PERSONAL NOTES ON NEGOTIABLE INTRUMENTS LAW : Negotiable Instruments Law (Act no 2031) o Took effect on June 2, 1911 or 90 days

after its publication in the Official Gazette dated March 4, 1911. Function and Importance o As a substitute for money; o As a medium of exchange; o As a medium of credit transactions; Characteristics and Features of Negotiable Instruments: o Negotiability the quality or attribute of a bill or a note whereby it may pass from hand to hand similar to money, so at to give the holder in due course the right to hold the instrument and collect the sum payable for himself free from any infirmity in the instrument or defect in the title of any of the prior parties, or defenses available to them among themselves. o Accumulation of secondary contracts the transferring of the negotiable instrument from one person to another will further accumulate secondary contracts. Once an instrument is issued additional parties can be involved. The more it passes from hand to hand, the more debts are added and the holder can proceed not only against the maker but also against all transferors. Theory Underlying Negotiable Instruments o The theory of the negotiable instruments and of their currency from hand to hand rests upon the proposition that they appear to belong to the person having them in possession and to no one else. Forms of Negotiable Instrument o Common Forms Promissory Notes or those which the issuer has promised to pay ; Bill of Exchange or those which the issuer has ordered a third person to pay o Special Types Promissory notes Certificate of Deposits Bank Notes Due Bills Bonds Bill of Exchange Checks Drafts Trade Acceptances Bankers Acceptances Non- Negotiable Instruments/Limited or Restricted Negotiability o Document of Title a receipt of order for the delivery of the goods. It included bill of lading, dock warrant, quedan or warehouse receipt. It is without an unconditional promise or order to pay a sum certain in money.

Bill of Lading a document signed by a carrier (transporter of the goods) or the carriers representative and issued to a consignor (the shipper of goods) that evidences the receipt of goods for shipment to a specified designation and person Straight Bill is one in which the goods are consigned to a designated party Order Bill is one in which the goods are consigned to the order of a named party Note: If its terms provide that the freight is to be delivered to the bearer (possessor) of the bill, to the order of a named party or as recognized in overseas trade, to a named person or assigns, a bill as a document of title , is negotiable. In contrast, a straight bill is not negotiable. Dock Warrant is an instrument issued by a ware housekeeper, licensed by the state to traders who deposit goods with them. A dock warrant certifies that the holder is entitled to the goods imported and warehoused in the docks. It transfers the absolute right to the goods described in it. A dock warrant is transferred by indorsement and delivery.

Sec 1 : (WUnDON) o For an instrument to be negotiable the following requirements must concur : o Promissory Notes : Must be in writing and signed by the maker; The accepted rule is that the negotiability of the instrument is determined from the writing that is from the face of the instrument itself Must contain an unconditional promise to pay a sum certain in money; Must be payable on demand, or at a fixed determinable future time; Must be payable to order or to bearer; o Bill of Exchange Must be in writing and signed by the drawer; The accepted rule is that the negotiability of the instrument is determined from the writing that is from the face of the instrument itself Must contain an unconditional order to pay a sum certain in money; The reason for the requirement that negotiable instruments must be payable in money is that money is the one standard value in actual business. All other commodities may rise and fall in value but in theory, at least, money always measures this rise and fall, and remains the same. Legal Tender is that sort of money in which a debt, or other obligation calling for money, may be lawfully paid, if the contract does not specify the medium of payment. Money means what is coined or stamped by public authority and has its value fixed by public authority. In a literal sense, money means cash. Must be payable on demand, or at a fixed determinable future time; Must be payable to order or to bearer; Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty

o A negotiable Promissory Note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed determinable future time, a sum certain in money to order or to bearer. o A negotiable Bill of Exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed determinable future time a sum certain money to order or to bearer. o Parties of a Bill of Exchange: Drawer the person who issues and draws the order bill. He gives the order to pay money to a third party. He does not pay directly Drawee the party upon whom the bill is drawn. He is the person whom the bill is addressed who is ordered to pay. Drawee is not liable unless he becomes the acceptor and he refused payment despite having funds from the drawer or has agreed to pay. Once he accepts the order bill, he becomes primarily liable. Payee the person in whose favor the bill is originally drawn and is payable. o A non-negotiable instrument is an instrument which does not meet the requirements laid down to qualify an instrument as a negotiable one, or an instrument which in its inception was negotiable but has lost its quality or negotiability. A check payable only to a specified person is a typical example of a nonnegotiable instrument. A negotiable instrument ceases to be negotiable if the indorsement prohibits the further negotiation of the instrument. Sec 2 : Certainty of Sum Payable : o The promise or order must call for the payment of a sum certain in money. This is a requirement for negotiability of the instrument to assure clarity and certainty in determining the value of the instrument. To determine if the sum is certain, it is enough if the holder can determine from the instrument itself the among that he is entitled to receive at maturity. In other words, the basic test is whether the holder can determine by calculation or computation the amount payable when the instrument is due. o An instrument containing an acceleration clause at the option of holder is nonnegotiable. (Acceleration clause - a provision in a contract or promissory note that if some event (like not making payments on time) occurs then the entire amount is due or other requirements are due now, pronto. This clause is most often found in promissory notes with installment payments for purchase of real property and requires that if the property is sold then the entire amount of the note is due immediately (the so-called "due on sale clause.") Some states prohibit "due on sale" and always allow the new property owner to assume the debt. o An instrument with an extension clause can be negotiable if by its terms it is payable in definite time subject to extension at the option of the holder, or to an extension to a further definite time at the option of the maker or acceptor or automatically upon a specified event. o Sum to be paid must be certain before maturity because a negotiable instrument is intended to substitute for money and this cannot be unless it can be ascertained from it exactly how much money it represents. Hence, anything, which only renders the sum payable uncertain after the instrument has ceased to be a substitute for money but which in no wise, affected it before such time, it cannot impair its negotiability.

Sec 3 : Determination if Promise or Order is Unconditional : o An unqualified order or promise to pay is unconditional even if There is an indication of a particular fund out of which reimbursement is to be made, or a particular account to debited with the amount; or There is a statement of the transaction which gives rise to the instrument. Reasons: An instrument, which mentions a particular fund out of which payment is to be made, is negotiable because the order to pay is not rendered conditional. In other words, the fund indicated is not the direct source of payment but only the source of reimbursement, which is an act subsequent to the payment. Likewise, an instrument, which contains a direction to debit a particular account, is negotiable because the order/promise is not also made conditional. The payment does not depend upon the existence or adequacy of the particular account to be debited. o Exception : An order or promise to pay out of a particular fund is not unconditional. Reason: Because the amount to be paid is made to depend upon the adequacy or existence of the fund designated. The test of negotiablitiy in every case is said to be whether or not the instrument carries the general personal credit of the maker or drawer. If it does, the instrument is negotiable, if it carries only the credit of a particular fund, the instrument is non-negotiable. o Reason for the Rule of Unconditional Order or Promise to Pay : Negotiable instruments are intended to flow easily through the commercial world. A prospective holder would not be eager to accept an instrument unless its payment can be reasonably expected under every circumstance. The fact that the liability is unconditional greatly enhances the ability of the instrument to circulate freely from one person to another. No one would accept a paper for debt if the right to recover were not absolute or unconditional. Instruments which are not to be paid until a condition has happened or been fulfilled would be of little practical value in business. Sec 4: What Constitutes Determinable Future Time o Determinable Future Time At a fixed period after date or sight ; or On or before a fixed or determinable future time specified therein; or On or at a fixed period after the occurrence of a specified event, which is certain to happen, though the time of happening is uncertain. o Exception : An instrument payable upon a contingency is not negotiable and the happening of the event does not cure the defect. o Section 4 indicates when an instrument is payable at a determinable future time : Payable at a fixed period Payable at a fixed period after date Payable at a fixed period after sight After sight means after the instrument is seen by the drawee or upon presentment for acceptance. Payable on or before a fixed time

