NOTES IN NEGOTIABLE INSTRUMENTS LAW I. PRELIMINARY CONSIDERATIONS NegotiableInstrument-a written contract for the payment ofmoneywhichcomplieswiththerequirementsofSec.1of theNIL,whichbyitsformandonitsface,isintendedasa substitute for money and passes from hand to hand as money, so as to give the holder in due course (HDC) the right to hold theinstrumentfreefromdefensesavailabletopriorparties. (Reviewer on Commercial Law, Sundiang and Aquino) Functions of Negotiable Instrument: 1.Substitute for money2.Medium of exchange3.Tool used in commercial transaction. Two Distinctive Features of NI: 1.Negotiability - it is that attribute or property whereby a bill or note or check may pass from hand to hand similar to money, so as to give the holder in due course the right to hold the instrument and to collect the sum payable for himself free from defenses.Requisites of Negotiability:a.Itmustbeinwritingandsignedbythemakeror drawer;b.Mustcontainanunconditionalpromiseororderto pay a sum certain in money;c.Mustbepayableondemand,oratafixedor determinable future time;d.Must be payable to order or to bearer; ande.Wheretheinstrumentisaddressedtoadrawee,he mustbenamedorotherwiseindicatedthereinwith reasonable certainty. 2.AccumulationofSecondaryContracts-secondary contractsarepickedupandcarriedalongwith NegotiableInstrumentsastheyarenegotiatedfromone persontoanother;orinthecourseofnegotiationof negotiable instruments, a series of juridical ties between the parties thereto arise either by law or by privity. The indorsers become secondarily liable to the holder. Distinctions: Negotiable and Non-Negotiable Instruments NEGOTIABLENON-NEGOTIABLE Must contain all requisitesDoes not contain all of sec.1requisites of sec.1 Transferable byTransferable by negotiation andassignment only assignment HDC can have rightsA transferee acquires no better than his transferorbetter right than his transferor Prior parties warrantPrior parties do not payment (secondarywarrant payment but liability)merely the legality of title Governed by NILNIL only by analogy Transferee is a holder inTransferee is assignee due courseonly Defenses generally notAll defenses available availableagainst last transferee Classes of Negotiable Instruments: 1.PromissoryNote(PN)-unconditionalpromiseinwriting byonepersontoanothersignedbythemakerengaging topayondemandoratafixedordeterminablefuture time, a sum certain in money to order or to bearer. 2.BillofExchange(BE)-anunconditionalorderinwriting 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. BillsinSet:onecomposedofseveralparts,eachpart numbered and containing a reference to the other parts, the whole of the parts constituting but one bill. Rightsofholderswherepartsarenegotiated separately:1.IfbothareHDC,theholderwhosetitlefirst accrues is considered the true owner of the bill.2.Butthepersonwhoacceptsorpaysindue course shall not be prejudiced.Obligationsofholderwhoindorses2ormoreparts of the Bill in Set:1.The person shall be liable on every such part.2.Every indorser subsequent to him is liable on the parthehashimselfindorsed,asifsuchparts were separate bills. Distinctions between a Negotiable Instrument and a Negotiable Document of Title NEGOTIABLE INSTRUMENTNEGOTIABLE DOCUMENT OF TITLE The subject is moneyThe subject is goods

Has all the requisites ofDoes not have these Sec 1 of NILrequisites A holder of NI may runIntermediate parties are after the secondary partiesnot secondarily liable if the for payment if dishonoreddocument is dishonored by the party primarily liable A holder, if HDC, mayA holder can never acquire acquire rights over therights to the document instrument better than hisbetter than his predecessors predecessors

PROMISSORYBILL OF EXCHANGE NOTE Unconditional promiseUnconditional order Involves 2 partiesInvolves 3 parties Maker is primarily liableDrawer is only secondarily liable Only one presentment: forTwo presentments: for paymentacceptance and for payment Instances when BILL may be treated as a NOTE: 1.Drawer and drawee are the same person. 