Negotiable

Instruments: WSPH
i. w ritten contracts for
the payment of money;
ii. by its form, intended
as a substitute for money
iii. intended to pass from
hand to hand,
iv. to give the holder in
due course the right to
hold
the same and collect the
sum due.
Functions and
importance of NI: SEC
1. operates as a
substitute for money
allows it to go
from hand to hand in the
commercial markets and
to
take the part of money in
commercial transactions.
2. the media of
exchange for most
commercial
transactions (Checks)
they are a safe and
convenient means of
doing business that
eliminate the
risk of dealing in cash.
3. serves as a medium
for credit transaction
men
without cash in hand are
enabled by means of
credit to
conduct and carry to
completion business and
commercial enterprises.
Note: Checks are
primarily used for
immediate payment
such as a substitute for
money, while the ordinary
bill of
exchange and the
promissory note are
intended for the
circulation of credits such
as a credit instrument.
Characteristics/Feature
s of NI:

1. Negotiability it may
pass from one person to
another similar to money.
2. Accumulation of
secondary contracts
negotiated
from one person to
another, hence, additional
parties
can become involved.
Every negotiation is a
contract in
itself, there will be more
parties to whom the
holder can
demand payment.
Note: If it cannot be
transferred, then it is
nonnegotiable.
Common forms of NI:
1. Promissory Note:
PSM
i. unconditional promise
to pay in writing made by
one person to another,
ii. s igned by the maker,
engaging to pay on
demand or a fixed
determinable future time
iii. a sum certain in
money to order or bearer.
When the note is drawn
to makers own order, it is
not
complete until indorse by
him. (Sec. 184 NIL)
2. Bill of Exchange:
OSRM
i. unconditional order in
writing addressed by one
person to another,
ii. s igned by the person
giving it,
iii. r equiring the person
to whom it is addressed
to
pay on demand or at a
fixed or determinable
future time
iv. a sum certain in
money to order or to
bearer.
(Sec. 126 NIL)

3. Check - bill of
exchange drawn on a
bank and
payable on demand.
(Sec. 185 NIL)
special kind of a bill of
exchange.
Other examples of NI:
CBDB/DTB
1. C ertificate of deposit;
2. B ank Notes;
3. D ue Bills;
4. B onds;
5. D rafts;
6. T rade Acceptances;
and
7. B ankers Acceptances.
Non-negotiable
Instruments:
WTPC/LBD
1. W arehouse Receipts;
2. T reasury Warrants;
3. P ostal Money Order;
4. C ertificate of Stocks;
5. L etter of Credits;
6. B ill of Lading; and
7. D ock Warrants.
Note: it cannot be
negotiated but can be
transferred by
assignment.
Life cycle of NI:
INPAD/PDNPD
1. I ssuance
2. N egotiation
3. P resentment for
acceptance in some NI
4. A cceptance itself
5. D ishonored by nonacceptance
6. P resentment for
payment
7. D ishonored by nonpayment
8. N otice of dishonor
9. P rotest in some cases
10.D ischarge
Promissory Note vs.
Bill of Exchange:
Promissory Note:
Promise Paper
i. unconditional promise;
ii. involves 2 parties;

iii. Maker is primarily

liable; and
iv. only 1 presentment
for payment.
Bill of Exchange:
Order Paper
i. unconditional order;
ii. involves 3 parties;
iii. Drawer is only
secondarily liable; and

1
iv. generally 2

presentments - for
acceptance and
for payment.
Form of NI: An
instrument to be
negotiable must
conform to the ff.
requirements: (Sec. 1
NIL)
PN: SUDO / BofE:
SUDOC
1. IT MUST BE IN
WRITING AND SIGNED
BY THE
MAKER OR DRAWER.
Notes:
The instrument must be
in writing; otherwise,
nothing could be
negotiated or passed
from
hand to hand.
The writing may be in
ink, print or pencil. It may
be upon parchment,
cloth, leather or any other
substitute of paper.
There is no such thing
as an oral negotiable
instrument.
It must be signed by
the maker or drawer. It
may consist of mere
initials, numbers or
thumb
marks, but the holder
must prove that what is
written is intended as a
signature of the person
sought to be charged.
His signature is prima
facie evidence of his

