NEGOTIABLE INSTRUMENTS LAW (NIL) REVIEWER

Classifications of NI
FORM AND INTERPRETATION
4c
5, 6 1 Form/definition of negotiable instruments (NI)
a. It must be in writing and signed by the maker or drawer.
b. Must contain an unconditional promise or order to pay a
7, 8 sum certain in money.
c. Must be payable on demand or at a fixed or determinable
4, 7 future time.
8, 9 d. Must be payable to order or bearer.
e. Where the instrument is addressed to a drawee, he must be
named or otherwise indicated therein with reasonable
9 certainty.
2. i Commercial paper – a written promises or obligations that
arise out of commercial transactions from the use of such
instruments as promissory notes or bills of exchange. ii
NOTE: All commercial paper or instrument is either negotiable or
non-negotiable.
3. i Every NI is presumed to be a contract but not every contract is
a NI. ii An NI may or may not be a commercial paper.
4. Considerations to be followed on negotiable instruments
a. The whole of the instrument.
b. Only what appears on the face of the instrument.
c. The provisions of Sec. 1 of NIL in order for an instrument to
be negotiable.
Selected formal requirements explained
10. Promissory note — 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. 184
a. i CLASSIFICATION OF NOTE: (1) demand instrument or (2)
time instrument. ii The note is normally a time instrument. 1c +
b. It is also called as a promise paper, or two-party paper.
11. Original parties to a note
a. Maker is the one who makes the promise and signs the
instrument; while the payee is the one to whom the promise
is made or the instrument is payable.
b. i PAYEE’S DESCRIPTION AND OBLIGATION: It may
specifically designated by name, or office or title
(Treasurer,) or may be unspecified (bearer.) ii It may seek
payment personally or further negotiate the instrument.
c. OBLIGATION OF THE MAKER: It promises to pay to the
payee or holder and signs on the face of the note for him to
be liable thereon. 191[7]
d. Additional parties can also become involved after an
instrument is issued and delivered.
12. General outline and principal features of a negotiable
promissory note
Payable to order

5. The instrument must be in writing — The instrument must be

reduced to tangible form; otherwise, nothing could be
negotiated or passed from hand to hand.
a. Writing the instrument includes that which has been
written on durable paper and with a pen or pencil and that
which is in print or has been typed.
b. An oral promise can make it difficult to determine liability
and create the danger of fraud.
6. The instrument must be signed by the maker or drawer —
GENERAL RULE: The signature may appear in any part
of the instrument whether at the top, middle or
bottom or at the margin, although the signature of the
maker or drawer is placed at the lower right hand
corner thereof; and it will be valid and binding as long
as it appears that a person intended to make the
instrument his own. Payable to bearer
a. i His signature is prima facie evidence of his intention to be
bound as either maker or drawer. ii However, if the
signature is so placed upon the instrument that if it is not
clear in what capacity the person intended to sign, he is
17f deemed an indorser.
b. i The written signature of the maker or drawer is preferable
that the full name or at least the surname should appear. ii
But, initials or any mark will be sufficient, provided that
such signature be used as a substitute and the maker or
drawer intends to be bound by it.
c. The party against whom it operates the refusal of
authenticity of signature of the maker or drawer, must
provide some evidence of its falsity because the
PRESUMPTION that the signature is valid.
d. Maker refers to the person issuing a promissory note,
while the drawer, to the person issuing a bill of exchange.
7. The instrument must contain an unconditional promise or
order to pay — CLASSIFICATION OF NI: (1) promises to pay or a. The figures “P 1,000,000.00” at the upper left corner of the
i
3, 10 promissory notes, and (2) orders to pay or bills of exchange. instrument indicate the amount of the note. ii The figure is
2, 6 8. The instrument must be payable in a sum certain in money convenient, not essential, because the amount in figures is
a. i REASON: Money is the one standard of value in actual more quickly grasped than the written words. 17a
business. ii The promise or order may designate a particular b. i “Bacolod City” at the upper right corner denotes the place
kind of current money in which payment is to be made. where the contract is executed, while the date “December
b. i Money — the medium of exchange authorized and 31, 2015,” the date of execution. ii The place and the date
adopted by a domestic or foreign government as part of its are not essential except in certain cases:
currency; and it includes all legal tender. ii Legal tender — (1) iii When the date is necessary to determine when the
a currency which a debtor can legally compel a creditor to note is due;
accept in payment of a debt in money when tendered by the (2) iv To run the interest when the payment of interest has
6e debtor in the right amount. been stipulated; or
9. The drawee must be named — the provision applies only to (3) v Whether the holder is barred by the statute of
bills of exchange and checks. limitations from enforcing the note. 144, 186
a. i An order obviously, which is not addressed to any person c. i “For value received” suggests the consideration given for
14 cannot be a bill. ii However, the bill would be sufficient if the the note which may be specified. ii The words thereof may
drawee is indicated therein with reasonable certainty be omitted as consideration is presumed. 6b, 24
8[2,] 17e,
128, 129
though he is not named. d. i “I promised to pay,” neither “he might” nor “will probably,”
b. REASON: The payee or holder is enable to know upon signifies an absolute and unconditional promise to pay the
whom he is call for acceptance or payment.
