NEGOTIABLE INSTRUMENTS

DEFINITION: a contractual obligation to pay money

FUNCTIONS and importance of negotiable instruments

1. Used as substitute for money

2. Constitute, at present, the media of exchange for most common transactions
3. Serve as a medium of credit transaction

CHARACTERISTICS and features of NI

1. Negotiability – whereby a bill or note passes from hand to hand similar to money, so as
to give the holder in due course the right to hold the instrument and collect the sum
payable for himself free from defenses
2. Accumulation of secondary contracts – transferred from one person to another

KINDS OF NEGOTIABLE INSTRUMENTS

1. Promissory Note – the issuer has promised to pay

2. Bill of exchange- the issuer has ordered a third person to pay

FORMAL REQUISITES:

1. The instrument must be in writing

2. Must be signed by the maker or drawer
3. Must contain an unconditional promise or order to pay-not subject to any condition or
contingency
4. Must be payable in a sum certain in money
5. Must be payable at a fixed or determinable future time or on demand
6. Must be payable to order or bearer
7. The drawee must be named

PARTIES:

1. Promissory note - promise to pay a sum certain in money

a. Maker – the one who makes the promise and signs the instrument
b. Payee – the one to whom the promise is made or the instrument is payable
2. Bill of exchange – an order made by one person to another to pay money to a third person
a. Drawer – the one who draws the bill
b. Drawee – the person upon whom the bill is drawn; the one to whom the bill is
addressed and who is ordered to pay
 c. Payee- the person whose favor the bill is drawn or is payable

LIABILITIES OF PARTIES

1. Primarily liable
a. Maker
b. Acceptor
c. Certifier of a check
2. Secondarily liable
a. Drawer
b. Indorser
3. Not liable
a. Drawee until he accepts the instrument in which case he becomes an acceptor

Construction of ambiguous instrument

1. Sums expressed in words and figures different –the sum in words prevails
2. Words ambiguous or uncertain-reference may be had to the figures
3. Date when stipulate interest to run not specified-it runs from the date of instrument or
the date of issue
4. Undated instrument – date of issue
5. Written and printed words in conflict – the written words prevail
6. Whether instrument is bill or note-the holder may treat either at his election
7. Capacity in which a person signed in doubt-he is deemed an indorser

FORGERY-is meant the counterfeit-making or fraudulent alteration of any writing, and may
consist in the signing of another’s name or the alteration of an instrument in the name, amount,
description of the person and the like, with intent thereby to defraud.

1. The signature on the instrument affixed by one who does not claim to act as an
agent and who has no authority to bind the person whose signature was forged
2. The signature is affixed by one who purports to be an agent but has no authority to
bind the alleged maker.

Effect : the instrument is wholly inoperative and no right can be acquired through the
forged signature. A real defense even as against a holder in due course.

CONSIDERATION – means the inducement to a contract, the cause, the price. A negotiable
instrument must have a consideration or cause. It is not necessary that the consideration be
expressly stated in the instrument.

ACCOMMODATION PARTY
 – one who has signed the instrument as maker, drawer, acceptor or indorser, without
receiving value therefor, and for the purpose of lending his name to some other person.

-liable on the instrument to a holder for value, notwithstanding such holder at the time
of taking the instrument knew him to be only an accommodation party.

MODES OF TRANSFER

1. Issue – the first delivery of the instrument complete in form

2. Negotiation - the transfer of a negotiable instrument from one person to another
made in such a manner as to constitute the transferee the holder thereof.
3. Assignment - the transfer of a title to the instrument, with the assignee generally
taking only such title as his assignor has

METHODS OF NEGOTIATION

1. Instrument payable to order –

a. indorsement by the payee or the present holder
b. delivery to the next holder
2. Instrument payable to bearer-negotiated by mere delivery without indorsement

INDORSEMENT –

1. the writing of the name of the indorser 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, or both.
2. It involves a new contract and an obligation on the part of the indorser-an implied
guaranty that the instrument will be duly paid according to the terms thereof
3. It involves certainty of two things:
a. The identity of the indorser
b. The genuineness of his signature

Kinds of indorsement:

1. Special indorsement - where the name of the payee is specified

2. Blank indorsement – one which specifies no indorsee.
3. Restrictive indorsement– an indorsement is restrictive, when it eithers:
a. Prohibits further negotiation of the instrument;
b. Constitutes the indorsee as agent of the indorser (e.g. indorsement for deposit);
c. Vests the titel in the indorsee in trust for or to the use of some other persons.
4. Qualified indorsement – one which constitutes the indorser a mere assignor of the title
to the instrument. Made by adding the words “without recourse”
 5. Conditional indorsement – the indorser annexes some other condition to his liability,
which may be disregarded by the party required to pay
6. Joint – indorsement payable to the order of two or more persons. (Sec. 41) As a general
rule, all of the payees must indorse in order that the instrument may be validly
negotiated, except:

a) where the payee or indorsee has authority to indorse for the others; or

b) where the payees or indorsees are partners.