intention to be bound as
either maker or drawer.
------------------------------------------------------------------------2. IT MUST CONTAIN
AN UNCONDITIONAL
PROMISE OR ORDER
TO PAY A SUM CERTAIN
IN
MONEY.
Notes:
The promise or order
must be unconditional; it
must not be a subject to
any condition or
contingency. It must be
payable absolutely.
The sum payable must
be certain; hence, it must
be definite and specific,
to assure clarity in
determining the value of
the instrument.
If the instrument calls
for an act, other than
the
payment of money, it
is not negotiable.
Exceptions:
sale of collateral
securities
confession of judgment
waives benefit of law
gives option to the
holder to require
something
to be done in lieu of
money
(Sec. 5 NIL)
Elaborated by Sec. 2
NIL:
Sum is certain even if
it is to be paid with:
The instrument is still
negotiable even if one of
the ff. is
stated:
a. Interest at fixed
rate, or at
increased/reduced rate.
b. In installments
must be stated in the
instrument:

a. interest of each
installment; and
b. due date of each
installment.
c. In installments with
acceleration clause a
promise that if any
installment or interest is
not paid as
agreed, the whole shall
become due.
d. With exchange
refers to instruments that
are
payable in foreign
currency.
The exchange rate must
be stated, otherwise
the latest exchange rate
will be the basis.
e. Costs of collection
or attorneys fees in
case
payment shall not be
made at maturity, there
shall be
added to the amount due
on the note costs of
collection
or an attorneys fee.
Elaborated by Sec. 3
NIL:
a. Indication of
particular fund from
which the
acceptor disburses
himself after payment.
The particular fund
indicated fund should
only be
the source of
reimbursement and
should not be
the direct source of
payment; else it becomes
conditional and therefore
non-negotiable.
An instrument which
contains a direction to
debit a particular account
is negotiable.
b. Statement of the
transaction which
gives rise to
the instrument.

The statement of the

consideration for which
the
instrument has been
issued does not make it
conditional; thus, it has
no adverse legal effect
on the negotiability of the
instrument.
------------------------------------------------------------------------3. IT MUST BE PAYABLE
ON DEMAND, OR AT A
FIXED OR
DETERMINABLE
FUTURE TIME.
Elaborated by Sec. 7
NIL:
Instrument is payable
upon DEMAND if:
a. It is expressed to be
so payable on sight or
upon
presentation
an instrument payable
on demand is due and
payable immediately
after its delivery. It is a
present debt due at once.
Ex. Other words
equivalent to on
demand (PN)
- at sight (BofE)
- on presentation
- on call
- at anytime called for
At sight means that the
instrument is payable
as soon as it is seen by
the party primarily liable.
b. No period of
payment is stipulated
when no time
is expressed.
c. Issued, accepted, or
endorsed after
maturity
when the maturity date
has already lapsed
(overdue)
and the drawee is willing
to pay, then it is payable
on
demand.

Elaborated by Sec. 4
NIL:
Instrument is payable
upon a DETERMINABLE
FUTURE TIME if:
a. There is a fixed
period after
sight/date.
Fixed period/time:
I promise to pay P or
order the sum of P10,000
on October 29, 2009.
Fixed period after sight:
Sixty days after sight,
pay to the order of P the
sum of P10,000.

Fixed period after date:

Sixty days after date, I
promise to pay P or
order the sum of
P10,000.
b. On or before a
specified date/fixed
determinable
future time.
On or before a fixed
time:
On or before October 10,
2009, I promise to
pay P or order P10,000.
The maker has the option
to pay in advance or
on the fixed date.
On or before a fixed
determinable time:
On or before the start of
the next school
semester, I promise to
pay P or order P10,000.
Determinable future
time means a time that
can be determined with
certainty after the
execution of the
instrument.
c. On or at a fixed date
after the occurrence of
an
event certain to
happen though the
exact date is not
certain.

