Negotiable Instruments Law Nature of Non-Negotiable Instrument

• merely a simple contract in writing

• may not be negotiated, but it may be assigned or transferred
provided that there is no express prohibition
Functions of NIL
1. As a substitute for money
2. As a medium of exchange for most commercial Sec. 2. The sum payable is a sum certain in money although it
transactions is to be paid
3. As a medium of credit transactions
- With interest
4. As a means, in the case of check, of making immediate
- With stated installments
payment
- With stated installments, with a provision that upon
default in payment, the whole shall become due
- With exchange
Characteristics of Negotiable Instruments
- With costs of collection or an attorney’s fee, in case
1. Negotiability – the quality or attribute of a bill or note payment shall be made at maturity
whereby it may pass 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  Promise or order is to assure clarity and certainty in
for himself free from any infirmity in the instrument determining the value of the instrument
or defect in the title of any of the prior parties, or  Since a negotiable instrument is a device intended as
defenses available to them among themselves. a substitute for money, it is essential that it
2. Accumulation of Secondary Contracts – most represents a fixed amount to be paid
important feature; once an instrument is issue,  Basic test: whether the holder can determine by
additional parties can become involved. computation from the terms of the instrument the
amount payable when the instrument is due.

Forms of Negotiable Instruments

Sec. 3. An unqualified order or promise to pay is unconditional
1. Promissory Notes
though couple with
- An unconditional promise in writing made by one
person to another, signed by the maker, engaging to - An indication of a particular fund out of which
pay on demand, or at a fixed determinable future reimbursement is to be made, or a particular account
time, a sum certain in money to another or his order to be debited with the amount
or to bearer. - A statement of the transaction which gives rise to the
- Maker, Payee instrument
2. Bill of Exchange
- Is an unconditional order in writing addressed by one
person to another, signed by the person giving it,  ORDER: a command or imperative direction
requiring the person to whom it is addressed to pay  Bare acknowledgment of indebtedness: non-
on demand or at a fixed or determinable future time negotiable as it does not import an express promise
a sum certain in money to order or to bearer. to pay or show that the parties intend the debt to be
- Drawer, Drawee, Payee paid
 Promise or order NOT unconditional if subject to any
condition, or if it is to be paid out of a particular fund
Sec. 1. An instrument to be negotiable must conform to the  Test of Negotiability: whether or not the instrument
following requirements: carries the general personal credit of the maker or
drawer
a. It must be made in writing and signed by the maker
or drawer Sec. 4. Determinable future time is one which is expressed to
b. It must contain an unconditional promise or order to be payable —
pay a sum certain in money
- At a fixed period after date or sight
c. It must be payable on demand or at a fixed or
- On or before a fixed determinable future time
determinable future time
specified therein
d. It must be payable to order or bearer
- On or at a fixed period after the occurrence of a
e. When addressed to the drawee, he must be named or
specified event, which is certain to happen, though
otherwise indicated therein with reasonable certainty
the time of happening be uncertain

Commercial Paper – written promises or obligations that arise

 Determinable future time – definite time upon or
out of commercial transactions from the use of such
after the occurrence of an event which is certain to
instruments as promissory notes and bills of exchange.
happen. It means a time that can be determined with
Legal Tender – sort of money in which a debt, or other certainty after the execution of the instrument.
obligation calling for money, may be lawfully paid, if the  Contingency – an uncertain future event which may
contract does not specify the medium of payment. or may not happen
Money- under the US Uniform Commercial Code it is a medium
of exchange authorized or adopted by the government as a
part of its currency.
Sec. 5. An instrument which contains an Order or promise to Sec. 10. The instrument need not follow the language of this
do any act in addition to the payment is NOT negotiable, but Act, but any terms are sufficient which clearly indicate an
its negotiable character is not affected by a provision which — intention to conform to the requirements.
- Authorized the sale of collateral securities in case the
instrument be not pid at maturity
Sec. 11. If instrument is date, such date is deemed prima facie
- Authorizes a confession of judgment if the instrument
to be the true date of the making, drawing, acceptance or
be not paid at maturity
indorsement, as the case may be.
- Waives the benefit of any law intended for the
advantage or protection of the obligor
- Gives the holder an election to require something to
 Date is NOT essential to make an instrument
be done in lieu of payment of money
negotiable. But, date is necessary for the
determination of maturity:
a. Where instrument is payable at a fixed period after
 Warrants of attorney to confess judgment are not
date
authorized nor contemplated by our law because it is
b. Where instrument is payable at a fixed period after
VOID as against public policy.
sight or presentment

