Negotiable instruments – characteristics

a. Negotiability –usually promissory note, bill of exchange

b. Accumulation of secondary contracts

Requisites

1. It must be in writing and signed by the maker or drawer

- It can be made on leather or on whatever surface so long as it is movable. Its negotiability can be
understood from the face of the instrument. The signature can be placed at any place of the instrument.
The burden of proving the legitimacy of a signature belongs to the one alleging its falsity.

What is important is that he intends to be bound on that signature

2. It must contain an unconditional promise or order to pay a sum certain in money-

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.
For money’s value may fluctuate and at the very least it tries to account for such fluctuations
The sum is certain in money if holder is able by looking at the instrument to determine the
amount he is entitled to upon maturity
As long as the money entitled to is computable by mere looking however if the amount is by
discretion of the maker then it is non negotiable since no set amount to be ascertained or
computed
In some certain instances,
a. With an interest rate, still negotiable provided it is computable. Lack of date
b. By stated installments, the date of installments and its rate must be provided
c. By stated installments with acceleration clause. But no option by the holder for there would
be no definite time of payment.
d. By stated installments with a extension clause. If the time extended if by option of the
holder, it is allowed for it is already due. But not for the obligor for he may extend it for so
long
CSSS
3. It must be payable on demand or at a fixed or determinable future time –
It must be payable on all events
a. Payable at a fixed or determinable future time – there must be no contingency or an
uncertain event

4. It must be payable to order or bearer

(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 more several payees; or
(f) The holder of an office for the time being.
PMDJSO

(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.
ENFPI

5. Where the instrument is addressed to drawee, he must be named or otherwise indicated

therein with reasonable certainty

Role of negotiable instruments

a. As a substitute for money

b. As a medium for exchange or commercial transactions
c. As a medium for credit transactions

The place and the date are not essential to the negotiability of the instrument except in certain cases
when the date is necessary to determine when the note is due

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 or determinable future time a sum certain in money to order or to bearer. (Sec. 126.)
From the foregoing, it will be seen that a bill of exchange is essentially an order made by one person to
another to pay money to a third person. For brevity, a bill of exchange is usually called a "bill." If drawn
on a bank and payable on demand, the order bill is, by definition, called check. (Sec. 185.) The check is
the most common form of order paper

There a three parties involved in a bill of exchange

1. The drawer – the one who makes the instrument

2. The drawee – the one order to pay- in a check, it is the bank. Can become the acceptor
3. The payee – the one the instrument is in favor of

A drawee-bank is not liable for its refusal to pay a check on account of insufficient funds
notwithstanding the fact that a deposit may be made later in the day. Where the
deposit is sufficient, the failure of a bank to pay the check of the drawer entitles the
drawer to substantial damages without any proof of actual damages.
When promise is unconditional. — An unqualified order or promise to pay is unconditional within the
meaning of this Act, 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.
But an order or promise to pay out of a particular fund is not unconditional.

The drawee is not limited to the money in his hands belonging to the drawer. 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.
EXAMPLE:
"Pay to the order of P PI,000.00 and reimburse yourself from the rentals of my house."
The drawee may pay the amount out of any fund. It is only the reimbursement that is to come from the
rentals.

But an instrument which is simply chargeable to a particular account (infra.) is negotiable. In this case,
payment is not confined to that fund, but is to be made whether it should fail or otherwise, and it is
mentioned only for the purpose of informing the drawee, as to his means of reimbursement.

The test of negotiability 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.

(1) "I promise to pay P or order the sum of P10,000.00 out of my salary in the government," or "out of
the proceeds of the sale of my shares of stocks."
(2) "Pay to bearer the sum of P10,000.00 out of the dividends which I may receive from X corporation."
(3) "Pay to bearer the sum of PI0,000.00 out of my money in your hands" or "out of my share of the
profits."

In each of the above cases, the maker or drawee is limited to the fund indicated and is not supposed to
pay if that fund should prove insufficient. The note, however, is not made uncollectible. The right or
contract must be resolved under ordinary contract law.

The intention to limit payment to a particular fund must be made plain. If the language used is
ambiguous or obscure, courts usually decide in favor of negotiability

EXAMPLES:
(1) "I promise to pay P or order the sum of PI,000.00 to be debited with his current account with me/'
(2) "Pay P or order the sum of PI,000.00 and charge the same to my account" or "to my share of the
profits."
(3) "Pay P or order PI,000.00 on account of my contract with you."

