Handout 8 - Law on Negotiable Instruments RFBT Review-converted PDF

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REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONSNegotiable Instruments Law also known as Act No. 2031 Functions of Negotiable Instruments a. They are substitutes for money. b. They increase the purchasing medium in circulation. c. They increase credit transactions. Attributes of Negotiable Instruments...

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REGULATORY FRAMEWORK FOR BUSINESS TRANSACTIONS Negotiable Instruments Law also known as Act No. 2031

1. Functions of Negotiable Instruments a. They are substitutes for money. b. They increase the purchasing medium in circulation. c. They increase credit transactions. 2. Attributes of Negotiable Instruments a. Accumulation of Secondary Contracts is an attribute of a negotiable instrument which means that as the instrument is passed from one person to another, secondary contracts are entered into thereby increasing the chances of the holder to collect the amount payable on the instrument. b. Negotiability is an attribute of a negotiable instrument which allows it to be passed from one hand to another similar to money, so as to give the holder in due course the right to hold the instrument and collect the sum payable, for himself free from personal defenses available to prior parties. 3. Differences between Assignment of Credit by Assignor and Negotiation of Negotiable Instruments by a General Indorser a. Assignment is applicable to non-negotiable promissory note while negotiation is applicable to negotiable promissory note. b. The transferee in assignment is called an assignee while the transferee in negotiation is called a holder. c. The transferor in assignment is called an assignor while the transferor in negotiation is called a general indorser if there is indorsement. d. The assignee in assignment is subject to personal defenses available to prior parties while the holder in due course in negotiation holds the instrument free from personal defenses available to prior parties. e. The assignor does not warrant the solvency of maker unless expressly stated while the general indorser guarantees the solvency of maker as long as notice of dishonor will be given to him. 4. Kinds of Negotiable Instruments a. Negotiable Promissory Note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed time or at a determinable future time, a sum certain in money to order or to bearer. i. Requisites of Negotiable Promissory Note 1. 2. 3. 4.

It must be in writing and signed by the maker. It must contain an unconditional promise to pay a sum certain in money. It must be payable on demand, or at a fixed time or at a determinable future time. It must be payable to order or bearer.

ii. Parties in a Negotiable Promissory Note 1. Maker - He drew the promissory note and therefore primarily liable up to the extent of the tenor of the promissory note. 2. Payee - He is the person to whom the instrument is originally payable. 3. Indorser - He signs and delivers the instruments to the subsequent holder after its issuance by the maker and therefore secondarily liable for the nonpayment of the promissory note. He negotiates the instrument by indorsement coupled with delivery. 4. Person negotiating the instrument by mere delivery - He negotiates the instrument by mere delivery and therefore not secondarily liable for the nonpayment of the promissory note unless there is violation of his warranties. 5. Holder is the payee or indorsee of an order negotiable instrument, who is in possession of it or the bearer of a bearer negotiable instrument.

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b. Negotiable Bill of Exchange is an unconditional order in writing addressed by one person (drawer) to another (drawee) signed by the person giving it (drawer), requiring the person (drawee) to whom it is addressed to pay on demand or at a fixed time or at a determinable future time a sum certain in money to order or to bearer. i. Requisites of Negotiable Bill of Exchange 1. 2. 3. 4. 5.

It must be in writing and signed by the drawer. It must contain an unconditional order to pay a sum certain in money. It must be payable on demand, or at a fixed time or at a determinable future time. It must be payable to order or bearer. Since it is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

