Commercial Law Negotiable Instruments Law

JUN 28
Posted by Magz

1.

Negotiable Instruments written contracts for the payment of money; by its form,

intended as a substitute for money and intended to pass from hand to hand, to give the holder in
due course the right to hold the same and collect the sum due.
2.

Characteristics of Negotiable Instruments:

a.

negotiability right of transferee to hold the instrument and collect the sum due

b.

accumulation of secondary contracts instrument is negotiated from person to person

3.

Difference between Negotiable Instruments from Non-Negotiable Instruments:

4.

Negotiable Instruments

Non-negotiable Instruments

Contains all the requisites of Sec. 1 of the

NIL

does not contain all the requisites of Sec.

1 of the NIL

Transferred by negotiation

transferred by assignment

Holder in due course may have better

rights than transferor

transferee acquires rights only of his

transferor

Prior parties warrant payment

prior parties merely warrant legality of

title

Transferee has right of recourse against

intermediate parties

transferee has no right of recourse

Difference between Negotiable Instruments and Negotiable Documents of Title

Negotiable Instruments

Negotiable Documents of Title

Have requisites of Sec. 1 of the NIL

does not contain requisites of Sec. 1 of NIL

Have right of recourse against intermediate

parties who are secondarily liable

no secondary liability of intermediate parties

Holder in due course may have rights better

than transferor

transferee merely steps into the shoes of the

transferor

Subject is money

subject is goods

Instrument itself is property of value

instrument is merely evidence of title; thing

of value are the goods mentioned in the
document

5.

Promissory Note unconditional promise to pay in writing made by one person to anther,

signed by the maker, engaging to pay on demand or a fixed determinable future time a sum
certain in money to order or bearer. When the note is drawn to makers own order, it is not
complete until indorse by him. (Sec. 184 NIL)
Parties:
1.
2.

maker
payee

6.
Bill of Exchange 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 NIL)
Parties:
1.
2.
3.

drawer
payee
drawee/ acceptor

7.

Check bill of exchange drawn on a bank and payable on demand. (Sec. 185 NIL)

8.

Difference between Promissory Note and Bill of Exchange

9.

Promissory Note

Bill of Exchange

Unconditional promise

unconditional order

Involves 2 parties

involves 3 parties

Maker primarily liable

drawer only secondarily liable

only 1 presentment for payment

generally 2 presentments for acceptance

and for payment

Distinctions between a Check and Bill of Exchange

CHECK

BOE

always drawn upon a bank or banker

may or may not be drawn against a

bank

always payable on demand

may be payable on demand or at a fixed

or determinable future time

not necessary that it be presented for

acceptance

necessary that it be presented for

acceptance

drawn on a deposit

not drawn on a deposit

the death of a drawer of a check, with

knowledge by the banks, revokes the

the death of the drawer of the ordinary

bill of exchange does not

authority of the banker pay

must be presented for payment within a
reasonable time after its issue (6
months)

may be presented for payment within a

reasonable time after its last negotiation.

10. Distinctions between a Promissory Note and Check

PN

CHECK

there are two (2) parties, the maker and

the payee

there are three (3) parties, the drawer,

the drawee bank and the payee

may be drawn against any person, not

necessarily a bank

always drawn against a bank

may be payable on demand or at a fixed

or determinable future time

-always payable on demand

a promise to pay

an order to pay

11. Other Forms of Negotiable Instruments:

a.

certificates of deposits

b.

trade acceptances

c.

bonds in the nature of promissory notes

d.

drafts which are bills of exchange drawn by 1 bank to another

e.

letters of credit

12. Trust Receipt a security transaction intended to aid in the financing of importers and
retailers who do not have sufficient funds to finance their transaction and acquire credit except to
use as collateral the merchandise imported
13. Requisites of a Negotiable Note (PN): (SUDO)
It must:
a.

be in writing signed by the drawer

b.
c.

contains an unconditional promise or order to pay a sum certain in money

be payable on demand or at a fixed determinable future time

d.
be payable to order or to bearer (Sec. 1 NIL)
14. Requisites of a Negotiable Bill (BOE): (SUDOC)
It must:

1.
2.
3.
4.
5.

be in writing signed by the drawer

contains an unconditional promise or order to pay a sum certain in money
be payable on demand or at a fixed determinable future time
be payable to order or to bearer
the drawee must be named or otherwise indicated with reasonable certainty (Sec. 1 NIL)

Notes on Section 1:

In order to be negotiable, there must be a writing of some kind, else there would be

nothing to be negotiated or passed from hand to hand. The writing may be in ink, print or pencil.
It may be upon parchment, cloth, leather or any other substitute of paper.

