NEGOTIABLE INSTRUMENTS LAW | WEEK ONE Special types of NI: PNs- certificates of deposits, bank notes, due bills,

PNs- certificates of deposits, bank notes, due bills, bonds, BoE -

drafts, trade acceptances, and banker's acceptances.
1. What is a negotiable instrument? What are negotiable instruments? How
do they differ from each other? 3. Who are the parties at the inception of a negotiable instrument? Should all
 It is an instrument which possesses all the elements of negotiability parties/ signatories be accountable?
provided in Section 1 of the Negotiable Instruments Law.
PARTIES TO A PROMISSORY NOTE - promise paper, or two- party paper.
2. What are negotiable instruments? How do they differ from each other?
a. Maker - the one who makes die promise and signs the instrument. The
ROLES OF NEGOTIABLE INSTRUMENTS:
maker's signature must appear on the face of the note for him to be liable
a. As a substitute for money – its negotiability allows it to pass freely from thereon
hand to hand in the commercial markets. It differs from money as they are b. Payee - the party to whom the promise is made or the instrument is payable.
valuable or worthless depending upon the financial ability of the parties to
The payee may be specifically designated by name or by office or title (e.g., treasurer
them.
of X Corporation). It may be unspecified (e.g., "bearer"). He may seek payment
b. As a medium of exchange for most commercial transactions - Without them
personally or further negotiate the instrument/Thus, the maker assumes liability to
circulating among business houses and individuals, more money either in
pay to the payee or to the holder.
coins or bank bills would be needed in circulation, thus it would be very
difficult for the economy to prosper. Every person to whom an instrument is delivered, is a holder, Such holder may be
c. As a medium of credit transactions - to allow men of undoubted credit to the payee or any subsequent person receiving the promissory note or bill of exchange
carry on a business enterprise upon their promissory notes, bills of exchange by delivery or by delivery and indorsement.
and checks knowing that other businessmen will treat these promises as
cash. PARTIES TO A BILL OF EXCHANGE - order paper, or three-party paper.

COMMON FORMS AND THEIR DIFFERENCES a. Drawer - The person who issues and draws the order bill. He gives the
order to pay money to a third party. He does not pay directly.
Those governed by the Negotiable Instruments Law: b. Drawee - The person to whom the bill is addressed and who is ordered to
pay. He becomes an acceptor when he indicates a willingness to accept
a. Promissory note – is an unconditional promise in writing made by one
responsibility for the payment of the bill. The drawee is a bank in the case
person to another, signed by the maker, engaging to pay on demand, or at a
of a check.
fixed or determinable future time, a sum certain in money to order or to
c. Payee - The party in whose favor the bill is originally drawn or is payable.
bearer. (issuer has promised to pay)
Up to the time of acceptance by the drawee, the payee looks exclusively to
- Briefly stated, PN is a promise to pay a sum of money. It is commonly
the drawer. Again, the payee, as in a promissory note, may be specifically
referred to as note. It may be a demand instrument but is normally a time
designated, or may be an office or title, or unspecified.
instrument.
b. Bill of Exchange - an unconditional order in writing addressed by one The parties need not all be distinct persons. Indeed, a bill will be valid where there is
person to another, signed by the person giving it, requiring the person to only one party to it, for one may draw on himself payable to his own order that is, the
whom it is addressed to pay on demand or at a fixed or determinable future two parties to the bill can be the same person (drawer-drawee or drawer-payee).
time a sum certain in money to order or to bearer. (issuer has ordered a third
person topay.) If drawn on a bank and payable on demand, the order bill is, If the drawee refuses to accept when he has funds for the purpose, he becomes liable
by definition, called check. to the drawer for the resulting damages and the harm done to his credit. If the drawer
A1. Checks - really a special form or kind of bill of exchange. A check is a has no funds in the hands of the drawee, it is at least presumed that the former must
bill of exchange drawn on a bank payable on demand. have made arrangements with the latter so that he will honor the bill. In such a case,
the drawee must look to the drawer for reimbursement and not to a bona fide holder.
A drawee-bank is not liable for its refusal to pay a check on account of insufficient

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funds notwithstanding the fact that a deposit may be made later in the day. Where the Implied promise to pay - Any words equivalent to a promise or assumption of full
deposit is sufficient, the failure of a bank to pay the check of the drawer entitles the responsibility for the payment of the note (like "payable", "to be paid," "I agree to
drawer to substantial damages without any proof of actual damages. pay," "I guaranty to pay," "M obliges himself to pay," "Good for," "due on demand,"
etc.) on the face of an instrument are sufficient to constitute a "promise to pay."
4. Importance of each element of a negotiable instrument
Bare acknowledgment of indebtedness - A bare admission or acknowledgement of
ELEMENTS: indebtedness (like "I.O.U.," "due PI,000.00," "for value received," etc.) alone is not a
a. It must be in writing and signed by the maker or drawer negotiable instrument as it does not import an express promise to pay.

