A written contract for the payment of money which complies with the requirements of Sec. 1 of the NIL, which by its form and on its face, is intended as a substitute for money and passes from hand to hand as money, so as to give the holder in due course (HDC) the right to hold the instrument free from defenses available to prior parties. (Reviewer on Commercial Law, Professors Sundiang and Aquino) 0 Functions: (Bar Review Materials in Commercial Law, Jorge Miravite, 2002 ed. 1 . To supplement the currency of the government. 2. To substitute for money and increase the purchasing medium. 0 Legal tender – That kind of money which the law compels a creditor to accept in payment of his debt when tendered by the debtor in the right amount. Note: A NI although intended to be a substitute for money, is not legal tender. However, a check that has been cleared and credited to the account of the creditor shall be equivalent to delivery to the creditor of cash. (Sec. 0, NCBA) OFeatures: (Reviewer on Commercial Law, Professors Sundiang and Aquino) 1. Negotiability – That attribute or property whereby a bill or note or check may pass from hand to hand similar to oney, so as to give the holder in due course the right to hold the instrument and to collect the sum payable for himself free from defenses. 0 The essence of negotiability which characterizes a negotiable paper as a credit instrument lies in its freedom to circulate freely as a substitute for money. Firestone Tire vs. CA, 353 SCRA 601) 2. Accumulation of Secondary Contracts – Secondary contracts are picked up and carried along with NI as they are negotiated from one person to another; or in the course of negotiation of negotiable instruments, a series of Juridical ties between the arties thereto arise either by law or by privity. OApplicability: 0 General Rule: The provisions of the NIL are not applicable if the instrument involved is not negotiable. 0 Exception: In the case of Borromeo vs.
Amancio Sun, 317 SCRA 176, the SC applied Section 14 of the NIL by analogy in a case involving a Deed of Assignment of shares which was signed in blank to facilitate future assignment of the same shares. The SC observed that the situation is similar to Section 14 where the blanks in an instrument may be filled up by the holder, the signing in blank being with the assumed authority to do so. The NIL was enacted for the purpose of facilitating, not hindering or hampering transactions in commercial paper.
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Thus, the statute should not be tampered with haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a single case. (Michael Osmena vs. Citibank, G. R. NO. 141278, March 23, 2004 callejo J. ) 0Kinds of NI 1. PROMISSORY NOTE (PN) u An unconaltlonal promise In wrltlng Dy one person to anotner slgnea Dy tne maker engaging to pay on demand or at a fixed or determinable future time, a sum certain in money to order or to bearer. (Sec. 184) 2.
BILL OF EXCHANGE (BE) 0 An 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) OCHECK – A bill of exchange drawn on a bank payable on demand. (Sec. 185). It is the most common form of bill of exchange. OTHER FORMS OF NI 1 . Certificate of deposit issued by banks, payable to the depositor or his order, or to bearer 2. Trade acceptance 3. Bonds, which are in the nature of promissory notes 4.
Drafts, which are bills of exchange drawn by one bank upon another 5. Debenture 0 All of these must comply with Sec. 1, NIL. Note: Letters of credit are not negotiable because they are issued to a specified person. Instances when a BE may be treated as a PN a. The drawer and the drawee are the same person; or b. Drawee is a fictitious person; or c. Drawee does not have the capacity to contract. (Sec. 130) d. Where the bill is drawn on a person who is legally absent; e. Where the bill is ambiguous (Sec. 17[e]) Parties to a NI 1 . Promissory Note a. Maker – one who makes promise and signs the instrument .
Payee – party to whom the promise is made or the instrument is payable. 2. Bill of Exchange a. Drawer – one who gives the order to pay money to a third party b. Drawee – person to whom the bill is addressed and who is ordered to pay. He becomes an acceptor when he indicates his willingness to pay the bill c. Payee – party in whose favor the bill is drawn or is payable. DISTINCTIONS Promissory Note Bill of Exchange Unconditional promise unconaltlonal order Involves 2 parties Involves 3 parties Maker is primarily liable Drawer is only secondarily liable Only one presentment: for payment
Two presentments: for acceptance and for payment Negotiable INSTRUMENTS Non-Negotiable INSTRUMENTS Only NI are governed by the NIL. Application of the NIL is only by analogy. Transferable by negotiation or by assignment. Transferable only by assignment A transferee can be a HDC if all the requirements are complied with A transferee remains to be an assignee and can never be a HDC A holder in due course takes the NI free from personal defenses All defenses available to prior parties may be raised against the last transferee Requires clean title, one that is free from any infirmities in the instrument and efects of title of prior transferors. Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino) Transferee acquires a derivative title only. (Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino) Solvency of debtor is in the sense guaranteed by the indorsers because they engage that the instrument will be accepted, paid or both and that they will pay if the instrument is dishonored. (Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents, Timoteo B.