7. Irregular – one made by a person not otherwise a party to the instrument.

Effect of special indorsement of a bearer instrument:

1. May nevertheless be further negotiated by delivery

2. Person indorsing specially is only liable to those holders who can trace their title to
the instrument by a series of unbroken indorsements

A negotiable instrument continues to be such until:

a. It is restrictively indorsed
b. It has been discharged by payment

Striking of indorsements :

a. When an instrument is payable to bearer on its face

b. When payable to order – all indorsements subsequent to a blank indorsement

REQUISITES OF A HOLDER IN DUE COURSE

A holder in due course is a holder who has taken the instrument under the following conditions:

1. That it is complete and regular upon its face;

2. That he became the holder of it before it was overdue, and without notice that it had
been previously dishonored;
3. That he took it in good faith and for value;
4. That at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it

Rights of a holder in due course

 1. May sue on the instrument in his own name
2. May receive payment and if the payment is in due course the instrument is discharged
3. Holds the instrument free from any defect of title of prior parties
4. Holds the instrument free from defenses available to prior parties
5. May enforce payment of the instrument for the full amount thereof against all parties
liable thereon

WARRANTIES

1. Person negotiating by delivery or by qualified indorsement

a. That the instrument is genuine and in all respects what it purports to be
b. That he has a good title to it
c. That all prior parties had capacity to contract
d. That he has no knowledge of any fact which would impair the validity of the
instrument or render it valueless

Therefore, such a person is not liable in case the instrument is dishonored due to
insolvency of any prior party, unless he has knowledge of such insolvency.

When the negotiation is by delivery, the warranty extends only to the immediate
parties.

Immediate parties – those parties who have knowledge of any conditions or limitations
placed upon the delivery of the instrument

Remote parties- those who have no contractual relation to each other. A party, although
proximately remote, may become an immediate party, if he has knowledge or notice.

2. General indorser
a.That the instrument is genuine and in all respects what it purports to be
b. That he has a good title to it
c. That all prior parties had capacity to contract
d. That the instrument is, at the time of his indorsement, is valid and subsisting
e. That in case of dishonor, he will pay the amount thereof to the holder or to any
subsequent indorser who may be compelled to pay

PRESENTMENT FOR PAYMENT – the presentation of an instrument to the person primarily liable
for the purpose of demanding and receiving payment.
PAYMENT IN DUE COURSE

1. Made at or after the date of maturity

2. Must be made to the holder
3. Must be made in good faith and without notice that the holder’s title is defective

DEFENSES OF PARTIES

1. Real defenses – those that are available against all parties including holders in due course
a. Want of delivery of incomplete instrument
b. Forgery
c. Duress amounting to forgery
d. Fraudulent alteration
e. Prescription
f. Discharge at or after maturity
2. Personal defenses-can be used only against original parties or immediate parties or
against one who is not a holder in due course
a. Filing of wrong date
b. Filling up blanks not in accordance with the authority given
c. Absence or failure of consideration
d. Acquisition of instrument by duress, by force or fear
e. Acquisition of instrument by unlawful means

NOTICE OF DISHONOR-bringing, verbally or in writing, to the knowledge of the drawer or indorser

of an instrument, the fact

1. that a specified negotiable instrument, upon proper proceedings taken, has not
been accepted or has not been paid, and
2. that the party notified is expected to pay it.

BATAS PAMBANSA BLG. 22-BOUNCING CHECKS LAW

Elements:
(1) the making, drawing, and issuance of any check to apply for account or for value;
(2) the knowledge of the maker, drawer, or issuer that at the time of issue he does not have
sufficient funds in or credit with the drawee bank for the payment of the check in full upon
its presentment;
(3) having sufficient funds in or credit with the drawee bank shall fail to keep sufficient funds
or to maintain a credit to cover the full amount of the check if presented within a period of
90 days from the date appearing thereon, and
 (4) the subsequent dishonor of the check by the drawee bank for insufficient funds or credit
or dishonor for the same reason had not the drawer, without any valid cause, ordered the
bank to stop payment.
Evidence of knowledge of insufficient funds:

The issuer is not automatically liable simply because the check “bounced”. A check generally
“bounces” when dishonored upon presentment (reasons include, account closed, drawn against
insufficient funds or DAIF). However, it is indispensable that the issuer must be notified in
WRITING about the fact of dishonor, and he has 5 days from receipt to pay the value of the check
or make arrangements for the payment thereof.

Penalty:

1. Imprisonment – not less than 30 days not more than one (1) year
2. Fine- not less than nor more than double the amount of the check which fine shall in no
case exceed P200,00.00

DISCHARGE OF NEGOTIABLE INSTRUMENTS –the release of all parties, whether primary or

secondary, from the obligations arising thereunder

1. Payment by the principal debtor

2. Payment by the accommodated party
3. Intentional cancellation of instrument by holder
4. Any act which discharges a contract
5. Reacquisition by principal debtor on his own right (confusion or merger)