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Law on Negotiable Instruments Reviewer
Management (MNGT)
Angeles University Foundation
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Negotiable Instruments PRELIM Hector de Leon, 2004 Edition Questions What constitutes a negotiable instrument (requirements)? Mnemonic: WUPPaW How to determine the negotiability of an instrument? Answers Section 1 of NIL: 1. It must be in writing and signed b the maker or drawer 2. Must contain an unconditional promise or order to pay a sum certain in money 3. Must be payable on demand, or at a fixed or determinable future time 4. Must be payable to order or to bearer 5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. To determine the negotiability of an instrument, the following must be considered: 1. The whole of the instrument 2. Only what appears on the face of the instrument 3. The provisions of the NIL, especially Section 1. Define Negotiable Instrument Section 1 What is a maker? Person issuing a promissory note What is a drawer? Person issuing a bill of exchange Distinguish Promissory Note from Bill of Exchange Why negotiable instrument should be in Promissory Note 1. Requirements: Section 1, Items 1, 2, 3, and 4 Bill of Exchange 1. Requirements: Section 1, Items 1 to 5 2. Issuer: Maker 2. Issuer: Drawer 3. The instrument must contain an 3. The instrument must contain an Nothing could be negotiated or passed from hand to hand if it writing? is not in writing. Note: Writing includes not only that which has been written on paper and with a pen or pencil but also that which is in print. Why is there a need to affix the signature in the instrument? It shall serve as a prima facie evidence of his intention to be bound as either drawer or maker. Who has the burden of proof if the signature of the maker or drawer is denied? The burden of proof is on the holder to show it. Why an instrument must contain an unconditional promise or order to pay? Section 3 of NIL See comments in preceding pages. Why the instrument must be payable in a sum of money? Negotiable instruments must be payable in money because money is the one standard of value in actual business. It does not fluctuate in value. What is a legal tender? 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. Why the instrument must be payable at a fixed or determinable future time or on demand? Section 4 and 7 of NIL: Why the instrument must be payable to order or bearer? Section 8 and 9 of NIL: Why is there a need to name the drawee? To enable the payee or holder to know upon whom he is to call for acceptance or payment. What is a instrument? A instrument is an instrument which is not negotiable, that is, an instrument which does not meet the requirements laid down to qualify an instrument as negotiable one, or an instrument which in its inception was negotiable but has lost its quality of negotiability. Example: A check payable only to a specified person. Note: A instrument may not be negotiated but Pesos. (Sgd.) Sam Mil If no time of payment expressed on the note, what does it mean? Can it be negotiated? Yes, it can be negotiated. Where no time for payment is expressed, an instrument is payable on demand. What is a bill of exchange? A bill of exchange is an unconditional order in writing addressed one person to another, signed the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed determinable future time a sum certain in money to order or to bearer. An order made one person to another to pay money to a third person. Who are original parties to a bill of exchange? 1. Drawer 2. Drawee 3. Payee Sample Bill of Exchange October 30, 2004 Manila Thirty days after date, pay to Piolo Pascual or order the sum of Ten Thousand (Php Pesos. Value received and charge the same to the account of (Sgd.) Sam Mil To Lolita Solis Quezon City What constitutes certain as to sum? Section 2 of NIL: The sum payable is a sum certain within the meaning of this Act, although it is to be paid: a. With or b. stated or c. stated installments, with a provision that upon default in payment of any installment or of interest the whole amount shall become or d. With exchange, whether at fixed rate or at the current or e. With costs of collection or an fee, in case payment shall not be made at maturity. Examples of Sum to be paid with interest 1. Interest at fixed rate: I promise to pay Piolo or order with interest at per annum. 2. Interest at increased or reduced rate: I promise to pay Piolo or order with interest at per annum from date until if paid when due. 3. of interest not specified: If no date from which interest is to run computed from the date of the if no date in the instrument computed from the issue. If rate is not specified the legal rate is (Article 2209, civil code, now 4. Interest usurious can still be negotiated, the contract remains valid as to the principal only. What is the meaning of Stated installments means that: a. The interest of each installments, and b. The due date of each installment must be fixed in the instrument. Example: I promise to pay Piolo or order the sum of in two installments as follows: P500, on or before November 1, 2004 and P500, on or before December 1, 2004. What are the different forms of stated installments? 1. With an acceleration clause if installment or interest is not paid, the whole amount shall become due. 2. Acceleration dependent on maker I promise to pay Piolo or order with interest at per annum in four equal monthly installments beginning December 1, 2004. 3. Acceleration at option of holder this is What does exchange means? Exchange is the charge for the expense of providing funds at the place where the instrument is payable to cover such instrument which is issued at another place. a determinable future time? 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 1. I promise to pay P or order the sum of on September 1, 2004 2. Sixty days after date, I promise to pay P or order the sum of b. On or before a fixed or determinable future time specified therein, or 1. On or before September 1, 2004, I promise to pay P or order 2. On or before the start of the next school semester, I promise to pay P or order c. On or at a fixed period after the occurrence of a specified event, which is certain to happen, the time of happening be uncertain, or 1. Thirty days after the death of his father, I promise to pay P or order What is payable upon a contingency mean? Is it negotiable? It is not negotiable because the order is conditional. The payment is not certain. The event may or may not happen. Example: Pay P or order the sum of upon his reaching the age of maturity. Enumerate exceptions to the Section 5: Provisions with 1. Sale of collateral securities 2. Confession of judgment 3. Waiver of benefit granted law 4. Election of holder to require some other act Enumerate omissions which do not affect the validity and negotiability of instruments. Omissions 1. It is not dated Effect The time it was issued is to be considered. No date in the calendar the nearest date in the month specified. 