Negotiable Instruments: WSPHi. w ritten contracts for the payment of money;ii. by its form, intended as a substitute for moneyiii. intended to pass from hand to hand,iv. to give the holder in due course the right to holdthe same and collect the sum due.Functions and importance of NI: SEC1. operates as a substitute for money – allows it to gofrom hand to hand in the commercial markets and totake the part of money in commercial transactions.2. the media of exchange for most commercialtransactions (Checks) – they are a safe andconvenient means of doing business that eliminate therisk of dealing in cash.3. serves as a medium for credit transaction – menwithout cash in hand are enabled by means of credit toconduct and carry to completion business andcommercial enterprises.Note: Checks are primarily used for immediate paymentsuch as a substitute for money, while the ordinary bill ofexchange and the promissory note are intended for thecirculation of credits such as a credit instrument.Characteristics/Features of NI:

1. Negotiability – it may pass from one person toanother similar to money.2. Accumulation of secondary contracts – negotiatedfrom one person to another, hence, additional partiescan become involved. Every negotiation is a contract initself, there will be more parties to whom the holder candemand payment.Note: If it cannot be transferred, then it is nonnegotiable.Common forms of NI:1. Promissory Note: PSMi. unconditional promise to pay in writing made byone person to another,ii. s igned by the maker, engaging to pay ondemand or a fixed determinable future timeiii. a sum certain in money to order or bearer.When the note is drawn to maker’s own order, it is notcomplete until indorse by him. (Sec. 184 NIL)2. Bill of Exchange: OSRMi. unconditional order in writing addressed by oneperson to another,ii. s igned by the person giving it,iii. r equiring the person to whom it is addressed topay on demand or at a fixed or determinablefuture timeiv. a sum certain in money to order or to bearer.(Sec. 126 NIL)

3. Check - bill of exchange drawn on a bank andpayable on demand. (Sec. 185 NIL)special kind of a bill of exchange.Other examples of NI: CBDB/DTB1. C ertificate of deposit;2. B ank Notes;3. D ue Bills;4. B onds;5. D rafts;6. T rade Acceptances; and7. B anker’s Acceptances.Non-negotiable Instruments: WTPC/LBD1. W arehouse Receipts;2. T reasury Warrants;3. P ostal Money Order;4. C ertificate of Stocks;5. L etter of Credits;6. B ill of Lading; and7. D ock Warrants.Note: it cannot be negotiated but can be transferred byassignment.Life cycle of NI: INPAD/PDNPD1. I ssuance2. N egotiation3. P resentment for acceptance in some NI4. A cceptance itself5. D ishonored by non-acceptance6. P resentment for payment7. D ishonored by non-payment8. N otice of dishonor9. P rotest in some cases10.D ischargePromissory Note vs. Bill of Exchange:Promissory Note: “Promise Paper”i. unconditional promise;ii. involves 2 parties;

iii. Maker is primarily liable; andiv. only 1 presentment – for payment.Bill of Exchange: “Order Paper”i. unconditional order;ii. involves 3 parties;iii. Drawer is only secondarily liable; and1iv. generally 2 presentments - for acceptance andfor payment.Form of NI: An instrument to be negotiable mustconform to the ff. requirements: (Sec. 1 NIL)PN: SUDO / BofE: SUDOC1. IT MUST BE IN WRITING AND SIGNED BY THEMAKER OR DRAWER.Notes:The instrument must be in writing; otherwise,nothing could be negotiated or passed fromhand to hand.The writing may be in ink, print or pencil. It maybe upon parchment, cloth, leather or any othersubstitute of paper.There is no such thing as an oral negotiableinstrument.It must be signed by the maker or drawer. Itmay consist of mere initials, numbers or thumbmarks, but the holder must prove that what iswritten is intended as a signature of the personsought to be charged.His signature is prima facie evidence of his

intention to be bound as either maker or drawer.---------------------------------------------------------------------------2. IT MUST CONTAIN AN UNCONDITIONALPROMISE OR ORDER TO PAY A SUM CERTAIN INMONEY.Notes:The promise or order must be unconditional; itmust not be a subject to any condition orcontingency. It must be payable absolutely.The sum payable must be certain; hence, it mustbe definite and specific, to assure clarity indetermining the value of the instrument.If the instrument calls for an act, other than thepayment of money, it is not negotiable.Exceptions:sale of collateral securitiesconfession of judgmentwaives benefit of lawgives option to the holder to require somethingto be done in lieu of money(Sec. 5 NIL)Elaborated by Sec. 2 NIL:Sum is certain even if it is to be paid with:The instrument is still negotiable even if one of the ff. isstated:a. Interest – at fixed rate, or at increased/reduced rate.b. In installments – must be stated in the instrument:

