CHAPTER 1

OBJECTIVES:

You are expected to learn the following:

a.) Definition Negotiable Instrument vs Legal Tender.

b.) Functions of the Negotiable Instruments
c.) Characteristics of NIL
d.) Forms of Negotiable Instruments
e.) Form and interpretation
Section 1-23 of NIL
INTRODUCTION

To be able to understand negotiable instrument law lets discuss first the word instrument. What comes in
your mind when you hear the word instruments?

An instrument is defined as a tool or device; a document; or even a piece of paper.

How about the term negotiable?

  Transferable from one person to another by being delivered so that the title passes to the transferee.

So what does it mean?

The instrument is being transferred from one person to another so that the title would be transferred to the
latter.

Negotiable Instruments
 It is a written contracts for the payment of money; by its form, intended as a substitute for money and
intended to pass from hand to hand, to give the holder in due course the right to hold the same and collect the sum
due.

About the definition of negotiation. It says that the instrument is intended as substitute for money, correct?
Having said that let’s talk about the functions of the instrument itself.

Substitute as money- why is it a substitute for money? We all know that all the transactions in our
commercial world needs the existence of MONEY. But because of the negotiable instrument we can deal with other
persons because it serves as payment in that particular transaction thereby increasing the purchasing media in
circulation. Nevertheless, take note, that it is not considered as legal tender.

NOW, when does NI produces the effect of payment?

It produces the effect of payment when it has been encashed; or throught the fault of the creditor they have
been impaired.

ILLUSTRATION:

X issued a check in favor of Y dated on January 1, 2021 and on the said date the same was encashed by Y.

X issued a check in favor of Y dated on January 1, 2021. Y failed to deposit or encash the samen, he only
remember the check on April 1, 2021.

The features of NI are the following:

1. Negotiability- we’ve discussed it already

2. Accumulation of secondary contract- A characteristic of a negotiable instrument where additional parties
become involved as they are transferred from one person to another.

Again it passes from one person to another. What is being transferred here is not limited to the instrument but
includes all that is related to it. Like the defenses and rights available to the holder as well as the liabilities.

1. Words prevail over figures.

2. If date from which interest is to run is unspecified, interest runs from the date of the instrument; if
undated, from the issue thereof.

3. If undated, instrument is considered dated as of the time it was issued

4. Written provisions prevail over printed.

5. If there is doubt whether it is a bill or note, the holder may treat it as either, at his election.

6. When not clear in what capacity it was signed, deemed signed as an indorser.

7. When two or more persons signed a negotiable instrument stating "promise to pay,"in case of liability,
they shall be deemed to be jointly and severally liable.

REQUISITES OF NI
1. The instrument must be in writing

It must be reduced in writing or in tangible form. The negotiability or non-negotiability of an

instrument is determined from the writing on the face of the instrument itself. Remember students that writing
is required in negotiation, there can be no verbal promissory note or bill of exchange.

2. The instrument must be signed by the maker or drawer

It is placed at the lower right-hand corner of the instrument. Nonetheless, it may appear in any part of
the instrument whether at the top, middle or bottom or at the margin.

Take note however that when a signature is so placed upon the instrument that it is not clear in what
capacity the person making the same intended to sign, he is to be deemed an indorser. So every signature
appearing on the instrument will be considered as having been signed as party to the instrument.

3. Unconditional promise or order to pay a sum certain in money

It is required because the very nature and purpose of the instrument is for it to be negotiated students.
If you subject the instrument to a condition then it may hamper the negotiation since it will limit the
transferability of the instrument. Further, the supposed transferee will have a doubt as to the capability of the
instrument to be a substitute for money.

An unqualified order or promise to pay is unconditional though coupled with:

1. An indication of particular fund out of which reimbursement is to be made or a particular account to be

debited with the amount; or

i.e, Pay to X or oder 10,000 pesos to be reimbursed from my bpi account.

2. A statement of the transaction which gave rise to the instrument. (Sec 3, NIL)

i.e, Pay to X or order 10,000 pesos to be taken from my bpi account with account number 1234567.

Let’s talk about certainty as to money

The sum payable is a sum certain within the meaning of this Act, although it is to be paid: (ISDA-E)
1. With Interest;

2. By Stated installments;

3. By stated installments, with a provision upon Default in payment of any installment or of interest, the
whole shall become due (acceleration clause);

4. With cost of collection or an Attorney’s fees, in case payment shall not be made at maturity;

5. With Exchange, whether at a fixed rate or at the current rate. (Sec. 2, NIL)

Payable on demand or at a fixed or determinable future time

1. Payable on demand – The holder may call for payment any time, likewise, the maker may also pay
any time and the refusal of the holder to accept payment shall stop the running of interest should there be any,
but obligation to pay the note subsist.

An instrument is payable on demand: (ENO)

a. When it is so expressed to be payable on demand, or at sight, or on presentation; or

b. In which no time for payment is expressed

c. Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing,
accepting, or indorsing it, payable on demand (Sec. 7, NIL).

2. At a fixed time – A term or time instrument is payable only upon the arrival of the time for payment.

3. At a determinable future time-An instrument is payable at a determinable future time which is

expressed to be payable: (ATiS)

a. At a 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 be uncertain (Sec. 4, NIL).

PAYABLE TO ORDER

The instrument is payable to order where it is drawn payable to the order of a specified person or to
him or to his order.

