Negotiable Instruments Law

CHAPTER I – Form and Interpretation

Study Guide:
I. Definitions
1. Negotiable promissory note – Sec. 184 defines a negotiable promissory note as an
unconditional promise in writing made by one person to another, signed by the
maker, engaging to pay on demand or at a fixed r determinable future time, a sum
certain in money to order or to bearer.
2. Negotiable bill of exchange – Sec. 126 defines a negotiable bill of exchange as 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 to bearer.
3. Legal tender – it refers to coins and bank notes that must be accepted when issued
in payment of debt.
4. Procuration – an act of giving power to another to act as an agent or a proxy on
one’s behalf.
5. Non-negotiable instrument – these are commercial papers that does not have the
characteristics and does not conform to the requisites of a negotiable instrument as
stated in Section 1 of the Law on Negotiable Instruments.
6. Fictitious person – people who are not existing but are used falsely in documents or
in any other similar form.
7. Immediate parties – these are people, firms or entities who have close relationships
that are involved through contracts or agreements or joint signatories thereof.
8. Remote parties – these are the persons who are not familiar with the circumstances
related with the negotiation of an instrument.

II. Discussions
1. Enumerate the requirements as to form and content of an instrument in order that
it will be negotiable under the law.
2. The drawee of a bill of exchange: dishonors or refuses to pay it. Will he be liable (a)
to payee; (b) to the drawer? Explain.
3. Is ante-dating or post-dating an instrument illegal? Explain and illustrate.
4. What is the effect of the insertion of a wrong date in an undated instrument by the
holder: (a) as to him? (b) With respect to a holder in due course?
5. May a person be held liable on an instrument although his signature does not
appear thereon? Explain.
6. In case of forged instruments, who are not allowed by law to set up the defense of
forgery, and are, therefore made liable to the holder?
7. When is a promise or order to pay unconditional? Give two examples of terms
appearing in an instrument which will not make the promise or order conditional.
8. Suppose an instrument contains a promise or order to do an act in addition to the
payment of money. Will it render the instrument non-negotiable? Explain.
9. When is an instrument payable to bearer? Give the reason why an instrument
payable to a fictitious person is treated as a bearer instrument.
10. Who are the original parties to a :
(a) Promissory note
(b) Bill of exchange
11. Is the sum payable certain although the instrument is to be paid with costs incurred
in collecting the same plus attorney’s fees? Why?
 12. Will the doing of an act in addition to the payment of money, make and instrument
non-negotiable? Explain.
13. When is an instrument payable to order? To whose order may an instrument be
made payable?
14. Will the failure to name the payee affect the negotiability of an instrument? Explain.
15. Give the requisites in order that an agent who signs a negotiable instrument on
behalf of a principal may not be held personally liable to the payee or holder.

III. Problems
Explain or state briefly the rule or reason for your answers.

1. A bill of exchange signed by W addressed to X states: “Please pay Y or order

P10,000.” Is the bill negotiable?

2. “I promise to pay X P10,000 within 10 days before I retire from government

service.” Is the note negotiable?

3. An instrument signed by W payable to X was indorsed by blank by X by simply

writing his name on the back thereof. The instrument was given by X to Y in
payment for goods sold by Y. Is the note negotiable in the hands of Y?

4. A promissory note signed by W with the amount and payee in blank, was stolen by
X who put the amount of P10,000 and his name as payee, and indorsed the note to
Y, then Y to Z. Has Z have the right to enforce against W? X? Y?

5. W signs a promissory note payable to X, indicating that he signs “as agent.” It is

true that he is acting for Y, His principal. May X hold W personally liable?

6. W, maker of a promissory note, payable to order of X who indorses it to Y whose

signature is forged by Z, who, in turn, indorses it to A. State the right of A assuming
he acted in good faith.

7. In the same problem, suppose the note is payable to bearer, and A indorses the
note to B who, in turn, delivers without indorsement to C who acted in good faith.
Give the rights of C.

8. W, maker of a promissory note payable to order of X, a minor, was indorsed by X

to Y. Is X liable to Y if W cannot pay?

9. “I promise to pay X P10,000 or if he wants a brand new six (6) cubic feet
refrigerator. Is the promissory note negotiable?