a. interest of each installment; andb. due date of each installment.c. In installments with acceleration clause – apromise that if any installment or interest is not paid asagreed, the whole shall become due.d. With exchange – refers to instruments that arepayable in foreign currency.The exchange rate must be stated, otherwisethe latest exchange rate will be the basis.e. Costs of collection or attorney’s fees – in casepayment shall not be made at maturity, there shall beadded to the amount due on the note costs of collectionor an attorney’s fee.Elaborated by Sec. 3 NIL:a. Indication of particular fund from which theacceptor disburses himself after payment.The particular fund indicated fund should only bethe source of reimbursement and should not bethe direct source of payment; else it becomesconditional and therefore non-negotiable.An instrument which contains a direction todebit a particular account is negotiable.b. Statement of the transaction which gives rise tothe instrument.

The statement of the consideration for which theinstrument has been issued does not make itconditional; thus, it has no adverse legal effecton the negotiability of the instrument.---------------------------------------------------------------------------3. IT MUST BE PAYABLE ON DEMAND, OR AT AFIXED OR DETERMINABLE FUTURE TIME.Elaborated by Sec. 7 NIL:Instrument is payable upon DEMAND if:a. It is expressed to be so payable on sight or uponpresentationan instrument payable on demand is due andpayable immediately after its delivery. It is apresent debt due at once.Ex. Other words equivalent to “on demand” (PN)- “at sight” (BofE)- “on presentation”- “on call”- “at anytime called for”“At sight” means that the instrument is payableas soon as it is seen by the party primarily liable.b. No period of payment is stipulated – when no timeis expressed.c. Issued, accepted, or endorsed after maturity –when the maturity date has already lapsed (overdue)and the drawee is willing to pay, then it is payable on

demand.Elaborated by Sec. 4 NIL:Instrument is payable upon a DETERMINABLEFUTURE TIME if:a. There is a fixed period after sight/date.Fixed period/time:“I promise to pay P or order the sum of P10,000on October 29, 2009.”Fixed period after sight:“Sixty days after sight, pay to the order of P thesum of P10,000.”2Fixed period after date:“Sixty days after date, I promise to pay P ororder the sum of P10,000.”b. On or before a specified date/fixed determinablefuture time.On or before a fixed time:“On or before October 10, 2009, I promise topay P or order P10,000.”The maker has the option to pay in advance oron the fixed date.On or before a fixed determinable time:“On or before the start of the next schoolsemester, I promise to pay P or order P10,000.”Determinable future time means a time thatcan be determined with certainty after theexecution of the instrument.c. On or at a fixed date after the occurrence of anevent certain to happen though the exact date is notcertain.

On the occurrence of a specified event:“I promise to pay P or order the sum of P10,000upon the death of his father.”After the occurrence of a specified event:“Thirty days after the death of his father, Ipromise to pay P or order the sum of P10,000.”If the instrument is payable upon a contingency, thehappening of the event does not cure the defect (stillnon-negotiable).Contingency – an uncertain future event or an eventwhich may or may not happen.---------------------------------------------------------------------------4. IT MUST BE PAYABLE TO ORDER OR TOBEARER.Notes:If payable to order – indorsement plus delivery.If payable to bearer – delivery only.An instrument payable to a specified person onlyis not an order instrument, thus, non-negotiableas the promise or order is limited to paying oneperson only.The payee must be named or otherwiseindicated therein with reasonable certainty.If there is no payee, there would be no one toindorse the instrument payable to order.Therefore useless to be considered negotiable.