It must be signed by the maker or drawer. It may consist of mere initials or even numbers,
but the holder must prove that what is written is intended as a signature of the person sought to
be charged.

The Bill must contain an order, something more than the mere asking of a favor.

Sum payable must be in money only. It cannot be made payable in goods, wares, or
merchandise or in property.

A drawees name may be filled in under Section 14 of the NIL

15. Determination of negotiability

1.
by the provisions of the Negotiable Instrument Law, particularly Section 1 thereof
2.
by considering the whole instrument
3.
by what appears on the face of the instrument and not elsewhere
*In determining is the instrument is negotiable, only the instrument itself and no other, must be
examined and compared with the requirements stated in Sec. 1. If it appears on the instrument
that it lacks one of the requirements, it is not negotiable and the provisions of the NIL do not
govern the instrument. The requirement lacking cannot be supplied by using a separate
instrument in which that requirement which is lacking appears.
16. Sum is certain even if it is to be paid with:
a.

interest

b.

in installments

c.

in installments with acceleration clause

d.

with exchange

e.

costs of collection or attorneys fees (Sec. 2 NIL)

17. General Rule: The promise or order should not depend on a contingent event. If it is
conditional, it is non-negotiable.
Exceptions:
a.

indication of particular fund from which the acceptor disburses himself after payment

b.

statement of the transaction which gives rise to the instrument. (Sec. 3 NIL)

But an order or promise to pay out of a particular fund is not unconditional

Notes on Section 3

The particular fund indicated should not be the direct source of payment, else it becomes
unconditional and therefore non-negotiable. The fund should only be the source of
reimbursement.

A statement of the transaction does not destroy the negotiability of the instrument.

Exception: Where the promise to pay or order is made subject to the terms and conditions of the
transaction stated.
18. Instrument is payable upon a determinable future time if:
a.

there is a fixed period after sight/date

b.

on or before a specified date/fixed determinable future time

c.

on or at a fixed date after the occurrence of an event certain to happen though the exact

date is not certain (Sec. 4 NIL)

Notes on Section 4

If the instrument is payable upon a contingency, the happening of the event does not cure
the defect (still non-negotiable)
19. General Rule: If some other act is required other than the payment of money, it is nonnegotiable.
Exceptions:
a.

sale of collateral securities

b.

confession of judgment

c.

waives benefit of law

d.

gives option to the holder to require something to be done in lieu of money (Sec. 5 NIL)
Notes of Section 5

Limitation on the provision, it cannot require something illegal.

There are two kinds of judgements by confession: a) cognovit actionem b) relicta

verificatione

Confessions of judgement in the Philippines are void as against public policy.

If the choice lies with the debtor, the instrument is rendered non-negotiable.

20. The validity and negotiability of an instrument is not affected by the fact that:
1.
it is not dated
2.
does not specify the value given or that any had been given
3.
does not specify the place where it is drawn or payable
4.
bears a seal
5.
designates the kind of current money in which payment is to be made (Sec. 6 NIL)
21. Instrument is payable upon demand if:
a.

it is expressed to be so payable on sight or upon presentation

b.

no period of payment is stipulated

c.

issued, accepted, or endorsed after maturity (Sec. 7 NIL)

Where an instrument is issued, accepted or indorsed when overdue, it is, as regards to the person
so issuing, accepting, or indorsing it, payable on demand.
Notes on Section 7
if the time for payment is left blank (as opposed to being omitted), it may properly be
considered as an incomplete instrument and fall under the provisions of Sec. 14, 15, or 16
depending on how the instrument is delivered.
22. Instrument is payable to order:

where it is drawn payable to the order of a specified person or

to a specified person or his order

It may be drawn payable to the order of:

1.

a payee who is not a maker, drawer, or drawee

2.
3.
4.
5.
6.

the drawer or maker

the drawee
two or more payees jointly
one or some of several payees
the holder of an office for the time being

(Sec. 8 NIL)

Notes on Section 8

The payee must be named or otherwise indicated therein with reasonable certainty.