It is necessary that the year of maturity be stated, otherwise, the time of payment of the instrument, although payable at a certain time, is not determinable. Payable on or before a determinable future time The phrase determinable future time means a time that can be determined with certainty after the execution of the instrument Payable on occurrence of a specified event The specified event must be certain to happen although the time of happening or occurrence is not known or uncertain like death. (See Art 1193 Civil Code). However, if there is a length of time within which death may take place, the instrument is not negotiable. Payable after the occurrence of a specified event But the note payable several days BEFORE the occurrence of the specified event is not negotiable, since the date of maturity of the instrument can only be ascertained after it ahs become overdue and, therefore, the time for payment is uncertain. Payable upon a contingency (NON-NEGOTIABLE) A contingency is, in law, an uncertain future event which may or may not happen. Payable when able or within reasonable time (NON-NEGOTIABLE) Negotiability is destroyed under the first view both by the condition and by want of fixed time for payment and by the general principle that a promise to pay within a reasonable time is not so certain as to render an instrument negotiable. If a contract does not state a specific time in which the parties are to meet the requirements of the contract, then the parties must meet them within a reasonable time. What is a reasonable time depends on the facts of each case, including the subject matter of the contract, the reasons each party entered into the contract, and the intentions of the parties at the time they entered the contract. (See Sec 193)

Sec 5: Additional provisions not affecting Negotiability o General Rule : An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. Reason : It is based on the fact that while one can be endorsed the other would have to be assigned. o Exception : But the negotiable instrument is not affected by a provision which a) Authorizes the sale of collateral securities in case the instrument be not paid at maturity ; o A statement that an instrument is secured by a collateral, in fact adds to the marketability of the instrument in commerce as a substitute for money or as a credit instrument, provided that the statement should not subject the order or promise to the terms or conditions of the pledge. The collateral should be only performed after the date of maturity when the instrument is no longer negotiable in the full commercial sense and until the date of maturity the promise is to pay money only.

b) Authorizes a confession of judgment if the instrument be not paid at maturity ; or o A confession of judgment enables a holder to obtain a judgment without the delay usually incident to a law suit , as it eliminates the necessity of a trial. It is a written statement signed by the defendant, setting forth the basis of liability and authorizing the entry of judgment thereon. o Distinction of Confession of Judgment from Cognavit Actionem and Relicta Verificationem o Cognavit Actionem (He has Confessed Action) is a written confession of action by the defendant acknowledging his indebtedness to the plaintiff after the action has been filed. o Relicta Verificationem (His pleading being abandoned) is a confession of judgment by withdrawal of the defense. c) Waives the benefit of any law intended for the advantage or protection of the obligor ; o Niether does waiver of protest (Sec 111), presentment for payment (Sec 70 or demand, exemption from attachment or execution destroy the negotiability of the instrument. d) Gives the holder an election to require something to be done in lieu of payment of money o The instrument is therefore negotiable since the holder has the choice and it good as an instrument payable in money. However, if the option is with the promissor, the instrument is nonnegotiable because the holder cannot compel him to make payment in money. o Exception to the Exception Any illegal provision or stipulation shall never be validated by this section. Sec 6: Effect of Omission of date o The validity and negotiable character of an instrument are not affected by the fact that : a) It is not dated; or Exception : o Date is necessary to determine the date of maturity in the following cases: Where said date is tied to the date of issue ( e.g., an undated note is payable thirty days after date); or Where interest is stipulated for the purpose of determining when the interest is to run (See Sec 17(c).); or In the case of promissory note, the date of issue and in the case of the bill of exchange, the date of the last negotiation thereof, for the purpose of determining whether a party acted within a reasonable time in making presentment for payment. (see Secs. 70, 71,144) Note :Even if the instrument is undated, it is still negotiable, the holder may insert the true date under Sec 13. The insertion of a wrong date will ot avoid the

instrument in the hands of an innocent third party who mat enforce the same notwithstanding the improper date. (Sec 14). b) Does not specify the value given, or that any value has been given therefor; or It is usual to state in the instrument that it is given for value received without specifying what the value is. But it is not even necessary to state that value has been received for the instrument because the consideration is presumed. (See Secs 24, Art 1354, Civil Code) c) Does not specify the place where it is drawn or the place where it is payable; or An instrument is presumed to have been made where it is dated. A note that does not specify the place of payment is presumed to be payable at the place of residence of the maker. If the place of execution or payment is not stated, it is presumed to be the makers or drawers place of business or his home. (See Sec 73) d) Bears a seal; or There is no distinction under our law on sealed instrument which in common law should be subject to the rules governing sealed contracts. The fact that the instrument bears a seal does not destroy its negotiability. However, it is advisable to have a bill or note appear in public instruments so that it will be included among the preferred credits with respect to other properties of the debtor. e) Designates a particular kind of current money in which payment is to be made. The law does not require that payment should be made in legal tender. (Sec 1). The instrument is still negotiable although it is payable in foreign money which is not current in the Philippines if the obligation may be discharged in pesos of equivalent amount.

