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POSTED IN NEGOTIABLE INSTRUMENTS LAW
Commercial Law – Negotiable Instruments Law
1. Negotiable Instruments – written contracts for the payment of money; by
its form, intended as a substitute for money and intended to pass from hand to
hand, to give the holder in due course the right to hold the same and collect the
sum due.
Parties:
maker
payee
6. Bill of Exchange – 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 NIL)
Parties:
drawer
payee
drawee/ acceptor
7. Check – bill of exchange drawn on a bank and payable on demand. (Sec. 185
NIL)
CHECK BOE
– always drawn upon a bank or banker – may or may not be drawn against a bank
– always payable on demand – may be payable on demand or at a fixed or
determinable future time
– not necessary that it be presented for acceptance – necessary that it be
presented for acceptance
– drawn on a deposit – not drawn on a deposit
– the death of a drawer of a check, with knowledge by the banks, revokes the
authority of the banker pay – the death of the drawer of the ordinary bill of
exchange does not
– must be presented for payment within a reasonable time after its issue (6
months) – may be presented for payment within a reasonable time after its last
negotiation.
10. Distinctions between a Promissory Note and Check
PN CHECK
– there are two (2) parties, the maker and the payee – there are three (3)
parties, the drawer, the drawee bank and the payee
– may be drawn against any person, not necessarily a bank – always drawn against a
bank
– may be payable on demand or at a fixed or determinable future time -always
payable on demand
– a promise to pay – an order to pay
11. Other Forms of Negotiable Instruments:
a. certificates of deposits
b. trade acceptances
e. letters of credit
It must:
a. be in writing signed by the drawer
It must:
– The Bill must contain an order, something more than the mere asking of a
favor.
a. interest
b. in installments
d. with exchange
e. costs of collection or attorney’s fees (Sec. 2 NIL)
17. General Rule: The promise or order should not depend on a contingent event.
If it is conditional, it is non-negotiable.
Exceptions:
Notes on Section 3
Notes on Section 4
19. General Rule: If some other act is required other than the payment of money,
it is non-negotiable.
Exceptions:
b. confession of judgment
Notes of Section 5
– If the choice lies with the debtor, the instrument is rendered non-
negotiable.
20. The validity and negotiability of an instrument is not affected by the fact
that:
it is not dated
does not specify the value given or that any had been given
does not specify the place where it is drawn or payable
bears a seal
designates the kind of current money in which payment is to be made (Sec. 6 NIL)
21. Instrument is payable upon demand if:
Notes on Section 7
– if the time for payment is left blank (as opposed to being omitted), it may
properly be considered as an incomplete instrument and fall under the provisions of
Sec. 14, 15, or 16 depending on how the instrument is delivered.
Notes on Section 9
– Where the agent has no authority to execute the instrument, the intent
of the principal is controlling
– the insertion of a wrong date does not avoid the instrument in the hands
of a subsequent holder in due course
25. Subsequent Holder in Due Course not affected by the following deficiencies:
It was delivered by the person making it in order that it may be converted into a
negotiable instrument
The holder has prima facie authority to fill it up as such for any amount. (Sec. 14
NIL)
Notes on Section 14
General Rule: 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. (Sec. 15 NIL)
Notes on Section 15
a. If between immediate parties and remote parties not holder in due course,
to be effectual there must be authorized delivery by the party making, drawing,
accepting or indorsing. Delivery may be shown to be conditional or for a special
purpose only
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
7) delivery may be conditional or for a special purpose but such do not affect
the rights of a holder in due course.
30. General rule: a person whose signature does not appear on the instrument in
not liable.
Exception:
31. 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:
32. Per Procuration – operates as notice that the agent has a limited authority
to sign.
Effects:
– the principal in 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. 21 NIL)
Effects:
34. General rule: a signature which is forged or made without authority is wholly
inoperative.
Effects:
no right to retain
no right to give a discharge
no right to enforce payment can be acquired. (Sec. 23 NIL)
Exception:
Notes on Section 23
– Persons who are precluded from setting up the forgery are a) those who
warrant or admit the genuineness of the signature b) those who are estopped.