1.Drawee is a fictitious person.2.Drawee has no capacity to contract.3.Wheninstrumentissoambiguous,theholdermay treat it either as a BILL or a NOTE. Other Forms of Negotiable Instruments 1.Certificate of deposit issued by banks, payable to the depositor or his order, or to bearer2.Trade acceptance3.Bonds, which are in the nature of promissory notes4.Drafts, which are bills of exchange drawn by one bank upon another!All of these must comply with Sec. 1, NILNote: Letters of credit are not negotiable. Legal Tender Thatkindofmoneythatthelawcompelsacreditorto acceptinpaymentofhisdebtwhentenderedbythe debtor in the right amount. Note:Anegotiableinstrumentalthoughintendedtobea substitute for money, is generally not a legal tender. Incidents in Life of Negotiable Instrument 1.Issue2.Delivery3.Negotiation4.Presentmentforacceptance,incertainkindsofbills of exchange5.Acceptance6.Dishonor by non-acceptance7.Presentment for payment8.Dishonor by non-payment9.Notice of dishonor10.Discharge Issue - the first delivery of the instrument, complete in form, to a person who takes it as a holder. Delivery - transfer of possession, actual or constructive, from one person to another Holder refers to the: a.The payee or indorsee of a bill or note who is in possession of it, orb.The bearer thereof (sec.191)Bearer - the person in possession of a bill or note which is payable to bearer. Person - includes a body of persons, whether incorporated or not. II. FORM AND INTERPRETATION OF INSTRUMENTS Requisites of Negotiability (Sec. 1, NIL a.It must be in writing and signed by the maker or drawer;b.Mustcontainanunconditionalpromiseororder to pay a sum certain in money;c.Mustbepayableondemand,oratafixedor determinable future time;d.Must be payable to order or to bearer; ande.Wheretheinstrumentisaddressedtoadrawee, he must be named or otherwise indicated therein with reasonable certainty. 1. Must be in writing, signed by the maker or drawer; - Otherwise it cannot be a substitute for money. 2. Must contain an unconditional promise or order to pay a sum certain in money; Certainty of sum payable. The sum payable is a sum certain although it is to be paid: a.With interest; orb.By stated installments; orc.By stated installments, with a provision that, upondefaultinpaymentofanyinstallment orofinterest,thewholeshallbecomedue; ord.With exchange, whether at a fixed rate or at the current rate; ore.With costs of collection or an attorney's fee, incasepaymentshallnotbemadeat maturity. (sec. 2) Acceleration clause - renders whole debt due and demandable upon failure of obligor to comply with certain conditions. When promise is unconditional An unqualified order or promise to pay is unconditional though coupled with: a.Anindicationofaparticularfundoutof whichreimbursementistobemadeora particularaccounttobedebitedwiththe amount; orb.Astatementofthetransactionwhichgives rise to the instrument.Anorderorpromisetopayoutofaparticular fund is not unconditional. FUND FORPARTICULAR FUND FOR REIMBURSEMENTPAYMENT Drawee pays the payeeThere is only one act: the from his own funds;drawee pays directly from afterwards, the draweethe particular fund pays himself from theindicated. Payment is particular fund indicated.subject to the condition that the fund is sufficient. Particular fund indicatedParticular fund indicated is is NOT the direct sourcethe direct source of of payment but only thepayment. source of reimbursement. Indication in theIndication in the instrument does notinstrument makes the affect the unconditionalpromise or order nature of the promise orconditional. order. 3. Payable on demand or at a fixed determinable future time; Certainty of time of payment An instrument is payable at a determinable future time which is expressed to be payable: a.At a fixed period after date or sight; orb.On or before a fixed or determinable future time specified therein; orc.On or at a fixed period after the occurrence of a specifiedeventwhichiscertaintohappen, though the time of happening be uncertain. "Aninstrumentpayableuponacontingencyisnot negotiable,andthehappeningoftheeventdoesnot cure the defect. (sec. 4) "Apromisetopaywhenable,assoonasIcan, etc.,withoutspecificationofanabsolutedateisnot negotiable. However, there is a difference of opinion astowhetheritisaconditionalpromiseoran absolute promise to pay at un unreasonable time:a.Underthefirstview,negotiabilityis destroyed both by the condition and by want of a fixed time for payment;b.Underthesecondview,bythegeneral principlethatapromisetopaywithina reasonabletimeisnotsocertainasto renderan instrument negotiable. Aftersight Draft - payable only after the expiration of the stipulated period from acceptance (legal sight). When payable on demand: a.Whenitissoexpressedtobepayableon demand, or at sight, or on presentation; orb.In which no time for payment is expressed. Note:Whereaninstrumentisissued,accepted,or indorsedwhenoverdue,itis,asregardsthepersonso issuing, accepting, or indorsing it, payable on demand. 