Law on Negotiable Instruments Reviewer PDF

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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 u...

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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 “unconditional promise”

3. The instrument must contain an “unconditional order”

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 Section 4 and 7 of NIL: or determinable future time or on demand? 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 non-negotiable instrument?

A non-negotiable 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 non-negotiable instrument may not be negotiated but it may be assigned or transferred.

Define Money

Money means what is coined or stamped by public authority and has value fixed by public authority. Money means cash. It is a medium of exchange authorized or adopted by a government as part of its currency. It includes all legal tender.

What is a promissory note?

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 or determinable future time, a sum of certain money to order or to bearer. A promise to pay a sum of money.

Who are parties to a promissory note?

The one who makes the promise and signs the instrument is called the maker, and the party to whom the promise is made or the instrument is payable is called the payee.

What is a holder?

Every person to whom an instrument is delivered is a HOLDER.

Sample of promissory note payable to order.

August 30, 2004 Manila P10,000.00 For value received, I promise to pay to the order of Piolo Pascual the sum of Ten Thousand (Php 10,000.00) Pesos on or before September 30, 2004 at his house at Pateros, Metro Manila. (Sgd.) Sam Milby

Sample of promissory note payable to bearer.

August 30, 2004 Manila P10,000.00 Two months after date, I promise to pay to Piolo Pascual or bearer the sum of Ten Thousand (Php 10,000.00) Pesos.

(Sgd.) Sam Milby

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 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 determinable future time a sum certain in money to order or to bearer. An order made by 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 P10,000.00 Thirty days after date, pay to Piolo Pascual or order the sum of Ten Thousand (Php 10,000.00) Pesos. Value received and charge the same to the account of (Sgd.) Sam Milby 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 interest; or b. By stated installments; or c. By stated installments, with a provision that upon default in payment of any installment or of interest the whole amount shall become due; or

d. With exchange, whether at fixed rate or at the current rate; or e. With costs of collection or an attorney’s 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 P10,000.00, with interest at 15% per annum. 2. Interest at increased or reduced rate: I promise to pay Piolo or order P10,000.00 with interest at 18% per annum from date until paid; 15% if paid when due. 3. Accrual/rate of interest not specified: If no date from which interest is to run – computed from the date of the instrument; if no date in the instrument – computed from the issue. If rate is not specified – the legal rate is 6% (Article 2209, civil code, now 12%) 4. Interest usurious - can still be negotiated, the contract remains valid as to the principal only.

What is the meaning of “stated installments”?

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 P10,000.00 in two installments as follows: P500.00, on or before November 1, 2004 and P500.00, 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 P10,000.00 with interest at 15% per annum in four equal monthly installments beginning December 1, 2004. 3. Acceleration at option of holder – this is non-negotiable.

What does “with 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. 1. Payment in foreign currency

2. Payment with exchange rate Moses promises to pay Hana or order $1,000.00 with exchange at ¾% 3. Exchange not applicable to inland or domestic bill. When is a promise or order unconditional?

Section 3: An unqualified order or promise to pay is unconditional if: a. There is an indication of a particular fund out of which reimbursement is to be made, or a particular account to be debited with the amount, or b. There is a statement of the transaction which gives rise to the instrument Note: It contains a promise or order to pay. 1. It must be payable absolutely and it is not subject to any condition or contingency. 2. It has the ability to circulate freely from one person to another.

When promissory note contains a promise to pay?

There is an unconditional promise to pay: 1. Implied promise to pay a. b. c. d. e.

I promise Payable To be paid I agree to pay I guaranty to pay

2. Bare acknowledgement of indebtedness does not imply negotiability 3. Use of words of negotiability When bill of exchange contains an order to pay?

There is an unconditional order to pay Note: Mere request to pay does not constitute an order, but the word “please” implies a polite command.

When does an instrument becomes payable at a determinable future time?

Section 4:

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 P1,000.00 on September 1, 2004 2. Sixty days after date, I promise to pay P or order the sum of P1,000.00. 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 P1,000.00 2. On or before the start of the next school semester, I promise to pay P or order P1,000.00 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 P1,000.00 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 P1,000.00 upon his reaching the age of maturity.

Enumerate exceptions to the non-negotiability clause

Section 5: Provisions with -1. Sale of collateral securities 2. Confession of judgment 3. Waiver of benefit granted by 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 maker’s or drawer’s 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 presentation; 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:

The instrument is payable to bearer: 1. When it is expressed to be so payable 2. When it is payable to a person named therein or bearer 3. When it is payable to the order of a fictitious or nonexisting person, and such fact was known to the person making it so payable 4. When the name of the payee does not purport to be the name of any person 5. When the only or last indorsement is an indorsement in blank Note: 1 and 2 are bearer instrument. 3, 4, and 5 are called order instrument What is a bearer instrument?

Instrument payable to the bearer which can be transferred by mere delivery without indorsement.

What is the effect of an instrument payable to a dead person?

It shall become an instrument payable to the bearer.

Sample of blank indorsement payable to bearer

Pay to P or order P1,000.00 (Sgd.) R To W Manila At the back of the endorsement, sign the instrument:

(Sgd.) P

Define Ante-dated

An instrument is ante-dated when it contains a date earlier that the true date of its issuance. Example: Instrument is issued on June 30, 2004 but dated June 15, 2004.

Define Post-dated Instrument

An instrument is post-dated 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 ante-dated or post-dated 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 by the maker or drawer to the payee or holder

Distinguish Section 14 from Section 15; 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 up; 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: When instrument is incomplete but delivered?

1. Authority to fill-up the blanks: The holder or the person in possession has prima facie authority to complete an incomplete instrument by 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 by M from P. This gives prima facie authority to fill-up 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 M’s 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 makes a note with the name of the payee in blank. P steals it. P – A – B – C – D, holder in due course. D cannot enforce the note against M.  constitutes a forgery. 2. Defenses available to parties prior to delivery. D can enforce the note against P, A, B, and C because their signature appear on the instrument after delivery, the instrument is valid as to them. When does delivery become effectual?

Section 16 of NIL: Delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved.

Define delivery. Define issue.

Delivery means transfer of possession, actual or constructive, from one person to another with intent to transfer title thereto. Issue is defined as the first delivery of the instrument, complete in form, to a person who takes it as holder.

What are the rules when the instrument is mechanically complete?

 An undelivered instrument is inoperative because delivery is a prerequisite to liability. M – P, M keeps it in his drawer.  

M is not liable P cannot acquire rights

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 f...