On the occurrence of a
specified event:
I promise to pay P or
order the sum of P10,000
upon the death of his
father.
After the occurrence of
a specified event:
Thirty days after the
death of his father, I
promise to pay P or order
the sum of P10,000.
If the instrument is
payable upon a
contingency, the
happening of the
event does not cure
the defect (still
non-negotiable).
Contingency an
uncertain future event or
an event
which may or may not
happen.
------------------------------------------------------------------------4. IT MUST BE PAYABLE
TO ORDER OR TO
BEARER.
Notes:
If payable to order
indorsement plus
delivery.
If payable to bearer
delivery only.
An instrument payable
to a specified person only
is not an order
instrument, thus, nonnegotiable
as the promise or order is
limited to paying one
person only.
The payee must be
named or otherwise
indicated therein with
reasonable certainty.
If there is no payee,
there would be no one to
indorse the instrument
payable to order.
Therefore useless to be
considered negotiable.

Elaborated by Sec. 8
NIL:
Instrument is payable
to ORDER:
a. Where it is drawn
payable to the order of
a
specified person Pay
to the order of P
P10,000.
b. To a specified
person or his order
Pay to P
or order P10,000.
It may be drawn
payable to the order
of:
a. A payee who is not a
maker, drawer, or
drawee; or
b. the drawer or maker;
or
c. the drawee; or
d. two or more payees
jointly; or
e. one or some of several
payees ; or
f. the holder of an office
for the time being.
Elaborated by Sec. 9
NIL:
Instrument is payable
to BEARER:
a. When it is
expressed to be so
payable I promise
to pay bearer P10,000.
b. When payable to the
person named or
bearer
Pay to P or bearer
P10,000. Or Pay to P or
holder
P10,000.
c. Payable to order of
fictitious or nonexistent
person and this fact
was known to drawer
Pay to
Superman or order
P10,000.
d. Name of payee not
name of any person
Pay to

cash., Pay to money.,

Pay to cash or order.
e. Only and last
indorsement is an
indorsement in
blank Blank
indorsement is payable to
bearer and may
be negotiated by delivery.
(Sec. 34 NIL)
Notes:
Once a bearer
instrument, always a
bearer
instrument despite an
indorsement, it can be
negotiated further by
mere delivery.
------------------------------------------------------------------------5. WHERE THE
INSTRUMENT IS
ADDRESSED TO A
DRAWEE, HE MUST BE
NAMED OR OTHERWISE
INDICATED THEREIN
WITH REASONABLE
CERTAINTY.
Notes:
This provision applies
only to bills and checks.
The reason for this last
element is to enable the
payee or holder to know
upon who he is to call
for acceptance or
payment.
Where a bill is
addressed to the
treasurer of a
corporation, the drawee is
sufficiently indicated.
------------------------------------------------------------------------The validity and
negotiability of an
instrument is not
affected by the fact
that: (Sec. 6 NIL)
a. It is not dated; or

b. does not specify the

value given or that any
had been
given; or
c. does not specify the
place where it is drawn or
payable; or
d. bears a seal; or
e. designates the kind of
current money in which
payment is to be made.
Notes:
The instrument need
not to follow the language
of the law, any terms are
sufficient which clearly
indicate an intention to
conform to the
requirements hereof.
(Sec. 10 NIL)

3
If the instrument bears

a date, it is presumed
that said date is the date
when it was made by
the maker, drawn by the
drawer, accepted by
the drawee, or indorsed
by the payee or holder.
(Sec. 11 NIL)
Ante-dating or postdating an instrument
does
not render it invalid or
non-negotiable provided
this is not done for an
illegal purpose or to
commit fraud. (Sec. 12
NIL)
The date may be
inserted in an
instrument when:
(Sec. 13 NIL)
a. an instrument
expressed to be payable
at a fixed
period after date is issued
undated.
b. where acceptance of
an instrument payable at
a fixed
period after sight is
undated.
Effects:

Any holder may insert

the true date of issuance
or acceptance.
The insertion of a wrong
date does not avoid
the instrument in the
hands of a subsequent
holder in due course.
As to the holder in due
course, the date inserted
(even if it be the wrong
date) is regarded as the
true date.
Steps in issuance of
NI:
1. The mechanical act
of writing the
instrument
completely and in
accordance with the
requirements of
Sec.1 NIL.
2. The delivery of the
complete instrument
by the
maker or drawer to the
payee or holder with the
intention
of giving effects to it.
Requisites for a Holder
in Due Course (HIDC):
COVI
(Sec. 52 NIL) Four
requisites must be
complied,
otherwise, he is not
qualified to be a HIDC.
a. Receives the
instrument complete
and regular on
its face.
An instrument is
considered complete and
regular on its face if:
a. the omission is
immaterial; and
b. the alteration on the
instrument was not
apparent on its face.
b. Became a holder
before it was overdue
and had

no notice that it had

been previously
dishonored if
such was the fact.
An instrument is
overdue after the date of
maturity.
On the date of maturity,
the instrument is not yet
overdue and the holder is
still a HIDC.
c. Takes the
instrument for value
and in good faith.
Chapter II
CONSIDERATION
Sec. 24 NIL.
Presumption of
consideration.
Every NI is deemed
prima facie to have been
issued for a valuable
consideration, and every
person whose signature
appears thereon to
have becomes a party
thereto for value.
The presumption is only
prima facie. It may be
rebutted or disproved by
evidence to the
contrary.
Sec. 25 NIL. What
constitutes value.
Value is any
consideration sufficient to
support a
simple contract. Such as:
PILSB
a. P re-existing debts;
b. I nterests;
c. L abor rendered
services;
d. S upport; and
e. B enefits.
If without for value, the
holder is not a HIDC.
Not Value:
a. Gift;
b. Donation;
c. Fear;
d. Love;
e. Gratitude.

Good faith means lack

of knowledge or notice of
defect
or infirmity.
d. At time he took the
instrument, no notice
of
infirmity in instrument
or defect in the title of
the
person negotiating it.
(He is in good faith, so to
speak).
Notes:
Every holder is
presumed to be a HIDC
(Sec.
59). He who claims
otherwise has the burden
of
proof.
------------------------------------------------------------------------Abnormal Instruments:
1. INCOMPLETE but
DELIVERED (Sec. 14
NIL).
Two (2) kinds:
a. Incomplete instrument
but delivered.
b. A signature and a
blank piece of paper
signed
by the person for the
purpose of converting it
into a negotiable
instrument. A must.
Two (2) requisites to
bind the person who
signed the
instrument before
delivery:
i. It must be filled-up
strictly with the authority
given; and
ii. Within a reasonable
time.
Effects to a HIDC:
If the instrument falls on
the hands of a HIDC, it
is valid and effectual
for all purpose as

though it was filled up

strictly in accordance with
the authority given and
within reasonable time.

Rules where
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 filling up
the
blanks therein.
2. Authority to put up
any amount a
signature on a
blank paper delivered in
order that may be
converted
into a NI operates as a
prima facie authority to
fill it up as
such for any amount.
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
reasonable time.
Notes:
iii. In both cases (a & b),
the presumption is that
the
blank was filled up in
accordance with the
authority given and within
reasonable time.
iv. The defense that the
instrument had not been
filled up in accordance
with the authority given
and within reasonable
time is not available as
against a holder in due
course.