Elaborated by Sec. 8 NIL:Instrument is payable to ORDER:a. Where it is drawn payable to the order of aspecified person – “Pay to the order of PP10,000.”b. To a specified person or his order – “Pay to Por order P10,000.”It may be drawn payable to the order of:a. A payee who is not a maker, drawer, or drawee; orb. the drawer or maker; orc. the drawee; ord. two or more payees jointly; ore. one or some of several payees ; orf. the holder of an office for the time being.Elaborated by Sec. 9 NIL:Instrument is payable to BEARER:a. When it is expressed to be so payable – “I promiseto pay bearer P10,000.”b. When payable to the person named or bearer –“Pay to P or bearer P10,000.” Or “Pay to P or holderP10,000.”c. Payable to order of fictitious or non-existentperson and this fact was known to drawer – “Pay toSuperman or order P10,000.”d. Name of payee not name of any person – “Pay to

cash.”, “Pay to money.”, “Pay to cash or order.”e. Only and last indorsement is an indorsement inblank – Blank indorsement is payable to bearer and maybe negotiated by delivery. (Sec. 34 NIL)Notes:Once a bearer instrument, always a bearerinstrument – despite an indorsement, it can benegotiated further by mere delivery.---------------------------------------------------------------------------5. WHERE THE INSTRUMENT IS ADDRESSED TO ADRAWEE, HE MUST BE NAMED OR OTHERWISEINDICATED THEREIN WITH REASONABLECERTAINTY.Notes:This provision applies only to bills and checks.The reason for this last element is to enable thepayee or holder to know upon who he is to callfor acceptance or payment.Where a bill is addressed to the “treasurer” of acorporation, the drawee is sufficiently indicated.---------------------------------------------------------------------------The validity and negotiability of an instrument is notaffected by the fact that: (Sec. 6 NIL)a. It is not dated; orb. does not specify the value given or that any had been

given; orc. does not specify the place where it is drawn orpayable; ord. bears a seal; ore. designates the kind of current money in whichpayment is to be made.Notes:The instrument need not to follow the languageof the law, any terms are sufficient which clearlyindicate an intention to conform to therequirements hereof. (Sec. 10 NIL)3If the instrument bears a date, it is presumedthat said date is the date when it was made bythe maker, drawn by the drawer, accepted bythe drawee, or indorsed by the payee or holder.(Sec. 11 NIL)Ante-dating or post-dating an instrument doesnot render it invalid or non-negotiable providedthis is not done for an illegal purpose or tocommit fraud. (Sec. 12 NIL)The date may be inserted in an instrument when:(Sec. 13 NIL)a. an instrument expressed to be payable at a fixedperiod after date is issued undated.b. where acceptance of an instrument payable at a fixedperiod after sight is undated.Effects:Any holder may insert the true date of issuanceor acceptance.

The insertion of a wrong date does not avoidthe instrument in the hands of a subsequentholder in due course.As to the holder in due course, the date inserted(even if it be the wrong date) is regarded as thetrue date.Steps in issuance of NI:1. The mechanical act of writing the instrumentcompletely and in accordance with the requirements ofSec.1 NIL.2. The delivery of the complete instrument by themaker or drawer to the payee or holder with the intentionof giving effects to it.Requisites for a Holder in Due Course (HIDC): COVI(Sec. 52 NIL) Four requisites must be complied,otherwise, he is not qualified to be a HIDC.a. Receives the instrument complete and regular onits face.An instrument is considered complete andregular on its face if:a. the omission is immaterial; andb. the alteration on the instrument was notapparent on its face.b. Became a holder before it was overdue and hadno notice that it had been previously dishonored ifsuch was the fact.An instrument is overdue after the date of

maturity.On the date of maturity, the instrument is not yetoverdue and the holder is still a HIDC.c. Takes the instrument for value and in good faith.Chapter II – CONSIDERATIONSec. 24 NIL. Presumption of consideration.Every NI is deemed prima facie to have beenissued for a valuable consideration, and everyperson whose signature appears thereon tohave becomes a party thereto for value.The presumption is only prima facie. It may berebutted or disproved by evidence to thecontrary.Sec. 25 NIL. What constitutes value.Value is any consideration sufficient to support asimple contract. Such as: PILSBa. P re-existing debts;b. I nterests;c. L abor rendered services;d. S upport; ande. B enefits.If without for value, the holder is not a HIDC.Not Value:a. Gift;b. Donation;c. Fear;d. Love;e. Gratitude.Good faith means lack of knowledge or notice of defector infirmity.d. At time he took the instrument, no notice of

infirmity in instrument or defect in the title of theperson negotiating it. (He is in good faith, so to speak).Notes:Every holder is presumed to be a HIDC (Sec.59). He who claims otherwise has the burden ofproof.---------------------------------------------------------------------------Abnormal Instruments:1. INCOMPLETE but DELIVERED (Sec. 14 NIL).Two (2) kinds:a. Incomplete instrument but delivered.b. A signature and a blank piece of paper signedby the person for the purpose of converting itinto a negotiable instrument. A must.Two (2) requisites to bind the person who signed theinstrument before delivery:i. It must be filled-up strictly with the authoritygiven; andii. Within a reasonable time.Effects to a HIDC:If the instrument falls on the hands of a HIDC, itis valid and effectual for all purpose asthough it was filled up strictly in accordance withthe authority given and within reasonable time.4Rules where instrument is incomplete but delivered:

1. Authority to fill-up the blanks – the holder or theperson in possession has prima facie authority tocomplete an incomplete instrument by filling up theblanks therein.2. Authority to put up any amount – a signature on ablank paper delivered in order that may be convertedinto a NI operates as a prima facie authority to fill it up assuch for any amount.3. Right against party prior to completion – theinstrument may be enforced only against a party prior tocompletion if filled up strictly in accordance with theauthority given and within reasonable time.Notes:iii. In both cases (a & b), the presumption is that theblank was filled up in accordance with theauthority given and within reasonable time.iv. The defense that the instrument had not beenfilled up in accordance with the authority givenand within reasonable time is not available asagainst a holder in due course.v. Sec. 14 raises a Personal Defense – if the lastholder is a HIDC, Maker is liable to pay.2. INCOMPLETE and UNDELIVERED (Sec. 15 NIL).Before delivery:

Before delivery, an incomplete and undeliveredinstrument which is completed and negotiatedwithout authority is not a valid contract in thehands of ANY holder as against the person whosigned the instrument.After delivery:However, after delivery, persons who signed theinstrument can be held liable to HIDC.Persons liable:General Indorsers are liable because theywarrant that the instrument is genuine and valid;thus, they are estopped to deny the validity ofthe instrument.Notes:Where an incomplete instrument has not beendelivered, it will not, if completed andnegotiated without authority, be a validcontract in the hands of any holder against anyperson who signed before delivery.The invalidity of the instrument is only withreference to the parties whose signaturesappear before and not after delivery.Sec. 15 raises a Real Defense – even if the lastholder is a HIDC, Maker is not liable to pay.(Indorsers are liable because they warrant thatthe instrument is genuine and in all respectswhat it purports to be. As their signatures appear

on the instrument after delivery, the instrumentis valid as to them.)3. COMPLETE BUT UNDELIVERED (Sec. 16 NIL).Effects of a Complete but Undelivered instrument:If a complete instrument is undelivered, then it isinoperative because delivery is a requisite toliability. It is considered incomplete; thus,revocable.In the absence of delivery, the instrumentthough complete in all its particulars, there is nocontract.In possession of an immediate party or a remoteparty:Immediate party – a party having been held toknow of the conditions or limitations placed uponthe delivery of the instrument.Remote party – a party who is not in directcontractual relation to each other. They can betransformed into “immediate party.”If a complete instrument is found in theirpossession, there is a prima facie presumptionof delivery (but subject to rebuttal).Notes:If the instrument is no longer in the possessionof the person who signed it and it is complete inits terms, “a valid and intentional delivery by himis presumed until the contrary is proved.”

Delivered conditionally or for a special purposeIf delivery was conditional or for a specialpurpose only, then it is not for the purpose oftransferring title to the instrument. However, it ispresumed to be made with the intention totransfer title – this can be rebutted.Effects to a HIDC:If a complete instrument is in the hands of aHIDC, a valid delivery thereof by all parties priorto him is CONCLUSIVELY presumed.Notes:Sec. 16 raises a Personal Defense – if the lastholder is a HIDC, Maker is liable to pay.4. FORGERY (see Sec.23 NIL notes)Notes on delivery of NI:51. Delivery is essential to the validity of any negotiableinstrument.2. As between immediate parties or those is like cases,delivery must be with intention of passing title.3. An instrument signed but not completed by the draweror maker and retained by him is invalid as to him forwant of delivery even in the hands of a holder in duecourse.4. But there is prima facie presumption of delivery of an

instrument signed but not completed by the drawer ormaker and retained by him if it is in the hands of a holderin due course. This may be rebutted by proof of nondelivery.5. An instrument entrusted to another who wrongfullycompletes it and negotiates it to a holder in due course,delivery to the agent or custodian is sufficient delivery tobind the maker or drawer.6. If an instrument is completed and is found in thepossession of another, there is prima facie evidence ofdelivery and if it be a holder in due course, there isconclusive presumption of delivery.7. Delivery may be conditional or for a special purposebut such do not affect the rights of a holder in duecourse.Rules of construction in case of ambiguity oromission: (Sec. 17 NIL)1. Sums expressed in words and in figures aredifferent.When there is a discrepancy between the sumexpressed in words and the sum expressed infigures, the words control.However, when the words are ambiguous,reference may be had to the figures to

