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I. PRELIMINARY CONSIDERATIONS
Classes of Negotiable Instruments:
Negotiable Instrument - a written contract for the payment 1. Promissory Note (PN) - unconditional promise in writing
of money which complies with the requirements of Sec. 1 of by one person to another signed by the maker engaging
the NIL, which by its form and on its face, is intended as a to pay on demand or at a fixed or determinable future
substitute for money and passes from hand to hand as money, time, a sum certain in money to order or to bearer.
so as to give the holder in due course (HDC) the right to hold 2. Bill of Exchange (BE) -an unconditional order in writing
the instrument free from defenses available to prior parties. addressed by one person to another, signed by the
(Reviewer on Commercial Law, Sundiang and Aquino) person giving it, requiring the person to whom it is
addressed to pay on demand or at a fixed or
Functions of Negotiable Instrument: determinable future time a sum certain in money to
1. Substitute for money order or to bearer.
2. Medium of exchange
3. Tool used in commercial transaction. Bills in Set: one composed of several parts, each part
numbered and containing a reference to the other parts, the
Two Distinctive Features of NI: whole of the parts constituting but one bill.
1. Negotiability - it is that attribute or property whereby a • Rights of holders where parts are negotiated
bill or note or check may pass from hand to hand similar separately:
to money, so as to give the holder in due course the right 1. If both are HDC, the holder whose title first
to hold the instrument and to collect the sum payable accrues is considered the true owner of the
for himself free from defenses. bill.
¾ Requisites of Negotiability: 2. But the person who accepts or pays in due
a. It must be in writing and signed by the maker or course shall not be prejudiced.
drawer; • Obligations of holder who indorses 2 or more parts
b. Must contain an unconditional promise or order to of the Bill in Set:
pay a sum certain in money; 1. The person shall be liable on every such part.
c. Must be payable on demand, or at a fixed or 2. Every indorser subsequent to him is liable on
determinable future time; the part he has himself indorsed, as if such
d. Must be payable to order or to bearer; and parts were separate bills.
e. Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with Distinctions between a Negotiable Instrument and a
reasonable certainty. Negotiable Document of Title
2. Accumulation of Secondary Contracts - secondary
contracts are picked up and carried along with NEGOTIABLE INSTRUMENT NEGOTIABLE DOCUMENT
Negotiable Instruments as they are negotiated from one OF TITLE
person to another; or in the course of negotiation of The subject is money The subject is goods
negotiable instruments, a series of juridical ties between
the parties thereto arise either by law or by privity. The
Has all the requisites of Does not have these
indorsers become secondarily liable to the holder.
Sec 1 of NIL requisites
Distinctions: Negotiable and Non-Negotiable Instruments A holder of NI may run Intermediate parties are
after the secondary parties not secondarily liable if the
NEGOTIABLE NON-NEGOTIABLE for payment if dishonored document is dishonored
Must contain all requisites Does not contain all by the party primarily
of sec.1 requisites of sec.1 liable
Transferable by Transferable by A holder, if HDC, may A holder can never acquire
negotiation and assignment only acquire rights over the rights to the document
assignment instrument better than his better than his predecessors
HDC can have rights A transferee acquires no predecessors
better than his transferor better right than his
transferor PROMISSORY BILL OF EXCHANGE
Prior parties warrant Prior parties do not NOTE
payment (secondary warrant payment but Unconditional promise Unconditional order
liability) merely the legality of Involves 2 parties Involves 3 parties
title Maker is primarily liable Drawer is only secondarily
Governed by NIL NIL only by analogy liable
Transferee is a holder in Transferee is assignee Only one presentment: for Two presentments: for
due course only payment acceptance and for
Defenses generally not All defenses available payment
available against last transferee
Instances when BILL may be treated as a NOTE: e. Where the instrument is addressed to a drawee, he must
1. Drawer and drawee are the same person. be named or otherwise indicated therein with reasonable
1. Drawee is a fictitious person. certainty.
2. Drawee has no capacity to contract.
3. When instrument is so ambiguous, the holder may treat 1. Must be in writing, signed by the maker or
it either as a BILL or a NOTE. drawer; - Otherwise it cannot be a substitute for
money.