– Where the payee’s signature is forged, payments made by the drawee bank
to collecting bank is ineffective. No debtor/creditor relationship is created. An
agency to collect is created between the person depositing and the collecting bank.
Drawee bank may recover from collecting bank who may in turn recover from the
person depositing.
In a PN
– a maker whose signature was forged cannot be held liable by any holder
In a BOE
– the drawer’s account cannot be charged by the drawee where the drawee
paid
– the payee can recover from the recipient of the payment, such as the
collecting bank
– the collecting bank bears the loss but can recover from the person to
whom it paid
– if the drawee has accepted the bill, the drawee bears the loss and his
remedy is to go after the forger
– if the drawee has not accepted the bill but has paid it, the drawee
cannot recover from the drawer or the recipient of the proceeds, absence any act of
negligence on their part.
35. Every negotiable instrument is deemed prima facie to have been issued for a
valuable consideration. (Sec. 24 NIL)
Effects:
– every person whose signature appears thereon is a party for value
– presumption is disputable
36. Where value has at any time been given for the instrument, the holder is
deemed a holder for value in respect to all parties who become such prior to that
time. (Sec. 26 NIL)
Notes on Section 28
38. An accommodation party is one who signs the instrument as maker, drawer,
acceptor, or indorser without receiving value therefor and for the purpose of
lending his name to some other person.
Effects:
Notes on Section 28
written
on the instrument itself or upon a piece of paper attached (Sec. 31 NIL)
Notes on Section 31
Notes on Section 40
43. A holder may strike out any indorsement which is not necessary to his title.
Effects:
– All indorsers subsequent to such indorser who has been discharged are
likewise relieved. (Sec. 48 NIL)
44. Effects of a transfer without endorsement:
Effects:
b. became a holder before it was overdue and had no notice that it had been
previously dishonored if such was the fact
Notes on Section 52
– the person who questions such has the burden of proof to prove otherwise
– on the date of maturity, the instrument is not overdue and the holder is
a HDC
– may enforce payment of the instrument for the full amount against all
parties liable(Sec. 57 NIL)
Notes on Section 57
– Personal or equitable defenses are those which grow out of the agreement
or conduct of a particular person in regard to the instrument which renders it
inequitable for him through legal title to enforce it. Can be set up against
holders not HDC
– Legal or real defenses are those which attach to the instrument itself
and can be set up against the whole world, including a HDC.
49. A instrument not in the hands of a HDC is subject to the same defenses as if
it were non-negotiable.
Exception:
– a holder who derives his title through a HDC and is not a party to any
fraud or illegality affecting the instrument, has all the rights of such HDC in
respect to all parties prior. (Sec. 58 NIL)
Rights of a holder not a HDC
– if he derives his title through a HDC and is not a party to any fraud or
illegality thereto, has all the rights of such HDC
50. General rule: every holder is deemed prima facie to be a holder in due
course.
Exception:
– where it is shown that the title of any person who has negotiated the
instrument is defective, the burden is on the holder to prove that he is a HDC or
that a person under whom he claims is a HDC (Sec. 59 NIL)
Notes on Section 60
– one who has signed as such is presumed to have acted with care and to
have signed with full knowledge of its contents, unless fraud is proved
– when two or more makers sign jointly, each is individually liable for
the full amount even if one did not receive the value given
– admits the existence of the drawer, the genuineness of his signature and
his capacity and authority to draw the instrument
if payable to order of a third person – liable to the payee and to all subsequent
parties
if payable to order of the maker or drawer – liable to all parties subsequent to
the maker or drawer
if payable to bearer – liable to all parties subsequent to the maker or drawer
if signs for an accommodation party – liable to all parties subsequent to the payee
(Sec. 64 NIL)
55. Warranties where negotiating by delivery or qualified endorsement:
Notes on Section 65
– lack of knowledge of the indorser as to any fact that would impair the
validity or the value of the instrument must be subsisting all throughout.
Notes on Section 66
– the indorser does not warrant the genuineness of the drawer’s signature
57. General rule: Presentment for payment is not necessary to charge persons
primarily liable on the instrument. Presentment for payment is necessary to charge
the drawer and indorsers. (Sec 70 NIL)
Notes on Section 70
– if payable at the special place, and the person liable is willing to pay
there at maturity, such willingness and ability is equivalent to tender of payment.