10. X obtains W’s signature for autograph purposes. Then X writes a negotiable
instrument over it and indorses it to Y, then Y to Z, then Z to A. Can the instrument
be enforced by against W?

11. W prepares a promissory note payable to order of X, his nephew, who steals the
same and indorses it to Y, then Y to Z, from Z to A who as unaware of the theft.
May A recover from W?
12. W, a retiree, issued a promissory note, to wit: “I promise to pay X or order the sum
of P50,000 out of the retirement pay which I will receive from the government”.
Actually, W will get more than P200,000 as retirement benefits. Is the note
negotiable?

13. “I promise to pay X or order P10,000 on or before September 20, 2012, following
the terms and conditions of the contract executed by W this date”. Is the note
negotiable?

14. W, maker, of a promissory note which reads. “I promise to pay X or order P50,000
after I sell my car”. The following day, W was able to sell his car. Is the note a
negotiable instrument?

15. W signs an instrument as follows. “I promise to pay X or order P10,000.” The

instrument is addressed to Y. Is the instrument a promissory note or a bill of
exchange?
CHAPTER II – Consideration
Study Guide:
I. Definitions
1. Consideration – it is the essential cause or reason why parties enter into a
contract.
2. Holder for value – the person whom the instrument is negotiated because of a
valuable consideration given by him.
3. Accommodation party – one who purposely lends his name to another without
receiving any value through the act of signing an instrument as the maker,
drawer, acceptor or indorser.
4. Failure of consideration – it is the non-compliance of a party by failing or
refusing to the consideration agreed upon.

II. Discussions
1. State the liability of an accommodation party on an instrument.
- Under Section 29, an accommodation party is liable on the instrument even in
the absence of consideration between him and the accommodated party even
though the holder of the instrument knew him to be only an accommodation
party.

2. Give the two (2) presumptions that under the law arise from the issue of a
negotiable instrument.
- Under section 24, every negotiable instrument is deemed (1) prima facie to have
been issued for a valuable consideration and (2) that every person whose
signature appears thereon has become a party thereto for value.

3. State the liability of a maker of a promissory note when there is:

(a) Absence of consideration – The note would not be recovered between the
maker and the payee but the maker will be liable between him and a holder
in due course because absence of consideration is not a personal defense
against the latter.

(b) Failure of consideration for the note – the maker is liable only to the extent
of consideration delivered to him known as partial failure of consideration
otherwise the payee could not recover if the consideration is not complied
with.

III. Problems
Explain or state briefly the rule or reasons for your answer.
1. X indorses and delivers to Y as security (pledge) for X’s debt in the amount of
P10,000, a promissory note for P12,000 issued by W in favor of X. How much
can Y collect from W.

2. A promissory note was issued by W without consideration to X who indorsed it

to Y, from Y to Z for value. Give the rights to Z.

3. W signs a bill of exchange in favor of X for P10,000. Give an instance when X

may enforce payment although W has not received any consideration from X
for the bill.
CHAPTER III – Negotiation
Study Guide:
I. Definitions
1. Negotiation – the act of transferring a negotiable instrument from one person
to another to make the transferee the holder thereof.
2. Indorsement – it is a new contract and obligation making the transferee the
holder thereof and it generates an additional contract between the indorser who
warrants the genuineness of the instrument and all subsequent holders.
3. Assignment – transfer of the title to an instrument including all the defenses
available against the assignor without the need of an indorsement.
4. Issue – it is the first delivery of a complete instrument to a person who take it
as a holder.
5. Restrictive indorsement – an indorsement that destroys the negotiability of the
instrument because it either prohibits further negotiation, constitute that the
indorsee is an agent of the indorser or vests title to the indorsee for the benefit
of a third party or the indorser.

II. Discussions
1. Give at least four (4) distinctions between negotiation and assignment.
NEGOTIATION ASSIGNMENT
Mode of Transfer Effected by delivery or Done by writing signed by
indorsement followed by the transferor
delivery.
Terms Negotiation refers only to Assignment refers
negotiable instruments. generally to ordinary
contracts
Title The transferee becomes a The assignee acquires all
holder in due course that the rights and all the
takes the instrument free defenses available against
from defect in the title of the assignor.
the transferor and subject
only to real defenses.
Liability Indorser is not liable Assignor is always liable
unless there be even if in the absence of
presentment and notice of notice of dishonor.
dishonor.