Sec 7 : When Instrument Payable on Demand o (1st par)An instrument is payable on demand not only between the immediate parties but also as to subsequent parties : Where it is expressed to be payable on demand, or at sight, or on presentation; or An instrument payable on demand is due and payable immediately after delivery. There is no need for a demand a condition precedent to a right of action. It is due and demandable at once. At sight (in bills of exchange) means that the instrument is payable as soon as it is seen by the party primarily liable. In which no time for payment is expressed Parol evidence however is admissible to show a contemporaneous (occurring at the same time) oral agreement fixing the time for payment , but an instrument payable on demand cannot be contradicted by parol proof. (see Sec 9 Rule 130 Rules of Court) nd o (2 par)An instrument is payable on demand only to immediate parties : Where an instrument is issued, accepted, or indorsed when overdue. Reason of 2nd par : Since between immediate parties there is no difference between a holder in due course and a person not a holder in due course.

Sec 8: When Instrument Payable to Order o An instrument is Payable to Order where it is drawn payable : To order of payee who is not the maker; or To order of payee who is not the drawer ; To order of payee who is not the drawee ; To order of drawer; To order of maker; but a note payable to the order of maker is not complete until indorsed by him (See Sec 184) To order of drawer ; To order of of two or more payees jointly ; See Sec 41 in case of indorsement. To order of one or some of several payees ; In this case, the instrument is payable to either one of them, and the indorsement of any one is sufficient to pass title To order of holder of an office for the time being o It must be noted that in an order instrument, a specified person must always be named or if not named, be indicated therein with reasonable certainty otherwise the instrument is non-negotiable for there would be nobody who could give the order or authority to collect or who could indorse the instrument (Sec 30,9 (c)). Sec 9: When Instrument is Payable to Bearer o An instrument is payable to bearer when : It is expressed to be so payable to bearer ; Bearer means the person in possession of a bill or note which is payable to bearer. o Ex : I promise to pay to bearer P10,000. It is payable to person named therein : Ex : Pay to P or bearer P10,000. o An instrument payable to holder or order or to the order of P or bearer has been held to be payable to bearer (83 Mich. 225) o While an instrument Pay to order P or bearer is an order instrument, unless the bearer words are handwritten or typewritten. It is presumed that the words or bearer are added by the maker or drawer then presumably the maker or drawer intended that they should control. o But an instrument payable to bearer or P is not negotiable. It is payable to order of fictitious person; Ex : Pay to John Doe or order P10,000. o A fictitious person is meant to be one who, though named or specified as payee in an instrument, has no right to it because the maker or drawer so intended and it matters not, therefore, whether the name of the payee used by him be that one living or dead, or one who never existed. o It is essential that the payee is known to the maker or drawer to be fictitious or non-existing person, otherwise, it would be an order instrument. Reason: Since the maker or drawer knows that the payee is not capable of indorsing, he cannot expect the instrument to circulate through the indorsement of the payee,