ii. Parties in a Negotiable Bill of Exchange 1. Acceptor - He assented to the order of the drawer and therefore primarily liable to the bill of exchange up to the extent of his acceptance. 2. Drawer - He drew the bill of exchange and commanded the drawee and therefore secondarily liable for the nonacceptance or nonpayment of the bill of exchange. 3. Payee - He is the person to whom the instrument is originally payable. 4. Indorser - He signs and delivers the instruments to the subsequent holder after its issuance by the drawer and therefore secondarily liable for the nonacceptance or nonpayment of the bill of exchange. He negotiates the instrument by indorsement coupled with delivery. 5. Person negotiating the instrument by mere delivery - He negotiates the instrument by mere delivery and therefore not secondarily liable for the nonacceptance or nonpayment of the bill of exchange unless there is violation of his warranties. 6. Holder is the payee or indorsee of an order negotiable instrument, who is in possession of it or the bearer of a bearer negotiable instrument. 7. Referee in case of need is a person whose name is inserted by a drawer of a bill or any indorser to whom the holder may resort in case of need; that is to say, in case the bill is dishonored by non-acceptance or non-payment. He becomes a party only upon his acceptance. 8. Acceptor for honor is a person who accepted the bill of exchange instrument to save the credit of the parties to the instrument or some party to it as the drawer, drawee, or indorser or somebody else by intervening the protested bill of exchange and accepting it with the consent of the holder. c. Negotiable Check is a special type bill of exchange drawn on a bank payable on demand. 5. Indicate whether the following instruments is negotiable or non-negotiable a. b. c. d. e. f. g. h. i. j. k. l. m. n. o. p. q. r.

I promise to pay B or bearer the sum of P1,000. Sgd M. Mr. O will oblige A by paying P or order P1,000 on his account. To A. Sgd O. I swear to pay to the order of P P1,000. Sgd. M Due B P1,000. Sgd. M Due B or order on demand P1,000. Sgd. M Pay to P or bearer P1,000 if he becomes a CPA. To Z. Sgd. M I promise to pay to P or order P1,000 five days after the death of Jay Cruz. Sgd.M. I promise to pay X or order P5,000 (10) days from this date January 1, 2031, at 10% interest p.a. Sgd. M. I promise to pay to P or order P10,000 together with all sums that may be due to him on December 31,2020. Sgd M. I promise to pay to P or order P1,000 in candies. Sgd. M. I promise to pay to P or his order Australian $1,000 on December 31, 2050 exchange rate. Sgd. M I promise to pay P or order P1,000 on or before October 4. Sgd M. Pay to P or his assigns P1,000. To A. Sgd. M. I promise to pay to the order of bearer P1,000. Sgd. M. I promise to pay to P or his agent or his collector, the sum of P10,000. Sgd. M. Payable to possessor P10,000 on demand. Sgd M. I promise to pay to bearer Kim P1,000. Sgd M. I promise to pay to Andrea P1,000. Sgd. A.

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6. Instances when the sum is certain a. The sum payable is sum certain for negotiable instruments although it is to be paid under the following instances i. With interest 1. Pay to C or order P1,000 with 6% interest p.a. until paid ii. By stated installments 1. I promise to pay to B or bearer P4,000 in four equal monthly installments beginning January 1,2001. 2. I promise to pay to the order of B the sum of P100 in two installments as follows: (1) P45 on Feb. 1, 1985 and (2) P55 on June 1, 1985. iii. By stated installments with escalation clause iv. With exchange, whether at a fixed rate or at a current rate. 1. Pay to B or order USA $1,000 on the December 31, 2016 exchange rate. v. With costs of collections or an attorney’s fee 1. Pay to C or order P100,000 with collection costs and attorney’s fee if not paid at maturity. 7. Instances when the promise remains to be unconditional making the instrument negotiable i. An indication of a particular fund out of which reimbursement is to be made. 1. Pay to P or order P100,000 and reimburse yourself out of my money on your hands. ii. An indication of a particular account to be debited with the amount. 1. Pay to P or bearer P10,000 and debit the amount to my receivable. iii. A statement of the transaction which gives rise to the instrument. 1. Pay to P or order P5,000 on account of contract of sale between you and SM Co. 8. Instance when the instrument is non-negotiable because of conditional promise i. An order or promise to pay out of a particular fund. 1. Pay to B or order P1,000 out of my salary in the company. 9. Instances when the instrument is payable on a determinable future time a. At a fixed period after date or sight. i. 20 days after sight, pay to the order of Ann P15,000. b. On or before a fixed or determinable future time specified therein. i. On or before December 1,2051, I promise to pay P or order P2,000. c. On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain. i. On the death of Art Santos, I promise to pay B or order P1,000. 10. Instances when the instrument is non-negotiable because not payable at a determinable future time a. 5 days before the death of Alice, I promise to pay P or bearer P10,000. b. I promise to pay P or bearer P12,000 10 days after L passes the bar examination. c. I promise to pay P or order P15,000 when my means permit me to do so. 11. Instances when a negotiable instrument is payable on demand a. Where it is expressed to be payable on demand, or at sight or on presentation. i. I promise to pay P1,000 to the order of P on demand. b. Where no time for payment is expressed. i. I promise to pay to the order of P P1,000. c. Where an instrument is issued, accepted, or indorsed when overdue, as regards to the person issuing, accepting or indorsing it. i. Issued on December 25, 2020 but dated January 5, 2018. I promise to pay to the order of P P1,000.