Aquino) Solvency of debtor is not guaranteed under Art. 628 of the NCC unless expressly stipulated. (Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino) NEGOTIABLE DOCUMENT OF TITLE Subject is money Subject is goods Is itself the property with value The document is a mere evidence of title – the things of value being the goods mentioned in the document Has all the requisites of Sec. 1 of NIL Does not have these requisites A holder of NI may run after the secondary parties for payment if dishonored by the party primarily liable.
Intermediate parties are not secondarily liable if the document Is Olsnonorea. A n010er, IT a n010er In Oue course, may acquire rlgnts over tne instrument better than his predecessors. A holder can never acquire rights to the document better than his predecessors. Billof Exchange CHECK Not necessarily drawn on a deposit. The drawee need not be a bank It is necessary that a check be drawn on a bank deposit. Otherwise, there would be fraud. Death of a drawer of a BOE, with the knowledge of the bank, does not revoke the authority of the drawee to pay.
Death of the drawer of a check, with the knowledge of the bank, revokes the authority of the banker to pay. May be presented for payment within reasonable time after its last negotiation. Must be presented for payment within a reasonable time after its issue. May be payable on demand or at a fixed or determinable future time Always payable on demand NEGOTIABLE WAREHOUSE RECEIPT If originally payable to bearer, it will always remain so payable regardless of manner of indorsement. If payable to bearer, it will be converted into a receipt deliverable to order, if indorsed specially.
A holder in due course may obtain title better than that of the one who negotiated the instrument to him. The indorsee, even if holder in due course, obtains only such title as the person who caused the deposit had over the goods. ASSIGNMENT NEGOTIATION Pertains to contracts in general Pertains to NI Holder takes the instrument subject to the defenses obtaining among the original parties Holder in due course takes it free from personal defenses available among the parties Governed by the Civil Code Governed by the NIL II. NEGOTIABILITY OForrn of W: (sec. 1) Key: WUPOA 1.
Must be in Writing and signed by the maker or drawer; 2. Must contain an Unconditional promise or order to pay a sum certain in money; 3. Must be Payable on demand, or at a fixed or determinable future time; 4. Must be payable to Order or to bearer; and 5. When the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. LIDetermlnatlon 0T negotlaDlllty a. Whole instrument b. What appears on the face of the instrument c. Requisites enumerated in Sec. l of the NIL d. Should contain words or terms of negotiability. Gopenco, Commercial Law Bar Reviewer, cited in Aquino, p. 23) Oln determining the negotiability of an instrument, the instrument in its entirety and by what appears on its face must be considered. It must comply with the requirements of Sec. 1 of the NIL. (Caltex Phils. v. CA, 212 SCRA 448) 0 The acceptance of a bill of exchange is not important in the determination of its negotiability. The nature of acceptance is important only on the determination of the kind of liabilities of the parties involved (PBCOM vs. Aruego, 102 SCRA 530) REQUISITES OF NEGOTIABILITY a.
It must be writing and signed by the maker or drawer OAny kind of material that substitutes paper is sufficient. OWith respect to the signature, it is enough that what the maker or drawer affixed shows his intent to authenticate the writing. Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino) b. Unconditional Promise or Order to pay a sum certain in money Unconditional promise or order 0 Where the promise or order is made to depend on a contingent event, it is conditional, and the instrument involved is non-negotiable.
The happening of the event does not cure the defect. 0 The unconditional nature of the promise or order is not affected by: a) An indication of a particular fund out of which reimbursement is to be made, or a particular account to be debited with the amount; or b) A statement of he transaction which gives rise to the instrument 0 Where the promise or order is subject to the terms and conditions of the transaction stated, the instrument is rendered non-negotiable. The NI must be burdened with the terms and conditions of that agreement to destroy its negotiability. Cesar Villanueva, Commercial Law Review, 2004 ed. ) 0 But an order or promise to pay out of a particular fund is NOT unconditional. (Sec. 3) Fund for Reimbursement Particular Fund for Payment Drawee pays the payee from his own funds; afterwards, the drawee pays himself from the particular fund indicated. There is only one act- the drawee pays directly from the particular fund indicated. Payment is subject to the condition that the fund is sufficient. Particular fund indicated is NOT the direct source of payment but only the source of reimbursement. Particular fund indicated is the direct source of payment.
