NOTES IN NEGOTIABLE INSTRUMENTS LAW

I. PRELIMINARY CONSIDERATIONS
Negotiable Instrument - a written contract for the payment
of money which complies with the requirements of Sec. 1 of
the NIL, which by its form and on its face, is intended as a
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
the instrument free from defenses available to prior parties.
(Reviewer on Commercial Law, Sundiang and Aquino)
Functions of Negotiable Instrument:
1. Substitute for money
2. Medium of exchange
3. 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. It must be in writing and signed by the maker or
drawer;
b. Must contain an unconditional promise or order to
pay a sum certain in money;
c. Must be payable on demand, or at a fixed or
determinable future time;
d. Must be payable to order or to bearer; and
e. Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty.
2.

Accumulation of Secondary Contracts - secondary

contracts are picked up and carried along with
Negotiable Instruments as they are negotiated from one
person to another; or in the course of negotiation of
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

NEGOTIABLE
Must contain all requisites
of sec.1
Transferable by
negotiation and
assignment
HDC can have rights
better than his transferor
Prior parties warrant
payment (secondary
liability)
Governed by NIL
Transferee is a holder in
due course
Defenses generally not
available

NON-NEGOTIABLE
Does not contain all
requisites of sec.1
Transferable by
assignment only
A transferee acquires no
better right than his
transferor
Prior parties do not
warrant payment but
merely the legality of
title
NIL only by analogy
Transferee is assignee
only
All defenses available
against last transferee

Classes of Negotiable Instruments:

1. Promissory Note (PN) - unconditional promise in writing
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.
2.

Bill of Exchange (BE) -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 or determinable future time
a sum certain in money to order or to bearer.

Bills in Set: one composed of several parts, each part

numbered and containing a reference to the other parts, the
whole of the parts constituting but one bill.

Rights of holders where parts are negotiated

separately:
1. If both are HDC, the holder whose title first
accrues is considered the true owner of the bill.
2. But the person who accepts or pays in due
course shall not be prejudiced.

Obligations of holder who indorses 2 or more parts

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
part he has himself indorsed, as if such parts
were separate bills.
Distinctions between a Negotiable Instrument and a
Negotiable Document of Title
NEGOTIABLE INSTRUMENT
The subject is money
Has all the requisites of
Sec 1 of NIL
A holder of NI may run
after the secondary parties
for payment if dishonored
by the party primarily
liable
A holder, if HDC, may
acquire rights over the
instrument better than his
predecessors
PROMISSORY
NOTE
Unconditional promise
Involves 2 parties
Maker is primarily liable
Only one presentment: for
payment

NEGOTIABLE DOCUMENT
OF TITLE
The subject is goods
Does not have these
requisites
Intermediate parties are
not secondarily liable if the
document is dishonored
A holder can never acquire
rights to the document
better than his predecessors

BILL OF EXCHANGE
Unconditional order
Involves 3 parties
Drawer is only secondarily
liable
Two presentments: for
acceptance 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. When instrument is so ambiguous, the holder may
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 bearer
2. Trade acceptance
3. Bonds, which are in the nature of promissory notes
4. Drafts, which are bills of exchange drawn by one bank
upon another

All of these must comply with Sec. 1,

NIL
Note: Letters of credit are not negotiable.
Legal Tender
That kind of money that the law compels a creditor to
accept in payment of his debt when tendered by the
debtor in the right amount.
Note: A negotiable instrument although intended to be a
substitute for money, is generally not a legal tender.
Incidents in Life of Negotiable Instrument
1. Issue
2. Delivery
3. Negotiation
4. Presentment for acceptance, in certain kinds of bills
of exchange
5. Acceptance
6. Dishonor by non-acceptance
7. Presentment for payment
8. Dishonor by non-payment
9. Notice of dishonor
10. 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, or
b. 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. Must contain an unconditional promise or order
to pay a sum certain in money;
c. Must be payable on demand, or at a fixed or
determinable future time;
d. Must be payable to order or to bearer; and
e. Where the instrument is addressed to a drawee,
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; or
b. By stated installments; or
c. By stated installments, with a provision that,
upon default in payment of any installment
or of interest, the whole shall become due;
or
d. With exchange, whether at a fixed rate or at
the current rate; or
e. With costs of collection or an attorney's fee,
in case payment shall not be made at
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. An indication of a particular fund out of
which reimbursement is to be made or a
particular account to be debited with the
amount; or
b. A statement of the transaction which gives
rise to the instrument.
An order or promise to pay out of a particular
fund is not unconditional.