– only the holder or one authorized by him has the right to make
presentment for payment
61. General rule: Presentment for payment necessary to charge persons secondarily
liable otherwise they are discharged:
Exception:
– Section 79 and 80
b. presentment is waived
Notes on Section 82
Notes on Section 84
68. Notice:
Effects:
71. Notice of Dishonor – given by the holder to the parties secondarily liable,
drawer and each indorser, that the instrument was dishonored by non-acceptance or
non-payment by the drawee/maker
General rule: Any drawer or indorser to whom such notice is not given is
discharged.
Exceptions:
d. drawer has no right to expect that the drawee will accept/pay the
instrument (Sec. 114 NIL)
74. Omission to give notice of dishonor by non-acceptance doe not prejudice a HDC
(Sec. 117 NIL)
75. Protest only necessary for a foreign bill of exchange. Protest for other
negotiable instruments is optional. (Sec. 118 NIL)
e. debtor becomes holder of the instrument at/after maturity in his own right
( Sec 119 NIL)
– if payment is not made by the principal debtor, payment only cancels the
liability of the payor and those obligated after him but does not discharge the
instrument.
– the party may strike out his own and all subsequent indorsements
Exception:
79. General rule: When materially altered, without the consent of all parties
liable, the instrument is avoided except as against:
dates
the sum payable
time and place of payment
number or relations of the parties
medium or currency for payment
adding a place of payment where no place is specified
any other which alters the affect of the instrument
81. Instances where a BOE may be treated as a PN:
where the drawer and the drawee are one and the same
where the drawee is a fictitious person
where the drawee has no capacity to contract (Sec. 130 NIL)
The holder has the option to treat it as a BOE or a PN
82. Acceptance is the signification by the drawee of his assent to the order of
the drawer. It is an act by which a person on whom the BOE is drawn assents to the
request of the drawer to pay it. (Sec. 132 NIL)
actual
constructive
general (Sec. 140)
qualified (Sec. 141)
Requisites of actual acceptance:
– in writing
– must not express the drawee will perform his promise by any other means
than payment of money
a. to make the drawee primarily liable and for the accrual of secondary
liability (Sec. 144)
Protest is required:
Acceptance for Honor (Sec. 161 NIL)– an acceptance of a bill made by a stranger
to it before maturirty, where the drawee of the bill has:
refused to accept it
and the bill has been protested for non-acceptance
or where the bill has been protested for better security
Requisites for acceptance for honor:
– the bill is not overdue at the time of the acceptance for honor
– Acceptor for honor is liable to the holder and to all the parties to the
bill subsequent to the party for whose honor he has accepted (Sec. 164)
Payment for Honor – payment made through a notarial act of honor of a party
liable/stranger to the bill after bill has been dishonored by non-payment by the
acceptor and protested for non-payment by the holder
Requisites:
Bills in Set – bill of exchange drawn in several parts, each part of the set being
numbered and containing a reference to the other parts, the whole of the parts just
constituting one bill (Sec 178 NIL)
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Negotiable Instruments Law – Discharge
NEGOTIABLE INSTRUMENTS LAW
Memory Aid
Of the Instrument
payment in due course by or on behalf of principal debtor
Payment in due course:
made at or after maturity
to the holder thereof
in good faith and without notice that his title is defective
payment in due course by party accommodated where party is made/ accepted for
accommodation
intentional cancellation by holder
if unintentional or under mistake or without authority of holder, inoperative.
Burden of proof on party which alleges it was unintentional, etc.
any other act which discharges a simple contract
principal debtor becomes holder of instrument at or after maturity in his own right
renunciation of holder:
holder may expressly renounce his rights vs. any party to the instrument, before or
after its maturity
absolute and unconditional renunciation of his rights vs. principal debtor made at
or after maturity discharges the instrument
renunciation does not affect rights of HDC w/o notice.