Sec. 6. The validity and negotiable character of an instrument

Sec. 12. If instrument is Post-dated or Ante-dated, it is still
are not affected by the fact that —
valid, provided it is not done for any illegal or fraudulent
- It is not dated purpose.
- Does not specify the value given, or that any value has
been given
- Does not specify the place where it is drawn or the Sec. 13. When date may be inserted, any holder may insert
place where it is payable the true date of issue or acceptance, and the instrument shall
- Bears a seal be payable accordingly.
- Designates a particular kind of current money in
 Insertion of a wrong date – personal defense
which payment is to be made

Sec. 14. Incomplete but delivered – personal defense

Sec. 7. Payable on demand —
The person in possession may insert the blanks provided:
- Where it is expressed to be payable on demand or at
sight or on presentation 1. There must be authority
- In which no time for payment is expressed 2. Must be done within reasonable time

Sec. 8. Payable to order (Persons to whom ORDER Sec. 15. Incomplete and undelivered – real defense
INSTRUMENT may be drawn) —
- A payee who is not a maker, drawer, or drawee
Sec. 16. Complete but undelivered – personal defense
- Drawer or maker
- Drawee  An undelivered instrument is inoperative because
- Two or more payees jointly delivery is a prerequisite to liability. However, if the
- One or more several payees instrument is no longer in the possession of the
- Holder of an office for the time being person who signed it and it is complete in its terms, a
valid and intentional delivery by him is presumed until
the contrary is proved.
 If payee is not named, instrument is not negotiable
Delivery – transfer of possession, actual or constructive, from
one person to another with intent to transfer the title thereto.
Sec. 9. Payable to bearer — Issue – the first delivery of the instrument, complete in form,
to a person who takes it as a holder
- When it is expressed to be so payable
- When it is payable to a person named therein or Holder – the payee or indorsee of a bill or note who is in
bearer possession of itC it the bearer thereof.
- 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 Sec. 17. Construction where the instrument is ambiguous —
- When the name of the payee does not purport to be
A. Sums expressed in words and in figures different –
the name of any person
sum expressed in words
- When the only or last indorsement is an indorsement
B. Words ambiguous or uncertain – figures
in blank
C. Instrument undated – date of issuance
D. Written and printed provisions in conflict – written
E. Whether instrument bill or note in doubt – holder has
Bearer – person in possession of a bill or note which is payable
the choice to treat is as either a bill or note
to bearer.
F. Capacity in which person signed in doubt – indorsee
G. Instrument signed by two or more persons – solidary
liability

2
 • No right or title can be acquired to a negotiable instrument
through or under a forged or unauthorized signature
Sec. 18. Only persons whose signatures appear on an
instrument are liable. Except: Except: if the party against whom it is sought to enforce such
right is precluded from setting up the forgery or want of
- Where a person signs in a trade or assumed name
authority and where the forged signature is not necessary to
- Principal is liable if a duly authorized agent signs on
the holder’s title in which case the forgery may be disregarded.
his own behalf
- In case of forgery, forger is liable even if his signature
does not appear on the instrument
PERSONS PRECLUDED FROM SETTING UP THE DEFENSE OF
- Where the acceptor makes his acceptance of a bill on
FORGERY:
a separate paler
- Where a person makes a written promise to accept a 1. Those who by their acts, silence, or negligence, are
bill before it is drawn estopped from setting up the defense of forgery
2. Those who warrant or admit the genuineness of the
signatures in question
Sec. 19. The signature of any party may be made by a duly
authorized agent. No particular form of appointment is
necessary for this purpose; and the authority of the agent may  A party precluded from raising the defense of forgery
be established as in other cases of agency. may still recover damages under the Civil Code on
quasi-delicts.