4. Payable to order or to bearer When payable to order The instrument is drawn payable: a.To the order of a specified person orb.To him or his order.The payee must be named or otherwise indicated therein with reasonable certainty. It may be drawn payable to the order of:a.Apayeewhoisnotmaker,drawer,or drawee; orb.The drawer or maker; orc.The drawee; ord.Two or more payees jointly; ore.One or some of several payees; orf.The holder of an office for the time being. When payable to bearer. a.When it is expressed to be so payable; orb.Whenitispayabletoapersonnamed therein or bearer; orc.When it is payable to the order of a fictitious ornon-existingperson,andsuchfactwas known to the person making it so payable; ord.Whenthenameofthepayeedoesnot purport to be the name of any person; ore.Whentheonlyorlastindorsementisan indorsement in blank. (Sec. 9) 5. Identification of the drawee Wheretheinstrumentisaddressedtoa drawee(meaninginabillofexchange),he mustbenamedorotherwiseindicatedwith reasonablecertainty.Theholdermustknow to whom he should present it for acceptance and/orpayment;otherwise,thepurposeof negotiableinstrumentasatoolin commercialdealingswillbegreatly hampered.(RevieweronCommercialLaw, Sundiang and Aquino) Abillmaybeaddressedtomorethanone drawee jointly, whether they are partners or not;butnottotwoormoredrawersinthe alternative or in succession. (Sec. 128) Test of Negotiability: presence of requirements in Section 1 of NIL. Factors that Determine Negotiability: 1.The whole instrument itself2.Only what appears on the face of the instrument3.Provisions of the NIL, Sec.1 BARQUESTION(Q):Whichofthefollowing stipulationsorfeaturesofapromissorynotes (PN)affectordonotaffectitsnegotiability, assumingthatthePNisotherwisenegotiable? Indicateyouranswerbywritingtheparagraph number of the stipulation or feature of the PN as shownbelowandyourcorrespondinganswer, either Affected or Not affected. Explain.(a)The date of the PN is February 30, 2002.(b)ThePNbearsinterestpayableonthelast day of each calendar quarter at a rate equal to 5% above the then prevailing 91-day Tbill rateaspublishedatthebeginningofsuch calendar quarter.(c)ThePNgivesthemakertheoptiontomake paymenteitherinmoneyorinquantityof palay of equivalent value.(d)The PN gives the holder the option either to require payment in money or to require the maker to serve as the bodyguard or escort of the holder for 0 days. SUGGESTED ANSWER (SA): (a)NOTAFFECTED.Thedateisnotoneofthe requirements for negotiability.(b)NOTAFFECTED.Theinterestistobe computedataparticulartimeandis determinable.Itdoesnotmakethesum uncertain or the promise conditional.(c)AFFECTED.Givingthemakeranoption renders the promise conditional.(d)NOTAFFECTED.Givingtheholderanoption does not make the promise conditional. Additional provisions not affecting negotiability. GeneralRule:theinstrumentisnon-negotiableifit containsapromiseorordertodoanyactinadditionto the payment of money. Exceptions: a.authorizes the sale of collateral securities in case the instrument be not paid at maturity; orb.authorizesaconfessionofjudgmentifthe instrument be not paid at maturity; orc.waivesthebenefitofanylawintendedforthe advantage or protection of the obligor; ord.gives the holder an election to require something to be done in lieu of payment of money. Confessionofjudgmentawrittenstatementsignedby thedefendant,settingforththebasisofliabilityand authorizing the entry of judgment thereon. Kinds of confession of judgmenta.cognivitactiomenliterallymeanshehas confessedaction.Itisawrittenconfessionof actionbythedefendantacknowledgingis indebtedness to the plaintiff after the action has been filed. It is given after the action is brought to save expenses.b.relictaverificationemliterallymeanshis pleadingsbeingabandoned.Itisconfessionof judgment by withdrawal of the defense. Note:However,warrantsofattorneytoconfess judgment,arenotauthorizednorcontemplatedby ourlaw.Theyarevoidasagainstpublicpolicy becausetheyenlargethefieldforfraud,because undertheseinstruments,thepromissorybargains awayhisrighttoadayincourt.TheNILdoesnot sanction nor validated any provision otherwise illegal. Omissions and Provisions that do not affect Negotiability (Sec. 6) Thevalidityandnegotiablecharacterofan instrument are not affected by the fact that: a.it is not dated; orb.does not specify the value given, or that any value had been given therefore; orc.does not specify the place where it is drawn or the place where it is payable; ord.bears a seal; ore.designatesaparticularkindofcurrent money in which payment is to be made."ifitisnotdated,theinstrumentwillbe consideredtobedatedasofthetimeitwas issued."considerationfortheinstrumentispresumed. (art. 154 NCC & sec. 25 NIL)"sec. 73 specifies where presentment for payment should be made when the place of payment is not specified Rules of construction: a.Where the sum payable is expressed in words and alsoinfiguresandthereisadiscrepancy between the two, the sum denoted by the words