FUND FOR
REIMBURSEMENT
Drawee pays the payee
from his own funds;
afterwards, the drawee
pays himself from the
particular fund indicated.
Particular fund indicated
is NOT the direct source
of payment but only the
source of reimbursement.
Indication in the
instrument does not
affect the unconditional
nature of the promise or
order.

PARTICULAR FUND FOR

PAYMENT
There is only one act: the
drawee pays directly from
the particular fund
indicated. Payment is
subject to the condition
that the fund is sufficient.
Particular fund indicated is
the direct source of
payment.
Indication in the
instrument makes the
promise or order
conditional.

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; or
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
specified event which is certain to happen,
though the time of happening be uncertain.

An instrument payable upon a contingency is not

negotiable, and the happening of the event does not
cure the defect. (sec. 4)

A promise to pay when able, as soon as I can,

etc., without specification of an absolute date is not
negotiable. However, there is a difference of opinion
as to whether it is a conditional promise or an
absolute promise to pay at un unreasonable time:
a. Under the first view, negotiability is
destroyed both by the condition and by want
of a fixed time for payment;
b. Under the second view, by the general
principle that a promise to pay within a
reasonable time is not so certain as to
render
an instrument negotiable.

Aftersight Draft - payable only after the expiration of the

stipulated period from acceptance (legal sight).
When payable on demand:
a. When it is so expressed to be payable on
demand, or at sight, or on presentation; or
b. In which no time for payment is expressed.
Note: 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 or to bearer

When payable to order
The instrument is drawn payable:
a. To the order of a specified person or
b. 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. A payee who is not maker, drawer, or
drawee; or
b. The drawer or maker; or
c. The drawee; or
d. Two or more payees jointly; or
e. One or some of several payees; or
f. The holder of an office for the time being.
When payable to bearer.
a. When it is expressed to be so payable; or
b. When it is payable to a person named
therein or bearer; or
c. When it is payable to the order of a fictitious
or non-existing person, and such fact was
known to the person making it so payable; or
d. When the name of the payee does not
purport to be the name of any person; or
e. When the only or last indorsement is an
indorsement in blank. (Sec. 9)
5. Identification of the drawee
Where the instrument is addressed to a
drawee (meaning in a bill of exchange), he
must be named or otherwise indicated with
reasonable certainty. The holder must know
to whom he should present it for acceptance
and/or payment; otherwise, the purpose of
negotiable instrument as a tool in
commercial dealings will be greatly
hampered. (Reviewer on Commercial Law,
Sundiang and Aquino)
A bill may be addressed to more than one
drawee jointly, whether they are partners or
not; but not to two or more drawers in the
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 itself
2. Only what appears on the face of the instrument
3. Provisions of the NIL, Sec.1

BAR QUESTION (Q): Which of the following

stipulations or features of a promissory notes
(PN) affect or do not affect its negotiability,
assuming that the PN is otherwise negotiable?
Indicate your answer by writing the paragraph
number of the stipulation or feature of the PN as
shown below and your corresponding answer,
either Affected or Not affected. Explain.
(a) The date of the PN is February 30, 2002.
(b) The PN bears interest payable on the last
day of each calendar quarter at a rate equal
to 5% above the then prevailing 91-day Tbill
rate as published at the beginning of such
calendar quarter.
(c) The PN gives the maker the option to make
payment either in money or in quantity of
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) NOT AFFECTED. The date is not one of the
requirements for negotiability.
(b) NOT AFFECTED. The interest is to be
computed at a particular time and is
determinable. It does not make the sum
uncertain or the promise conditional.
(c) AFFECTED. Giving the maker an option
renders the promise conditional.
(d) NOT AFFECTED. Giving the holder an option
does not make the promise conditional.
Additional provisions not affecting negotiability.
General Rule: the instrument is non -negotiable if it
contains a promise or order to do any act in addition to
the payment of money.
Exceptions:
a. authorizes the sale of collateral securities in case
the instrument be not paid at maturity; or
b. authorizes a confession of judgment if the
instrument be not paid at maturity; or
c. waives the benefit of any law intended for the
advantage or protection of the obligor; or
d. gives the holder an election to require something
to be done in lieu of payment of money.
Confession of judgment a written statement signed by
the defendant, setting forth the basis of liability and
authorizing the entry of judgment thereon.
Kinds of confession of judgment
a. cognivit actiomen literally means he has
confessed action. It is a written confession of
action by the defendant acknowledging is
indebtedness to the plaintiff after the action has
been filed. It is given after the action is brought
to save expenses.
b. relicta verificationem literally means his
pleadings being abandoned. It is confession of
judgment by withdrawal of the defense.