 payee or to a holder and the words thereof are essential. ii
The substituted words for “promise” are: “I agree to pay,”
“I bind myself to pay,” “I will pay,” “good to Ricci L. Siason
or order,” “I acknowledge to be indebted to Ricci L. Siason
or order,” etc. iii Words that would not satisfy the
negotiability of the note are: “Due to Ricci L. Siason P
3 1,000,000,” or “will agree to pay.”
e. “To the order of” and “or order,” implies a promise to pay as
ordered or commanded by the payee; but the instrument
may be payable to bearer.
f. i “On or before January 31, 2016” indicates the date of
maturity or the time when the promise to pay is to be
fulfilled. ii Where no time for payment is expressed, an
instrument is payable on demand.
g. The name “Ricci L. Siason” indicates the payee, the person
7b to whom the promise is made or the instrument is payable;
if the promise is made to “bearer,” the payee need not be
specified.
h. The amount “One Million Pesos,” which precedes the
unnecessary figures “P 1,000,000.00,” indicates the amount
which the maker binds himself to pay.
i. “At his house at Kabankalan City, Negros Occidental”
17a indicates the place of payment of the note, not essential.
j. i The signature “Arniel Jake M. Jordan” is the maker of the
note, the one who promises to pay. ii A note may be signed
by several persons either jointly or jointly and severally.
13. i Bill of exchange — an unconditional order in writing
17g addressed by one person to another, signed by the person
giving it, and requiring the person to whom it is addressed to
the drawee, not a real party to the bill, who assumes liability
only when he accepts the bill usually by writing the word
“accepted” and signing his name on the face thereof in which
case he ceases to be a drawee and becomes known as an
acceptor. ii By accepting, the acceptor becomes primarily 132, 133
liable like the maker of the note, the drawer becoming only a
surety. 61, 62
d. The word (may be omitted) “charge the same to the account
of,” means the amount to be paid by the drawee is to be
charged against the funds of the drawer.
16. i Non-negotiable instrument — an instrument lost the quality
of negotiability or doe not meet the requirements laid down for
negotiable instruments. ii EXAMPLE is a check payable only to a
specified person.
a. A negotiable instrument ceases to be negotiable if the
indorsement prohibits the further negotiation of the 32, 36a,
instrument. 41
b. A non-negotiable instrument may not be negotiated but may
be assigned or transferred, absent an express prohibition
against assignment or transfer written on the instrument. 30
c. Scope of law: The Civil Code within the assignment of
contract rights governed the rules of transfers of non-
negotiable instruments and within the principles of contract 1624-
law a NI is improperly negotiated to a third person 1635, CC
(transferee.)
d. Legal consequences of transfer or assignment: Persons
who transfer or assign contractual or non-negotiable rights
pass only the rights that they had.

126
pay upon demand or at a fixed or determinable future time a
sum certain in money to order or to bearer. ii Check — the
common type of order paper or bill drawn on a bank and
2 The sum payable is a sum certain within the meaning of this
Act, although it is to be paid: It does not affect its negotiability
a. With interest; 3
payable on demand. iii It is a three-party paper, requiring the b. By stated installments; 4
185 drawer, drawee, and the payee to fill the legal roles involved. c. By stated installments with a provision that, upon default in
PURPOSE payment of any installment or of interest, the whole shall
a. iv Fundamental idea and purpose: The drawer has funds in become due; 5
hands of the drawee which the former desires to be paid to d. With exchange, whether at a fixed rate or at the current rate; 6
the payee; thus, he draws the bill ordering the drawee to or
pay the amount in the bill to the payee. e. With cost of collection or an attorney’s fee in case payment
b. v Liability of drawee for nonpayment: If the drawee shall not be made at maturity. 7
refuses to accept when he has funds for the purpose, he 2. i “The NI must contain an unconditional promise or order to
becomes liable to the drawer (not the payee) for the pay a sum certain in money” is a requisite for the negotiability 1b
resulting damages and the harm done to his credit. vi If the to assure the clarity and certainty in determining the
drawer has no funds in the hands of the drawee while the instrument’s value. ii The sum certain may be:
PRESUMPTION is the former must have the arrangements a. A fixed amount to be paid wholly in money stated plainly
with the latter so that he will honor the bill; thus, the on the face of the instrument. iii NOTE: If the instrument calls
drawee must look for reimbursement to the drawer and not for an act, other than payment of money, it is not negotiable
to a bona fide holder. because a NI is intended as a substitute for money. 5
14. Original parties to a bill of exchange b. iv Permissible clauses or stipulation laid down in Sec. 2. 1
a. Drawer — the person who issues and draws the order bill; v Neither is the certainty of the sum affected by an
drawee — the party upon whom the bill is drawn or the acceleration clause in an installment note. vi BASIC TEST
person to whom the bill is addressed and who is ordered THE SUM CERTAIN IN INSTALLMENT NOTE: Whether the
and expected to pay; and payee — the party in whose favor holder can determine by calculation or computation
the bill is originally issued or is payable. the amount payable when the instrument is due. vii But,
b. OBLIGATIONS: Drawer gives order to pay money to a third A note giving the maker the right to ascertain the amount
party— meaning he does not pay directly; and drawee rightly payable is non-negotiable.