Other Forms of Negotiable Instruments
1. Certificate of deposit issued by banks, payable to the 2. Must contain an unconditional promise or order to pay a
depositor or his order, or to bearer sum certain in money;
2. Trade acceptance
3. Bonds, which are in the nature of promissory notes Certainty of sum payable.
4. Drafts, which are bills of exchange drawn by one bank The sum payable is a sum certain although it is to be paid:
upon another a. With interest; or
All of these must comply with Sec. 1, NIL b. By stated installments; or
Note: Letters of credit are not negotiable. c. By stated installments, with a provision that, upon
default in payment of any installment or of interest,
Legal Tender the whole shall become due; or
That kind of money that the law compels a creditor to accept d. With exchange, whether at a fixed rate or at the
in payment of his debt when tendered by the debtor in the current rate; or
right amount. e. With costs of collection or an attorney's fee, in case
payment shall not be made at maturity. (sec. 2)
Note: A negotiable instrument although intended to be a Acceleration clause - renders whole debt due and
substitute for money, is generally not a legal tender. demandable upon failure of obligor to comply with certain
conditions.
Incidents in “Life” of Negotiable Instrument
1. Issue When promise is unconditional
2. Delivery An unqualified order or promise to pay is unconditional
3. Negotiation though coupled with:
4. Presentment for acceptance, in certain kinds of bills of a. An indication of a particular fund out of which
exchange reimbursement is to be made or a particular
5. Acceptance account to be debited with the amount; or
6. Dishonor by non-acceptance b. A statement of the transaction which gives rise to
7. Presentment for payment the instrument.
8. Dishonor by non-payment ¾ An order or promise to pay out of a particular fund is not
9. Notice of dishonor unconditional.
10. Discharge FUND FOR PARTICULAR FUND FOR
REIMBURSEMENT PAYMENT
Issue - the first delivery of the instrument, complete in form, Drawee pays the payee There is only one act: the
to a person who takes it as a holder. from his own funds; drawee pays directly from
afterwards, the drawee the particular fund
Delivery - transfer of possession, actual or constructive, from pays himself from the indicated. Payment is
one person to another particular fund indicated. subject to the condition
Holder – refers to the: that the fund is sufficient.
a. The payee or indorsee of a bill or note who is in Particular fund indicated Particular fund indicated is
possession of it, or is NOT the direct source the direct source of
b. The bearer thereof (sec.191) of payment but only the payment.
Bearer - the person in possession of a bill or note which is source of reimbursement.
payable to bearer. Indication in the Indication in the
Person - includes a body of persons, whether incorporated or instrument does not instrument makes the
not. affect the unconditional promise or order
nature of the promise or conditional.
order.
II. FORM AND INTERPRETATION OF INSTRUMENTS
Requisites of Negotiability (Sec. 1, NIL 3. Payable on demand or at a fixed determinable future
time;
a. It must be in writing and signed by the maker or drawer;
b. Must contain an unconditional promise or order to pay a Certainty of time of payment
sum certain in money; An instrument is payable at a determinable future time which
c. Must be payable on demand, or at a fixed or is expressed to be payable:
determinable future time; a. At a fixed period after date or sight; or
d. Must be payable to order or to bearer; and b. On or before a fixed or determinable future time
specified therein; or
c. On or at a fixed period after the occurrence of a purpose of negotiable instrument as a tool in
specified event which is certain to happen, though commercial dealings will be greatly hampered.