and, therefore, he must have intended the same to be transferred by mere delivery just like an instrument payable to bearer. Thus, a check made payable to non-fictitious or existing person is not necessarily an order instrument if the payee is not the intended recipient of the proceeds of the instrument. It is payable to order of a non-existing person; Ex: Pay to the order of the King of the Pacific Ocean o In this case, the payee named is one who does not exist and had never existed, indorsment is obviously impossible and the manifest intention of the drawer is to make the instrument a bearer paper negotiable by delivery. Name of payee not name of person; Ex : Pay to cash, Pay to cash or order, Pay to money, Pay to Sundries, Pay to payroll o In the above examples, the instrument does not purport to designate a specific payee. In making an instrument payable to an impersonal payee, the maker or drawer intends the same to be payable to bearer Only indorsement in blank The blank indorsement at the back of the instrument payable to bearer. Last indorsement in blank If the last indorsee of the instrument merely signs at the back of the instrument without indorsing the bill to a specified person, the instrument becomes payable to bearer. But it cannot be considered a non-negotiable instrument, it is negotiable as a bearer instrument. Otherwise, the last person who signed his name on the back of the instrument would be able to change entirely the contract as entered into between parties and make the character of the instrument depend upon the manner of the indorsement and not upon the terms of expressed therein. o It should be noted that subsections (a) and (b) are bearer instruments and subsections (c), (d) and (e) are order instruments upon its face, but still both are bearer instrument. o Sec 9 defines a bearer instrument. An instrument payable to bearer may be transferred by delivery without indorsement( Sec 30) and payment to any person in possession thereof (Sec 191) in good faith and without notice that his title is defective, at or after maturity ( Sec 88,) discharges the instrument. (Sec 119). Delivery alone is enough to effect negotiation of the instrument. Sec 10: Terms to be used, when sufficient o It is not necessary to use the exact words of the law, as long as the clear intention of the aprties to make the instrument negotiable can be determined, the law will give force and effect. o Use of foreign language in an instrument may still be negotiable. o A mere defect or grammatical error in the instrument does not destroy negotiability. Sec 11: Presumtion of Date o If the instrument bears a date, it is presumed that said date is the date when it was made or drawn.

o If the acceptance or indorsement of a bill is dated said date is considered to be the date of acceptance or indorsement. o If the date is inadvertently wrote in the instrument, evidence of other date is admissible. However, the different may be shown only as between parties but not as against a holder in due course.( Sec 14, 57) o Note : An instrument payable on demand need not be dated since it is demandable at any time. However, it is required under Sec 71 that a promissory note must be presented for payment within a reasonable time after its issue and in case of a bill of exchange, within a reasonable time after the last negotiation thereof, otherwise, persons ordinarily liable may be released from their liability. (Sec 70) The date of issue of the promissory note or the date of the last negotiation of the bill of exchange is, therefore, essential for the purpose of determining whether a party has acted within a reasonable time. (Sec 144) but not to make the instrument negotiable. Sec 12: Effect of Ante-Dating and Post-Dating o Ante-dating (putting a date earlier than its issuance) or post-dating (putting a date later than its issuance) an instrument does not render it invalid or non-negotiable by that fact alone, provided this is not done for an illegal or fraudulent purpose. It may be negotiated before or after the date given as long as it is not negotiated after its maturity. o See also Art 315 (2) [d] of the Revised Penal Code for the liability of the if issuing a check without sufficient funds. o Note :The person to whom the instrument so dated is delivered acquires title or ownership over it, not as of the date it bears but as of the date it is delivered. Sec 13: Insertion of Date of an Undated Instrument o The holder may validly put a date on an instrument in two cases : 1) where an instrument is payable at a fixed period after date but is issued undated ; and 2) where an instrument is payable at a fixed period after sight but the acceptance is undated. It is necessary that the date of issue or acceptance may be specified so as to determine the date of maturity, otherwise one will not know when the instrument will be due. Any holder may insert therein the true date of issue or acceptance and the instrument is payable accordingly. This is not applicable to instrument payable on demand or to an undated bill of exchange payable at a fixed period after sight but it is however necessary to determine whether the holder acted with reasonable diligence (Sec 144) If acceptance is not dated, it is necessary to insert date because maturity is counted not from the date of issue but from sight or acceptance. o Insertion of a wrong date by one having knowledge of the true date will avoid the instrument as to him or by one claiming under him but not to a subsequent holder in due course who may enforce the same notwithstanding the improper date. In the hands of a holder in due course, the date inserted, even if wrong, is to be regarded as the true date. The insertion of a wrong date constitutes a material alteration which will avoid the instrument as to the party who has himself made, authorized, or