accepts the bill when he indicates his willingness to pay the
bill. The Composition of Sum To Be Paid is One of the Following
c. DESCRIPTION OF PAYEE: He may be specifically
|| 11bi designated, or may be an office or title, or unspecified.3. With interest at fixed rate; or at increased or reduced rate.
d. The parties need not all be distinct persons; thus, the 4. By stated installments — stated installment means (a) the
drawer may draw on himself payable to his own order, i. e., interest of each installment and (b) the due date of each
the two parties to the bill can be the same person (drawer- installment must be fixed in the instrument.
drawee or drawer-payee.) 5. i By stated installments with acceleration clause — Two
15. General outline and principal features of a negotiable bill of cases for acceleration feat:
|| 12 exchange a. ii Dependent on maker — Acceleration clause means a
promise that if any installment or interest is not paid as
agreed, the whole shall become due. iii Such clause does not
make an instrument payable upon contingency and so non-
negotiable since the time of payment will come.
iv NOTE: The maker can avoid the acceleration by paying the
installments on due date; while the payee or holder cannot
accelerate the note unless the maker fails to pay an
installment.
b. At the option of holder — If the note provides for
acceleration at the option of holder, the instrument is non-
negotiable.
6. With exchange — Means the instrument is payable in foreign
a. “Pay to” indicates an unconditional order to pay. currency.
b. The name “Arniel Jake M. Jordan” indicates the drawer, the a. i Exchange — The charge, may be at fixed or current rate,
one who signs the bill of exchange. for the expense of providing funds at the place where the
c. i The name “Carlos Hilado Memorial State College” indicates instrument is payable to meet the instrument which is
 issued at another place. ii Two provisions of payment with
exchange:
b. Payment in foreign currency — this does not impair the
negotiability, REASON: the current exchange rate at any
given time may be inquired from banks dealing on
exchange or foreign currencies and such rate is a matter of
common commercial knowledge.
c. Payment with exchange rate — applies to instrument
drawn in one country and payable in another; in other
129 words, exchange is applicable only to foreign bills.
7. With costs of collection or an attorney’s fee— Its provisions:
a. Increase in amount due effective after maturity does not
affect the certainty of amount payable at maturity,
REASON: The increase in the amount due even if uncertain
takes place after maturity when the instrument ceases to be 5. Indication of a particular fund out of which reimbursement
negotiable in the full commercial sense or to perform the
office of money; until the instrument matures, the amount
payable is certain.
b. Liability of attorney’s fee may be reduced by courts if
found unconscionable or unreasonable; if such fee is
unspecified, then it shall be in a reasonable sum.
c. Acquisition of instrument after maturity — A transferee
acquiring the instrument when it is overdue would not be a
52 holder in due course and consequently would not hold the
58 instrument subject to defenses, as if it were non-negotiable. 7. Statement of transaction which gives rise to instrument
3 i When promise is unconditional — An unqualified order or
promise to pay is unconditional within the meaning of this Act
though coupled with:
a. An indication of a particular fund out of which
ii
reimbursement is to be made or a particular account to be
debited with the amount; or
b. iii A statement of the transaction which gives rise to the
instrument.
iv But an order or promise to pay out of a particular fund is not
unconditional.
2. When promissory note contains a promise to pay — A
prospective holder would not eager to accept an instrument
unless its payment can be reasonably expected under every
circumstance.
a. Implied promise to pay — A negotiable promissory note
must contain an unconditional promise to pay, that is, any
words equivalent to a promise or assumption of
responsibility for the payment of the note on the face of an
1b instrument are sufficient to constitute a “promise to pay.”
b. A bare acknowledgement of indebtedness alone neither
constitutes a promise to pay nor a NI; however, if words of
negotiability are added, the instrument is negotiable
although it lacks express promissory words since the
written promise to pay may be fairly inferred therefrom.