Renunciation must be in writing unless instrument delivered up to person primarily
liable thereon
material alteration (sec. 124: material alteration w/o assent of all parties liable
avoids instrument except as against party to alteration and subsequent indorsers)
Of secondary parties
any act which discharges the instrument
intentional cancellation of signature by holder
discharge of prior party
valid tender of payment made by prior party
release of principal debtor, unless holder’s right of recourse vs. 2ndary party
reserved
any agreement binding upon holder to extend time of payment, or to postpone
holder’s right to enforce instrument, unless made with assent of party secondarily
liable, or unless right of recourse reserved.
Failure to make due presentment (sec. 70, 144)
failure to give notice of dishonor
certification of check at instance of holder
reacquisition by prior party
where instrument negotiated back to a prior party, such party may reissue and
further negotiate, but not entitled to enforce payment vs. any intervening party to
whom he was personally liable
where instrument is paid by party secondarily liable, it’s not discharged, but
the party so paying it is remitted to his former rights as regard to all prior
parties
and he may strike out his own and all subsequent indorsements, and again negotiate
instrument, except
where it’s payable to order of 3rd party and has been paid by drawer
where it’s made/accepted for accommodation and has been paid by party accommodated.
BarOps ’99
Commercial Law – Val Feria, Mina Herrera, Gary Mallari & Rachel Ramos
PRIMARY PARTIES
Person primarily liable: person who by the terms of the instrument is absolutely
required to pay the same.
Sec. 70 (effect of want of demand on principal debtor)
Liability of Maker
Promises to pay it according to its tenor
admits existence of payee and his then capacity to indorse
Liability of Acceptor
Promises to pay inst according to its tenor
Admits the following:
existence of drawer
genuineness of his signature
his capacity and authority to draw the instrument
existence of payee and his then capacity to endorse
sec. 191, 132, 133, 138 — formal requisites of acceptance
sec. 136, 137, 150 — constructive acceptance
sec. 134, 135 — acceptance on a separate instrument
Kinds of Acceptance:
general
qualified
conditional
partial
local
qualified as to time
not all drawees
Certification: Principles
when check certified by bank on which it’s drawn, equivalent to acceptance
where holder of check procures it to be accepted/certified, drawer and all
indorsers discharged from al liability
check not operate as assignment of any part of funds to credit of drawer with bank,
and bank is not liable to holder, unless and until it accepts or certifies check
certification obtained at request of drawer: secondary parties not released
bank which certifies liable as an acceptor
checks cannot be certified before payable
SECONDARY PARTIES
Liability of Drawer
Admits existence of payee and his then capacity to endorse
Engages that on due presentment instrument will be accepted, or paid, or both,
according to its tenor and that
If it be dishonored, and the necessary proceedings on dishonor be duly taken, he
will pay the amount thereof to the holder or to an subsequent indorser who may be
compelled to pay it
drawer may insert in the instrument an express stipulation negativing / limiting
his own liability to holder
Liability of Indorsers:
Qualified Indorser and one Negotiating by Delivery
Instrument genuine, in all respects what it purports to be
good title
all prior parties had capacity to contract
he had no knowledge of any fact w/c would impair validity of instrument or render
it valueless
in case of negotiation by delivery only, warranty only extends in favor of
immediate transferee
Liability of an Agent
Signature of any party may be made by duly authorized agent, establish as in
ordinary agency
Where instrument contains or a person adds to his signature words indicating that
he signs for or on behalf of a principal, he is not liable on the instrument if he
was duly authorized, but the mere addition of words describing him as an agent
without disclosing his principal, does not exempt from personal liability.