isthesumpayable;butifthewordsare ambiguous or uncertain, reference may be had to the figures to fix the amount;b.Wheretheinstrumentprovidesforthepayment ofinterest,withoutspecifyingthedatefrom whichinterestistorun,theinterestrunsfrom the date of the instrument, and if the instrument is undated, from the issue thereof;c.Wheretheinstrumentisnotdated,itwillbe consideredtobedatedasofthetimeitwas issued;d.Wherethereisaconflictbetweenthewritten andprintedprovisionsoftheinstrument,the written provisions prevail;e.Where the instrument is so ambiguous that there isdoubtwhetheritisabillornote,theholder may treat it as either at his election;f.Whereasignatureissoplaceduponthe instrumentthatitisnotclearinwhatcapacity the person making the same intended to sign, he is to be deemed an indorser;g.Whereaninstrumentcontainingtheword"I promise to pay" is signed by two or more persons, theyaredeemedtobejointlyandseverally liable thereon. (sec. 17) Consideration "Presumptionofconsideration.-everynegotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signatureappearsthereontohavebecomeaparty thereto for value. "Value-anyconsiderationsufficienttosupporta simplecontract.Anantecedentorpre-existingdebt constitutesvalue;andisdeemedsuchwhetherthe instrument is payable on demand or at a future time. "Holderforvalueonewhohasgivenavaluable consideration for the instrument issued or negotiated to him.What constitutes holder for value:wherevaluehasatanytimebeengivenforthe instrument,theholderisdeemedaholderfor valueinrespecttoallpartieswhobecomesuch prior to that time.wheretheholderhasalienontheinstrument arisingeitherfromcontractorbyimplicationof law,heisdeemedaholderforvaluetothe extent of his lien. "Effect of want of consideration: a matter of defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whetherthefailureisanascertainedandliquidated amount or otherwise. Absenceofconsiderationtotallackofanyvalid considerationforthecontractisonlyapersonal defense. Failureofconsiderationfailureorrefusalorone party to do, perform or comply with the consideration agreed upon is also only a personal defense. III. TRANSFER AND NEGOTIATION Types of transfers: 1.Assignment-transferoftitletotheinstrument, with the assignee generally taking only such title ashisassignorhas,subjecttoalldefenses available against his assignor;2.Negotiation - transfer of a negotiable instrument fromonepersontoanothermadeinsucha manner as to constitute the transferee the holder thereof3.ByOperationofLawsuchasbysuccession,by insolvency. Distinctions between Negotiation and Assignment NEGOTIATIONASSIGNMENT 1. Refers only to1. Refers generally to an negotiableordinary contract; instruments; 2. The transferee is a2. The transferee is an holder;assignee; 3. A holder in due course3. An assignee is subject is subject only to realto both real and defenses;personal defenses; 4. A holder in due course4. Generally, an assignee may acquire a bettermerely steps into the right than that of ashoes of the assignor; prior party 5. A general indorser5. An assignor does not warrants the solvencywarrant the solvency of of prior parties;prior parties unless expressly stipulated or the insolvency is known to him; 6. An indorser is not6. An assignor is liable liable unless there beeven without notice of presentment anddishonor; notice of dishonor; 7. Negotiation is7. Governed by Arts. 1624 governed y the NIL.to 1635 (on assignment of credits) of the Civil Code. Methods of negotiation 1.OrderInstrumentIndorsementand Delivery.2.Bearer Instrument Delivery only. Indorsement - legal transaction effected by the writing of one's own name at the: a.back of the instrument orb.uponapaper(allonge)attachedtheretowithor without additional words specifying the person to whomortowhoseordertheinstrumentistobe payablewherebyonenotonlytransferslegal title to the paper transferred but likewise enters into an implied guaranty that the instrument will be duly paid."GeneralRule:indorsementmustbeoftheentire instrument.Exception: where instrument has been paid in part, it may be indorsed as to the residue. "Kinds of indorsement:a.Special-specifiesthepersontowhomorto whoseorder,theinstrumentistobepayable (sec. 34)b.Blank - specifies no indorsee:Instrumentispayabletobearerandmaybe negotiated by delivery (sec. 34)Maybeconvertedtospecialindorsementby writingoverthesignatureofindorserin blank any contract consistent with character of indorsement.c.Restrictive - when the indorsement either:i.Prohibitsfurthernegotiationofthe instrument; orii.Constitutestheindorseetheagentof the indorser; oriii.Veststhetitleintheindorseeintrust for or to the use of some other persons. Butmereabsenceofwordsimplying