Ca$h MoNey LaW 4 Dummies (Negotiable Instruments Law)

Negotiable Instruments Law

-Act No. 2013 (June 12,1911)

-Copied from Negotiable Act of US (which was copied from England)

3 types of NI

-Promissory Note (Sec 184) parties involved: Maker, payee

-Bill of Exchange (Sec 126) parties involved: drawer, payee, drawee/acceptor

-Checks (Sec 185) parties involved: drawer, payee, drawing bank

Promissory Note vs. Bill of Exchange:

P/N= Unconditional Promise

B/E= Unconditional Order

Reading order (if ur gonna read de leon)

Sec 1(a)->191->18-21->22

Sec 1(b)->3->5->2

Sec 1(c)->7->4->194

Sec 1(d)->8->9

Sec 1(e)->128

Sec 10->17->6
Sec 1(a) – It must be in writing and signed by the maker or drawer

Sec 191 – Def of terms (in the book)

Sec 18 – Effect of signature to liability

Gen Rule: No signature, no liability

XPN:

-Person signs in a trade or assumed name (Assumed name example: Artists)

-Principal is liable if duly authorized agent signs

-Forgery: Forger is liable

-Where acceptor makes his acceptance of a bill on a separate paper

-Where a person makes a written promise to accept a bill before it is drawn

Sec 21 – Effect of Signature by procuration

Procuration: “The act by which a principal gives power to another to act in his place as he could
himself.”

Effect of procuration:

-Where agent exceeded his authority: principal is not liable

-Where agent acted with abuse of authority: abuse of authority is not a defense against
a bona fide holder

Sec 22 – Indorsement or assignment by a corp or infant (minor)

Effect of minority:

-Gen Rule: Contracts entered in by minors are voidable. However, minor can transfer
rights

-Minority is a defense that only can be used by the minor

-However, he is liable if he commits fraud

Effect of Corporation:

-Applies only to ultra vires acts of the corporation

Sec 1(b): Must contain an unconditional promise or order to pay a sum certain in money.

Sec 3 – Check book

Implied promise to pay: it is not essential that the word “promise” should be used. Any words
equivalent to that are sufficient to constitute a “promise to pay”

Bare acknowledgement of indebtedness is not a negotiable instrument

Use of words of negotiability makes instrument negotiable.

When promise to pay/order to pay is unconditional:

Instrument payable absolutely: It is not enough that there be a promise or order. It must be
unconditional.

An instrument which mentions a particular fund out of which reimbursement is to be made is

negotiable because the order to pay is not rendered conditional.

An instrument payable out of a particular fund is non-negotiable.

Test of negotiability – Whether or not the instrument carries the general personal credit of the
maker or drawer. Yes: Negotiable. No: non-negotiable

An instrument which obtains a direction to debit a particular account is negotiable because the
promise/order is not also made conditional.

Sec 5 – Additional provisions affecting negotiability

General Rule: As a gen. rule, the instrument is non-negotiable if it contains a promise or order
to do any act in addition to payment of money.

XPNs:

-Sale of collateral securities

-Confession of judgement

-waiver of benefit granted by law

-Election of holder to require some other act

Sec 1(c) – Must be payable on demand, or at a fixed or determinate future time.

Sec 7 – An instrument is payable on demand-

-Where it is expressed to be payable on demand, or at sight, or on presentation; or

-in which no time for payment is expressed.

Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person
so issuing, or indorsing it, payable on demand.

Sec 4 – Def of determinable future time:

-at a fixed period after date or sight

-on or before a fixed or determinable future time specified therein; or

-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.

An instrument payable upon contingency is not negotiable, and the happening of the event
does not cure the defect.

Certainty of Time of Payment:

1. Instrument payable at all events: A NI must be payable at all events

2. When time of payment certain: In order that an instrument may be negotiable,
there must be certainty as to the time of payment.

A promise to pay “when able” is not a negotiable instrument.