Negligence – the omission to do something which is a

Sec. 20. When agent may escape personal liability:
reasonable man, guided by those considerations which
- He is duly authorized ordinarily regulate the conduct of human affairs, would do, or
- He adds words to his signature indicating that he signs the doing of something which a prudent and reasonable man
as an agent, that is, for or on behalf of a principal would do.
- He discloses his principal
Proximate Cause – is that cause, which, in natural and
continuous sequence, unbroken by any efficient intervening
cause, produces the injury, and without which the result would
Sec. 21. Procuration is the act by which a principal gives power
not have occurred.
to another (agent) to act in his place as he could himself. It
operates as a notice that the agent has but a limited authority
to act.
Sec. 24. Presumption of consideration.
Consideration – inducement to a contract that is thr cause,
Effects of signature by procuration: price or impelling influence which induces a contracting party
to enter into the contract.
1. Where agent exceeded his authority – principal is not
bound 1. It need not be expressly stated
2. Where agent acted with abuse of authority – it is not 2. Need not be alleged and proved
a defense against a holder in due course 3. Lack of consideration as a defense may be used only
against the payee

Sec. 22. Indorsement of minor or corporation without

authority is VALID, but they cannot be held liable in cases of Sec. 25. Value is any consideration sufficient to support a
liability. simple contract.
- It is a real defense, but personal to the minor or
corporation without authority
Valuable Consideration – consist either in some right, interest,
profit or benefit accruing to the party who makes the contract,
or some forbearance, detriment, loss, responsibility, act, labor
Sec. 23. Forgery is the counterfeit-making or fraudulent
or service, on the other side.
alteration of a writing, and may consist in the signing of
another’s name or the alteration of an instrument in the name, - It need not be adequate. It is sufficient if it is a
amount, description of the person and the like, with intent valuable one
thereby to defraud. (REAL DEFENSE)
 Effect of Forgery: wholly inoperative
Sec. 26. Holder for value is one who has given a valuable
 Proof of Forgery: must be proven clearly and
consideration for the instrument issued or negotiated to him.
convincingly

Sec. 27. Where the holder has a lien on the instrument, arising
• A forged indorsement prevents any subsequent party from
either from contract or by implication of law, he is deemed a
acquiring any right as against any party whose name appears
holder for value to the extent of his lien.
prior to the forgery.
Except: where a party is precluded from setting the forgery as
a defense. Sec. 28. Absence of consideration means a total lack of any
valid consideration for the contract, in consequence of which
the alleged contract must fall. (PERSONAL DEFENSE)

3
  Failure of Consideration – failure or refusal of one of 1. Issue – first delivery of the instrument to a person
the parties to do, perform, or comply with the who takes it as a holder
consideration agreed upon. 2. Negotiation – ordinarily involves indorsement; it
makes it possible for the transferee to acquire a
better right to the instrument than the transferor had
Sec. 29. Accommodation Party is one who has signed the 3. Assignment – the less usual method which may or
instrument as maker, drawer, acceptor, or indorser, without may not involve an indorsement in the sense of a
receiving for value for the signature, and for the purpose of writing on the back of the instrument
lending his name to some other person.
Accommodation note or bill – one which the accommodation
 ORDER Instrument – indorse and deliver
party has put his name, without consideration, for the purpose
 BEARER Instrument – deliver
of accommodating some other party who is to use it, and is
expected to pay it.
Accommodated Party – one in whose favor a person, without ASSIGNMENT – a transfer of the title to the instrument, with
receiving value therefor, signs an instrument for the purpose the assignee generally taking only such title as his assignor has,
of lending his credit and enabling said party to raise money subject to all defenses available against his assignor.
upon it.

NEGOTIATION ASSIGNMENT
LIABILITY OF ACCOMMODATION PARTY TO A HOLDER: Refers only to Refers to ordinary
negotiable contract
1. Liable on the instrument to a holder for value
instruments
2. This rule is inapplicable to corporations
Transferee is a Transferee is an
holder assignee
Rights of Accommodation Party: Holder in due Assignee is
course is subject subject to both
1. Right to revoke accommodation – since it is only to Real real and personal
gratuitous Defenses defenses
2. Right to reimbursement from accommodated party Holder in due Assignee merely
3. Right to contribution from other solidary course may steps into the
accommodation maker acquire better shoes of the
title or greater assignor
rights under the
ACCOMMODATION REGULAR PARTY instrument than
PARTY those possessed
Signs an instrument Signs the by the transferor
without receiving instrument for General indorser Assignor does not
value value warrants the warrant the
Signs an instrument Does not sign solvency or prior solvency of prior
for the purpose of instrument to parties parties unless
lending his name to lend his name to expressly
some other person some other stipulated or the
person insolvency is
May always show Cannot disclaim known to him
by parol evidence or limit his Indorsee is not Assignor is liable
that he is only such personal liability liable unless there even without
as appearing on be presentment notice of
the instrument by and notice of dishonor
parol evidence dishonor
Cannot avail of the May avail of said Governed by NIL Governed by the
defense of absence defense Civil Code
or failure of (absence/failure
consideration of consideration)
against a holder against a holder Sec. 31. Indorsement is the writing of the name of the payee
NOT in due course NOT in due on the instrument with the intent either to transfer the title to
course the same or to strengthen the security of the holder by
After paying the May not sue any assuming a contingent liability for its future payment, or both.
holder, he may sue subsequent party - Must always be coupled with delivery
reimbursement the for - Indorsement involves the certainty of the identity of
accommodated reimbursement the indorser and the genuineness of his signature
party, although a - Must be written
subsequent party - Must be contained in a separate sheet (allonge)