2. What are the rights of a restrictive indorsee?

- Under Section 37, the rights of a restrictive indorsee is:
o to receive payment of the instrument;
o to bring any action thereon that the indorser could bring;
o to transfer his rights as such indorsee, where the form of the
indorsement authorizes him to do so.

3. Can there be a negotiation to a payee? Explain.

- Yes, there is negotiation to a payee when the first delivery of the instrument is
other than the payee such as the agent of the maker or drawer or when the
instrument is delivered back to the payee by the last holder.

4. Is indorsement necessary in the transfer of an instrument? Explain.

 - Generally, an indorsement is necessary in the execution of a negotiation of an
order instrument but it is not necessary if it is only an assignment of an
instrument or if the instrument is a bearer instrument. Indorsement is also
necessary for a transferee of an instrument payable to his order be considered
as a holder in due course.

5. How and for what purpose or reason is a qualified indorsement made?

- According to Section 38, a qualified indorsement constitutes the indorser a
mere assignor of the title to the instrument and it may be made by adding to the
indorser’s signature the words “without recourse” or any words of similar
import which in effect limits the indorser’s liability to the instrument.

III. Problems
Explain or state briefly the rule or reasons for your answer.
1. X indorsed an instrument by W for P12,000 to Y, to wit: “Pay to Y or order
P10,000.” Is there a valid negotiation?

2. X, payee of a note, indorses the same as follows: “Pay to Y or order.” May Y

negotiate the note by mere delivery?

3. W, issued a promissory note in favor of X who indorsed the note as follows: “Pay
to Y”. May the note be negotiated by Y in the absence of words of negotiability,
to wit: “or order” or “to the order of”?

4. A promissory note by W payable to X or his order is indorsed by X to Y payment

of which is subject to fulfillment by Y of a condition. W paid Y knowing that Y
has not yet complied with the condition. Has X have the right to recover from
W the amount paid to Y?

5. Same problem as above. The note is indorsed successively by X to Z, then Z to

A, A to B, B to C, and C to X. On maturity, X claims payment from C. Has C
have the right to refuse payment from X?
CHAPTER IV –Rights of the Holder
Study Guide:
I. Definitions
1. Personal defenses – these are defenses available between original parties or
immediate parties but not against a holder in due course.
2. Real defenses – these are defenses available against all parties including holders
in due course, immediate and remote parties.
3. Fraud in factum – it is a type of fraud where there is misrepresentation to
deceive one and causes him to enter without negligence into a transaction
without accurately realizing the true character of the instrument and the risk,
duties and obligations incurred by him.
4. Notice of infirmity or defect – Under section 56, to constitute notice of defect or
infirmity, the transferee must have actual knowledge, either of the defect or
infirmity, or of such facts that his action in taking the instrument amounts to
bad faith.

II. Discussions
1. What are the right of a holder in due course?
- Section 57 states the rights of holder in due course:
o holds the instrument free from any defect of title of prior parties
o free from defenses available to prior parties among themselves, and
o May enforce payment of the instrument for the full amount thereof
against all parties liable thereon.
- In Section 51, it is also stated that a holder in due course may sue in his own
name and payment to him in due course discharges the instrument.

2. Enumerate the conditions to qualify one a holder in due course.

- Under Section 52, a holder qualifies as a holder in due course if he has taken the
instrument under the following conditions:
o That it is complete and regular upon its face;
o That he became the holder of it before it was overdue, and without notice
that it has been previously dishonored, if such was the fact;
o That he took it in good faith and for value;
o That at the time it was negotiated to him, he had no notice of any
infirmity in the instrument or defect in the title of the person negotiating
it.

3. When is the title of one who negotiates an instrument defective under the law?
- Under Section 55, the title who negotiates an instrument is defective when he
obtained the instrument or any signature thereto by:
o fraud
o duress
o force and fear
o other unlawful means
o illegal consideration
o he negotiates in breach of faith; or
o other circumstances as to amount to a fraud

4. When is the date of maternity of an instrument?

- The date of maturity of an instrument is the time fixed therein.
 - If payable on demand, it is determined by the date of presentment.
- If payable on occurrence of a specified event which is certain to happen, the date
of maturity is the date when the event actually happened.