the time of happening be uncertain. (Reviewer on Commercial Law, Sundiang and
Aquino)
¾ An instrument payable upon a contingency is not ¾ A bill may be addressed to more than one drawee
negotiable, and the happening of the event does not jointly, whether they are partners or not; but not to
cure the defect. (sec. 4) two or more drawers in the alternative or in
¾ A promise to pay “when able,” “as soon as I can”, etc., succession. (Sec. 128)
without specification of an absolute date is not
negotiable. However, there is a difference of opinion as Test of Negotiability: presence of requirements in Section 1
to whether it is a conditional promise or an absolute of NIL.
promise to pay at un unreasonable time:
a. Under the first view, negotiability is destroyed Factors that Determine Negotiability:
both by the condition and by want of a fixed 1. The whole instrument itself
time for payment; 2. Only what appears on the face of the instrument
b. Under the second view, by the general principle 3. Provisions of the NIL, Sec.1
that a promise to pay within a reasonable time
is not so certain as to render BAR QUESTION (Q): Which of the following
an instrument negotiable. stipulations or features of a promissory notes (PN)
Aftersight Draft - payable only after the expiration of the affect or do not affect its negotiability, assuming
stipulated period from acceptance (legal sight). that the PN is otherwise negotiable? Indicate your
answer by writing the paragraph number of the
When payable on demand: stipulation or feature of the PN as shown below and
a. When it is so expressed to be payable on demand, or your corresponding answer, either ‘Affected” or
at sight, or on presentation; or “Not affected.” Explain.
b. In which no time for payment is expressed. (a) The date of the PN is “February 30, 2002.”
Note: Where an instrument is issued, accepted, or indorsed (b) The PN bears interest payable on the last day
when overdue, it is, as regards the person so issuing, of each calendar quarter at a rate equal to 5%
accepting, or indorsing it, payable on demand. above the then prevailing 91-day Tbill rate as
published at the beginning of such calendar
4. Payable to order or to bearer quarter.
(c) The PN gives the maker the option to make
When payable to order payment either in money or in quantity of
The instrument is drawn payable: palay of equivalent value.
a. To the order of a specified person or (d) The PN gives the holder the option either to
b. To him or his order. require payment in money or to require the
¾ The payee must be named or otherwise indicated therein maker to serve as the bodyguard or escort of
with reasonable certainty. the holder for 0 days.
¾ It may be drawn payable to the order of:
a. A payee who is not maker, drawer, or drawee; or SUGGESTED ANSWER (SA):
b. The drawer or maker; or (a) NOT AFFECTED. The date is not one of the
c. The drawee; or requirements for negotiability.
d. Two or more payees jointly; or (b) NOT AFFECTED. The interest is to be computed
e. One or some of several payees; or at a particular time and is determinable. It
f. The holder of an office for the time being. does not make the sum uncertain or the
promise conditional.
When payable to bearer. (c) AFFECTED. Giving the maker an option renders
a. When it is expressed to be so payable; or the promise conditional.
b. When it is payable to a person named therein or (d) NOT AFFECTED. Giving the holder an option
bearer; or does not make the promise conditional.
c. When it is payable to the order of a fictitious or
non-existing person, and such fact was known to the Additional provisions not affecting negotiability.
person making it so payable; or General Rule: the instrument is non -negotiable if it contains
d. When the name of the payee does not purport to be a promise or order to do any act in addition to the payment
the name of any person; or of money.
e. When the only or last indorsement is an indorsement Exceptions:
in blank. (Sec. 9) a. authorizes the sale of collateral securities in case
the instrument be not paid at maturity; or
5. Identification of the drawee b. authorizes a confession of judgment if the
¾ Where the instrument is addressed to a drawee instrument be not paid at maturity; or
(meaning in a bill of exchange), he must be named c. waives the benefit of any law intended for the
or otherwise indicated with reasonable certainty. advantage or protection of the obligor; or
The holder must know to whom he should present it d. gives the holder an election to require something to
for acceptance and/or payment; otherwise, the be done in lieu of payment of money.
g. Where an instrument containing the word "I promise to
Confession of judgment – a written statement signed by pay" is signed by two or more persons, they are deemed
the defendant, setting forth the basis of liability and to be jointly and severally liable thereon. (sec. 17)
authorizing the entry of judgment thereon.