Signature per procuration operates as notice that the agent has but a limited
authority to sign, and the principal is bound on ly in case the agent in so signing
acted within the actual limits of his authority
Where a broker or agent negotiates an instrument without indorsement, he incurs all
liabilities in Sec. 65, unless he discloses name of principal and fact that he’s
only acting as agent
I. Presentment For Acceptance
bill payable after sight, or in other cases where presentment for acceptance
necessary to fix maturity
where bill expressly stipulates that it shall be presented for acceptance
where bill is drawn payable elsewhere than at residence / place of business of
drawee
When failure to present releases drawer/indorser
Reasonable Time
Must consider
nature of instrument
usage of trade or business with respect to instrument
facts of each case
Date and time of presentment of instrument bearing fixed maturity Sec. 71, 85, 86,
194
Date of presentment
Where instrument not payable on demand: presentment must be made on date it falls
due
Where payable on demand: presentment must be made within reasonable time after
issue, except that in case of a bill of exchange, presentment for payment will be
sufficient if made within a reasonable time after last negotiation (but note:
though reasonable time from last negotiation, it may be unreasonable time from
issuance thus holder may not be HDC under sec. 71)
Check must be presented for payment within reasonable time after its issue or
drawer will be discharged from liability thereon to extent of loss caused by delay
Place Sec. 73
Notice of Dishonor
General rule: to drawer and to each indorser, and any drawer or indorser to whom
such notice is not given is discharged
Form, Contents, Time Sec. 95, 96, 102, 103, 104, 105, 106, 108, 113
By Whom Given
By or on behalf of the holder or any party to the instrument who may be compelled
to pay it to the holder, and who, upon taking it up, would have a right to
reimbursement from the party to whom the notice is given
Notice of dishonor may be given by an agent either in his own name or in the name
of any party entitled to give notice, whether that party be his principal or not
Where instrument has been dishonored in hands of agent, he may either himself give
notice to the parties liable thereon, or he may give notice to his principal (as if
agent an independent holder)
Protest
Definition: testimony of some proper person that the regular legal steps to fix the
liability of drawer and indorsers have been taken
BarOps ’99
Commercial Law – Val Feria, Mina Herrera, Gary Mallari & Rachel Ramos
KINDS OF DEFENSES
real defense – attaches to instrument; on the principle that the right sought to be
enforced never existed/there was no contract at all
personal defense – growing out of agreement; renders it inequitable to be enforced
vs. defendant
DEFENSES
wholly inoperative
no right to retain instrument, or give discharge, or enforce payment vs. any party,
can be acquired through or under such signature (unless forged signature
unnecessary to holder’s title)
Exception:
unless the party against whom it is sought to enforce such right is precluded from
setting up forgery/want of authority
precluded:
1. overdraft
2. stop payment order
3. forged indorsements
MATERIAL ALTERATION
Where NI materially altered w/o assent of all parties liable thereon, avoided,
except as vs. a
party who has himself made, authorized or assented to alteration
and subsequent indorsers.
But when an instrument has been materially altered and is in the hands of a HDC not
a party to the alteration, HDC may enforce payment thereof according to orig. tenor
Material Alteration
change date
sum payable, either for principal or interest
time of payment
number/relations of parties
medium/currency of payment, adds place of payment where none specified, other
change/addition altering effect of instrument in any respect.
*material alteration a personal defense when used to deny liability according to
org. tenor of instrument, but real defense when relied on to deny liability
according to altered terms.
FRAUD
fraud in execution: real defense (didn’t know it was NI)
fraud in inducement: personal defense (knows it’s NI but deceived as to
value/terms)
DURESS
Personal, unless so serious as to give rise to a real defense for lack of
contractual intent
COMPLETE, UNDELIVERED INSTRUMENT
Personal defense (sec. 16)
If instrument not in poss. Of party who signed, delivery prima facie presumed
If holder is HDC, delivery conclusively presumed
INCOMPLETE, UNDELIVERED INSTRUMENT
Real defense (sec. 15)
Instrument 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
10. INCOMPLETE, DELIVERED
BarOps ’99
Commercial Law – Val Feria, Mina Herrera, Gary Mallari & Rachel Ramos
HOLDER
Sec. 191
RIGHTS OF HOLDER
* if in the hand of any holder (note definition of holder) other than a HDC,
vulnerable to same defenses as if non-negotiable
General Rule: in the hands of any holder other than a HDC, NI is subject to same
defenses as if it were non-negotiable.
Exception: holder who derives title through HDC and who is not himself a party to
any fraud or illegality has all rights of such former holder in respect to all
parties prior to the latter.
BarOps ’99
Commercial Law – Val Feria, Mina Herrera, Gary Mallari & Rachel Ramos
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