Sec. 30. Negotiation is done when an instrument is transferred

from one person to another in such a manner as to constitute Necessity of Indorsement:
the transferee the holder. 1. Essential to the execution of an instrument payable to
Methods of Transferring a Negotiable Instrument: the order of the maker or drawer

4
 2. Essential to the negotiation of an order instrument,
not of a bearer instrument
 Qualified Indorser is not liable except in these 4
3. NOT NECESSARY to a mere assignment if a negotiable
warranties
or non-negotiable instrument
1. Forgery
4. Estoppel may take place of an indorsement to uphold
2. Lack of good title to the instrument indorsed
the transfer of a bill or note.
3. Lack of capacity to contract on the part of the prior
parties
4. Instrument was valueless
Sec. 32. Indorsement must be of entire instrument.
Reason: instrument must be delivered to the indorsee, and
there cannot be partial delivery of one instrument or Sec. 39. Conditional Indorsement is one by which the indorser
piecemeal payments to several persons to avoid multiplicity of imposes some other conditions to his liability or on the
suits indorsee’s right to collect the proceeds of the instrument.
- In the nature of a special indorsement. It has no effect
on the further negotiation
Sec. 33. An indorsement may be either special or blank; and
- Does not prohibit the further negotiation of the
it may also be either restrictive or qualified, or conditional.
instrument regardless of whether the condition has
been fulfilled or not
- Binding only between the indorser and the indorsee
Sec. 34. Special Indorsement is one where the name if the
payee is specified.
Forms: Sec. 40. Where a bearer instrument is indorsed specially, it
may nevertheless be further negotiated by delivery; but the
a. Specifies the person to whom the instrument is
person indorsing specially is liable as indorser to only such
payable
holders as make title thru the indorsement.
b. Specifies the person to whose order the instrument is
to be payable
Sec. 41. (Joint Indorsement) Where an instrument is payable
to the order of two or more payees or indorsees who are not
Blank Indorsement is one which specifies NO particular
partners, ALL must indorse unless the one indorsing has
indorsee.
authority to indorse for the others.

Sec. 35. Blank Indorsement may be changed to a special

Sec. 42. Where an instrument is drawn or indorsed to a
indorsement by writing ver the signature of the indorser in
person as “cashier” or other fiscal officer of a bank or
blank.
corporation, it is deemed prima facie to be payable to the bank
of corporation, of which he is such officer; and may be
negotiated by either the indorsement of the bank or
Sec. 36. Restrictive Indorsement
corporation, or the indorsement of the officer.
- Prohibits the further negotiation of the instrument
- Constitutes the indorsee the agent of the indorser
- Vests the title in the indorsee in trust for it to the use Sec. 43. Where the name of a payee or indorsee is wrongly
of some other person designated or misspelled, he may indorse the instrument as
described, adding, if he thinks fit, his proper signature