Sec 194: Where the day or last day for doing an act required by the instrument falls on a
Sunday or holiday, the act may be done on the next succeeding secular or business day.

If an instrument falls on a Sunday, it is payable on a Monday. If Monday is a holiday, it is

payable on Tuesday.
1(d) – Must be payable to order or to bearer.

Sec 8 – Instrument is payable to order where it is drawn payable to the order of a specified
person or to him or to his order. It may be drawn to the order of:

-Payee who is not drawer, maker, or drawee

-drawer or maker or

-drawee

-two or more payees jointly

-one or more several payees

-the holder of an office for the time being.

Where the instrument is payable to order, payee must be named or otherwise indicated with
reasonable certainty.

The words “to the order of”, “or bearer”, etc. are not required to import negotiability

An instrument is payable to order if it is drawn payable:

1. To the order of a specific person or

2. To him or to his order

Effect where payee/ drawee not named or described

1. In an order instrument, a specified person must be named before or after the word
“order”. Where there is not blank space for the name of the payee indicating
authority to insert payee’s name, it is not negotiable.
2. Payee must be designated with reasonable certainty in bills of exchange as well

Sec 9 – Instrument is payable to bearer:

- When it is expressed to be so payable

- When it is payable to a person named therein or bearer
- When it is payable to a fictitious person
 - When the name of the payee does not purport the name of the person
- When the only or last indorsement is an indorsement in blank.

When instrument is payable to bearer:

Bearer: the person in possession of a bill or note which is payable to bearer.

Sec 1(e) – Where the instrument is addressed to a drawee, he must be named or otherwise
indicated therein with reasonable certainty.

Sec 128 – A bill may be addressed to two or more drawers, jointly, whether they are partners or
not; but not to two or more drawers in the alternative or in succession.

Ex: “To A and B”, “To A, B, and C” = negotiable. “To A or B”, “To A or B or C” = non-negotiable

Sec 10 – Terms which are sufficient to constitute negotiability

-Clear intention of parties = Substance > form

-Use of foreign language is allowed

-Mere defect in language or grammatical error does not destroy negotiability.

Sec 17 – Rules in interpreting:

-words > numbers in case of discrepancy. However, figure may be used as a reference in
case words are uncertain

-In case of interest, it runs from the date of the instrument

-when not dated, dated at the time it was issued

-written provisions > printed provisions

-when instrument is ambiguous on whether it is a bill or not, may be treated as either

-when signature is placed but not sure in what capacity, deemed to be an indorser

-when “I promise to pay” is signed by 2 or more people, deemed to be jointly and

severally liable
Sec 6 – Validity of instrument are not affected by the ff:

-not dated

-does not specify the value given

-does not specify the place where it is drawn

-bears a seal

-designates a particular kind of current money in which payment is to be made.

Effect of omission of date:

-Date of instrument generally not necessary

-When date is necessary

-where said date is tied to the date of issue

-where interest is stipulated for the purpose of determining when interest is to

run

-in the case of promissory note, date of issue

-in the case of bills of exchange, date of last negotiation

-date not stated in calendar, closest date of month the date intended.

Effect of omission of value

-usual to not specify value as consideration is presumed

Effect of omission of place:

-presumed to have been made where it was dated

-place of payment not specified = residence of maker

-place of execution or payment is not stated, maker/drawer’s place of business or home.

Effect of presence of seal

-fact that instrument has seal does not destroy its negotiability

-it is advisable to have bill or note appear in a public instrument

Effect of designation of particular kind of money payable

-Law does not require that payment should be made in legal tender

-Money is not limited to legal tender

-Instrument is still negotiable as long as obligation may be discharged in pesos in

equivalent amount in case instrument is payable in foreign money.