Kinds of confession of judgment Consideration
a. cognivit actiomen – literally means “he has ¾ Presumption of consideration. - every negotiable
confessed action”. It is a written confession of instrument is deemed prima facie to have been issued
action by the defendant acknowledging is for a valuable consideration; and every person whose
indebtedness to the plaintiff after the action has signature appears thereon to have become a party
been filed. It is given after the action is brought to thereto for value.
save expenses. ¾ Value - any consideration sufficient to support a simple
b. relicta verificationem – literally means “his contract. An antecedent or pre-existing debt constitutes
pleadings being abandoned.” It is confession of value; and is deemed such whether the instrument is
judgment by withdrawal of the defense. payable on demand or at a future time.
¾ Holder for value – one who has given a valuable
Note: However, warrants of attorney to confess judgment, consideration for the instrument issued or negotiated to
are not authorized nor contemplated by our law. They are him.
void as against public policy because they enlarge the field • What constitutes holder for value:
for fraud, because under these instruments, the promissory where value has at any time been given for the
bargains away his right to a day in court. The NIL does not instrument, the holder is deemed a holder for value
sanction nor validated any provision otherwise illegal. in respect to all parties who become such prior to
that time.
Omissions and Provisions that do not affect Negotiability • where the holder has a lien on the instrument
(Sec. 6) arising either from contract or by implication of
The validity and negotiable character of an instrument are law, he is deemed a holder for value to the extent
not affected by the fact that: of his lien.
a. it is not dated; or ¾ Effect of want of consideration: a matter of defense as
b. does not specify the value given, or that any value against any person not a holder in due course; and
had been given therefore; or partial failure of consideration is a defense pro tanto,
c. does not specify the place where it is drawn or the whether the failure is an ascertained and liquidated
place where it is payable; or amount or otherwise.
d. bears a seal; or Absence of consideration – total lack of any valid
e. designates a particular kind of current money in consideration for the contract is only a personal defense.
which payment is to be made.
¾ if it is not dated, the instrument will be considered to be Failure of consideration – failure or refusal or one party
dated as of the time it was issued. to do, perform or comply with the consideration agreed
¾ consideration for the instrument is presumed. (art. 154 upon is also only a personal defense.
NCC & sec. 25 NIL)
¾ sec. 73 specifies where presentment for payment should
be made when the place of payment is not specified III. TRANSFER AND NEGOTIATION
Protest - the formal instrument executed usually by a notary When persons secondarily liable on the instrument are
public certifying that the legal steps necessary to fix the discharged:
liability of the drawee and the indorsers have been taken. 1. By any act which discharges the instrument;
2. By the intentional cancellation of his signature by
¾ Effect of waiver: where protest is waived, presentment the holder;
and notice of dishonor are also deemed waived. But 3. By the discharge of a prior party;
where the notice of dishonor is waived, presentment is 4. By a valid tender of payment made by a prior party;
not waived. 5. By the release of the principal debtor, unless the
holder’s right of recourse against the party
¾ Applicability: protest is necessary only in case of foreign secondarily liable is expressly reserved;
bills of exchange which have been dishonored by non- 6. By any agreement binding upon the holder to extend
acceptance or non-payment, as the case may be. If it is the time of payment or to postpone the holder’s
not so protested, the drawer and indorsers are right to enforce the instrument.
discharged.
¾ In the following cases, the agreement to extend the time
of payment does not discharge a party secondarily liable:
¾ Foreign Bill of Exchange: 1. where the extension of time is consented to by such
1. Drawn in the Philippines but payable outside the party;
Philippines. 2. where the holder expressly reserves his right of
2. Payable in the Philippines but drawn outside the recourse against such party.
Philippines.