A. It limits the rights of the indorsee

B. Destroys negotiability of instrument Sec. 44. Where any person is under obligation to indorse in a
representative capacity, he may indorse in such terms as to
negative personal liability.
Sec. 37. Restrictive Indorsement confers upon the indorsee
the right —
Sec. 45. Every negotiation is deemed prima facie to have been
- To receive payment of the instrument
effected before the instrument was overdue except where an
- To bring any action that the indorser could bring
indorsement bears date after the maturity of the instrument.
- To transfer his rights as such indorsee, where the
form of the indorsement authorizes him to do so
Sec. 46. Every indorsement is presumed prima facie to have
been made at the place where the instrument is dated except
Sec. 38. Qualified Indorsement is one which constitutes the
where the contrary appears.
indorser a mere assignor of the title to the instrument; it limits
the liability of the indorser
- Uses the word without recourse Sec. 47. An instrument negotiable when issued, is always
negotiable until paid, irrespective of the form of indorsement
of the instrument.
Effect of Qualified Indorsement
Except:
1. Indorser, mere assignor
- When the instrument has been restrictively indorsed
2. Indorser’s liability limited
3. Negotiablity of instrument not effected
5
 - When it has been discharged by payment or
otherwise
Sec. 88 What constitutes payment in due course – Payment is
made in due course when it is made at or after the maturity
of the instrument to the holder thereof in good faith and
Sec. 52 Holder in due course (Compliant w/ sec. 1)
without notice that his title is defective
- A holder in due course is a holder who has taken the
Requisites of payment in due course
instrument under the following conditions
- A holder in due course is always a holder for value - Payment in the usual course of business
a. It is complete and regular upon its face 1. Payment must be made at or after date of maturity
b. He became the holder of it before it was overdue, 2. Payment must be made to the holder
and without notice that it had been previously 3. Payment must be made in good faith and without
dishonored notice that the holder’s title is defective
c. He took it in good faith and for value
Sec. 119. Instrument; how discharged – A negotiable
d. At the time it was negotiated to him he had no
instrument is discharged
notice or any infirmity in the instrument or defect
in the title of the person negotiating it a. By payment in due course by or on behalf of the
principal debtor;
Holder in due course
b. By payment in due course by the party of
- He takes the instrument free of most defenses, or accommodated, where the instrument is made or
adverse claims to it by other parties accepted for accommodation;
- Personal defenses cannot be affected to a holder in c. By the intentional cancellation thereof by the
due course holder;
- Real defense can be effected to a holder in due course d. By any other act which will discharge simple contract
for the payment of money
1. Presence of all conditions – If any one of them is e. When the principal debtor becomes the holder of
absent, holder cannot be considered a holder in due the instrument at or after maturity in his own right.
course
Discharge of an instrument – means a release of all parties ,
2. Status as mere assignee – Holder of a non-negotiable
whether primary or secondary, from the obligations arising
instrument cannot attain the status of a holder in due
thereunder. It renders the instrument without force and effect
course. He is a mere assignee subject to defenses. L
and, consequently it can no longer be negotiated
3. Presumption – prima facie presumption exists that
the holder of a negotiable instrument is a holder in
due course
Methods of discharge of instrument
Drawee as holder in due course
Provided in section 119, are exclusive upon the familiar rule
- A drawee does not become a holder in due course that the express mention of one thing implies the exclusion of
another
Holder – refers to one who has taken the instrument as it
passes along in the course of negotiation towards the drawee Payment by principal debtor
and not the drawee who, on the acceptance and payment of
- Most common type of discharge
the instrument, thereby strips it all of negotiability and reduces
- Must be made in money, but by agreement between
it to a mere voucher or proof of payment
the parties, it may be made in other forms.
Instrument complete and regular upon its face 1. If it is satisfied by him who is primarily liable, a
complete discharge results
1. Wanting in any material particular
2. In order that payment may produce the effect of
2. Alteration apparent on face of instrument
discharging the instrument
a. It must be made by or on behalf of the principal
debtor
 An instrument is overdue after the date of maturity
b. At or after its maturity
Sec. 67 Liability of indorser where paper negotiable by delivery c. To the holder
– Where a person places his indorsement on an instrument d. In good faith and without notice that the holder’s
negotiable by delivery he incurs all the liabilities of an title is defective
indorser. 3. To pay in due course – To pay at or after the maturity
of the instrument to the holder thereof in good faith
Sec. 69 Liability of an agent or broker – Where a broker or
without notice that his title is defective.
other agent negotiates an instrument without indorsement,
he incurs all the liabilities prescribed by section sixty-five of Payment by accommodated party
this Act, unless he discloses the name of his principal and the
- Accommodated party is the real debtor
fact that he is acting only as agent
- Payment by the accommodated party is actually
payment by the principal debtor
Liability of an agent or broker Intentional cancellation of instrument by holder
1. Personal liability – refers to instruments which are 1. Be intentionally done
payable to bearer and are, therefore, negotiable by 2. By the holder thereof
delivery.
2. Exemption from liability – To escape personal liability,  Presumption is that the cancellation is intentional
he must disclose his principal and the fact that he is
acting only as agent

6
  If the mutilation or destruction is by accident, or in
case of loss, the original terms of the instrument may
be established by parol or secondary evidence.
Reacquisition by principal debtor in his own right.
1. By the principal debtor
2. In his own right
3. At or after the date of maturity.