determine the true amount.2. Date when stipulated interest to run not specified– if the date when the stipulated interest is to run is notspecified, the interest runs from the date of theinstrument or if undated from the date of its issue.3. An undated instrument is considered dated as ofthe date of its issue.4. Written and printed words in conflict – in case ofconflict between the written and printed provisions, thewritten provisions prevail. Written words are deemed toexpress the true intention of the maker or drawerbecause they are placed there by him.5. Whether instrument bill or note in doubt – in caseof doubt as to whether the instrument is a bill or note, theholder may treat either at his election.6. Capacity in which the person signed in doubt – incase of doubt due to the ambiguous location of thesignature, the party who signed is deemed to be anindorser, who assumes the least liability, and not as amaker or drawer.7. Instrument signed by two or more persons – theirliability may either be solidary or joint.

“I promise to pay” signed by two or morepersons gives rise to solidary liability.“We promise to pay” signed by two or morepersons gives rise to joint liability.Sec. 18 NIL. Liability of person signing in trade.General rule: A person whose signature does notappear on the instrument is NOT liable.Exceptions:a. One who signs in a trade or assumed name. (Sec. 18)b. A duly authorized agent. (Sec. 19)c. A forger.(Sec. 23)Sec. 20 NIL. Liability of a person signing as agent.General rule: An agent is not liable on the instrument ifhe were duly authorized to sign for or on behalf of aprincipal.Requisites:a. He must be duly authorized;b. He must add words to his signature indicating that hesigns as an agent; andc. He must disclose his principal.If an agent does not disclose his principal, theagent is personally liable on the instrument.Sec. 21 NIL. Per Procuration - operates as notice thatthe agent has a limited authority to sign.Effects:The principal is only bound if the agent actedwithin the limits of the authority given.The person who takes the instrument is bound

to inquire into the extent and nature of theauthority given.Sec. 22 NIL. Effect of indorsement by infant/corporation.General rule: Infants and corporations incur no liabilityby their indorsement or assignment of an instrument.Effects:No liability attached to the infant or thecorporation.The instrument is still valid and the indorseeacquires title.---------------------------------------------------------------------------FORGERY (Sec. 23 NIL)Two (2) kinds:a. Forged signature; andb. Signature made without authority.Effects:a. no right to retain;b. no right to give a discharge; andc. no right to enforce payment can be acquired.It is only the forged signature or unauthorizedsignature that is declared to be inoperative.The instrument or other signatures which aregenuine may still exist and be enforced.Exceptions: Forged or unauthorized signatures mayproduce rights or title, IF:a. The party against whom it is sought to enforce suchright is precluded (prevented) from setting up the forgeryor want of authority.

Persons precluded from setting up the defense offorgery:6The forger himself.Those who warrant or admit the genuineness ofthe signature in question (indorsers, personsnegotiating by delivery, and acceptors of BofE).Those who, by their acts, silence or negligence,are estopped from setting up the defense offorgery Estoppel.b. Where the forged signature is not necessary to theholder’s title, in which case the forgery may bedisregarded.Rights of parties in cases of forged indorsements:1. Payable to order (PN) – the party whose signaturewas forged is not liable to any holder, even to a HIDC.The indorsement, being forged is inoperative.2. Payable to bearer (PN) – the party whose signatureis forged is liable to a HIDC, but not to the one who isnot a HIDC. The reason is that the instrument beingoriginally payable to bearer, it can be negotiated by meredelivery. Hence, even if the indorsement is forged, theforgery may be disregarded.3. Payable to order (BofE) – the party whose signature

was forged is not liable to any holder, even to a HIDC.The indorsement, being forged is inoperative.4. Payable to bearer (BofE) – when the bill is originallypayable to bearer, the drawee may debit the drawer’saccount in spite of the forged indorsement. The reasonis that the forged indorsement is not necessary to thetitle of the holder.Notes:Section 23 applies only to forged signatures orsignatures made without authority.Alterations such as to amounts or like fall underSection 124.Drawee bank is conclusively presumed to knowthe signature of its drawer.Forgery is a Real Defense.---------------------------------------------------------------------------