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12. Instance when payable on a fixed time a. On December 5, 2050, I promise to pay B or order P1,000. 13. Provisions that do not affect negotiability of an instrument a. Authorization of sale of collateral securities in case the instrument be not paid at maturity. i. I promise to pay to B or order P4,000 on October 1, 2014, provided, however, that if this note is not paid at maturity date, the ring pledged may be sold at public auction. b. Authorization of confession of judgment if the instrument be not paid at maturity. c. Waiver of the benefit the law intended for the advantage or protection of the obligor. i. Six months after December 1, 2043, I promise to pay to P or order P3,000 waiving the right to appeal and all of valuation appraisement. d. Giving the holder an election to require something to be done in lieu of payment of money. i. I promise to pay B or order P1,000 or 10 dogs at the option of holder.

14. Instances that affect negotiability of an instrument a. I promise to pay to bearer P12,000 and to deliver him two pencils. b. I promise to pay P or order P1,000 or three cellphones. 15. Instances that do not affect the negotiable character of an instrument a. It is not dated. b. It does not specify the value given, or than any value had been given therefore. c. It does not specify the place where it is drawn or the place where it is payable. d. It bears a seal. e. It designated a particular kind of current money in which payment is to be made. 16. Instances when an instrument is payable to order a. When it is payable to the order of a specified person or b. When it is payable to a specified person or his order c. 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 any of the following payees 1. A payee, who is not maker, drawer, or drawee 2. The drawer 3. The maker 4. The drawee 5. Two or more payees jointly 6. One or some of several payees 7. The holder of an office for the time being 17. Examples of Order Instruments a. b. c. d. e. f. g.

I promise to pay to the order of A P10,000. Pay to the order of ourselves P100.00. To B. I promise to pay to the order of myself P1,000. Pay to yourself or order P1,000. To Y. I promise to pay to A and B or order P1,000. I promise to pay to the order of A or B P1,000. I promise to pay to the order of cashier of DLSU P1,000.

18. Instances when the instrument is payable to bearer a. When it is expressed to be so payable to bearer. b. When it is payable to a person named therein or bearer. c. 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. d. When the name of the payee does not purport to be the name of any person. e. When the only or last indorsement is an indorsement in blank. 19. Examples of Bearer Instrument a. b. c. d. e.

Pay to bearer P10,000. Pay to P or bearer P15,000. Pay to the order of Batman P1,000. (The issuer knew that the Batman is a fictitious person.) Pay to cash. Pay to the order of money. Pay to the order of cash. Pay to X or order P1,000. To Y. Sgd G. Indorsement. Sgd Y.