Note: However, warrants of attorney to confess

judgment, are not authorized nor contemplated by
our law. They are void as against public policy
because they enlarge the field for fraud, because
under these instruments, the promissory bargains
away his right to a day in court. The NIL does not
sanction nor validated any provision otherwise illegal.
Omissions and Provisions that do not affect
Negotiability (Sec. 6)
The validity and negotiable character of an
instrument are not affected by the fact that:
a. it is not dated; or
b. does not specify the value given, or that any
value had been given therefore; or
c. does not specify the place where it is drawn
or the place where it is payable; or
d. bears a seal; or
e. designates a particular kind of current
money in which payment is to be made.
if it is not dated, the instrument will be
considered to be dated as of the time it was
issued.
consideration for the instrument is presumed.
(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
also in figures and there is a discrepancy
between the two, the sum denoted by the words
is the sum payable; but if the words are
ambiguous or uncertain, reference may be had to
the figures to fix the amount;
b. Where the instrument provides for the payment
of interest, without specifying the date from
which interest is to run, the interest runs from
the date of the instrument, and if the instrument
is undated, from the issue thereof;
c. Where the instrument is not dated, it will be
considered to be dated as of the time it was
issued;
d. Where there is a conflict between the written
and printed provisions of the instrument, the
written provisions prevail;
e. Where the instrument is so ambiguous that there
is doubt whether it is a bill or note, the holder
may treat it as either at his election;
f. Where a signature is so placed upon the
instrument that it is not clear in what capacity
the person making the same intended to sign, he
is to be deemed an indorser;
g. Where an instrument containing the word "I
promise to pay" is signed by two or more persons,
they are deemed to be jointly and severally
liable thereon. (sec. 17)

Consideration
Presumption of consideration. - every negotiable
instrument is deemed prima facie to have been issued
for a valuable consideration; and every person whose
signature appears thereon to have become a party
thereto for value.

Value - any consideration sufficient to support a

simple contract. An antecedent or pre-existing debt
constitutes value; and is deemed such whether the
instrument is payable on demand or at a future time.

Holder for value one who has given a valuable

consideration for the instrument issued or negotiated
to him.

What constitutes holder for value:

where value has at any time been given for the
instrument, the holder is deemed a holder for
value in respect to all parties who become such
prior to that time.

where the holder has a lien on the instrument

arising either from contract or by implication of
law, he is deemed a holder for value to the
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,
whether the failure is an ascertained and liquidated
amount or otherwise.
Absence of consideration total lack of any valid
consideration for the contract is only a personal
defense.
Failure of consideration failure or refusal or one
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 - transfer of title to the instrument,
with the assignee generally taking only such title
as his assignor has, subject to all defenses
available against his assignor;
2. Negotiation - transfer of a negotiable instrument
from one person to another made in such a
manner as to constitute the transferee the holder
thereof
3. By Operation of Law such as by succession, by
insolvency.
Distinctions between Negotiation and Assignment
NEGOTIATION
1. Refers only to
negotiable
instruments;
2. The transferee is a
holder;
3. A holder in due course
is subject only to real
defenses;
4. A holder in due course

ASSIGNMENT
1. Refers generally to an
ordinary contract;

may acquire a better

right than that of a
prior party
5. A general indorser
warrants the solvency
of prior parties;

merely steps into the

shoes of the assignor;

6. An indorser is not
liable unless there be
presentment and
notice of dishonor;
7. Negotiation is
governed y the NIL.

2. The transferee is an
assignee;
3. An assignee is subject
to both real and
personal defenses;
4. Generally, an assignee

5. An assignor does not

warrant the solvency of
prior parties unless
expressly stipulated or
the insolvency is known
to him;
6. An assignor is liable
even without notice of
dishonor;
7. Governed by Arts. 1624
to 1635 (on assignment
of credits) of the Civil
Code.