OPostal money orders are not negotiable instruments. Some of the restrictions imposed by postal laws and regulations are inconsistent with the character of negotiable instruments. (Phil. Education Co. vs. Soriano, 39 SCRA 587) 0 Treasury warrants are non-negotiable because there is an indication of the fund as he source of payment of the disbursement. (Metrobank vs. CA, 194 SCRA 169) Payable in sum certain in money 0 An instrument is still negotiable although the amount to be paid is expressed in currency that is not legal tender so long as it is expressed in money. (PNB vs. Zulueta, 101 Phil 1071, Sec. (e)). 0 The certainty is however not affected although to be paid: a. With interest; or b. By stated installments; or c. By stated installments with an acceleration clause; d. With exchange; or e. With cost of collection or attorneys fees. (Sec. 2) 0 The dates of each installment must be fixed or at least determinable and the mount to be paid for each installment. 0 A sum is certain if the amount to be unconditionally paid by the maker or drawee can be determined on the face of the instrument and is not affected by the fact that the exact amount is arrived at only after a mathematical computation. Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino) ACCELERATION CLAUSE INSECURITY CLAUSE EXTENSION CLAUSE A clause that renders whole debt due and demandable upon failure of obligor to comply with certain conditions. Provisions in the contract which allows the holder to ccelerate payment if he deems himself insecure. Clauses in the face of the instrument that extend the maturity dates; a. At the option of the holder; b. Extension to a further definite time at the option of the maker or acceptor c. Automa -tically upon or after a specified act or event.
Instrument is still negotiable Instrument is rendered non-negotiable because the holder’s whim and caprice prevail without the fault and control of the maker Instrument is still negotiable (Notes Timoteo B. Aquino) Stated on the face of the instrument Agreement binding the holder; a. To extend the time of payment or . Postpone the holder’s right to enforce the instrument Parties are bound because they took the instrument knowing that there is an extension clause Binds the person secondarily liable (and therefore cannot be discharged from liabilities if: a.
He consents or b. Right of recourse is expressly reserved. (Notes and Cases on Banks, Negotiable c. Payable on Demand or at fixed or determinable future time PAYABLE ON DEMAND PAYABLE AT A FIXED OR DETERMINABLE FUTURE TIME a. Where expressed to be payable on demand, at sight or on presentation; b. Where no period of payment is stated; c. Where issued, accepted, or indorsed after maturity (only as between immediate parties). (Sec. 7) a. Ata fixed period after date or sight; b. On or before a fixed or determinable future time specified therein; or c.
On or at a fixed period after the occurrence of a specified event, which is certain to happen, though the time of happening is uncertain. (Sec. 4) 0 If the day and the month, but not the year of payment is given, it is not negotiable due to its uncertainty. (Pandect of Commercial Law and Jurisprudence, Justice Jose Vitug, 1997 ed. ) d. Payable to Order or to Bearer Payable to Order 0 The instrument is payable to order where it is drawn payable to the order of a specified person, or to him or his order. (Sec. 8) 0 The payee must be named or otherwise indicated therein with reasonable certainty. The instrument may be made payable to the order of: a. A payee who is not the maker, drawer or drawee b. The drawer or maker c. The drawee d. 2 or more payees Jointly e. One or some of several payees T. I ne n010er 0T an omce Tor a t Payable to Bearer Ime Delng 0 The instrument is payable to bearer: a. When it is expressed to be so payable; or b. When it is payable to a person named therein or to bearer; or c. When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or d.
When the name of the payee does not purport to be the name of any person; or e. When the only or last indorsement is an indorsement in blank. (Sec. 9) Note: An instrument originally payable to bearer can be negotiated by mere delivery even if it is indorsed especially. If it is originally a BEARER instrument, it will always be a BEARER instrument. As opposed to an original order instrument becoming ayable to bearer, if the same is indorsed specially, it can NO LONGER be negotiated further by mere delivery, it has to be indorsed. A check that is payable to the order of cash is payable to bearer. Reason: The name of the payee does not purport to be the name of any person. (Ang Tek Lian vs. CA, 87 Phil. 383) FICTITIOUS PAYEE RULE 0 It is not necessary that the person referred to in the instrument is really non- existent or fictitious to make the instrument payable to bearer. The person to whose order the instrument is made payable may in fact be existing but he is till fictitious or on-existent under Sec. 9(c) of the NIL if the person making it so payable does not intend to pay the specified persons. Reviewer on Commercial Law, Professors Sundiang and Aquino) e. Identification of Drawee 0 Applicable only to a bill of exchange 0 A bill may be addressed to 2 or more drawees Jointly whether they are partners or not but not to 2 or more drawees in the alternative or in succession. (Sec. 128) OMISSIONS & PROVISIONS THAT DO NOT AFFECT NEGOTIABILITY ADDITONAL PROVISONS NOT AFFECTING NEGOTIABILITY a. It is not dated; b. It does not specify the value given or that any alue has been given; c. It does not specify the place where it is drawn or where it is payable; d.