Consideration (Sec 24)

Consideration = inducement to a contract

Motive vs. Consideration

Consideration = inducement to a contract

Motive = personal or private reasons of a party entering into a contract

Presumptions of Consideration:

1. Need not be expressly stated

2. Need not be alleged and proved (by the holder)
3. Lack of consideration as a defense (may be used only against the payee)

Value

Sec 25 – Value is any consideration sufficient to support a simple contract

Valuable Consideration:

-Value means valuable consideration

-Any prestation sufficient to support any contract in favor of the party to an instrument

A valuable consideration need not be adequate. It is sufficient if it is a valuable one.

Antecedent = Valuable Consideration

-Debt of a Third person

-Security for pre-existing debt

What constitutes holder for value?

-is one who has given a valuable consideration for the instrument issued or negotiated
to him.

-holder is deemed as such not only as regards the party to whom value has been
given by him but also in respect to all those parties prior to the time when value was given.

-a holder of a negotiable instrument is presumed to be a holder for value until

the contrary is shown.

Rule where funds represented by check have been withdrawn

-First in, First out in debit-credit

-Diff. rule states that as long as balance of depositor is equal to or exceed the amount of
the check, said balance cannot be considered as withdrawn and bank is not a holder for value.

Lien on instrument: one who has taken a negotiable instrument as collateral security for a debt
as a lien on the instrument.

IF:

Amount of instrument > debt, pledgee is holder for value to the extent of his lien

Amount of instrument < debt, holder for value for the full amount

If between pledgor and party liable there are defenses, pledgee can collect to the amount of
debt. In defense of party liable, pledgee can recover nothing.

Effect of want of consideration:

Sec 28

Absence of Consideration = total lack of any valid consideration for the contract, in
consequence of which the alleged contract must fall

Failure of Consideration = failure or refusal of one of the parties to do, perform, or comply, with
the consideration agreed upon.
Negotiation

Modes of transferring a negotiable instrument:

-Issue (Sec 191)

-Negotiation

-Assignment

Sec 30 – Negotiation is the transfer of a negotiable instrument from one person to another
made in such a manner as to constitute the transferee the holder thereof.

Methods of Negotiation

To determine the manner required for negotiation, one must examine the form of the
instrument.

-If payable to order, it is negotiable by delivery with the necessary indorsement.

-If the instrument is a bearer instrument, delivery alone is sufficient to constitute

negotiation.

Payment of instrument by drawee not negotiation

-The payment of a check or other bill by the drawee bank is not a negotiation and does
not make the bank a holder within Sec30. The bank is neither the payee nor indorsee. The
writing of the name of the holder on the back of the check before surrendering it for payment
to the drawee-bank is not an indorsement. It only signifies receipt for the money.

Delivery

Kinds – Delivery is the transfer of possession, actual or constructive, from one person to
another.

Necessity- Delivery is an essential part of every negotiation. Indorsement, as defined by this Act,
means an indorsement completed by delivery.

Where delivery conditional

Condition precedent – note is not to take effect until condition happens

Condition subsequent – where an instrument is unconditionally delivered as an operative

contract.
Indorsement

Sec 31- Indorsement is the writing of the name of the payee on the instrument with the intent
either to transfer the title to the same, or to strengthen the security of the holder by assuming
a contingent liability for its future payment.

The payee by signing the instrument and delivering it to another person becomes an indorse.
Person receiving it becomes indorsee.

Indorsement without delivery conveys no title and creates no holder.

An indorsement is not only a mode of transfer. It involves also a new contract on the part of the
indorser.

Necessity

-Essential to the execution of an instrument payable to the order of the maker or drawer.

-Essential to the negotiation of an order instrument, not of a bearer instrument.

-It is not necessary to a mere assignment of a negatable or non-negotiable instrument.

-Under proper circumstances, an estoppel may take the place of an indorsement to uphold the
transfer of a bill or not when indorsement is forged or unauthorized.

Form

-Law does not require exclusive form, but it must be in writing or print. An indorsement made
by rubber stamp or typewritten on the instrument complies with the requirement.

