Functions and Importance of Negotiable Instruments

 Substitute for money

 Medium of exchange for most commercial transactions
 Medium of credit transactions

Characteristics or Features of Negotiable Instruments

 Negotiability
 Accumulation of secondary contracts

Form of Negotiable Instruments

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

PROMISSORY NOTE
An unconditional promise in writing made 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.

Parties to a Promissory Note:

 Maker
 Payee

BILL OF EXCHANGE
It 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.

Parties to a Bill of Exchange:

 Drawer
 Drawee
 Payee

The validity and negotiable character of an instrument are not affected by the fact
that:
 It is not dated;
 Does not specify the value given, or that any value has been given therefor;
 Does not specify the place where it is drawn of the place where it is payable;
 Bears a seal; or
  Designates a particular kind of current money in which the payment is to be made.

When payable on demand

An instrument is payable on demand –

 Where it is expressed to be payable on demand, or at sight, or on presentation; or

 In which no time of payment is expressed.

When payable to bearer

The instrument is payable to bearer:

 When it is expressed to be payable; or

 When it is payable to a person named therein or bearer; or
 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
 When the name of the payee does not purport to be the name of any person; or
 When the only or last indorsement is an indorsement in blank.

Effect of ante-dating and post-dating

Ante-dating or post-dating an instrument does not render it invalid or non-negotiable by that fact alone,
provided this is not done for illegal or fraudulent purpose.

It may be negotiated before or after the given date as long as it is not negotiated after its maturity.

Rules where instrument is incomplete but undelivered

The fact that an incomplete instrument, completed without authority, has not been delivered, is a
defense even against a holder in due course.

The invalidity of the instrument is only with reference to the parties whose signature appear on the
instrument before and not after delivery.

Rules of construction in case of ambiguity or omission

 When there is a discrepancy between the sum expressed in words and the sum expressed in
figures, the former controls.
 If the date when the stipulated interest is to run is not specified, the interest runs from the date
of the instruments or if undated, from the date of issue.
 An undated instrument is considered dated as of the date of its issue.
 In case of doubt as to whether an instrument is a bill or a note, the holder may treat either at his
election.
 In case of doubt as to the capacity the person making the instrument intended to sign, he is
deemed to be an indorser.
  An instrument with the words “I promise to pay” signed by two or more persons give rise to
solidary liability.

Effects of forged signature

 When a signature is forged or made without authority of the person whose signature it purports
to be, it is wholly inoperative.
 No right can be acquired through the forged signature.
 Payment made “through or under such forged signature” does not discharge the instrument.
 A person whose signature was forged as maker, drawer, payee or indorsee of a note or a check
was never a party or never gave his consent to the contract which gave rise to the instrument.
Since his signature does not appear in the instrument, he cannot be held liable to anyone.

Extent of the effect of forgery

 It is only the forged or unauthorized signatures which are inoperative.
 Rights may still exist and be enforced by virtue of such instrument as to those whose signatures
are found to be genuine.
 A forged signature prevents any subsequent party from acquiring any right as against any party
whose name appears prior to the forgery.

Persons precluded from setting up the defense of forgery

Those who by their acts, silence or negligence, are estopped from setting up the defense of forgery; and

Those who warrant or admit the genuineness of the signatures in question, namely:

 indorsers;
 acceptors; and
 persons negotiating by delivery.

HOLDER FOR VALUE

 One who has given a valuable consideration for the instrument issued or negotiated to him.
 A holder of a negotiable instrument is presumed to be a holder for value until the contrary is
shown.

NEGOTIATION
 Transfer from one person to another in such a manner as to constitute the transferee the holder
thereof.
 If payable to bearer, it is negotiated by delivery.
 If payable to order, it is negotiated by the indorsement of the holder completed by delivery.
INDORSEMENT
a. It is writing the name of the payee on the instrument with the intent either to transfer the title
to the same or to strengthen the security of the holder by assuming a contingent liability for its
future payment or both.
b. Indorsement alone without delivery conveys no title and creates no holder.
c. It involves a new contract and an obligation on the part of the indorser.
d. It involves the certainty of two things:
 identity of the of the indorser (as being the payee or true owner); and
 genuineness of his signature.
e. The signature of the indorser, without additional words, is a sufficient indorsement. It is called
“blank indorsement”.
f. Indorsement may be on the instrument itself or upon a paper attached thereto.
g. The indorsement must be indorsement of the entire instrument. The reason is that the
instrument must be delivered to the indorsee and there is no partial delivery of one instrument.
h. An instrument payable to bearer on its face may be negotiated by mere delivery without
indorsement. In case it is endorsed, it remains a bearer instrument and may be further
negotiated by mere delivery.
i. An instrument originally payable to order may be negotiated only through indorsement
completed by delivery. When the indorsement is special, the indorsement of the special
indorsee is necessary to the further negotiation of the instrument. When the indorsement is in
blank, the instrument becomes payable to bearer and may be negotiated by mere delivery.

Holder in Due Course

Is a holder who has taken the instrument under the following conditions:

 That it is complete and regular upon its face;

 That he became the holder of it before it was overdue, and without notice that it had been
previously dishonored, if such was the fact;
 That he took it in good faith and for value;
 That at the time it was negotiated to him he had no notice of its infirmity in the instrument or
defect in the title of the person negotiating it.

Rights of a Holder in Due Course

 He may sue on the instrument in his own name;
 He may receive payment and if the payment is in due course, the instrument is discharged;
 He holds the instrument free from any defect of title of prior parties;
 He holds the instrument free from defenses available to prior parties among themselves; and
 He may enforce payment of the instrument for the full amount thereof against all parties liable
thereon.
REAL DEFENSES
Are those that are available against all parties, both immediate and remote, including holders in due
course.

Example:

 Incapacity as far as the incapacitated person is concerned;

 Illegality of contract when declared by law;
 Want of delivery of an incomplete instrument;
 Forgery
 Want of authority, apparent or real
 Duress amounting to forgery
 Fraud
 Prescription
 Discharge at or after maturity

PERSONAL DEFENSES
Those that grow out of the agreement or conduct of a particular person in regard to the instrument
which renders it inequitable to him, though holding the legal title.

Example:

 Filling the wrong date;

 Filling up of blanks not in accordance with the authority given and within reasonable time;
 Want of delivery of complete instrument;
 Absence or failure of consideration
 Simple fraud;
 Acquisition of instrument (not signature) by duress, force or fear;
 Acquisition of instrument by unlawful means.

PERSONAL DEFENSES
Example:

 Acquisition of instrument for an illegal consideration;

 Negotiation of breach of faith;
 Negotiation under circumstances that amounts to fraud;
 Discharge by payment or renunciation or release before maturity date;
 Discharge of party secondarily liable by discharge of prior party;
 Want of authority of the agent who has apparent authority.