It bears a seal; e. It designates a particular kind of current money in which payment is to be made. (sec. 6) UC5ENERAL RULE’ IT some otner act Is requlrea otner tnan or In aaaltlon o payment of money, the instrument is not negotiable. (Sec. 5) OEXCEPTIONS: a. Authorizes the sale of collateral securities on default; b. Authorizes confession of Judgment on default; c. Waives the benefit of law intended to protect the debtor; or d. Allows the creditor the option to require something in lieu of money. Ill. INTERPRETATION OF NEGOTIABLE INSTRUMENTS (sec. 17) a.
Discrepancy between the amount in figures and that in words – the words prevail, but if the words are ambiguous, reference will be made to the figures to fix the amount. b. Payment for interest is provided for – interest runs from the date of the instrument, if undated, from issue thereof. c. Instrument undated – consider date of issue. d. Conflict between written and printed provisions – written provisions prevail. e. When the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election; f.
If one signs without indicating in what capacity he has affixed his signature, he is considered an indorser. g. If two or more persons sign “We promise to pay,” their liability is Joint (each liable for his part) but if they sign “l promise to pay,” the liability is solidary (each can be compelled to comply with the entire obligation). (Sec. 17) ‘V. TRANSFER AND NEGOTIATION INCIDENTS IN THE LIFE OF A NI (1 Agbayani, 1992 ed. ) Issue a. b. Negotiation c. Presentment for acceptance, in certain kinds of Bills of Exchange d. h. Dishonor by non-acceptance i. Presentment for payment j.
Dishonor by non-payment k. Notice of dishonor l. Discharge MODES OF TRANSFER Acceptance a. Negotiation – the transfer of the instrument from one person to another so as to constitute the transferee as holder thereof. (Sec. 30) b. Assignment – The transferee does not become a holder and he merely steps into the shoes of the transferor. Any defense available against the transferor is available against the transferee. (Notes I Imoteo B Aquino) u Assignment may De e TTectea wnetner tne Instrument Is negotiable or non-negotiable. (Sesbreno vs. CA, 222 SCRA 466) HOW NEGOTIATION TAKES PLACE a.
Issuance – first delivery of the instrument complete in form to a person who takes it as a holder. (Sec. 191) OSteps: 1 . Mechanical act of writing the instrument completely and in accordance with the requirements of Section 1; and 2. The delivery of the complete instrument by the maker or drawer to the payee or holder with the intention of giving effect to it. (The Law on Negotiable Instruments with Documents of Title, Hector de Leon, 2000 ed. ) b. Subsequent Negotiation 1 . If payable to bearer, a negotiable instrument may be negotiated by mere delivery. 2. If payable to order, a NI may be negotiated by indorsement completed by delivery
Note: In both cases, delivery must be intended to give effect to the transfer of instrument. (Development Bank vs. Sima Wet, 219 SCRA 736) c. Incomplete negotiation of order instrument OWhere the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein and he also acquires the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is made. (Sec. 49) d.
Indorsement 0 Legal transaction effected by the affixing one’s signature at the: a. Back of the instrument or b. Upon a paper (allonge) attached thereto with or without additional words specifying the person to whom or to whose order the instrument is to be payable whereby one not only transfers legal title to the paper transferred but likewise enters into an implied guaranty that the instrument will be duly paid (Sec. 31) OGENERAL RULE: Indorsement must be of the entire instrument. OEXCEPTION: Where instrument has been paid in part, it may be indorsed as to the residue. (Sec. 32) 0 Kinds of Indorsement: A.
SPECIAL – Specifies the person to whom or to whose order, the instrument is to be payable (Sec. 34) B. BLANK – Specifies no indorsee: 1 . Instrument becomes payable to bearer and may be negotiated by delivery (Sec. 34) 2. May be converted to special indorsement by writing over the signature of indorser in blank any contract consistent with character of indorsement (Sec. 35) C. ABSOLUTE – One by which indorser binds himself to pay: 1. Upon no other condition than failure of prior parties to do so; 2. Upon due notice to him of such failure. D. CONDITIONAL – Right of the indorsee is made to depend on the happening of a