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1 PART I THE NEGOTIABLE INSTRUMENTS LAW (ACT NO. 2031.) INTRODUCTION Historical background of our Negotiable Instruments Law. (1) U.S. Uniform Negotiable Instruments Act. — Our law is patterned with very slight modifications after the Uniform Negotiable Instruments Act of the United States of 1896 d...

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PART I THE NEGOTIABLE INSTRUMENTS LAW (ACT NO. 2031.) INTRODUCTION Historical background of our Negotiable Instruments Law. (1) U.S. Uniform Negotiable Instruments Act. — Our law is patterned with very slight modifications after the Uniform Negotiable Instruments Act of the United States of 1896 drafted by the National Conference of Commissioners on Uniform State Laws. The Conference was appointed in 1895 to revise and codify the law merchant in the United States as there was much confusion and lack of uniformity then in the court decisions on the subject resulting from the variety of statutes pertaining to commercial paper enacted by various state legislatures. This law, in turn, is based upon and largely copied from the English Bill of Exchange Act of 1882, a codification of the laws in England governing bills of exchange, promissory notes and checks. Most state legislatures adopted the Act as the main law for regulating commercial paper. (2) U.S. Uniform Commercial Code. — The Uniform Negotiable Instruments Act has been replaced in part by Article 3 and in part by other articles of the Uniform Commercial Code (U.C.C.) prepared under the auspices of the National Conference of Commissioners on Uniform State Law and the American Law 1

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THE NEGOTIABLE INSTRUMENTS LAW

Institute. Proposed for adoption by the legislatures of the states, the first draft of the Code was finished in 1952 although the Code is revised periodically. (see 11 Am. Jur. 2d 64.) The Code seeks to simplify and modernize the law of commercial transactions. Each state has adopted part or all of the Code. (3) Act No. 2031. — Our Negotiable Instruments Law was enacted as Act No. 2031 on February 3, 1911. It took effect 90 days after its publication on March 4, 1911 in the Official Gazette of the Philippine Islands was completed. (Sec. 198.) The Act, therefore, took effect on June 2, 1911. Since then, our Congress has not seen fit to amend any of its provisions. The evident purpose of the Act is to facilitate transactions in commercial paper and to promote free flow of credit. Since then, our Congress has not seen fit to amend any of its provisions. (4) Code of Commerce. — Prior to the passage of Act No. 2031, the law then existing and in force as to negotiable instruments could be found in Book II of the Code of Commerce, from Articles 443 to 556. All these articles, with the exception of those on crossed checks, have been repealed. (Sec. 197.) Application and purpose of the Negotiable Instruments Law. (1) The Act applies only to negotiable instruments (Arnold vs. Jordan, 215 Ala. 693, 112 So. 305.) or to those instruments which meet the requirements laid down in Section 1 of the law. It is designed to describe fully the law of negotiable instruments. It “covers the entire subject of negotiable instruments and must be treated as a complete body of law upon the subject and controlling in all cases to which it is applicable.” (Bank of Italy, etc. vs. Symmes, 118 Cal. App. 716, 5 P. [2d] 956.) It is decisive as to all matters comprehended within its terms. (2) Any case not provided for by the Act shall be governed by the provisions of existing legislation or in default thereof, by the rules of the law merchant. (Sec. 196.) The Civil Code has no effect on its provisions except to supply any deficiency in cases not covered by the Act. (see Art. 18, Civil Code.)