v. Sec. 14 raises a
Personal Defense if
the last
holder is a HIDC, Maker is
liable to pay.
2. INCOMPLETE and
UNDELIVERED (Sec. 15
NIL).
Before delivery:
Before delivery, an
incomplete and
undelivered
instrument which is
completed and
negotiated
without authority is not
a valid contract in the
hands of ANY holder as
against the person who
signed the instrument.
After delivery:
However, after delivery,
persons who signed the
instrument can be held
liable to HIDC.
Persons liable:
General Indorsers are
liable because they
warrant that the
instrument is genuine and
valid;
thus, they are estopped
to deny the validity of
the instrument.
Notes:
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 against any
person who signed before
delivery.
The invalidity of the
instrument is only with
reference to the parties
whose signatures
appear before and not
after delivery.
Sec. 15 raises a Real
Defense even if the
last

holder is a HIDC, Maker is

not liable to pay.
(Indorsers are liable
because they warrant
that
the instrument is genuine
and in all respects
what it purports to be. As
their signatures appear
on the instrument after
delivery, the instrument
is valid as to them.)
3. COMPLETE BUT
UNDELIVERED (Sec. 16
NIL).
Effects of a Complete
but Undelivered
instrument:
If a complete instrument
is undelivered, then it is
inoperative because
delivery is a requisite to
liability. It is considered
incomplete; thus,
revocable.
In the absence of
delivery, the instrument
though complete in all its
particulars, there is no
contract.
In possession of an
immediate party or a
remote
party:
Immediate party a
party having been held to
know of the conditions or
limitations placed upon
the delivery of the
instrument.
Remote party a
party who is not in direct
contractual relation to
each other. They can be
transformed into
immediate party.
If a complete instrument
is found in their
possession, there is a
prima facie presumption
of delivery (but subject to
rebuttal).
Notes:

If the instrument is no
longer in the possession
of the person who signed
it and it is complete in
its terms, a valid and
intentional delivery by
him
is presumed until the
contrary is proved.
Delivered conditionally
or for a special
purpose
If delivery was
conditional or for a
special
purpose only, then it is
not for the purpose of
transferring title to the
instrument. However, it is
presumed to be made
with the intention to
transfer title this can be
rebutted.
Effects to a HIDC:
If a complete instrument
is in the hands of a
HIDC, a valid delivery
thereof by all parties prior
to him is CONCLUSIVELY
presumed.
Notes:
Sec. 16 raises a
Personal Defense if
the last
holder is a HIDC, Maker is
liable to pay.
4. FORGERY (see
Sec.23 NIL notes)
Notes on delivery of
NI:

1. Delivery is essential to
the validity of any
negotiable
instrument.
2. As between immediate
parties or those is like
cases,
delivery must be with
intention of passing title.
3. An instrument signed
but not completed by the
drawer

or maker and retained by

him is invalid as to him
for
want of delivery even in
the hands of a holder in
due
course.
4. But there is prima facie
presumption of delivery
of an
instrument signed but not
completed by the drawer
or
maker and retained by
him if it is in the hands of
a holder
in due course. This may
be rebutted by proof of
nondelivery.
5. An instrument
entrusted to another who
wrongfully
completes it and
negotiates it to a holder
in due course,
delivery to the agent or
custodian is sufficient
delivery to
bind the maker or drawer.
6. If an instrument is
completed and is found in
the
possession of another,
there is prima facie
evidence of
delivery and if it be a
holder in due course,
there is
conclusive presumption of
delivery.
7. Delivery may be
conditional or for a
special purpose
but such do not affect the
rights of a holder in due
course.
Rules of construction
in case of ambiguity or
omission: (Sec. 17 NIL)
1. Sums expressed in
words and in figures
are
different.

When there is a
discrepancy between the
sum
expressed in words and
the sum expressed in
figures, the words
control.
However, when the
words are ambiguous,
reference may be had to
the figures to
determine the true
amount.
2. Date when
stipulated interest to
run not specified
if the date when the
stipulated interest is to
run is not
specified, the interest
runs from the date of the
instrument or if undated
from the date of its issue.
3. An undated
instrument is
considered dated as of
the date of its issue.
4. Written and printed
words in conflict in
case of
conflict between the
written and printed
provisions, the
written provisions
prevail. Written words are
deemed to
express the true intention
of the maker or drawer
because they are placed
there by him.
5. Whether instrument
bill or note in doubt
in case
of doubt as to whether
the instrument is a bill or
note, the
holder may treat either at
his election.
6. Capacity in which
the person signed in
doubt in
case of doubt due to the
ambiguous location of the