- The instrument must be in writing or reduced in tangible form; otherwise, nothing When BoE contains an order to pay:
could be negotiated or passed from hand to hand. Words equivalent to an order to pay - It is not also necessary to use the words "order"
- Writing can be written on paper, type, print or any substitute for paper. There is no in a bill of exchange to satisfy the requirement. Any other words which are
such thing as an oral negotiable instrument. equivalent to an order or which show the drawer's will that the money should be paid
(like "Let the bearer," or "W [drawee] will much oblige R [drawer] to pay P or
- SIGNATURE; GR: It is placed at the lower right hand corner of the instrument, but order," etc.) are sufficient.
it may appear in any part thereof whether at the top, middle or bottom or at the
margin. Mere request to pay - An order is a command or imperative direction and, therefore,
a mere request which merely asks a favor (like "I request you to pay," or "I wish you
- It will be valid and binding as long as it appears that a person intended to make the would pay," or "I authorize you to pay," or "I hope you will pay") supplication, or
instrument his own. His signature is the evidence of his intention to be bound as authority does not constitute an order for it does not import a right to ask and a duty
either maker or drawer. to obey.
- Where the genuineness of the signature of the maker or drawer is denied, the It is not enough that there be a promise or order. It must be unconditional, that is, it
signature is nevertheless presumed valid. must not be subject to any condition or contingency. The reason for this is because
of the fact that the liability is unconditional greatly enhances the ability of the
(b) Must contain an unconditional promise or order to pay a sum certain in
instrument to circulate freely from one person to another. No one would accept a
money
paper for debt if the right to recover were not absolute or unconditional in nature.
- Negotiable instruments acquire a uniform standard of value enabling them to pass
6. Sum Certain in Money
freely in lieu of money in the business world.
The promise or order must call for the payment of a sum certain in money. The "sum
(c) Must be payable on demand, or at a fixed or determinable future time
certain" requirement is met if the holder can determine from the instrument itself the
- amount he is entitled to receive at maturity.

(d) Must be payable to order or to bearer; If an instrument be for a specified sum of money, and also for the payment of
something else, the value of which is not ascertained but depends upon extrinsic
(e) Where the instrument is addressed to a drawee, he must be named or evidence, it would not be negotiable. Ex: "To pay PI,000.00 or what may be due on
otherwise indicated therein with reasonable certainty. my deposit book/'
- to enable the payee or holder to know upon whom he is to call for acceptance or - The basic test is whether the holder can determine by calculation or
payment. computation the amount payable when the instrument is due. But a
promissory note giving the maker the right to ascertain the amount rightly
5. Payment: Promise distinct from an Order and being unconditional
payable thereunder is non-negotiable.
When PN contains a promise to pay: 7. When is an instrument payable?

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 - An instrument is payable at a determinable future time. since a maker or drawer assumes greater risks under a negotiable instrument than
a. Payable at a fixed time - "I promise to pay P or order the sum of under a non-negotiable one.
P10,000.00 on September 10,2010."
b. Payable at a fixed period after date. - "Sixty (60) days after date, I
promise to pay P or order the sum of P10,000.00.” 10. Can there options as to the payment?
c. Payable at a fixed period after sight – “"Sixty (60) days after sight, pay
to the order of P the sum of P10,000.00." It is to be paid: (does not affect negotiability)
d. Payable on or before a fixed time - "On or before September 10,2010, I
a. With interest - If the instrument provides for the payment of interest without
promise to pay P or order P10,000.00."
stating the date from which interest is to run, it shall be computed from the
e. Payable on or before a determinable future time. – “"On or before the
date of the instrument, and if the instrument is not dated, from the issue
start of the next school semester, I promised to pay P or order
thereof. If there is a stipulation for the payment of interest but the rate is not
P10,000.00."
specified, it shall be the legal rate of 6% (Art. 2209, Civil Code.), now 12%.
f. Payable on the occurence of a specified event. - "I promised to pay P or
b. by stated installments - (a) the interest of each installment, and (b) the due
order the sum of P10,000.00 upon the death of his father."
date of each installment must be fixed in the instrument.
g. Payable after the occurrence of a specified event. - "Thirty (30) days
c. With exchange - charge for the expense of providing funds at the place
after the death of his father, I promise to pay P or order the sum of
where the instrument is payable to cover such instrument which is issued at
P10,000.00/'
another place. It may be at a fixed rate or at the current rate.
8. Is a date required? Must the date be the actual date?
d. With costs of collection and/or attorney's fee
The date in a bill or note is not necessary. Hence, the omission of the date will not
make the instrument non-negotiable, (see Sec. 13 as to insertion of the date.) In such
case, the instrument will be considered to be dated as of the time it was issued. 11. Can there be security for payment?
12. Can there be payment in installments? - yes
- If the instrument bears a date, it is presumed that said date is the date when
13. Can there be acceleration of payments in installments? - yes
it was made or drawn. (Sec. 11)
The sum is still certain although payable by stated installments with an acceleration
ANTE-DATING AND POST-DATING
clause, i.e., a promise that if any installment or interest is not paid as agreed, the
a. An instrument is ante-dated when it contains a date earlier that the true date whole shall become due. Such a clause requires full payment of an instrument
of its issuance. Thus, an instrument issued on July 30,2010 but is dated July immediately upon default on any installment. It does not make an instrument payable
15,2010 is antedated. upon contingency (and so non-negotiable) since the time of payment will surely
b. An instrument is post-dated when it contains a date later than the true date come and the exact value of the instrument can be ascertained.
of its issuance. It is just the reverse of an antedated instrument. In the
14. Who is liable to pay if the signatory is an agent. a minor, a corporation
example given, if the instrument was issued on July 15,2010, but bears a
date of July 30,2010, it is postdated. GR: Only persons whose signatures appear on an instrument are liable thereon.