INTRODUCTION

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(3) The law was enacted for the purpose of facilitating, not hindering or hampering transactions in commercial paper. Thus, the said statute should not be tampered with haphazardly or lightly nor should it be brushed aside in order to meet the necessities in a single case. (State Investment House, Inc. vs. Court of Appeals, 217 SCRA 32 [1993].) Function and importance of negotiable instruments. Negotiable instruments play an important role in the business world. (1) As a substitute for money. — Although they do not constitute legal tender (Art. 1249, ibid.), and are not money, they are used as a substitute for money. One of the distinctive characteristics of a negotiable instrument is its negotiability which allows it to pass freely from hand to hand in the commercial markets and to take the place of money in commercial transactions free from all personal defenses (see Secs. 57-58.) available against the original owner. A negotiable instrument differs from money, however, in that the former is valuable or worthless depending upon the financial ability of the parties to them. The purpose of the law is to place negotiable instruments on such footing that it would be freely accepted without question in commercial transactions and thereby facilitate trade. (2) As a medium of exchange for most commercial transactions. — Negotiable papers, particularly checks, constitute, at present, the media of exchange for most commercial transactions. They thus increase the purchasing medium in circulation. Without them circulating among business houses and individuals, more money either in coins or bank bills would be needed in circulation to take care of the ever increasing everyday business transactions. It would be very difficult for the economy to prosper. (3) As a medium of credit transactions. — Negotiable instruments also serve as a medium of credit transactions. “A man does not always have property, or valuable property rights which he can turn into cash at any moment. These things, however, measure his credit and he avails himself of his credit by executing

PREFACE Upon first impression, the Negotiable Instruments Law may appear to be complex and abstruse. However, it is believed that the subject may be presented in a simplified and concise manner without sacrificing the proper scope, so that it may be easily understood by a wide range of readers. It is with this aim in mind that this modest work which is now on its seventh edition has been prepared. It will be noticed that the authors did not limit themselves to merely explaining the law, giving illustrations, and citing or quoting judicial decisions and opinions of well-known writers on bills and notes. In many instances, they expressed their own opinions especially where there is a conflict of views. Needless to say, they do not pretend to speak with authority. This book also discusses at some length the Civil Code provisions on documents of title and the Warehouse Receipts Law. The authors have deemed it fit to include as appendices important specialized laws in the mercantile field. While this volume is intended primarily to serve as a textbook for law students, it may conveniently be used by lawyers, judges, and business executives as a handy reference. The authors acknowledge their grateful appreciation to former Justice Catalino R. Castañeda, Jr. of the Sandiganbayan, a classmate in the U.P. College of Law and co-author of “Comprehensive Review of Business Law” of the first author of this work, for his valued comments and suggestions. HECTOR S. DE LEON HECTOR M. DE LEON, JR. June 2010 iii

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TABLE OF CONTENTS PART I THE NEGOTIABLE INSTRUMENTS LAW (ACT NO. 2031.) Preface ................................................................................................................

iii

INTRODUCTION 1. 2. 3. 4. 5. 6. 7. 8. 9.

Historical background of our Negotiable Instruments Law .......... Application and purpose of the Negotiable Instruments Law ...... Function and importance of negotiable instruments ...................... Characteristics or features of negotiable instruments ..................... The theory of negotiable instruments ............................................... Forms of negotiable instruments ........................................................ Doubt resolved in favor of negotiability ........................................... Contracts and negotiable instruments compared ............................ Commercial papers with limited negotiability ................................

1 2 3 4 6 6 7 7 8

TITLE I NEGOTIABLE INSTRUMENTS IN GENERAL Chapter I. — Form and Interpretation Section 1 ............................................................................................................ 1. 2. 3. 4. 5. 6. 7. 8. 9.

Commercial paper defined ............................................................. Formal requirements of negotiability in general ........................ Negotiable instrument defined ..................................................... Formal requirements explained .................................................... Non-negotiable instrument defined ............................................. Money defined ................................................................................. Money not governed by Act .......................................................... Promissory note defined ................................................................ Original parties to a promissory note .......................................... v

11 11 12 12 12 16 16 17 17 17

10. Bill of exchange defined ................................................................. 11. Original parties to a bill of exchange ........................................... 12. Idea and purpose of a bill of exchange ........................................

21 21 23

Sec. 2 ..................................................................................................................

24

1. 2. 3. 4. 5. 6.

Certainty of sum payable ............................................................... Sum to be paid with interest .......................................................... Sum to be paid by stated installments ......................................... Extension clauses ............................................................................. Sum to be paid with exchange ...................................................... Sum to be paid with costs of collection and/or attorney’s fee ....................................................................................

24 25 27 28 28

Sec. 3 ..................................................................................................................

31

1. 2. 3. 4.

29

When promissory note contains a promise to pay ..................... When bill of exchange contains an order to pay ........................ When promise or order to pay unconditional ............................ Indication of a particular fund out of which reimbursement is to be made ................................................... Indication of a particular fund out of which payment is to be made .............................................................. Indication of a particular account to be debited with the amount ......................................................................... Statement of transaction which gives rise to instrument ..........