Methods of negotiation
1. Order Instrument Indorsement
Delivery.
2. Bearer Instrument Delivery only.

and

Indorsement - legal transaction effected by the writing of

one's own name at the:
a. back of the instrument or
b. upon a paper (allonge) attached thereto with or
without additional words specifying the person to
whom or to whose order the instrument is to be
payable whereby one not only transfers legal
title to the paper transferred but likewise enters
into an implied guaranty that the instrument will
be duly paid.
General Rule: indorsement must be of the entire
instrument.
Exception: where instrument has been paid in part, it
may be indorsed as to the residue.

Kinds of indorsement:
a. Special - specifies the person to whom or to
whose order, the instrument is to be payable
(sec. 34)
b. Blank - specifies no indorsee:

Instrument is payable to bearer and may be

negotiated by delivery (sec. 34)

May be converted to special indorsement by

writing over the signature of indorser in
blank any contract consistent with character
of indorsement.
c. Restrictive - when the indorsement either:
i. Prohibits further negotiation of the
instrument; or
ii. Constitutes the indorsee the agent of
the indorser; or
iii. Vests the title in the indorsee in trust
for or to the use of some other persons.
But mere absence of words implying
power to negotiate does not make an
indorsement restrictive.

A restrictive indorsement confers upon the

indorsee the right:
a. To receive payment of the
instrument;
b.

To bring any action thereon that the

indorser could bring;

c.

To transfer his rights as such

indorsee, where the form of the
indorsement authorizes him to do
so.

The purpose of this kind of indorsement is to

transfer title without guaranteeing payment
by the primary party.
It does not mean, however, that the qualified
indorser incurs no liability at all. The effect
is merely to limit his liability. He is
secondarily liable for breach of is warranties
as an indorser under Sec. 65. Thus, he is
liable if the instrument is dishonored by
NON-ACCEPTANCE or NON-PAYMENT due to:
a. forgery;
b. lack of good title to the instrument
indorsed;
c. lack of capacity to contract on the part
of prior parties; or
d. the fact that the instrument was
valueless or not valid at the time of the
indorsement which fact was known to
him.
e.

Conditional - right of the indorsee is made to

depend on the happening of a contingent event
Party required to pay may disregard the
conditions.
This kind of indorsement has no effect on the
further negotiation of the instrument. The
party required to pay, if he chooses, may
make payment, disregarding the condition
without incurring any liability because he is
expressly authorized to do so under Sec. 39.
But the person who received payment will
hold the proceeds subject to the right of the
conditional indorser.

f.

Absolute - one by which indorser binds himself to

pay:
i. upon no other condition than failure of
prior parties to do so; and
ii. upon due notice to him of such failure.

g.

Joint - indorsement of instrument payable to 2 or

more persons; all must indorse in order for the
transaction to operate as a negotiation.

Exceptions to the rule requiring joint

indorsement:
Where the payees or indorsees are
partners; and

But all subsequent indorsees acquire only the

title of the first indorsee under the restrictive
indorsement. (sec. 37)
Such indorsement destroys the negotiability of
the instrument and bars further negotiation to
a holder in due course.
d.

Qualified - constitutes the indorser a mere assignor of

the title to the instrument. (sec. 38)
made by adding to the indorser's signature words
like "sans recourse, without recourse",
"indorser not holder", "at the indorser's own risk",
etc.

Where the payee or indorsee

indorsing has authority to indorse
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), and
b. 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
further negotiated by delivery; but the person indorsing specially is liable as indorser to only such holders as make title
through his indorsement.
Note: The rule only applies to originally bearer instruments. If it is originally a BEARER instrument, it will always be a
BEARER instrument. As opposed to an original order instrument becoming payable to bearer, if the same is indorsed
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
indorser whose indorsement is struck out and all indorsers subsequent to him, are thereby relieved from liability on the
instrument.
o If the instrument is payable to bearer on its face, then whether or not there are indorsements on the back of the
instrument would be immaterial to the title of the bearer, who is presumptively the owner and holder by his mere
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.
o Where the instrument is payable to order on its face, the situation is different. First, the indorsement of a special
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
and further negotiate the same. But he is not entitled to enforce payment thereof against any intervening party to whom he
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.