any indorser to whom the holder may resort in case of need – that is in case the
bill is dishonored by non-acceptance or by non-payment.
Note: It is the option of the holder to resort to the referee in case of need or not as he
may see fit.
BEARER
Person in possession of a bill/note payable to bearer
HOLDER
Payee or indorsee of a bill or note who is in possession of it, or the bearer thereof.
NEGOTIABILITY
REQUISITES (SUDOC)
1. in writing and signed by maker or drawer
no person liable on the instrument whose signature does not appear thereon
Exceptions:
* A person signing in a trade or assumed name
* Principal is liable if a duly authorized agent signs in his own behalf
(Agent must be duly authorized; He adds words indicating that he
signs as an agent; He must disclosed his principal)
(Signature by procuration-operates as notice that the agent has
limited authority to sign and principal is bound if agent acted
beyond the limits of his authority)
* In case of forgery, the forger is liable even if his signature does not
appear on the instrument
* Where the acceptor makes his acceptance of a bill on a separate paper
* Where a person makes a written promise to accept a bill before it is
drawn
one who signs in a trade or assumed name liable to the same extent as if he had
signed in his own name
signature of any party may be made by a duly authorized agent, no particular form of
appt. necessary
3. payable on demand,
when expressed to be payable on demand, or at sight, or on presentation;
when no time for payment expressed, or
where an instrument is issued, accepted or indorsed when overdue, it is, as regards
the person so issuing, accepting, or indorsing it, payable on demand
4. payable to order
where it is drawn payable to the order of a specified person or to him or his order.
May be drawn payable to order of ---
a. a payee not the maker/drawer/drawee, or
b. drawer or maker, or
c. drawee, or
d. two or more payees jointly, or
e. holder of an office for time being
when the instrument is payable to order the payee must be named or otherwise
indicated therein with reasonable certainty
or bearer,
when expressed to be so payable
when payable to person named therein or bearer
when payable to order or fictitious/non-existent person, and such fact known to the
person making it so payable, or
when name of payee doesn’t purport to be the name of any person, or
when the only/last indorsement is in blank
Negotiable Instruments Law 5
(Sec.5) Gen. Rule: order/promise to do any act in addition to the payment of money
renders instrument non-negotiable.
Exception: negotiability not affected by provisions w/c
1. authorize sale of collateral security if instrument not paid at maturity
2. authorize confession of judgment…
3. waives benefit of any law intended for advantage/protection of obligor
4. give holder election to require something to be done in lieu of money
DATE IN AN INSTRUMENT
Presumption as to date: Said date is the date when it was made by the maker, drawn
by the drawer, accepted by the drawee or indorsed by the payee. (Sec. 11)
Effect of ante-dating or Post-dating: Instrument is not invalid, provided not done for an
illegal or fraudulent purpose. (Sec. 12)
* Ante-dating: Giving an instrument a date that is earlier than the date it was issued
* Post-dating: Giving an instrument a date that is later than the date it was issued
Issuance-the first delivery of the instrument complete in form to a person who takes it as
a holder.
Steps:
1. Mechanical Act of writing, complying with requirements of Sec. 1
2. Delivery with intention to give effect thereto.
• NI incomplete and revocable until delivery for the purpose of giving effect thereto. As
between:
a. immediate parties
b. a remote party other than holder in due course
delivery, to be effectual, must be made by or under the authority of the party
making/drawing/accepting/indorsing
• in such case delivery may be shown to have been conditional, or for a special purpose
only, and not for the purpose of transferring the property in the instrument
PRESUMPTION OF DELIVERY
Where the instrument is no longer in the possession of a party whose signature appears
thereon, a valid and intentional delivery by him is presumed until the contrary is proved
(*if in the hands of a HDC, presumption conclusive)
NEGOTIATION
• When an instrument is transferred from one person to another as to constitute the
transferee the holder thereof.