3. i When bill of exchange contains an order to pay
a. Words equivalent to an order to pay — An
ii
unconditional order to pay by one party to another
2a encompasses the bill of exchange; otherwise, it is not
1b negotiable. iii Any words which are equivalent to an order
or which show the drawer’s will that money should be paid
are sufficient.
b. Mere request to pay — The language used in law is not a
iv
request, that is, the drawer demands the drawee to make
payment. v Order is a command or imperative direction and 2. Certainty of time of payment
thus a mere request, supplication or authority does not
constitute an order; moreover, the mere use of courteous
words like “please” does not convert an order into a
request.
c. vi Liability of drawer — Whether the drawer obedient to
the order to pay or not is not immaterial. The
vii
negotiability of a bill depends upon the terms of the order.
viii The drawer has his liability under the law.
61
4. i When promise or order to pay unconditional
a. ii Instrument payable absolutely — A promise or order
only on NI is not enough. The NI must be unconditional or
iii
absolute, that is, it must not be subject to any condition or
4, CC 1179 contingency, except implied conditions of presentment,
70, 143
152, 165,
protests and notice of dishonor as provided in the law.
167, 170, b. iv REASON OF REQUISITE — The liability is unconditional
89 greatly enhances the ability of the instrument to circulate
freely from one person to another. If the promise or order
v
to pay is clearly conditional in nature, the instrument
constitutes a simple contract; even if the condition or event 2. When instrument payable at determinable future time
is very likely to occur, or occur subsequently, it remains
non-negotiable although becomes payable at due time.
c. vi Terms not affecting unconditional liability — The mere
indication of the particular fund out of which reimbursement
is to be made, or an indication of particular account to be
debited with the amount or a statement of transaction which
gives rise to the instrument does not render the promise or
order conditional, REASON: This has reference to bills only
since reimbursement and debiting can only take place
where payment by another is made. vii Additional terms
appearing on an instrument (e.g., a statement of the purpose
for which the instrument is issued, the collateral securing it,)
do not make the promise or order conditional if the duty to
pay is unaffected by such terms.
Unconditional Terms Coupled for the NI
is to be made is negotiable because the fund indicated is not
the direct source of payment but only the source of
reimbursement which is an act subsequent to the payment;
moreover the drawee is not limited to the money in his hands
belonging to the drawer.
6. Indication of a particular account to be debited with the
amount is negotiable because the payment does not depend
upon the existence or adequacy or the particular account to be
debited and such account must be indicated.
a. Instruments are issued by reason of the transaction upon
which they are based; hence, the mere recital of the
consideration for which the instrument was issued or
mere references to a separate agreement out of which
the instrument has arisen does make it conditional.
b. If the promise or order is “subject to the terms and
conditions of our contract executed by us on December
31, 2015,” the instrument is non-negotiable, REASON, The
obligation to pay is burdened with the terms and conditions
of another contract, subjecting recovery on the instrument
to defenses available under the contract; furthermore, this
will require an examination of said contract to determine
the rights and obligations under the instrument.
8. Indication of a particular fund out of which payment is to be
made is non-negotiable because the amount to be paid is made
to depend upon the adequacy or existence of the fund
designated; moreover, the fund specified is the direct source of
payment and the measure of liability. Even if the fund is found
to be sufficient at maturity, the instrument remains non-
negotiable. TEST OF NEGOTIABILITY: Whether the
instrument carries the general personal credit of the
maker or drawer.
4i What constitutes determinable future time — An
instrument is payable at such time, within the meaning of this
Act, which is express to be payable:
a. ii At a fixed period after date or sight;
b. iii On or before a fixed or determinable future time specified
therein; or
c. iv 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.
v An instrument payable upon a contingency is not negotiable,
and the happening of the event does not cure the defect.
a. Instrument payable at all events is an essential
requirement for negotiability of an instrument that its
payment will certainly become due and demandable one
time or other, though it may be uncertain when that time
will come.
b. i When time of payment certain — The instrument must
be payable on demand, or at a fixed or determinable future
in order to be negotiable. ii In case of demand or sight 1c
instrument, the holder may call for payment at any time; on
the other hand, a term or time instrument is payable only
upon the arrival of the time for payment. iii Checks must be
payable on demand. 185
c. i REASONS: TIME MUST BE CERTAIN so that: the holder
will know when he may enforce the instrument. ii The 51
person liable (maker, drawee, or acceptor) knows when he
may be required to pay. iii The secondary parties (drawer, 60, 62
indorser, or accommodation party) know when his
obligation will arise. 29, 61, 63-67
7
a.