¾ Payment at or after maturity by a party secondarily
¾ Protest may be made by:: liable does not discharge the instrument. It only cancels
1. a notary public; or his own liability and that of the parties subsequent to
2. any respectable resident of the place where the bill him.
is dishonored, in the presence of 2 or more credible
witnesses. Effects of Renunciation:
1. A renunciation in favor of a secondary party may be
Protest for better security is one made by the holder of a bill made by the holder before, at or after maturity of
after it has been accepted but before it matures, against the the instrument. Effect: only such secondary party is
drawer and indorsers, where the acceptor has been adjudged discharged and all parties subsequent to him but the
a bankrupt or an insolvent, or has made an assignment for instrument itself remains in force.
the benefit of the creditors. 2. A renunciation in favor of the principal debtor may
be effected at or after maturity. Effect: the
instrument is discharged and all parties thereto
VIII. DISCHARGE provided the renunciation is made unconditionally
and absolutely.
Discharge of instrument - a release of all parties, whether
primary or secondary, from the obligations arising Note: In either case, renunciation does not affect the
thereunder. It renders the instrument without force and rights of a holder in due course without notice.
effect and, consequently, it can no longer be negotiated.
¾ Cancellation of an instrument includes tearing, erasure,
Instances: obliteration, or burning. It is not limited to writing of the
1. By payment in due course by or on behalf of the word ‘cancelled”, or “paid”, or drawing of criss-cross
principal debtor; lines across the instrument.
2. Payment by accommodated party;
3. Intentional cancellation by the holder; Payment for Honor - payment made by a person, whether a
party to the bill or not, after it has been protested for non-
payment, for the benefit of any party liable thereon or for countermand by the payor after
the benefit of the person for whose account it was drawn. indorsement.
o The bank’s manager signs manager’s check
¾ Requisites: while cashier’s check is signed by the bank
1. the bill has been dishonored by non-payment; cashier.
2. it has been protested for non-payment;
3. payment supra protest (another term for payment 2. Certified Check – one drawn by a depositor upon funds to
for honor because prior protest for non-payment is his credit in a bank which a proper officer of the bank
required) is made by any person, even by a party certifies will be paid when duly presented for payment
thereto;
4. the payment is attested by a notarial act of honor 3. Stale check – one which has not been presented for
which must be appended to the protest or form an payment within a reasonable time after its issue
extension of it;
5. the notarial act must be based on the declaration 4. Crossed check – when 2 parallel lines are drawn across its
made by the payor for honor or his agent of his face or across a corner thereof. If the name of a bank
intention to pay the bill for honor and for whose appears between the parallel lines, the check is said to
honor he pays. be specially crossed, and payment should be made only
if presented by the named bank. If no name appears
Note: If the above formalities are not complied with, between the parallel lines, the check is said to be
payment will operate as a mere voluntary payment and generally crossed, and payment should be made only
the payor will acquire no right to full reimbursement upon presentment by some bank.
against the party for whose honor he pays.
Effects of crossing a check:
¾ In payment for honor, the payee cannot refuse payment. a. That the check may not be encashed but only be
If he refuses, he cannot recover from the parties who deposited in the bank;
would have been discharged had he accepted the same. b. That the check may be negotiated only once to one
In acceptance for honor, the holder’s consent is who has an account with a bank; and
necessary. c. That the act of crossing the check serves as a
warning to the holder that the check has been
¾ The payor for honor is given the right to receive both the issued for a definite purpose so that he must inquire
bill and the protest obviously to enable him to enforce if he has received the check pursuant to that
his rights against the parties who are liable to him. purpose.
Kinds of checks:
1. Manager’s / Cashier’s Check – drawn by a bank on itself
and therefore, it is a primary obligation of the bank.
o It is accepted in advance by the act of its
issuance and is not subject to