• If payable to BEARER, negotiated by delivery; if payable to ORDER, negotiated by
indorsement of holder + delivery
INDORSEMENT
It is the writing of the name of the indorser on the instrument with the intent either to
transfer the title to the same, or to strengthen the security of the holder by assuming a
contingent liability for its future payment.
The indorsement must be written on the instrument itself or upon a paper attached
thereto. The signature of the indorser is sufficient. (Sec. 31)
Negotiable Instruments Law 7
KINDS OF INDORSEMENT
A. As to manner of future method of negotiation
1. Special – specifies the person to whom/to whose order the instrument is to be
payable; indorsement of such indorsee is necessary to further negotiation.
2. Blank – specifies no indorsee, instrument so indorsed is payable to bearer, and may
be negotiated by delivery
• The holder may convert a blank indorsement into a special indorsement by writing
over the signature of the indorser in blank any contract consistent with the character of
the indorsement (Sec. 35)
2. non-restrictive
2. unconditional
REQUISITIES
1. complete and regular upon its face
• sec. 124 (effect of material alteration—not defense against HDC)
Material Alteration: any change in the instrument which affects or changes the
liability of the parties.
Spoliation- A material alteration made by a stranger
• sec. 125 what constitute material alterations:
a. Date
b. Sum Payable, either for principal or interest
c. Time or place of payment
d. Number or relations of the parties
e. Medium of currency or which adds a place of payment
2. holder became such before it was overdue, without notice of any previous
dishonor
• sec. 53 (instrument payable on demand negotiated after unreasonable length of
time: holder is not HDC)
• sec. 12 (effect antedating/postdating)
Negotiable Instruments Law 9
Notice
Sec. 54-notice before full amt. paid: deemed HDC only to the extent of the
amount paid by him
Sec. 56-notice of defect: Actual knowledge necessary
KINDS OF DEFENSES
1. real defense – attaches to instrument; on the principle that the right sought to be
enforced never existed/there was no contract at all. Available to all parties both
immediate and remote including HDC.
2. personal defense – growing out of agreement; renders it inequitable to be enforced
against defendant. Available to prior parties among themselves but w/c are not good
against a HDC.
Negotiable Instruments Law 10
DEFENSES
1. INCAPACITY: REAL: indorsement/assignment by corporation/infant passes
property but corp/infant no liability
2. FORGERY: Real:
Definition: the counterfeit-making or fraudulent alteration of any writing, and may consist
in the signing of another’s name or the alteration of an instrument in the name, amount,
description of the person and the like, with intent thereby to defraud.
Precluded:
a. parties who make certain warranties, like a general indorser or acceptor
b. estopped/negligent parties
3. MATERIAL ALTERATION
• Where NI materially altered w/o assent of all parties liable thereon, avoided, except as
against
1. party who has himself made, authorized or assented to alteration
2. and subsequent indorsers
• But when an instrument has been materially altered and is in the hands of a HDC not a
party to the alteration, HDC may enforce payment thereof according to orig. tenor
*material alteration a personal defense when used to deny liability according to org.
tenor of instrument, but real defense when relied on to deny liability according to altered
terms.
4. FRAUD
a. fraud in execution: real defense (didn’t know it was a Negotiable Instrument)
b. fraud in inducement: personal defense (knows it’s Negotiable Instrument but
deceived as to value/terms)
7. INCOMPLETE, DELIVERED
• Personal defense (sec. 14)
• 2 Kinds of Writings:
1. Where instrument is wanting in any material particular: person in possession has
prima facie authority to complete it by filing up blanks therein
2. Signature on blank paper delivered by person making the signature in order that the
paper may be converted into a NI: prima facie authority to fill up as such for any amount
• In order that any such instrument, when completed, may be enforced against any
person who became a party thereto prior to its completion:
1. must be filled up strictly in accordance w/ authority given
2. within a reasonable time
• but if any such instrument after completion is negotiated to HDC, it's valid for all
purposes in his hands, he may enforce it as if it had been filled up properly
LIABILITIES OF PARTIES
A. PRIMARY PARTIES
• Person primarily liable: person who by the terms of the instrument is absolutely
required to pay the same.
