NEGOTIABLE INSTRUMENTS LAW

4 June 2014
Atty Danny Uy

I. FORMS AND INTERPRETATION

What makes an instrument a negotiable instrument? there must be a complete

compliance to Sec 1 of NIL to be considered negotiable instrument.

(Characteristics) Important features of a negotiable instrument

1
2

Negotiability: may pass from hand to hand

Accumulation of secondary contracts: secondary contracts are picked up
and carried along with them as they are negotiated from one person to another,
so far away that the holder does not even know the maker/drawer

NEGOTIATION: An instrument is negotiated when it is transferred from one person to

another in such a manner as to constitute the transferee the holder thereof. If payable to
bearer, it is negotiated by deliver. If payable to order, it is negotiated by endorsement of
the holder and completed by delivery (Sec 30, NIL).

What is a holder? The payee (bearer instrument) or indorsee (order

instrument) of a bill or note who is in possession of it, or the bearer thereof
(Sec 191, NIL).

NOTE: know the differences between transfer, negotiation and

assignment!

Kinds of Negotiation
1
By deliver
2
By indorsement of the holder and completed by delivery

Kinds of negotiable instrument

Know first What can be an instrument?: (1) bill of exchange or (2) promissory
note, before you deal with the issue of negotiability under sec. 1.
1

PROMISSORY NOTE: 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 or determinable future time, a sum certain in
money to order or to bearer (Sec 184, NIL).

U Promise + in writing + to pay + P (pesos) + T (time) + order or

bearer

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 or determinable
future time a sum certain in money to order or to bearer (Sec 126).

U Order + in writing + to pay another + P (pesos) + T (time) +

order or bearer

When is a bill of exchange a promissory note?

1
drawer = drawee
2
drawee = fictitious
3
drawee = no capacity to contract
4
in case of doubt or it is ambiguous, the presumption is it is a

promissory note.

the objective of the law is to make sure that the money

goes to the right person.

Variations in the Bill of Exchange

Trust receipt is a demand draft: im demanding that you pay

Time: Time draft
Location:

If issued and payable in the Phil: Inland bill

If issued and made payable outside the Phil: Foreign

Bill

If issued in the Phil and made payable outside the Phil

(or other way around): Foreign bill

Answer: does not qualify as an inland bill

Bonds and debentures - are promissory notes

Bonds
Debentures

Vinculum juris
(both based on debt)

debtor-creditor

debtor (issuer/borrower)

The government

creditor

The public
the government borrows
money from the public to
bring down inflation

reason

debtor-creditor
The one who issues the
debenture (San Miguel; Cocacola)
Holder of the debenture

Kinds of bonds

T-bills: matures in 1 year

T-bonds: matures in 3 years

T-notes: matures in 5 years

The government does not want to pay

the public all at the same time

there are only two ways to raise funds: (1) sale; (2) loan. In the
first the vinculum juris existing is buyer-seller. In the second,
debtor - creditor. Any of these instruments (securities law,
negotiable instruments law), will fall under either of the two
categories. but they are called by different terms. Hence, the
sophistication.

In case you are not sure of the nature of the instrument because
it was you first time to hear such, choose between the two (B/L
or PN) and you can only be wrong or correct 50% of the time.

Money order is an order instrument but not a negotiable

instrument. Conditions are based on postal law, not NIL.

Parties
Bill of Exchange
Maker
payee
-

Promissory note
drawer
drawee
acceptor
holder; referee in case of need

Is the drawee ever liable? Is the drawee always liable? The drawee is never
liable, until and unless he becomes an acceptor by accepting the
instrument. If you look at the provisions of liabilities, you will never see a
section in the entire NIL a provision which says liabilities of a drawee. you will
see the liabilities of a drawer, indorser, accommodation party and acceptor. But
you will never see any provision which says liabilities of a drawee,
because drawee is never liable.

II. NEGOTIABILITY and ACCUMULATION OF SECONDARY

CONTRACTS

Why is there a need to define a holder? the law even made a distinction between
a holder and a holder in due course. think about it? because of the second feature:
accumulation of secondary contracts

Accumulation of secondary contracts allows for a situation where the maker or

the drawer may not eventually know to whom he is liable to. that is the purpose
of negotiability. Thus the question: am i liable to the person holding the
instrument?