35 36

Sec. 4 ..................................................................................................................

37

5. 6. 7. 1. 2.

31 32 33 34 34

Certainty of time of payment ........................................................ Payable “when able,” etc.; within reasonable time ....................

38 42

Sec. 5 ..................................................................................................................

42

Acts in addition to payment of money ................................................

42

Sec. 6 ..................................................................................................................

46

1. 2. 3. 4. 5.

Effect of omission of date ............................................................... Effect of omission of value ............................................................. Effect of omission of place ............................................................. Effect of presence of seal ................................................................ Effect of designation of particular kind of current money payable ...........................................................................

48

Sec. 7 ..................................................................................................................

49

When instrument payable on demand ................................................

49

Sec. 8 ..................................................................................................................

52

1. 2.

46 47 48 48

When instrument payable to order .............................................. Effect where payee not named or described ...............................

52 54

Sec. 9 ..................................................................................................................

55

When instrument payable to bearer .....................................................

55

vi

Sec. 10 ................................................................................................................

61

Substance criterion of negotiability ......................................................

61

Sec. 11 ................................................................................................................

61

1. 2. 3.

Presumption as to date ................................................................... Date in instrument payable at a fixed future date ...................... Date in instrument payable on demand ......................................

61 62 63

Sec. 12 ................................................................................................................

63

1. 2. 3.

Meaning of ante-dating and post-dating ..................................... Effect of ante-dating and post-dating .......................................... Date when instrument takes effect ...............................................

63 64 65

Sec. 13 ................................................................................................................

65

1. 2.

When date may be inserted ........................................................... Effect of insertion of wrong date ...................................................

65 66

Sec. 14 ................................................................................................................

67

1. 2. 3.

Steps in issuance of negotiable instrument ................................. Application of Sections 14, 15, and 16 .......................................... Rules where instrument incomplete but delivered ....................

67 68 68

Sec. 15 ................................................................................................................

71

Rules where instrument incomplete and undelivered ......................

71

Sec. 16 ................................................................................................................

72

Rules where instrument mechanically complete ................................

73

Sec. 17 ................................................................................................................

77

Rules of construction in case of ambiguity or omission ....................

78

Sec. 18 ................................................................................................................

82

Persons liable on an instrument ............................................................

82

Sec. 19 ................................................................................................................

83

Signature by an authorized agent .........................................................

83

Sec. 20 ................................................................................................................

84

1. 2. 3.

When agent may escape personal liability .................................. Disclosure by agent of principal ................................................... Use of descriptive words without disclosure of principal ........

85 86 87

Sec. 21 ................................................................................................................

88

1. 2.

Meaning of procuration ................................................................. Effect of signature by procuration ................................................

88 88

Sec. 22 ................................................................................................................

89

1. 2.

Effect of indorsement by incapacitated persons ......................... Effect of indorsement by a corporation ....................................... vii

89 91

Sec. 23 ................................................................................................................ 1. 2. 3. 4. 5. 6. 7. 8. 9.

Forgery explained ........................................................................... Application of Section 23 ............................................................... Cases of forgery in general ............................................................ Extent of the effect of forgery ........................................................ Exceptions to the general rule ....................................................... Persons precluded from setting up the defense of forgery ....... Right of drawee to recover payment made where drawer’s signature was forged ............................................... Right of drawee to recover payment where payee’s or indorser’s signature was forged ......................................... Rights of parties in cases of forged indorsements ......................

91 91 92 93 93 95 95 113 120 123

Chapter II. — Consideration Sec. 24 ................................................................................................................ 1. 2.

131

Meaning of consideration in general ............................................ Presumption of consideration .......................................................

131 131

Sec. 25 ................................................................................................................

132

1. 2. 3.

Valuable consideration in general ................................................ Adequacy of consideration ............................................................ Antecedent or pre-existing debt ....................................................

132 133 134

Sec. 26 ................................................................................................................

135

What constitutes a holder for value .....................................................

135

Sec. 27 ................................................................................................................

136

Where a holder has lien on instrument ................................................

136

Sec. 28 .............................................................................