1. Liability of Maker
a. Promises to pay it according to its tenor
b. admits existence of payee and his then capacity to indorse
3. Liability of Acceptor
• Promises to pay instrument according to its tenor
• Admits the following:
a. existence of drawer
b. genuineness of his signature
c. his capacity and authority to draw the instrument
d. existence of payee and his then capacity to indorse
B. SECONDARY PARTIES
1. Liability of Drawer
a. Admits existence of payee and his then capacity to endorse
b. Engages that on due presentment instrument will be accepted, or paid, or both,
according to its tenor and that
c. If it be dishonored, and the necessary proceedings on dishonor be duly taken, he
will pay the amount thereof to the holder or to an subsequent indorser who may be
compelled to pay it
• drawer may insert in the instrument an express stipulation negativing / limiting his
own liability to holder
2. Liability of Indorsers:
1. Instrument payable to order of 3rd person: liable to payee and to all subsequent
parties
2. Instrument payable to the order of maker/drawer, or payable to bearer: liable to all
parties subsequent to maker/drawer
3. Signs for accommodation of payee, liable to all parties subsequent to payee
Liability of an Agent
• Signature of any party may be made by duly authorized agent, establish as in ordinary
agency
• Where instrument contains or a person adds to his signature words indicating that he
signs for or on behalf of a principal, he is not liable on the instrument if he was duly
authorized, but the mere addition of words describing him as an agent without disclosing
his principal, does not exempt from personal liability.
• Signature per procuration operates as notice that the agent has but a limited authority
to sign, and the principal is bound only in case the agent in so signing acted within the
actual limits of his authority
• Where a broker or agent negotiates an instrument without indorsement, he incurs all
liabilities in Sec. 65, unless he discloses name of principal and fact that he’s only acting
as agent
Negotiable Instruments Law 14
PRESENTMENT
A. In Promissory Notes
Purpose:
Not necessary to make the maker liable, but is necessary to make the secondary parties
liable.
Requisites:
For a valid presentment for payment of a promissory note, the following are necessary:
a. made within a reasonable time after issue;
b. by the holder or his agent;
c. to the party liable under it;
d. at a reasonable hour on a business day; and
e. at the proper place.
***The holder must exhibit the instrument to the debtor and should deliver it to said
debtor if the latter pays.
B. In Bills of Exchange
Acceptance is the signification by the drawee of his assent to the order of the drawer.
How made:
- The acceptance may be on the bill, on a separate paper (allonge), and may even be in
writing before the bill is drawn.
- The drawee, if he wants to dishonor, must do so expressly within twenty-four
(24) hours from presentment to him. If he refuses to act, tears the bill, or refuses
to return the bill within said period of twenty-four hours, he is deemed to have
accepted the bill – implied acceptance.
- A sight draft (usually accompanying a letter of credit in importations) is payable
on demand and needs no acceptance by the drawee.
Classes of Acceptance
1. General and Qualified
General Acceptance – a general acceptance assents without qualification to the order of
the drawer.
Qualified Acceptance – it varies the effect of the bill as drawn. The acceptance is
qualified if it is:
a. Conditional;
b. Partial;
c. Local;
d. Qualified as to time;
e. Accepted by some or more of the drawees but not by all.
Negotiable Instruments Law 15
- The drawee must sign because without his signature he would not be bound – See
Section 18, NIL.
N.B. Acceptance is NOT required for CHECKS for the same are payable on demand.
EFFECT OF ACCEPTANCE:
Upon acceptance, the drawee becomes liable on the bill. The bill becomes in effect a
note, the acceptor standing in the place of the maker, and the drawer, in the place of the
first indorser.
But should the drawee refuse to accept, the payee or the holder has no recourse
against him but only against the drawer and indorsers, if any.