Somewhere between A and G, that instrument may be stolen, may be forged, or

materially altered, to the point that the person who made the instrument or drew
the bill of exchange will not even know who is the holder. To make sure that he is
paying the right person, the law needed to define holder. To make sure that
he is not able to defend against the person who is now in possession of it, when
that person qualifies as the holder in due course personal defences will not be
available. He has to pay.

a holder in due course holds the instrument free from any defeat
of title of prior parties, and free from defences available to prior parties
among themselves, and may enforce payment of the instrument for the
full amount thereof against all parties liable thereon (Sec 57, NIL).

Holder in due course is free from: (1) defects of title and (2) defences of
prior parties.

Because of the feature called accumulation of secondary contract the danger that
he will be paying the wrong person is there. And so the definition of the holder
and holder in due course are provided. this is important in relation to chapter
in discharge.

Accumulation of secondary contract can take 2 forms: Transfer can take 2

forms.
1
Negotiation
2
Assignment
Transfer

If you want to transfer, you

can either negotiate or assign.

HOW to Transfer:
(1) by negotiation
(2) by assignment

Negotiation
If i negotiate, the person in
possession becomes the
holder or holder in due
course

HOW to negotiate:
(1) by delivery - if payable
to bearer
(2) by endorsement
completed with delivery if payable to order

Assignment
If i assign, the person who
receives it becomes the
assignee.
*** assignee can never be a
holder in due course because
only a holder can be HDC

The only context i know that

there can be endorsement
and delivery in an assignment
(outside negotiation) is in
warehouse receipts law.

If you want to transfer, you

can either negotiate or assign.

If i negotiate, the person in

possession becomes the
holder or holder in due
course

HOW to negotiate:
(1) by delivery - if payable
to bearer
(2) by endorsement
completed with delivery if payable to order

HOW to Transfer:
(1) by negotiation
(2) by assignment

***Outside negotiation, there

is no such thing as
endorsement and delivery.

AS TO TRANSFEROR:
Will the principle stepping
into the shoes apply when
the negotiable instrument is
transferred?
It depends, because there
are two kinds of transfer. if
the transfer were by
negotiation, the answer is no.
If the transfer were by
assignment, the answer is yes.

If i assign, the person who

receives it becomes the
assignee.
*** assignee can never be a
holder in due course because
only a holder can be HDC

The only context i know that

there can be endorsement
and delivery in an assignment
(outside negotiation) is in
warehouse receipts law.

Rights transferred:
steps into the shoes
subrogation
stepping into the shoes will
not apply if negotiable
instrument is negotiated.
Rights transferred:

(1) all the title that the

transferor had over the
instrument and
(2) the right to compel the
transferor to give the
endorsement.
*** cannot be holder or a
HDC
*** can assignee endorse the
instrument?

AS TO TRANSFEREE
(receiver):
The transferee becomes:
(1) Assignee - if the
transfer was by assignment.
(2) Holder - if the transfer
was by negotiation
Whether instrument is
payable to order or to
bearer, same rule applies.
do not get confused.

Assignee

Holder

Whether instrument is
payable to order or to
bearer, same rule applies.

Whether instrument is
payable to order or to
bearer, same rule applies.

III. SECTION 1

always asked in the bar.

unconditional order or to pay a sum certain in money

If the maker or drawer is entitled to pay in money or in some other service or

thing other than money, is this allowed?

Basis: Under civil code, when the obligation is dependent upon the will
of the obligor, it is void.

the option should not be upon the person who has the duty to perform.

ikaw na any may utang, ikaw pa pipili ng bayad mo. ang yabang mo.

But if you were the holder ako ang pipili ng bayed mo, pwede. if you
were the creditor you would agree to the agreement.

payable on demand or at a fixed determinable future time

20 days after my dog dies : determinable

when my dog dies before my cat : not determinable

at sight - for Bill of exchange, at sight of the drawee; to be able to fix the date,
specially when instrument is undated.

Payable to order or to bearer

1
when payable to order?

where
2
when payable to bearer?
Payable to order

If you indorse an order instrument, is

there negotiation? None, there must be
endorsement and delivery.
If you deliver an order instrument, is
there negotiation? None, to perfect
negotiation, there must be endorsement
coupled with delivery.
If you are the indorser, would you indorse it?
No, why are you requiring an endorement?
Any person in possession of the instrument to
whom it was delivered has the right to compel
the person who delivered the instrument to
endorse it.

payable to bearer
If you endorse a bearer instrument, is
there negotiation? None, once a bearer,
always a bearer. Thus, there must be delivery.
endorsement is not enough.