It may be drawn payable to the order of:

1. A Payee who is not a maker, drawer, or drawee;

2. The Drawer or maker;

3. The Drawee;

4. Two or more payees Jointly;

5. One or some of Several payees; or

6. The Holder of an office for the time being (Sec. 8, NIL)

PAYABLE TO BEARER
1. When it is Expressed to be so payable; (e.g. I promise to pay to bearer P10,000.00)

2. When it is payable to a person Named therein or bearer; (e.g. Pay to P or bearer P10,000.00)

3. When it is payable to the order of a Fictitious person or non-existing person, and such fact was known to the
person making it so payable; (e.g. Pay to John Doe or order)

4. When the name of the Payee does not purport to be the name of any person; (e.g. Pay to cash)

5. When the only or the Last indorsement is an indorsement in blank (Sec 9,NIL).

Fictitious-Payee rule contemplates that the payee is fictitious or not intended to be true recipient of the
proceeds. The check is considered a bearer instrument negotiable by delivery alone. When drawee must be
named with reasonable certainty (BJ-Pa)

1. In a bill of exchange, the drawee must be named or otherwise designated with reasonable certainty (Sec. 1,
NIL).

2. A bill may be addressed to two or more drawees jointly, but not to two or more drawees in the alternative or
in succession (Sec. 127, NIL). Eg. An instrument may be addressed “to A and B” but not “to A or B”.

3. An instrument payable “to the order of the bearer” has been held to be an instrument payable to “order ”(10
C.J.S. 575-576).

COMPLETION AND DELIVERY

1. The mechanical act of writing the instrument completely and in accordance with Sec. 1 of NIL.

2. Delivery - The transfer of possession, actual or constructive, from one person to another (NIL, Sec. 191),
with the intent to transfer title to payee and recognize him as holder thereof.

COMPLETION OF BLANKS

Various situations involving negotiable instruments

1. Incomplete instrument

a. Delivered

i. With forgery and alteration

ii. Without forgery and alteration

b. Not delivered

i. With forgery and alteration

ii. Without forgery and alteration

2. Complete instrument

a. Delivered

i. With forgery and alteration

ii. Without forgery and alteration

b. Not delivered

i. With forgery and alteration

ii. Without forgery and alteration

 Every contract on a negotiable instrument is incomplete and revocable until delivery for the purpose of
giving effect thereto.

If between immediate parties and remote parties not holder in due course, to be effectual there must
be authorized delivery by the party making, drawing, accepting or indorsing. Delivery may be shown to be
conditional or for a special purpose only

If the holder is a holder in due course, all prior deliveries conclusively presumed valid 

If instrument not in hands of drawer/maker, valid and intentional delivery is presumed until the
contrary is proven 

Immediate parties are persons having knowledge of the conditions or limitations placed upon the
delivery of an instrument. It means privity, and not proximity.

Remote Parties Persons without knowledge as to the conditions or limitations placed upon the delivery
of an instrument, even if he is the next party physically or parties who are not in direct contractual relation to
each other, but if they are chargeable, for example, with knowledge or notice of any infirmities in the
instrument or defect in the title of the person negotiating the same, they will be considered as immediate
parties for purposes of Section16.

It is incomplete and revocable until delivery of the instrument for the purpose of giving it effect (NIL,
Sec. 16). Delivery is essential to the validity of any negotiable instrument. The defense of want of delivery of a
complete instrument is only a personal defense which means that it is only available against a holder NOT in
due course.

SIGNATURE

A signature may be made in any manner as long as the person signing has the intention to be bound.

1. Person who signs in Trade or assumed name (NIL, Sec. 18)

2. Principal who signs through a duly authorized agent and such agent discloses the name of his
principal and adding words to show he is merely signing in a representative capacity (NIL, Sec. 19,
20)

1. He is Duly Authorized 2. He Adds words to his signature indicating that he signs as an

agent/representative and 3. He Discloses the name of his principal

3. Forger (NIL, Sec. 23)

It is the counterfeit making or fraudulent alteration of any writing. It happens when a signature is
affixed by one who does not claim to act as an agent and who has no authority to bind the person
whose signature he has forged. Forgery, as any other mechanism of fraud must be proven clearly and
convincingly, and the burden of proof lies on the party alleging forgery.

Pay to P or order P10,000 30 days after sight.

(Sgd)D, (forged by P)

It does not avoid the instrument but only the forged signature. In other words, rights may still exist and
be enforced by virtue of such instrument as to those signatures thereto are found to be genuine.

Minor
GR: A contract entered into by a minor is voidable, at the option of the minor. It is a real defense that can be
invoked only by the minor, even against a holder in due course, and cannot be invoked by the other parties.

XPN: Where a minor committed actual fraud by specifically stating that he is of legal age, a minor can be
bound by his signature in an instrument. (PNB v. CA, G.R. No. L-34404, June 25, 1980) NOTE: While a minor is
not bound by his indorsement for lack of capacity, he is howev

I promise to pay P (16 years old) or order P10,000. Sgd. M P indorsed it to A.

a. May A collect from M notwithstanding that P, the indorser is a minor?

b. In case that A cannot collect from M, can he collect from P?

A:

a. YES. A can collect from M. Notwithstanding the fact that P is a minor, the indorsement of P (the minor)
passes title to A. The holder. M cannot invoke the defense of minority because such defense would only be
available to P.

b. NO. A cannot collect from P, as he has a real defense of minority on his part.