Is payment equivalent to acceptance? NO, - the payment of a check does not include
or imply its acceptance in the sense that this word is used in Section 62, NIL.
Section 136.
- The drawee is allowed twenty-four hours after presentment in which to
decide whether or not he will accept the bill; the acceptance if given,
dates as of the day of presentation.
- NOTE: The time allowed begins from the time of delivery and not after
demand for a return of the bill and the time for returning the bill to the
holder does not begin to run from the demand for its return but from the
date of its delivery.
- If the holder should demand its return before twenty-four hours, the
drawee would be required to comply on pain of being held as an
acceptor; but return within twenty-four hours unaccepted would not be a
dishonor.
- In all the foregoing, the drawee will be deemed to have accepted the bill
even if there is NO ACTUAL WRITTEN ACCEPTANCE by him.
GENERAL RULE:
Presentment for acceptance is NOT NECESSARY to render any party to the bill
liable.
EXCEPTIONS:
1. Where the bill is payable after sight, or in any other case, where presentment for
acceptance is necessary in order to fix the maturity of the instrument; or
2. Where the bill is expressly stipulates that it shall be presented for acceptance; or
3. Where the bill is drawn payable elsewhere than at the residence or place of
business of the drawee.
Requisites:
1. It must be presented at a reasonable hour;
2. It must be presented on a business day; and
3. It must be presented before the bill is overdue.
2. Where a bill is addressed to two or more drawees who are not partners;
presentment must be made to them all unless one has authority to accept
or refuse acceptance for all, in which case presentment may be made to
him only;
Note: The only difference between Section 72 and 85 is that under Section 146
there is no distinction between the instruments payable at a fixed or determinable
future time and instruments payable on demand.
Where the holder of a bill drawn payable elsewhere other than the place of
business or the residence of the drawee – has no time, with the exercise of
reasonable diligence to present the bill for acceptance before presenting it for
payment on that day it falls due – THE DELAY CAUSED BY PRESENTING THE
BILL FOR ACCEPTANCE BEFORE PRESENTING IT FOR PAYMENT IS
EXCUSED AND DOES NOT DISCHARGE THE DRAWERS AND INDORSERS.
Purpose: The purpose of presentment for payment of an accepted bill is to collect from
the acceptor; and if refused, to collect from the secondary parties.
Requisites:
1. The accepted bill must be presented for payment within a reasonable time from the
last negotiation by the holder or his agent
2. to the acceptor or his agent
3. at a reasonable hour on a business day
4. at the proper place as defined.
The bill must be exhibited to the acceptor and surrendered to him when he pays.
DISHONOR
1 .In PROMISSORY NOTE
- In a promissory note, dishonor by non-payment takes place when it is duly presented
for payment and payment is refused or cannot be obtained; or if presentment is excused,
the instrument is overdue and unpaid.
Negotiable Instruments Law 19
2. In BILLS OF EXCHANGE
- In bills of exchange, where the bill is presented for acceptance and is returned
dishonored, or within twenty four hours from presentment, is not returned accepted or
unaccepted, or when presentment for acceptance is excused and the bill is not accepted
there is a dishonor by non-acceptance.
-There is a dishonor by non-payment if the bill, after it has been accepted is not paid
when presented for payment, or presentment being excused, is not paid on the date of
maturity.
NOTICE OF DISHONOR
--bringing either verbally or by writing, to the knowledge of the drawer or indorser of
an instrument, the fact that a specified negotiable instrument, upon proper proceedings
taken, has not been accepted or has not been paid and that the party notified is
expected to pay it.