signature, the party who

signed is deemed to be
an
indorser, who assumes
the least liability, and not
as a
maker or drawer.
7. Instrument signed
by two or more
persons their
liability may either be
solidary or joint.
I promise to pay
signed by two or more
persons gives rise to
solidary liability.
We promise to pay
signed by two or more
persons gives rise to
joint liability.
Sec. 18 NIL. Liability of
person signing in trade.
General rule: A person
whose signature does not
appear on the instrument
is NOT liable.
Exceptions:
a. One who signs in a
trade or assumed name.
(Sec. 18)
b. A duly authorized
agent. (Sec. 19)
c. A forger.(Sec. 23)
Sec. 20 NIL. Liability of
a person signing as
agent.
General rule: An agent
is not liable on the
instrument if
he were duly authorized
to sign for or on behalf of
a
principal.
Requisites:
a. He must be duly
authorized;
b. He must add words to
his signature indicating
that he
signs as an agent; and
c. He must disclose his
principal.
If an agent does not
disclose his principal, the

agent is personally liable

on the instrument.
Sec. 21 NIL. Per
Procuration - operates as
notice that
the agent has a limited
authority to sign.
Effects:
The principal is only
bound if the agent acted
within the limits of the
authority given.
The person who takes
the instrument is bound
to inquire into the extent
and nature of the
authority given.
Sec. 22 NIL. Effect of
indorsement by
infant/corporation.
General rule: Infants
and corporations incur no
liability
by their indorsement or
assignment of an
instrument.
Effects:
No liability attached to
the infant or the
corporation.
The instrument is still
valid and the indorsee
acquires title.
------------------------------------------------------------------------FORGERY (Sec. 23 NIL)
Two (2) kinds:
a. Forged signature; and
b. Signature made
without authority.
Effects:
a. no right to retain;
b. no right to give a
discharge; and
c. no right to enforce
payment can be acquired.
It is only the forged
signature or
unauthorized
signature that is
declared to be
inoperative.
The instrument or other
signatures which are

genuine may still exist

and be enforced.
Exceptions: Forged or
unauthorized
signatures may
produce rights or title,
IF:
a. The party against
whom it is sought to
enforce such
right is precluded
(prevented) from setting
up the forgery
or want of authority.
Persons precluded
from setting up the
defense of
forgery:

The forger himself.

Those who warrant or
admit the genuineness of
the signature in question
(indorsers, persons
negotiating by delivery,
and acceptors of BofE).
Those who, by their
acts, silence or
negligence,
are estopped from setting
up the defense of
forgery Estoppel.
b. Where the forged
signature is not necessary
to the
holders title, in which
case the forgery may be
disregarded.
Rights of parties in
cases of forged
indorsements:
1. Payable to order
(PN) the party whose
signature
was forged is not liable to
any holder, even to a
HIDC.
The indorsement, being
forged is inoperative.
2. Payable to bearer
(PN) the party whose
signature

is forged is liable to a
HIDC, but not to the one
who is
not a HIDC. The reason is
that the instrument being
originally payable to
bearer, it can be
negotiated by mere
delivery. Hence, even if
the indorsement is
forged, the
forgery may be
disregarded.
3. Payable to order
(BofE) the party whose
signature

was forged is not liable to

any holder, even to a
HIDC.
The indorsement, being
forged is inoperative.
4. Payable to bearer
(BofE) when the bill is
originally
payable to bearer, the
drawee may debit the
drawers
account in spite of the
forged indorsement. The
reason
is that the forged
indorsement is not
necessary to the
title of the holder.

Notes:
Section 23 applies only
to forged signatures or
signatures made without
authority.
Alterations such as to
amounts or like fall under
Section 124.
Drawee bank is
conclusively presumed to
know
the signature of its
drawer.
Forgery is a Real
Defense.
-------------------------------------------------------------------------