If you deliver a bearer instrument, is

there negotiation? Yes, no need for
endorsement

If you indorse a bearer instrument and

deliver it, is there negotiation? Yes, the
person who indorsed will be liable as an
indorser in addition to his liability as the
person who delivered it.
If you indorse and delivered an order
instrument, is there negotiation? Yes.

***If you endorse a bearer instrument,

tatanga-tanga ka. bakit? kung dineliver mo,
wala kang problem. ngayon may mga
warranties ka pa as an indorser under sec
65. Kung wala kang indorsement, wala kang
warranties as an indorser. Qualified indorser
lang.

When addressed to a drawee, must be named or otherwise indicated with

reasonable certainty

can an instrument be indorsed certainly? yes

can indorsement be made to several persons? No, only one endorsement for the
entire check
payee

Can an instrument be may payable to two or

more persons?Yes (Sec 8)

drawee
Can it be addressed to two or more drawees?
No, there must be only one drawee
(Sec )

payee
Can an instrument be may payable to two or
more persons?Yes (Sec 8)

drawee
Can it be addressed to two or more drawees?
No, there must be only one drawee
(Sec )

IV. LIABILITIES OF PARTIES

If A makes a promissory note and endorses it to B. A was not able to pay, can
B run after A?

Yes, under the provisions of Sec 60: Liabilities of maker, the maker warrants that
he shall make good the liability, that he shall pay xxx. Makers liability is direct
and primary.

Would you answer change if this were a bill of exchange and not a
promissory note? Yes. Is A liable to B?

No

Under the provisions of Sec 60 and 61, liabilities of the drawer and maker are the
same. They warrant, in the case of the drawer, that upon presentment, that it
shall be paid according to the tenor of the instrument.

B endorses to C a promissory note/bill of exchange. B does not pay C, can C

run after A?

The maker or the drawer warrants that he shall pay according to the tenor of his
issuance of the instrument. it does not matter.

It turned out that B is not the same person to whom it was paid. somehow C
acquired it, as based on instrument, from B. Can A be made liable to C?

A is liable to C and cannot defend the fact that B is not the same B. because A,
when he issued the check, under the same provision, warrants the existence of
the payee. Also in the same provisions, he warrants that he shall pay it according
to its tenor.

Never answer in your own words. Memorize Sec 60 to 66

Assuming that B is the real payee, is B liable to C?

Yes, He warrants that he shall pay it according to the tenor of the

instrument. Wrong!

He warrants that he shall pay it according to the tenor of his endorsement.

If B indorsed the instrument and it is for P100, when it reached C, somebody

made it appear that it was made for P150, is B liable to C?

Yes, to the extend of P100, because B warrants that he shall pay according to the
tenor of his endorsement.

Is the instrument valid in that situation?

It depends, it falls under material alteration under sec 124 in relation to 125.
under 124, if an instrument is materially altered, the instrument is avoided. But if
that were not raised as a defense and the question therefore is, B liable to C,
answer sec 66: Yes, because B warrants to pay according to the tenor of his
endorsement.

If B requires that he will only accept the payment in check of A, if a person

would co-sign with him. What do you call mr X? Not an accommodation party. X
is deemed an indorser.

He is not an accommodation maker. When X co-signed with A, the check show A

and X. If X will be an accommodation maker/party, (Sec 29: Accommodation
party is one who has signed as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to some other
person.). In this situation it appears that X, when he issued a check, he did not
receive a consideration for that. But because A is a party to it, he is not an
accommodation party, he is a co-maker, under civil law. Kung si X lang, an
accommodation party can sign as the drawer. Only then the provisions of the
accommodation party apply.

C transferred to D, is C liable to D? Can D run after B?

Yes, C is liable to D.

Yes, B is liable according to the tenor of his endorsement.

A bearer instrument, A delivered to B. B delivered to C. C indorsed to D. Is C

liable to D?

Yes, under Sec 65. He acquires the liability of an indorser, despite the fact that it
is a bearer instrument.

Incomplete/undelivered instrument

A decided to write a check. he signed it without filling all the entries in the
check. He gave it to B, who filled up the remaining details. Although A
instructed B to place the amount P10,000, B filled it up for P100,000.
Instead of giving it to As creditor, B paid it to C. Is A liable to C?