If there is no payee, there would be no one to indorse the instrument payable to order.
Therefore useless to be considered negotiable.

Joint payees in indicated by the conjunction and. To negotiate, all must indorse.

Being several payees is indicated by the conjunction or.

23. Instrument is payable to bearer :

a.

when it is expressed to be so payable

b.

when payable to the person named or bearer

c.

payable to order of fictitious or non-existent person and this fact was known to drawer

d.

name of payee not name of any person

e.

only and last indorsement is an indorsement in blank (Sec. 9 NIL)

Notes on Section 9

fictitious person is not limited to persons having no legal existence. An existing person

may be considered fictitious depending on the intention of the maker or the drawer.

fictitious person means a person who has no right to the instrument because the maker

or drawer of it so intended. He was not intended to be the payee.

where the instrument is drawn, made or prepared by an agent, the knowledge or intent of

the signer of the instrument is controlling.

Where the agent has no authority to execute the instrument, the intent of the principal is

controlling
24. The date may be inserted in an instrument when:
1.
an instrument expressed to be payable at a fixed period after date is issued undated

2.

where acceptance of an instrument payable at a fixed period after sight is undated (Sec. 13
NIL)

Effects:

any holder may insert the true date of issuance or acceptance

the insertion of a wrong date does not avoid the instrument in the hands of a subsequent

holder in due course

as to the holder in due course, the date inserted (even if it be the wrong date) is regarded

as the true date.

25. Subsequent Holder in Due Course not affected by the following deficiencies:
a.

incomplete but delivered instrument (Sec. 14 NIL)

b.

complete but undelivered (Sec. 16 NIL)

c.
complete and delivered issued without consideration or a consideration consisting of a
promise which was not fulfilled (Sec 28 NIL)
26. Holder in Due Course Affected by Abnormality/Deficiency:
a.

incomplete and undelivered instrument (Sec. 15 NIL)

b.

maker/drawers signature forged (Sec. 23 NIL)

27. Incomplete but Delivered Instrument:

1. Where an instrument is wanting in any material particular:
a.

Holder has prima facie authority to fill up the blanks therein.

b.
It must be filled up strictly in accordance with the authority given and within a reasonable
time.
c.
If negotiated to a holder in due course, it is valid and effectual for all purpose as though it
was filled up strictly in accordance with the authority given and within reasonable time. (Sec. 14
NIL)
2. Where only a signature on a blank paper was delivered:
1.

It was delivered by the person making it in order that it may be converted into a negotiable
instrument

2.

The holder has prima facie authority to fill it up as such for any amount. (Sec. 14 NIL)

Notes on Section 14

if the instrument is wanting in material particular, mere possession of the instrument is

enough to presume prima facie authority to fill it up.

material particular may be an omission which will render the instrument non-negotiable

(e.g. name of payee), an omission which will not render the instrument non-negotiable (e.g. date)

in the case of the signature in blank, delivery with intent to convert it into a negotiable

instrument is required. Mere possession is not enough.

28. Incomplete and Undelivered Instrument:
General Rule: Where an incomplete instrument has not been delivered, it will not, if completed
and negotiated without authority, be a valid contract in the hands of any holder against any
person who signed before delivery. (Sec. 15 NIL)
Notes on Section 15

it is a real defense. It can be interposed against a holder in due course.

delivery is not conclusively presumed where the instrument is incomplete

defense of the maker is to prove non-delivery of the incomplete instrument.

29. Complete but Undelivered:

General Rule: Every contract on a negotiable instrument is incomplete and revocable until
delivery for the purpose of giving effect thereto.
a.
If between immediate parties and remote parties not holder in due course, to be effectual
there must be authorized delivery by the party making, drawing, accepting or indorsing. Delivery
may be shown to be conditional or for a special purpose only
b.