Place of indorsement

-On the instrument itself

-on a separate paper (allonge)

Indorsement of the entire instrument (Sec 32)

-Joint payees: Allowed, but to further negotiate the instrument, it must require the
indorsement of all joint indorsees.

-Alternative payees: valid, the negotiation of the instrument may be made by the indorsement
of either of them.
Partial indorsement- If part of the instrument has been paid, the unpaid balance may be
indorsed.

Kinds of indorsement (Sec 33)

Special indorsement (Sec 34)

A special indorsement is one where the name of the payee is specified.

A blank indorsement is one which specifies no particular indorsee.

Conversion from blank to special indorsement (Sec 35)

Blank to special: write name of indorsee

Special to blank: just sign after the last signature of indorser.

Restrictive indorsement (Sec 36)

-prohibits further negotiation of the instrument

-constitutes the indorsee the agent of the indorser

-vests the title in the indorsee in trust for or to the use of some other person.

*mere absence of words implying power to negotiate does not make an indorsement restrictive

Rights of indorsee under restrictive indorsement (Sec 37)

-receive payment

-bring any action thereon that the indorser could bring

-transfer his rights

Qualified indorsement: Constitutes the indorser a mere assignor

-Used to limit indorser’s liability.

-Limit of liability: only liable due to forgery, lack of good title, lack of capacity to contract on the
part of the prior parties, fact that instrument was not valid at the time of the indorsement.

Conditional Indorsement (Sec 39)

-one which the indorser imposes some other conditions to his liability or on the indorsee’s right
to collect the proceeds of the instrument.
-Di naman kailangan ng maker na sundin yung condition na binigay ng subsequent parties. Bakit
pa ba niya iisipin yun, gusto lang naman niya mabayaran yung instrument eh. -Tito Rex, 2019

-Does not prohibit further negotiation of the instrument.

-binding only between indorser and indorsee.

Effect of special instrument where instrument originally payable to bearer (Sec 40)

-Mere delivery now doesn’t constitute negotiation. Must need indorsement and delivery.

Joint indorsement (Section 41)

General Rule: All joint indorsees are needed to further negotiate the instrument

XPNs: Where the payees or indorsees are partners or when one indorsee has authority to
indorse for the others.

Indorsement to cashier (Sec 42)

-When indorsed to a person as cashier, it is deemed prima facie to be payable to the bank of
corporation.

Indorsement where name is misspelled (Sec 43)

Example: Correct name: Rex Cruz

He may sign as:

(Sgd.) Reks Cruz or

(Sgd.) Reks Cruz

(Sgd.) Rex Cruz

Both are valid as long as Rex Cruz acknowledges the error by signing both wrong and correct
names.

Indorsement in representative capacity (Sec 44)

-Either personal or through an agent. Authority given need not be in writing (Sec 20)

Time of indorsement (Sec 45)

-Except where an indorsement bears date after the maturity of the instrument, every
negotiation is deemed prima facie to have been effected before the instrument was overdue.
Place of indorsement (Sec 46)

-Every indorsement is presumed prima facie to have been made at the place where the
instrument is dated, unless the contrary appears.

Continuation of negotiable character (Sec 47)

General rule: Form of an indorsement can have no effect on the general character of an
instrument.

XPNs: When the instrument has been restrictively indorsed; or when it has been discharged by
payment or otherwise.

Striking out indorsements (Sec 48)

-Holder may strike out previous indorsements

-Those striked out shall have no more liability

-May not strike out those necessary for the instrument (Like indorsement to original payee)

Transfer without indorsement (Sec 49)

-Applicable only to instrument payable to order

-Transfer without indorsement acts as equitable assignment.

When a previous party reacquires the instrument (Sec 50)

-if he reacquires it before maturity, he may negotiate it further

-Limitations on the renegotiation- Cannot further negotiate in these cases:

-Where it is payable to the order of a third person, and has been paid by the drawer

-Where it was made or accepted for accommodation and has been paid by the party
accommodated

-Where the instrument is discharged when acquired by a prior party.