In the above cases, the instrument is payable absolutely and not out of a particular fund. It merely
indicates a particular account out of which the holder or drawee is to reimburse himself. The instrument
is to be paid first after which the particular account indicated will be debited.

"I promise to pay to the order of P P300,000.00 being the price of a car this day sold and delivered to
me."
The statement merely identifies the transaction which gives rise to the instrument. It does not qualify
the order or promise to pay making it conditional. The instrument is to be paid whether or not the cont
Terms and conditions contained in another paper. — If the promise or order is "subject to or governed
by the terms and
conditions of our contract executed by us on ___________________ ," the
instrument is not negotiable because the obligation to pay is burdened with the terms and conditions of
another contract, subjecting recovery on the Instrument to defenses available under the contract.
Furthermore, this will require an examination of said contract to determine the rights and obligations under
the instrument. Such instrument is non-negotiable regardless of what the terms of the contract actually are.
As already stated, the negotiability of the instrument must be determinable from what appears on its face
alone and not elsewhere, (see Sec. 1.)
In short, to destroy negotiability, the reference to a collateral contract must show that the obligation to
pay is burdened with the conditions of that contract. (Powell & Powell v. Greenleaf & Currier, 104 Vt.
480,162 Atl. 377.)
The rule in Section 3 may be stated thus: "The negotiability of a bill or note is not affected by a reference
which is simply: (a) a recital of the consideration for which the paper was given; or (b) a statement of
the origin of the transaction; or (c) a statement that it is given in accordance with the terms of a contract
between the same parties." (ibid.)

Determinable future time means

1. At a fixed period after date or sight – after sight means after being seen
2. On or before a fixed or determinable future time – time that can be determined with certainty
3. On or at a fixed period after the occurrence of a specified event which is certain to happen,
though the time of its happening be uncertain – specified means certain to happen and not a
contingency which not uncertain. Must be after the occurrence
ABA

Section 5- GR if it contains an additional act to be done, then it is non-negotiable, exceptions are the
following. CCWE

1. Sale of collateral securities in the instrument is not paid at maturity

2. A confession of judgment if not paid at maturity – it does not affect but it is not enforceable; it is
void for being contrary to public policy
3. Waiver of benefit given by any law for the protection or advantage of the obligor
4. Gives the holder an election to have something done in lieu of payment of money – if the holder
has choice then negotiable but if option belongs to the payor then it is non negotiable
Sec 6 – not affecting

1. Not dated

Take note that omission would still not affect negotiability since the holder is allowed to
fill them up.
(a) where said date is tied to the date of issue (e.g., an undated note is "payable thirty days after date");
or
(b) where interest is stipulated for the purpose of determining when the interest is to run (see Sec.
17[c].); or
(c) in the case of the 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

2. Does not specify the value given – there is presumption that money or consideration is given. No
need to say what it was
3. Does not specify the place where it was drawn or where it is payable
4. Bears a seal – no change in effect if with seal and without seal
5. Designates a particular kind of money to be payment. This allowed

DVPBP

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.

An instrument is payable on demand

1. Payable on demand when expressed to be payable on

a. On demand
b. On presentation
c. On sight
d. So is an instrument that is already due and demandable
2. No time for payment is expressed

When it is payable on order

1. Of a specified person
2. To him or his order

It is then indorsed by him when purchased. The buyer will be simply be the assignee of the right
The payee then would have to be specified or indicated with certainty. So he could indorse it and it
could become negotiable

When payable to bearer – negotiation takes place upon delivery

1. Expressed to be so payable to bearer

2. Payable to a person named therein or bearer
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.) Under the Uniform Commerce Code (UCC), an Instrument
(i.e., Pay to order P or bearer") is an order instrument, "unless the bearer words are handwritten
or typewritten. (Sec. 3-110[3], thereof.) The assumption is that if the words "or bearer" are
added by the maker or drawer, then presumably the maker or drawer intended that they should
control. But an instrument payable to "bearer or P," according to a noted authority, is not
negotiable
3. Payable to the order of a fictitious or non existing person – such fact must be known to the
person making it so payable. If known, it would mean he had no intention for it to be payable to
order since they could not possibly indorse it.
4. Payable to a person who does not purport to be the name of any person – pay to cash pay to
payroll
5. The only or last indorsement is blank - the indorser does not indicate and indorsee

If the instrument bears a date, it is presumed that said date is the date when it was made or drawn

The Instrument is not invalid for the reason only that it is ante-dated or post-dated, provided this is
not done for an illegal or fraudulent purpose. The person to whom an instrument so dated is delivered
acquires the title thereto as of the date of delivery.
(1) An instrument is ante-dated when it contains a date earlier that the true date of its issuance. Thus,
an instrument issued on July 30,2010 but is dated July 15,2010 is antedated.
(2) An instrument is post-dated when it contains a date later than the true date of its issuance. It is just
the reverse of an antedated instrument. In the example given, if the instrument was issued on July
15,2010, but bears a date of July 30,2010, it is postdated.