assented to the alteration and subsequent indorsers but not in a holder in due not a party to the alteration who may enforce payment according to its original tenor. Sec 14: Blanks when may be filled (Incomplete Instrument Delivered) o This section is applicable only to an incomplete instrument which has been delivered by the maker or the drawer to the payee or holder o The holder or the person in possession has prima facie authority to complete (authority to complete not authority to alter) an instrument by filling up the blanks therein. Material particular means any particular proper to be inserted in a negotiable instrument to make it complete ; and the power to fill in blanks extends, therefore to every complete feature or the instrument (e.g., blanks for date, due date, name of payee, amount, rate of interest, name of drawer may be filled in as well as amount of attorneys fees) o Classes of instrument in blanks Those in which obvious blanks are left at the time they are made or indorsed, of such a character as manifestly to indicate that the instruments are incomplete until such blanks shall be filled up ; One who signs or indorses is liable to bona fide holders thereof on the Doctrine of Implied Authority Those which are apparently complete, containing blanks only because the written matter does not so fully occupy the entire paper as to preclude the insertion of additional words, figures, or both The liability for the amount of the instrument which ahs been increased by filling up the unoccupied spaces therein is placed upon the Doctrine of Negligence. o In this case the maker is not liable to holder not in due course if the instrument had not been filled up in accordance with the authority given and within a reasonable time. But if the instrument is in the hands of a holder in due course, the instrument is valid and effective and he may enforce it as if it has been filled up strictly in accordance with the authority given and within a reasonable time. o The defense that the instrument had not been filled up in accordance with the authority given and within reasonable time is only a PERSONAL DEFENSE and cannot be availed of against a holder in due course. (See also Sec 58) Sec 15: Incomplete Instrument not Delivered o An incomplete instrument, completed without authority, is not a valid contract in the hands of any holder. This is a real defense even against a holder in due course. (Sec 58). Although, under some circumstances, negligence on the part of the maker or drawer may render them liable to a holder in due course. The maker or drawer of an incomplete instrument, completed without authority, is not liable to any holder even a holder in due course . o The invalidity of the incomplete instrument is only with reference to the parties whose signatures appear on the instrument BEFORE and not after delivery. (See Sec 65-66). The instrument is valid as to parties whose signatures appear AFTER delivery and they are liable to any holder being indorsers of the instrument. Sec 16: What Constitutes Delivery

o General Rule : A negotiable instrument like any other written contract, has no legal inception or existence, as such, until it has been delivered in accordance with the purpose and intent of the parties. Without the delivery of the instrument, there can be no liability thereon, But such delivery must be intended to give effect to the instrument. Delivery means the transfer of possession, actual or constructive, from one person to another (Sec 191, par 6) with intent to transfer title thereto. Issue is the first delivery of the instrument, complete in form, to a person who takes it as a holder in due. o Delivery may be made either by the maker or drawer himself or through a duly authorized agent. Mailing an instrument with intent to transmit it to the payee constitutes a constructive delivery. o An undelivered instrument is inoperative because delivery is a prerequisite to liability. However, if the instrument is no longer in the possession of the person who signed it and it is complete in its terms, a valid and intentional delivery by him is presumed until the contrary is proved. If the instrument is found in the possession of an immediate party or remote party other than a holder in due course, there is a prima facie (presumed to be true unless disproved) presumption of delivery but subject to rebuttal. Immediate parties refers to those who are immediate in the sense of having knowledge or being held to know of the conditions and limitations placed upon the delivery of the instrument. Remote are parties who are not in direct contractual relation to each other. They can also be immediate if they have knowledge of the infirmities of the instrument. o As to Immediate Parties The maker or drawer is not liable if it can be shown that the delivery was conditional or for a special purpose only. o As to a Holder in due course The maker or drawer is liable if a complete instrument is in the hands of a holder in due course since valid delivery thereof by all parties prior to him is CONCLUSIVLEY PRESUMED. The defense of the maker is only personal and not real defense. Reason : This is a principle of manifest justice where it confined to cases where the party who is made to suffer the loss has reposed confidence in the third person whose acts have occasioned the loss. This CONCLUSIVE PRESUMPTION does not apply to an instrument which is incomplete. (Sec 15) But in a case, for example, where there was no actual delivery to anyone for any purpose by the maker of a promissory note who was a victim of theft or robbery committed in his hose and there was nothing to show any fault or negligence on his part, it would be unreasonable to hold him liable even to an innocent holder for value. A note in the hands of the maker, albeit complete, in in law, but a blank piece of paper. Its wrongful seizure cannot create against his will a valid contract where none existed before. Sec 17: Rule of Contruction when there is ambiguity in the language of the instrument. o Self explanatory. Just memorize the rules under this section.