If the holder is a holder in due course, all prior deliveries conclusively presumed valid

c.
If instrument not in hands of drawer/maker, valid and intentional delivery is presumed until
the contrary is proven (Sec. 16 NIL)
Rules on delivery of negotiable instruments:
1)

delivery is essential to the validity of any negotiable instrument

2)

as between immediate parties or those is like cases, delivery must be with intention of

passing title
3)

an instrument signed but not completed by the drawer or maker and retained by him is

invalid as to him for want of delivery even in the hands of a holder in due course
4)

but there is prima facie presumption of delivery of an instrument signed but not completed

by the drawer or maker and retained by him if it is in the hands of a holder in due course. This
may be rebutted by proof of non-delivery.
5) an instrument entrusted to another who wrongfully completes it and negotiates it to a holder
in due course, delivery to the agent or custodian is sufficient delivery to bind the maker or
drawer.
6)

If an instrument is completed and is found in the possession of another, there is prima facie

evidence of delivery and if it be a holder in due course, there is conclusive presumption of

delivery.
7) delivery may be conditional or for a special purpose but such do not affect the rights of a
holder in due course.
30. General rule: a person whose signature does not appear on the instrument in not liable.
Exception:
1.
2.
3.

one who signs in a trade or assumed name (Sec. 18)

a duly authorized agent (Sec. 19)
a forger (Sec. 23)

31. General rule: an agent is not liable on the instrument if he were duly authorized to sign for
or on behalf of a principal.
Requisites:
1.
2.
3.

he must be duly authorized

he must add words to his signature indicating that he signs as an agent
he must disclose his principal (Sec. 20 NIL)

Notes on Section 20

if an agent does not disclose his principal, the agent is personally liable on the instrument.

32. Per Procuration operates as notice that the agent has a limited authority to sign.

Effects:

the principal in only bound if the agent acted within the limits of the authority given

the person who takes the instrument is bound to inquire into the extent and nature of the

authority given. (Sec. 21 NIL)

33. General rule: Infants and corporations incur no liability by their indorsement or assignment
of an instrument. (Sec. 22 NIL)
Effects:

no liability attached to the infant or the corporation

the instrument is still valid and the indorsee acquires title

34. General rule: a signature which is forged or made without authority is wholly inoperative.
Effects:
1.
2.
3.

no right to retain
no right to give a discharge
no right to enforce payment can be acquired.

(Sec. 23 NIL)

Exception:

the party against whom it is sought to be enforced is precluded from setting up the forgery
or want of authority.
Notes on Section 23

Section 23 applies only to forged signatures or signatures made without authority

Alterations such as to amounts or like fall under section 124

Forms of forgery are a) fraud in factum b) duress amounting to fraud c) fraudulent

impersonation

Only the signature forged or made without authority is inoperative, the instrument or

other signatures which are genuine are affected

The instrument can be enforced by holders to whose title the forged signature is not

necessary

Persons who are precluded from setting up the forgery are a) those who warrant or admit

the genuineness of the signature b) those who are estopped.

Persons who are precluded by warranting are a) indorsers b) persons negotiating by

delivery c) acceptors.

drawee bank is conclusively presumed to know the signature of its drawer

if endorsers signature is forged, loss will be borne by the forger and parties subsequent
thereto

drawee bank is not conclusively presumed to know the signature of the indorser. The
responsibility falls on the bank which last guaranteed the indorsement and not the drawee bank.

Where the payees signature is forged, payments made by the drawee bank to collecting
bank is ineffective. No debtor/creditor relationship is created. An agency to collect is created
between the person depositing and the collecting bank. Drawee bank may recover from collecting
bank who may in turn recover from the person depositing.
Rules on liabilities of parties on a forged instrument
In a PN

a party whose indorsement is forged on a note payable to order and all parties prior to him
including the maker cannot be held liable by any holder

a party whose indorsement is forged on a note originally payable to bearer and all parties
prior to him including the maker may be held liable by a holder in due course provided that it was
mechanically complete before the forgery

a maker whose signature was forged cannot be held liable by any holder

In a BOE

the drawers account cannot be charged by the drawee where the drawee paid

the drawer has no right to recover from the collecting bank

the drawee bank can recover from the collecting bank

the payee can recover from the drawer

the payee can recover from the recipient of the payment, such as the collecting bank

the payee cannot collect from the drawee bank

the collecting bank bears the loss but can recover from the person to whom it paid

if payable to bearer, the rules are the same as in PN.