If used for illegal or fraudulent purpose then it is an invalid instrument

Blanks to be filled

When date may be inserted

 1. It is payable at a fixed period after date but it was issued undated
2. It is payable at a fixed period after sight and date of acceptance was undated

Then the holder or any subsequent holder may insert the true date. But if wrong date was inserted, it
shall be void as the holder or any subsequent holder who knew that it was wrong for it being fraudulent.
However if it was indorsed to a holder in due course then for him the wrong date is the true date and it
will be enforced as such.

Mechanical act of writing it and delivery in accordance to law

14, 15, 16

Section 14 applies only to an incomplete instrument which has been delivered by the maker or the
drawer to the payee or holder; Section 15, to an incomplete instrument and undelivered; and Section
16, to a complete instrument but undelivered.

When considering Section 14, it is important to bear in mind the distinction between the two classes of
instruments:
(1) 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; and
(2) 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 or figures, or both.

With respect to the first class, one who signs or indorses is liable to bona fide holders thereof on the
doctrine of implied authority, while with respect to the second class, the liability for the amount of the
instrument which has been increased by filling up unoccupied spaces therein is placed upon the doctrine
of negligence

(1) Authority to fill up the blanks. — The holder or the person in possession has prima facie authority to
complete an incomplete instrument by filling up the blanks therein. •
(a) The law speaks of material particular. It may be
defined as 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 incomplete feature or the instrument.

Not only those necessary

It is an authority to complete and not alter. You may not alter those already filled

With intention to turn it into a negotiable instrument

(3) Right against party prior to completion. — The instrument may be enforced only against a party prior
to completion if filled up strictly in accordance with the authority given and within a reasonable time.
(a) If an instrument is incomplete when delivered, the holder has prima facie authority to fill up the
blanks thereon. If a blank paper is delivered by the person making the signature, the holder has prima
facie authority to fill it up for any amount if the person making the signature intended to convert it into
a negotiable instrument. In either case, the presumption is that the blank was filled up in accordance
with the authority given and within a reasonable time, (see Sec. 193.)
(b) The person who signed his name has the burden to rebut the presumption of agency by contrary
proof of want of authority, or proving that the authority granted was exceeded. Such "reasonable time"
for filling up the Instrument is to be reckoned from the time of the issuance of the instrument because
the interest involved is that of the issuer, and! not from the time of each successive negotiation.

(4) Right of holder in due course. — The defense that the instrument had not been filled up in
accordance with the authority given and within a reasonable time is not available as against a holder in
due course

Sec 15, incomplete instrument not delivered. Is not valid and will not hold maker liable even to a holder
in due course unless the maker was negligent and there is a presumed delivery which he must rebut

The thief and subsequent indorser of the instrument are made liable for it

Sec 16 undelivered instrument and it is incomplete and revocable

Delivery refers to actual or constructive with an intention to transfer title

Delivery itself consummates the obligation

However a complete instrument which was undelivered but found to be with a remote or immediate
party privy to the knowledge is presumed to have been delivered and the contrary must be proven

There is presumption to transfer title and it was for a special or particular purpose then prove it and that
there was privy to knowledge

In the hands of a holder in due course.—If a complete instrument is in the hands of a holder in due
course, a valid delivery thereof by all parties prior to him is conclusively presumed

Ambiguous words in the instrument

1. Sums expressed in words and in figures different – words prevail if there is ambiguity to the
words, figure prevail
2. Instrument provides interest but Is not dated where it first accrues – it runs from the date of the
instrument if it has no date then from when it was issued
3. Undated then the date is the date of issue – issue refers to the first delivery . it can be contested
between immediate parties but it is already conclusive for a holder in due course
4. Written prevail over printed for being true intention
5. If there is doubt if it is a bill or a note then holder may choose
6. If doubt as to capacity then he is an indorser only if sign in ambiguous location. Note that
maker/drawer at lower right, drawee lower left and holder who indorses on the back
7. I promise to pay signed by 2 then solidary and we promise to pay joint only