C indorsed to D, can D run after B? can B defend by saying that the obligation
is only up to P10,000?

A signed a check and placed it in his drawer, with the intention of telling B to
pay it to the creditor. B instead of placing P10,000, wrote P100,000 and
indorsed it to C. Is A liable to C?

No, the instrument is incomplete and is not delivered. it is not a valid contract in
the hands of any holder, as against any person whose signature was place thereon
before delivery.

applicable doctrine is incomplete and undelivered doctrine under Sec 15.

C indorsed to D. D indorsed to E, who is a holder in due course. Can E hold A

liable?

B is liable to D because he warrants that he shall pay according to the tenor of his
endorsement of P100,000.

An incomplete and undelivered instrument is not valid in the hands of any

holder, including a holder in due course.

Can E claim that he is free from any defect of title or defences of prior parties
in this situation?

No, because an instrument that is incomplete and undelivered is not valid in the
hands of any holder, including a holder in due course.

Forgery

A issued to B, for some reason E is in possession of the instrument indorsed

by C to D. Can E claim from A? Can E run after B?

If signature of A is forged? is B liable to E?

Sec 23, What is wholly inoperative?

Is B liable to E? No, because signature is inoperative. No right to retain the

instrument or to give discharge therefor, or to enforce payment thereof against
any party, can be acquired.

The effect of forgery is provided for in Sec 23.

rules on 13, 14, 15, 16 - remember!

related with 124, 23

Alteration

If the amount is forged, is the instrument inoperative?

you cannot forge the amount. under 23, you can only forge the signature. if there
is forgery of the amount, The effect is in sec 124. The instrument is avoided.

If you are the creditor, yung 100 ginawing 150, sasabihin mo bang avoided yan o
hindi? Hindi, any sasabihin mo 100. pag sinabi mong avoided at sinunod mo ang
Sec 124, parang binaril mo yung sarili mo. in other words, the law says you have
that option. But the law does not say that. Unfair nga naman if avoided. i-forge
lang, eh di lalong di ka naka-collecta. I-alter lang, di ka na maka-collecta forever.
All you have to do is alter it and the creditor cannot collect anymore because
instrument is avoided. di naman tama yun.

If the date is forged, effect is Sec 124.

If the name of the payee is forged, 124

If you look at 125, the only forgery can only happen in the signature. any attempt
to change the other details is alteration, except that the SC ruled that altering the
serial number is not enough to change the negotiable instrument.

Other side of the coin

A recipient is only either a holder or a holder in due course or assignee

HDC: 52

effect of HDC: free from any defect of title of prior parties, and free from defences
available to prior parties amount themselves, and may enforce payment of the
instrument for the full amount thereof against all parties liable thereon. 57

Not free in incomplete and undelivered, forgery

But there is one defense that he is not free of that is not upon the face of the
instrument itself? Only ONE.

FRAUD.

complete and regular: will affect notice of infirmity or defect from the instrument
itself. Iba yung notice of infirmity or defect on the title itself. kasi kailangan makabalita
ka na may niloko muna - that is defect in title. pero yung mga cross check, that is the
perfect example, that is upon the instrument itself, therefore the notice of any infirmity is
not on title but on the instrument itself.

once you see a crossed check, is the instrument negotiable? The instrument is
negotiable. but the fact that it is negotiable only once places you on inquiry, Bakit? when
there is failure to inquire, it will be considered as badge of bad faith, sufficient to take you
out from the provision of sec 52. From there you can now derive the defences, real or
person, you can put up against the holder.

The whole purpose of issuing this check, other than negotiability, is for the continuing
accumulation of secondary contracts to the point that there is an end to the negotiability.
the end of the negotiability is called discharge.

V. DISCHARGE

Memorize the discharge.

In the civil code, the provisions for the extinguishment of obligation will discharge a
negotiable instrument. But there are peuliarilites in discharge under NIL that are not in
the extinguishment of obligation under civil code. if an instrument is dated jan 1, 2014
and is deposited in jan 1 2019, what is the effect? discharge.

Is the issuer liable in his obligation? Yes. when the instrument is discharged, he is no
longer liable in the negotiable instrument. but it does not mean that he can avoid his
obligation to pay. there is a difference between the liability under NIL and under
Contracts law. You cannot file a suit under NIL, you rendered yourself impaired by your
own inaction. can he sue you for collection of sum of money? Yes, check is just an
evidence.