XPNS:
9. Words of negotiability. a. Where a person signs in a trade or assumed name.
b. The principal is liable if a duly authorized agent signs on his own behalf
The words "to the order of/' "or order/' "or bearer/' and "to bearer" (see Sec. 9.) are
c. In case of forgery (Sec. 23.), the forger is liable even if his signature does
standardized words of negotiability of an instrument. These words serve as an
not appear on the instrument
expression of consent that the instrument may be transferred, to whoever the payee
d. Where the acceptor makes his acceptance of a bill on a separate paper
orders, allowing further negotiation of the instrument. This consent is indispensable
e. Where a person makes a written promise to accept a bill before it is drawn
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In order that an agent who signs a negotiable instrument may escape personal d. Instrument undated — An undated instrument is considered dated as of the
liability, the following are the requisites: date of its issue. Issue means the first delivery of the instrument complete in
form, to a person who takes it as holder
(a) He is duly authorized; e. Written and printed provisions in conflict - In case of conflict between the
(b) He adds words to his signature indicating that he signs as an agent, that is, for or written and printed provisions, the former prevail. The reason for the rule is
on behalf of a principal, or in a representative capacity; and that the written words are deemed to express the true intention of the maker
or drawer because they are placed there by himself.
(c) He discloses his principal. f. Whether instrument bill or note in doubt. - In case of doubt as to whether an
instrument is a bill or note, the holder may treat either at his election.
Effect of indorsement by Minors - As a general rule, contracts entered into by a
g. Capacity in which person signed in doubt - In case of doubt as to what
minor are voidable (Arts. 1327,1329,1390, Civil Code.) at his instance or at the
capacity the person making the instrument intended to sign, he is to be
instance of his guardian. A minor is not bound by his indorsement for lack of
deemed an indorser.
capacity. He is, however, not incapacitated to transfer certain rights. Section 22
h. Instrument signed by two or more persons. - An instrument with the words
merely provides that the indorsement of an infant is not void and that his incapacity
"I promise to pay" signed by two or more persons gives rise to solidary
is not a defense in favor of prior parties, and does not take away the infant7 s right to
liability.
disaffirm his indorsement and recover the instrument even against an innocent
indorsee or subsequent holder for value. Minority is not even a personal defense
which may be set up by parties other than the minor; but it is real defense available
to the minor.

Effect of indorsement by a corporation - It has been held that a corporation is not

liable on notes in a suit thereon by an indorsee, where the corporation is without
capacity to make the contract in fulfillment of which they were executed.

15. Rule of constructions.

RULES OF CONSTRUCTION IN CASE OF AMBIGUITY OR OMISSION:

a. Sums expressed in words and in figures different - When there is a

discrepancy between the sum expressed in words and the sum expressed in
figures, the former controls. The figures in the margin form no part of the
instrument and are simply an abridgement of the amount payable for
convenience or reference; second, it is easier to change the figures or to
commit a mistake on them than when the amount is written in words.
b. Words ambiguous or uncertain - Words outweigh figures. However, when
the words are ambiguous or uncertain, reference may be had to the figures
to determine the true amount. If the ambiguity is between words and
numbers, the words control, if they are clear.
c. 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 issue. If no rate of interest is
mentioned, it will draw interest at the legal rate.

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