5. Illustrate a situation where, in relation to an instrument, there are immediate,

remote, and prior parties.
- D makes and delivers a promissory note to J and J indorses to P, and P to B.
- D-J, J-P and P-B are immediate parties while D and B are remote parties and
D, J and P are prior parties with respect to B.

III. Problems
Explain or state briefly the rule or reasons for your answer.
1. W, a maker of a promissory note; X, payee, increased the amount and indorsed
the note to Y, a holder in due course, and from Y to Z who had notice of the
fraud by X, and from Z to A who had also notice of the defect.
Decide the rights of Z with respect to W, X, and Y, and the rights of A with
respect to all prior parties.

2. X secured without consideration in breach of faith the promissory note of W,

and indorsed it to Y, from Y to Z, from Z to A, the present holder.
(a) Is A required to show that he is a holder in due course?

(b) What is the rule if the breach of faith was instead committed by Y against
Z?

3. M, maker of promissory note for P10,000 in favor of X who indorsed it to Y.

State the right of Y if he received notice of defect in the title of X:
(a) Before he has paid X
(b) After he has paid X P6,
(c) Y nevertheless paid X P10,000 under (a)
(d) Y nevertheless paid X P9, 000 under (b)
CHAPTER V – Liabilities of Parties
Study Guide:
I. Definitions
1. Irregular or anomalous indorser - a person who is not really party to the
instrument but affixes his signature on the instrument before its delivery.
2. Party primarily liable – the person absolutely required to pay by the terms of
the instrument
3. Indorser – Undr section 63, an indorser is a person placing his signature upon
an instrument other than a maker, drawer or acceptor unless he clearly indicates
by appropriate words his intention to be bound in some other capacity.
4. Acceptor – an acceptor is the one who accepts an instrument and will be liable
for payment thereof according to the tenor of his acceptance.
5. Maker – the one who makes a negotiable instrument and engages himself to pay
it according to his tenor and admits the existence of the payee and his then
capacity to indorse.

II. Discussions
1. Give the distinctions between a maker of a promissory note and the drawer of a
bill of exchange.
Drawer Maker
Issues a bill of exchange Issues a promissory note
Secondarily liable Primarily liable
Can limit his liability Cannot limit his liability

2. Give the distinctions between a general indorser and an irregular indorser.

General Indorser Irregular Indorser
Makes either blank or special Always makes a blank indorsement
indorsement
Indorses the instrument after its Indorses before its delivery to the
delivery to the payee payee
Liable only to the parties subsequent Liable to the payee and subsequent
to him parties unless he signs for the
accommodation of the payee which
makes him liable only to all parties
subsequent to the payee.

3. Give the principal distinction between a primarily liable party and a secondarily
liable party.
primarily liable party secondarily liable party
Absolutely and unconditionally Conditionally bound to pay the
required to pay by the terms of the instrument upon maturity
instrument upon maturity

4. What conditions must be complied with to make a general indorser liable under
an instrument?
- Under Section 66, a general indorser is liable when he engages on due
presentment of the instrument that it shall be accepted or paid or both
according to its tenor and that if it be dishonored and necessary proceedings are
 duly taken, he will pay the amount thereof to the holder or to any subsequent
indorser who may be compelled to pay it.

III. Problems
Explain or state briefly the rule or reasons for your answer.
1. W, drawer, X, drawee of a bill of exchange payable to order of Y was indorsed
successively to, Z, A, and lastly, to B, the present holder. X publicly made it
known that he would not accept the bill. Learning this, B immediately tried to
recover from W. Decide.

2. Same problem above. Afer accepting the bill, X discovered that the signature of
Z was not genuine. X denies liability. Decide.

3. Same problem as (1). It was established that Z signed the instrument at the
instance y os not liableand for the benefit of A for the purpose of identifying Y,
the payee. For this reason, Z denies liability as an indorser. Decide.

4. Suppose in the first problem, the instrument is a promisory note payable to

bearer and delivered to Y. It was negotiated by delivery by Y to Z in whose
hands the note was dishonored by W because of insolvency. Y denies liability
to Z. Decide.

5. Same problem. After dishonor, Z negotiated also by delivery, the note to A, a

holder in due course, concealing the lack of capacity of W to contract (not
insolvency), being a minor. Are Y and Z liable to A?