REQUISITES:
1. Given by a holder or his agent(SPA necessary), or by any party who may be
compelled by the holder to pay. (Sec. 90)
2. Given to a secondarily liable party or his agentSec. 97)
-Notice to one partner is notice to all even though there has been dissolution
-Notice to persons jointly liable who are not partners must be given to each of them
unless one of them has authority to receive such notice for others
-Notice to bankrupt may be given to his trustee or assignee
3. Given as soon as the instrument is dishonored and within the periods provided by law.
(Sec. 102)
4. Given at the proper place (Secs. 103 & 104)
TO WHOM GIVEN
a. Non-acceptance(bill)—to persons secondarily liable, namely, the drawer and
indorsers as the case may be
b. Non-payment (bill and note)—indorsers
BY whom Given
a. The holder
b. Another, on behalf of the holder
c. Any party to the instrument who may be compelled to pay it to the holder, and who
would have a right of reimbursement from the party to whom notice is given
Negotiable Instruments Law 20
By Whom Made:
a. By maker or acceptor
b. Surety, if a primary party or
c. By an agent on behalf of the principal
PROTEST
“It is a formal statement in writing made by a notary under his seal of office at the
request of the holder of a bill or note, in which it is declared that the same was on a
certain day presented for payment (or acceptance as the case may be), and such
payment (or acceptance) was refused, whereupon the notary protests against all parties
to such instrument and declares that they will be held responsible for all loss or damage
arising from its dishonor.” It means all the steps or acts accompanying the dishonor of a
bill or note necessary to charge an indorser,”
Negotiable Instruments Law 22
Necessity of Protest: Protest is required only for FOREIGN BILLS, but not for inland
bills or notes. HOWEVER, they may also be protested if desired. OMISSION OF
PROTEST, where protest is required, will DISCHARGE the DRAWER and the
INDORSERS.
* When a bill has been DULY NOTED – the protest may be subsequently extended
as of the date of the noting.
“DULY NOTED” – means that a notary public jots down on a note on the bill or an
paper attached thereto, or in his registry book, consisting of his initials or signature
and those matters required to be stated in Section 153.
EXCEPTION: - where that when the bill drawn payable at the place of business or
residence of some person other than the drawee has been dishonored by non-
Negotiable Instruments Law 23
NOTE: Protest is dispensed with by any circumstances which would dispense with
notice of dishonor.
NOTE:
It is necessary that the acceptor for honor MUST APPEAR before a notary
public and declare that he accepts the protested bill in honor of the drawer or
indorser, as the case may be, and that he will pay it at the appointed time.
Negotiable Instruments Law 24
MATURITY OF A BILL PAYABLE AFTER SIGHT – which has been accepted for
honor: Maturity is calculated from the date of NOTING of the NON-ACCEPTANCE and
NOT from the date of the acceptance for honor.
Note: Delay in making presentment is excused when the delay was caused by events
which are BEYOND HIS CONTROL and NOT IMPUTABLE TO DEFAULT,
MISCONDUCT or NEGLIGENCE.
BILLS IN SET
Bills in set – one composed of various parts, each part being numbered and containing
a reference to the other parts, all of which parts constitute but one bill.
Liability of holder who indorses two or more parts of a set to different persons:
- He is liable on EVERY SUC H PART; and
- EVERY INDORSER SUBSEQUENT to him is LIABLE on the part he has himself
indorsed – AS IF SUCH PARTS WERE SEPARATE BILLS.
Negotiable Instruments Law 26
NOTE:
Where a note is drawn to the maker’s own order, it is NOT complete until
indorsed by him.
Classes of Bonds:
1. Mortgage bonds 5. Debentures
2. Equipment Bonds 6. Income bonds
3. Collateral trust bonds 7. Convertible bonds
4. Guaranteed bonds 8. Redeemable Bonds
Negotiable Instruments Law 27
9. Registered Bonds
10. Coupon Bonds – those which are attached a sheet of dated, numbered and
similarly printed coupons which the bondholder may cut off when due or
thereafter. Such coupons may be served and deposited in a bank, negotiated
before the maturity of the interest they represent, and transferred just like any
commercial paper. They are negotiable if it the requisites in Section 1, NIL are
complied with.
NOTE:
- Acceptance is NOT required for checks for the same are PAYABLE ON
DEMAND.