powertonegotiatedoesnotmakean indorsement restrictive.Arestrictiveindorsementconfersuponthe indorsee the right:a.Toreceivepaymentofthe instrument; b.To bring any action thereon that the indorser could bring; c.Totransferhisrightsassuch indorsee,wheretheformofthe indorsementauthorizeshimtodo so. Butallsubsequentindorseesacquireonlythe titleofthefirstindorseeundertherestrictive indorsement. (sec. 37) Suchindorsementdestroysthenegotiabilityof the instrument and bars further negotiation toa holder in due course. d.Qualified - constitutes the indorser a mere assignor of the title to the instrument. (sec. 38)madebyaddingtotheindorser'ssignaturewords like"sansrecourse,withoutrecourse", "indorser not holder", "at the indorser's own risk", etc. Thepurposeofthiskindofindorsementisto transfertitlewithoutguaranteeingpayment by the primary party. Itdoesnotmean,however,thatthequalified indorserincursnoliabilityatall.Theeffect ismerelytolimithisliability.Heis secondarily liable for breach of is warranties asanindorserunderSec.65.Thus,heis liableiftheinstrumentisdishonoredby NON-ACCEPTANCE or NON-PAYMENT due to:a.forgery;b.lackofgoodtitletotheinstrument indorsed;c.lackofcapacitytocontractonthepart of prior parties; ord.thefactthattheinstrumentwas valueless or not valid at the time of the indorsementwhichfactwasknownto him. e.Conditional-rightoftheindorseeismadeto depend on the happening of a contingent eventPartyrequiredtopaymaydisregardthe conditions.Thiskindofindorsementhasnoeffectonthe furthernegotiationoftheinstrument.The partyrequiredtopay,ifhechooses,may makepayment,disregardingthecondition withoutincurringanyliabilitybecauseheis expressly authorized to do so under Sec. 39. Butthepersonwhoreceivedpaymentwill hold the proceeds subject to the right of the conditional indorser. f.Absolute - one by which indorser binds himself to pay:i.uponnootherconditionthanfailureof prior parties to do so; andii.upon due notice to him of such failure. g.Joint - indorsement of instrument payable to 2 or morepersons;allmustindorseinorderforthe transaction to operate as a negotiation. !Exceptionstotherulerequiringjoint indorsement: Wherethepayeesorindorseesare partners; and Wherethepayeeorindorsee indorsinghasauthoritytoindorse for the others. h.Irregular a person who not otherwise a party to an instrument places thereon his signature in blank before deliver Rules on Indorsements: Effect of transfer without indorsement:a.transfer vests in the transferee such title as the transferor had therein (assignment), andb.the right to have the indorsement of the transferor.For the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made.Applicable only to order instruments Indorsement of a bearer instrument: where an instrument, payable to bearer, is indorsed specially, it may nevertheless be furthernegotiatedbydelivery;butthepersonindorsingspeciallyisliableasindorsertoonlysuchholdersasmaketitle through his indorsement. Note:Theruleonlyappliestooriginallybearerinstruments.IfitisoriginallyaBEARERinstrument,itwillalwaysbea BEARERinstrument.Asopposedtoanoriginalorderinstrumentbecomingpayabletobearer,ifthesameisindorsed specifically, it can NO LONGER be negotiated further by mere delivery, it has to be indorsed. Striking out indorsements: the holder may at any time strike out any indorsement, which is not necessary to his title. The indorserwhoseindorsementisstruckoutandallindorserssubsequenttohim,aretherebyrelievedfromliabilityonthe instrument.oIftheinstrumentispayabletobeareronitsface,thenwhetherornotthereareindorsementsonthebackofthe instrumentwouldbeimmaterialtothetitleofthebearer,whoispresumptivelytheownerandholderbyhismere possession of such instrument. None of the indorsement would be necessary to its title since mere delivery would have been sufficient to transfer title from one holder to another.oWheretheinstrumentispayabletoorderonitsface,thesituationisdifferent.First,theindorsementofaspecial indorsee is necessary for the further negotiation of the instrument. Second, the last indorsement controls the method of further negotiation. When prior party (reacquirer) may negotiate: where an instrument is negotiated back to a prior party, such party may reissue andfurthernegotiatethesame.Butheisnotentitledtoenforcepaymentthereofagainstanyinterveningpartytowhomhe was personally liable.In the following cases, a prior party cannot further negotiate the instrument:1.Where it is payable to the order of a third person, and has been paid by the drawer; 2.Where it was made or accepted for accommodation and has been paid by the party accommodated;2.In other cases, where the instrument is discharged when acquired by a prior party.