if the drawee has accepted the bill, the drawee bears the loss and his remedy is to go
after the forger

if the drawee has not accepted the bill but has paid it, the drawee cannot recover from
the drawer or the recipient of the proceeds, absence any act of negligence on their part.

35. Every negotiable instrument is deemed prima facie to have been issued for a valuable
consideration. (Sec. 24 NIL)
Effects:

every person whose signature appears thereon is a party for value

presumption is disputable

36. 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. (Sec. 26 NIL)

37. Effect of want of consideration:

1.

Absence or failure of consideration may be set up against a holder not a holder in due course
(personal defense)
2.
Partial failure of consideration is a defense pro tanto (Sec 28 NIL)

Notes on Section 28

absence of consideration is where no consideration was intended to pass.

failure of consideration implies that consideration was intended by that it failed to pass

the defense of want of consideration is ineffective against a holder in due course

a drawee who accepts the bill cannot allege want of consideration against the drawer

38. An accommodation party is one who signs the instrument as maker, drawer, acceptor, or
indorser without receiving value therefor and for the purpose of lending his name to some other
person.
Effects:

an accommodation party is liable to the holder for value notwithstanding that such holder
knew that of the accommodation. (Sec. 28 NIL)

Notes on Section 28

the accommodated party cannot recover from the accommodation party

want of consideration cannot be interposed by the accommodation party

an accommodation maker may seek reimbursement from a co-maker even in the absence
of any provision in the NIL; the deficiency is supplied by the New Civil Code.

he may do this even without first proceeding against the debtor provided:

a.

he paid by virtue of judicial demand

b.

principal debtor is insolvent

39. An instrument is negotiated when:

1.
2.

it is transferred from one person to another

that the transfer must be in a manner as to constitute the transferee a holder

For a bearer instrument by delivery

For payable to order by indorsement and delivery (Sec. 30 NIL)

40. Indorsement to be must be:

1.
2.

written
on the instrument itself or upon a piece of paper attached (Sec. 31 NIL)

Notes on Section 31

the paper attached with the indorsement is an allonge

an allonge must be attached so that it becomes a part of the instrument, it cannot be

simply pinned or clipped to it.

41. Kinds of Indorsements:
1.
Special (Sec. 34)
2.
Blank (Sec. 35)
3.
Restrictive (Sec. 36)
4.
Qualified (Sec. 38)
5.
Conditional (Sec. 39 NIL)
42. Effects of indorsing an instrument originally payable to bearer:

it may further be negotiated by delivery

the person indorsing is liable as indorser to such persons as to make title through his

indorsement (Sec. 40 NIL)

Notes on Section 40

Section 40 applies only to instruments originally payable to bearer

It cannot apply where the instrument is payable to bearer because the only or last

indorsement is in blank.
43. A holder may strike out any indorsement which is not necessary to his title.
Effects:

An indorser whose indorsement is struck out is discharged

All indorsers subsequent to such indorser who has been discharged are likewise relieved.
(Sec. 48 NIL)
44. Effects of a transfer without endorsement:

the transferee acquires such title as the transferor had

the transferee acquires the right to have the indorsement of the transferor

negotiation takes effect as of the time the indorsement is actually made (Sec. 49 NIL)

45. Rights of a holder:

a holder may sue in his own name

a holder may receive payment.

Effects:

if in due course it discharges the instrument (Sec. 51 NIL)

46. Requisites for a Holder in Due Course (HDC):

a.

receives the instrument complete and regular on its face

b.
became a holder before it was overdue and had no notice that it had been previously
dishonored if such was the fact
c.

takes the instrument for value and in good faith

d.

at time he took the instrument, no notice of infirmity in instrument or defect in the title of

the person negotiating it (Sec. 52 NIL)