Check is not Legal Tender, but produces the effect of payment when:
a. The check was encashed. (Encashment is not limited to physical
encashment over the counter of the drawee bank. A check can be considered
encashed through the clearing house, or when the check had been credited to the
account of the creditor)
b. When through the fault of the creditor the check is impaired
c. In case of redemption
Kinds of checks:
1. Ordinary Check—The most common check issued by a bank to a client who
opens a checking account
2. Cashier’s check – it is a check drawn by the cashier of a bank in the name of the
bank against the bank itself payable to a third person or order.
3. Manager’s Check – a drawn by the manager of a bank in the name of the bank
against the bank itself payable to a third person. It is similar to the cashier’s check
as to effect and use.
4. Gift Check-Similar to a cashier’s or manager’s check and may be signed either by
the cashier or manager. It is indicated as a “Gift Check”, so as to be used as a gift
for birthdays, weddings, graduations and similar occasions.
5. Memorandum Checks – a check on which is written the word “memorandum”,
“memo”, and “mem”, signifying that the drawer engages to pay the bona fide holder
absolutely and not upon a condition to pay upon presentment and non-payment.
- If it bounces – the drawer can be charged for violation of BP 22.
Negotiable Instruments Law 28
6. Certified Checks – a check on which the drawee bank has written an agreement
whereby it undertakes to pay the check at any future time when presented for
payment, such as, by stamping on the check the word “certified” or “Good For
Payment” and underneath it is written the signature of the cashier.
7. Traveler’s Check- one issued by a bank to a holder, usually a traveller, who must
put his signature upon purchase of the check and countersign with the same
signature on the space indicated on its face or back when using the check as a
mode of payment in his travel. When these checks are lost or stolen, the purchaser
can notify the agent of the seller anywhere in the world and prevent the use of the
lost or stolen traveller’s check.
8. Crossed check –One which has two parallel lines, usually on the upper left hand
corner.
How is crossing of check done:
-it is usually done by drawing two parallel lines transversally on the face of
the check. A check may be crossed (1) specially or (2) generally.
Crossing specially – a check is crossed specially when the name of a particular banker
or a company is written between the parallel lines drawn transversally on the face of the
check. Here, the drawer is instructing the drawee bank not to honor the check unless the
payee is identified by another bank
Crossing generally – a check is crossed generally when only the words “and company”
are written between the parallel lines, or when nothing is written at all between the
parallel lines. Here, the drawer is instructing the drawee bank not to honor the check
unless the payee is identified by the particular bank named in between the two parallel
lines.
NOTES:
1. Under crossed check – the payee has the duty to ascertain the holder’s title to
checks.
2. Drawee should not encash a crossed check but merely the same for deposit.
3. Where other than payee of crossed checks presented it for payment, there is no
proper presentment and drawer is not liable thereon.
must be presented within six (6) months – otherwise it will become stale.
- a check under BP 22 must be presented for payment to the bank within 90 days
from date so that the holder will enjoy the benefit of the prima facie presumption that
the maker, drawer, or issuer knows at the time of issue that he does not have
sufficient funds in or credit with the drawee bank for payment of such check.
Effect if the check was allowed to become stale? (Stale when not encashed w/in 6
months)
- the drawer is discharged but only to the extent of the loss caused by the delay. Hence,
if no loss or injury is shown, the drawer is not discharged.
Form of certification:
- No particular form is required – BUT IT MUST BE IN WRITING.
- The letters “O.K.”, with the initials of the cashier of a bank do not constitute a
sufficient certification under modern banking practice.
Negotiable Instruments Law 30
Effect of Certification:
1. It is equivalent to acceptance and is the operative act that makes the drawee
bank liable;
2. It operates as an assignment of the funds of the drawer in the hands of the
drawee bank; and
3. If obtained by the holder, it discharges persons secondarily liable thereon.
Stop Payment Order—an instruction by the drawer addressed to the drawee bank
directing the latter not to honor or pay the check. A drawer may stop payment of the
check before the same is accepted, certified or paid by the drawee bank.