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Distinctions between Order Instrument and Bearer Instrument Order Instrument Bearer Instrument Holder Payee/Indorsee + Possessor Possessor or Bearer of of Instrument Instrument Indorsement + Delivery Mere Delivery or Indorsement Modes of Negotiation + Delivery Originally order instrument Originally bearer instrument Conversion can be converted to bearer can never be converted to instrument by blank order instrument because an indorsement and reverted to originally bearer instrument is order instrument by special always a bearer instrument. indorsement. Forged Indorsement Real defense to parties prior Not a real defense but merely to forgery a personal defense known as want of delivery 20. Rules of constructions of ambiguity or omissions in negotiable instrument a. Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable, but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount. 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 thereof. c. Where the instrument is not dated, it will be considered to be dated as of the time it was issued. d. Where there is a conflict between the handwritten and printed provisions of the instrument, the handwritten provisions prevail. e. Where the instrument is so ambiguous that there is doubt whether it is a bill of exchange or promissory note, the holder may treat it as either bill of exchange or promissory note at his election. 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 deemed to be an indorser. g. Where an instrument containing the words “I promise to pay” is signed by two or more persons, they are deemed to be solidarly liable thereon while where an instrument containing the words “We promise to pay” is signed by two or more persons, they are deemed to be jointly liable. 21. Requisites for an agent signing in behalf of the principal to escape liability on the instrument a. The agent must be duly authorized. b. The agent must add words to his signature indicating that he signs as an agent, that is, for or on behalf of a principal, or in representative capacity. c. The agent must disclose his principal and need not be in the signature. 22. Incidents in the life of negotiable instrument particularly negotiable bill of exchange a. Issuance or Issue is the first delivery of the instrument complete in form to a person who takes it as a holder. b. Delivery refers to the transfer of possession with intent to transfer title or it consists principally by placing the transferee in possession of the instrument but it must be accompanied by an intent to transfer title. c. Negotiation is the transfer of an instrument from one person to another as to constitute the transferee the holder of the instrument. i. Bearer instrument is negotiated by (1) mere delivery or (2) indorsement coupled with delivery. ii. Order Instrument is negotiated by indorsement completed by delivery.

1. Principles of Indorsement a. The indorsement must be written on the instrument itself or upon a separate paper attached thereto known as Allonge. b. The signature of the indorser, without additional words, is a sufficient indorsement because blank indorsement is allowed. c. The indorsement must be an indorsement of the entire instrument. d. When the instrument has been paid in part, it may be indorsed as to the

residue.

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e. The indorsement or assignment of the instrument by a corporation or by an infant passes the property therein, notwithstanding that from want of capacity, the corporation or infant may incur no liability thereon. f. An indorsement which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more indorsees severally is not a valid negotiation of the instrument. g. Where an instrument does not bear date after the maturity of the instrument, every negotiation is deemed prima facie to have been effected before the instrument was overdue. h. Where the name of a payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described adding, if he thinks fit, his proper signature. i. Where any person is under obligation to indorse in a representative capacity, he may indorse in such terms by indicating that he is merely an agent and disclosing his principal to negate personal liability. j. In the absence of contrary evidence, every negotiation is deemed prima facie to have been effected at the place where the instrument is dated. k. In case an instrument payable to order is merely delivered without indorsement and the transferor indicates the indorsement at a date later than the date of delivery, the indorsement takes effect for the purpose of determining whether the transferee is a holder in due course at the time the indorsement was actually made. l. Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all of two or more payees or indorsees must indorse unless the one indorsing has the authority to indorse for others. m. Where an instrument is payable to the order of two or more payees or indorsees who are partners, anyone of the payees may indorse because the there is presumption of mutual agency among the payees. n. Where an instrument is drawn or indorsed to a person as "cashier" or other fiscal officer of a bank or corporation, it is deemed prima facie to be payable to the bank or corporation of which he is such officer, it may be negotiated by the indorsement of the bank or corporation or it may be negotiated by the indorsement of such officer of the bank or corporation. 2. Instances of invalid indorsement if the amount is P500 a. Pay to P P200. Sgd Indorser b. Pay to P P100 and Pay to R P400. Sgd Indorser c. Pay to A or B P500. Sgd Indorser 3. Instances of valid indorsement if the amount is P500 a. Pay to A and B P500. Sgd Indorser b. Assuming P200 has already been paid, Pay to A P300. Sgd Indorser 4. Kinds of indorsement a. Special indorsement is an indorsement which specifies the person to whom, or to whose order, the instrument is to be payable, and the indorsement of such indorsee is necessary to the further negotiaition of the instrument. If the instrument is originally an order instrument, special indorsement will revert an instrumen...