2. Does not specify the value given or that any value has been given therefor 3. Does not specify the place where it drawn or the place where it is payable It is presumed to be the or place of business or his home. 4. Bears a seal 5. Designates a particular kind of current money in which payment is to be made. When is an instrument considered payable on demand? Section 7: An instrument is payable on demand: a. When it is expressed to be payable on demand or at sight, or on or b. In which no time for payment is expressed. When is an instrument payable to order? Section 8: The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of: 1. 2. 3. 4. 5. 6. A payee who is not maker, drawer, or drawee The drawer or the maker The drawee Two or more payees jointly One or more several payees The holder of an office for the time being. What is the effect when the payee is not named? There is nobody who could give the order or authority to collect. There would be nobody who could indorse the instrument, and, therefore, there is not point considering it negotiable. When is an instrument payable to the bearer? Section 9: Define Instrument An instrument is when it contains a date later than the true date of its issuance. Example: Issued on June 15, 2004 but dated June 30, 2004 When does or instrument takes effect? On the date it is delivered. Can date be inserted in case it is omitted in the instrument? Yes. According to Section 13 of NIL, any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. What is the effect of inserting a wrong date (material alteration)? The instrument will become void with respect to the holder or any one claiming under the holder, but not to the subsequent holder in due course. Note: Kapag holder in due course pwede niyang ienforce ang instrument as if it has a true date. What constitutes the insertion of wrong date? It constitutes a material alteration. What are the steps involved in the issuance of a negotiable instrument? Section 14: 1. The mechanical act of writing the instruments completely in accordance with the requirements 2. The delivery of the complete instrument the maker or drawer to the payee or holder Distinguish Section 14 from Section from Section 16. Section 14 applies only to incomplete instrument which has been delivered. It raises a personal defense. Section 15 applies to and incomplete instrument which are undelivered. It raises a real defense. Section 16 applies to complete instrument which are undelivered. What are two classes of instruments contemplated in Section 14? 1. FIRST CLASS: Those in which obvious blanks are left at the time that are made or indorsed, of such a character as manifestly to indicate that the instruments are incomplete until such blanks shall be filled 2. SECOND CLASS: 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. Distinguish the two classes of blank instruments. First class: One who signs or indorses is liable to the bona fide holder on the doctrine of implied authority. Second class: One who signs or indorses is liable to the bona fide holder on the doctrine of negligence. What is the rule with regard to Section 14: 1. Authority to the blanks: The holder or the person in When instrument is incomplete but delivered? possession has prima facie authority to complete an incomplete instrument filing up the blanks therein. Suppose M issues a note to P with the space for the date left blank in payment for goods purchased M from P. This gives prima facie authority to the blanks. 2. Authority to put any amount Suppose that M just delivered a blank paper containing his signature to P. There must be a proof of signature. 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. Not a holder in due course cannot recover if the instrument is filled up in accordance with the authority given and within the reasonable time. 4. Right of holder in due course. Real defense What is the rule when the instrument is incomplete but not delivered? Section 15 of NIL: 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, as against any person whose signature was placed thereon before delivery. What are the defenses available to parties? 1. Defenses even against a holder in due course. M P, M keeps it in his drawer, P stole it, P A B C D (has knowledge) P and D are immediate parties Delivery may be presumed but subject to rebuttal. M X P (for safekeeping, but P has no idea) P can enforce the instrument as he is not an immediate party with the meaning of Section 16. M X P (for safekeeping, but P has idea) P cannot enforce it against M because the delivery is conditional or for a special purpose only and not for purpose of transferring the title to the instrument. Note: If delivery was made or authorized, it may be shown to have been conditional, or for special purpose only, and not for the purpose of transferring the property (title) to the instrument. What is the rule on conclusive presumption? When the instrument is found in the hand of a person who is a holder in due course, it is conclusively presumed that the delivery thereof is valid and intentional. However, this does NOT apply to an instrument which is INCOMPLETE. The defense is only a personal defense NOT a real defense (incomplete instrument). What is the rule if the construction of the instrument is ambiguous or has omissions? Section 17 of NIL: Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply: a. Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted the words is the sum but if the words are ambiguous or uncertain, reference may be had to the figures to fix the 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 c. Where the instrument is not dated, it will be considered to be dated as of the time it was d. Where there is a conflict between the written and printed provisions of the instrument, the written provisions 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 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 g. Where an instrument containing the word promise to is signed two or more persons, they are deemed to be jointly and severally liable thereon. What is the rule if the sum expressed in words and the figures are different? Example: Pay to the order of P the amount of Five Hundred Pesos (Php The amount in WORD controls. What if the words are ambiguous or uncertain? The marginal figures control. What of the date when stipulated interest to run is not specified? The instrument will earn interest from the date of the note or the date of its issue. If no rate of interest is mentioned, it will draw interest at the legal rate. What if the date is not stated in the instrument? An undated instrument is considered dated as of the date of issue (first delivery). Example: No date, but delivered on October 15, 2005 the note will be considered dated as of the same time. What if the written and printed provisions are in conflict? The WRITTEN provisions control. What if the instrument was signed two or promise to the two are solidarily liable precluded from setting up the forgery or want of authority. 2. Where the forged signature is not necessary to the title in which the case the forgery may be disregarded. Who are precluded from setting up the forgery? 1. Those who their acts, silence, or negligence, are estopped from setting up the defense of forgery. 2. Those who warrant or admit the genuineness of the signature in question. What defense may be availed under Section 23? (Forgery) Real defense even against a holder in due course. What are the two cases of forgery? 1. Forgery of bearer instrument a. The possessor can collect even though it is stolen. b. The owner is liable to a holder in due course. The party alleging forgery has the burden of proof. 2. Forgery of order instrument a. Prior parties can claim b. Subsequent parties cannot claim c. The owner is not liable to any person, even to a holder in due course. Define value. Section 25 of NIL: Value is any consideration sufficient to support a simple contract. An antecedent or debt constitutes and is deemed such whether the instrument is payable on demand or at a future time. Define Consideration. Consideration means an inducement to a contract, that is, the cause, price or impelling influence which induces a contracting party to enter into the contract. Is it necessary that the consideration must be adequate to be considered valuable? A valuable consideration need not be adequate. It is sufficient if it is a valuable one. Are antecedent or debt considered a valuable consideration? Yes. An antecedent or debt is a valuable consideration. What constitutes a holder for value? Section 26 of NIL: 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. A holder for value is one who has given a valuable consideration for the instrument issued or negotiated to him. Example of holder for value M P (without consideration) A (without consideration) B (with value). B is deemed a holder for value. M P (without consideration) A (without consideration) B (with value) C (as a gift). C is the holder for value. What is the rule if the holder for value has lien on the instrument? Section 27 of NIL: Where the holder has a lien on the instrument arising either from contract or implication of law, he is deemed a holder for value to the extent of his lien. What is the effect of want of consideration? Section 28 of NIL: Absence or failure of consideration is a matter of defense as against any person not a holder in due and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise. What is the meaning of Absence of Consideration? Absence of consideration means a total lack of any valid consideration for the contract. Example: M P (promissory note) in payment for a parcel of land which does not exist. P A (a holder in due course) P cannot recover from M because of absence of consideration BUT A can recover from M because absence of consideration is only a PERSONAL DEFENSE not available against a holder in May sue for reimbursement the subsequent party What constitutes a negotiation? May not sue any subsequent party. Section 30: An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated if payable to order, it is negotiated the indorsement of the holder and completed delivery. What are the three methods of transferring a negotiable instrument? 1. Issue the first delivery of the instrument 2. Negotiation involves indorsement 3. Assignment Define Negotiation The transfer of negotiable instrument from one person to another in such a manner as to constitute the transferee the holder thereof. What are the methods of negotiation for an order instrument? 1. Indorsement of the payee to the holder 2. Delivery What are the methods of negotiation for a bearer instrument? A mere delivery without indorsement is enough. Is the payment of a check the drawee bank constitutes a negotiation? No. It is not a negotiation and it does not make the bank a holder. The bank is neither the payee not an indorsee. Define Assignment. Transfer of the title to the instrument. What happens if an order instrument is delivered without indorsement? It cannot be negotiated unless indorsed. Distinguish Negotiation from Assignment. Negotiation Refers only to negotiable instruments Assignment Generally refers to an ordinary contract The transferee is a holder The transferee is an assignee A holder in due course is subject only to a real defenses An assignee is subject to both real and personal defenses. A holder in due course may acquire a better title than that of a prior party. Assignee merely steps on the shoes of the assignor Example: A entered into a contract with B. B issued a promissory note that is (the contract is without consideration) to A. B failed to deliver the goods. Subsequently, B indorsed the note to C. Can C collect from A? NO. C cannot collect from A because the transfer of the note is not thru negotiation (kasi instrument) but way of assignment. In assignment, C merely steps on the shoes of B (the assignor). What are the different kinds of delivery? 1. Constructive delivery 2. Actual delivery What is the rule if the delivery is conditional? 1. Condition precedent parol evidence is admissible 2. Condition subsequent parol evidence is not admissible. How an indorsement is made? Section 31 of the NIL: Indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement. Writing at the back of the instrument. It is completed means of delivery. Is an indorsement to two or more indorsees valid? No. An instrument which purports to transfer the instrument to two or more indorsees severally is not valid and does not operate as a negotiation of the instrument (Section 32). Example:
Law on Negotiable Instruments Reviewer
Course: Management (MNGT)
University: Angeles University Foundation
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