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OF BSA – A3A
PART 1
(1) Used as a substitute for money (but do not constitute legal tender)
a. Negotiability – go from hand to hand in the commercial markets; take part of money in commercial transactions
b. Law’s purpose – to make negotiable instruments freely acceptable in financial transactions and facilitate trade.
(2) Constitute, at present, the media of exchange for most commercial transactions
a. Without them, more money would be needed in circulation
b. Eliminate the risk of dealing in cash
(3) Serve as a medium of credit transaction
a. A man does not always have cash in hand, so negotiable instruments enable him to conduct and complete
business transactions through credit.
b. Check: immediate payment; bill of exchange and promissory note: credit circulation
Example: A issues a promissory note payable to the order of B. B transfers his right to the instrument to C.
Primary Secondary
A B C
(Maker) (Transferor) (Holder)
Forms of negotiable instruments. (2) “The more debts are added, the more advantageous it
will be to the holder (C) as he can proceed not only against
(1) Common forms the maker (A), but also against all transferors (B).”
a. Promissory notes – issuer has promised to pay
b. Bills of exchange – issuer has ordered a third person to pay
*Checks – special form or kind of bill of exchange
(2) Special forms
a. Certificate of deposits, bank notes, due bills and bonds Promissory notes
b. Drafts, trade acceptances and banker’s acceptances Bills of exchange
Doubt resolved in favor of negotiability – Purpose: To encourage the free circulation of negotiable papers
Reason: Performs necessary function
Instruments with limited negotiability. (Refer to pp. 6-8 for examples) in commercial business transactions
- Widely used in commercial transactions, but considered non-negotiable because they do not have the essential
requisites under the Negotiable Instruments Law.
- Governed by other laws
Source: De Leon, H. M., & De Leon, H. S. (2016, August). The law on negotiable instruments. Quezon City: REX Printing Company, Inc.
MACASAET, LENIA JANEL L. OF BSA – A3A
TITLE I
- Written promises or obligations that arise out of commercial transactions from the use of such instruments as
promissory notes and bills of exchange
- Either negotiable or non-negotiable
(1) Form and content – briefly stated, negotiable instrument a contractual obligation to pay money (+Section 1)
(2) Matters to be considered (3) – in determining negotiability
a. Whole of the instrument
b. Only what appears on the face of the instrument
c. Provisions of the Negotiable Instruments Law Section 1
Applicability of formal requirements. (Refer to Section 1 – c. and d. are applicable to both; e. is applicable to bill only)
(1) The instrument must be in writing – reduced to tangible form; otherwise, nothing could be negotiated
a. Written – literally written or printed in a durable paper
a. b. NO oral negotiable instrument – oral promise difficult to determine liability and creates
danger of fraud
(2) The instrument must be signed by the maker or drawer
– General rule: Signature is placed at the lower right hand corner of the instrument
– Exception: It may appear in any part.
– Signature valid and binding as long as the person who signed intended to make the instrument his own
a. Prima facie evidence of his intention to be bound; if unclear deemed indorser
b. Usually written; preferably full name or at least, surname, but initials or any mark will be sufficient
c. Presumed valid – so if its genuineness is denied, he who alleges must prove its invalidity
d. Signer – must intend to adopt the signature as his own and to obligate himself for its payment
(like a parent’s responsibility to his/her child/ren)
*Use of pencil is undesirable easy to tamper
Source: De Leon, H. M., & De Leon, H. S. (2016, August). The law on negotiable instruments. Quezon City: REX Printing Company, Inc.
MACASAET, LENIA JANEL L. OF BSA – A3A
(3) The instrument must contain an unconditional promise or order to pay – Section 3
b.
(4) The instrument must be payable in a sum certain in money
a. Money – the on standard of value in actual business
b. Money – medium of exchange authorized or adopted by a domestic or foreign government as part of its
currency; cash (literal sense)
*Legal tender – debtor can legally compel a creditor to accept in payment of a debt in money when
tendered in the right amount ; Philippine Peso
c. (5) The instrument must be payable at a fixed or determinable future time or on demand – Sections 4 and 7
(6) The instrument must be payable to order – Section 8
d.
(7) The instrument must be payable to bearer – Section 9
e. (8) The drawee must be named – only applies to bills and checks
a. An order not addressed to any person ≠ bill;
but if the drawee is indicated therein with reasonable certainty (though not named) = bill
b. Reason – to enable payee or holder to know upon whom he is to call for acceptance or payment
c. Promissory note – not drawee, but payee, who must also be named with reasonable certainty
(1) Merely a simple contract in writing – covered by the general provisions of the Civil Code
(2) May not be negotiated, but may be assigned or transferred
Promissory note defined. Bill of exchange defined.
- Brief definition: A written promise to pay a sum of - Brief definition: An order made by one person to
money another to pay money to a third person
- May be a demand instrument, - Check drawn on a bank + payable on demand
but normally a time instrument - 3O/Trio: 3-party paper or Order paper
- P2: Promise paper or 2-party paper
Original parties to a promissory note. Original parties to a bill of exchange.
(1) Maker – makes the promise to pay the payee or holder (1) Drawer – issues and draws
and signs the instrument – gives the order to pay money
– his signature must appear on the face of the (2) Drawee – party upon whom the bill is drawn
note for him to be liable thereon – ordered and expected to pay
(2) Payee – party to whom the promise is made; – can be natural or juridical person
– specifically designated by name, or office (3) Payee – party in whose favor the bill is originally
or title, or may be unspecified Issued
*For examples and explanation: See pp. 17-18 – may be specifically designated or unspecified
*For examples and explanation: See pp. 21-22
Idea and purpose of a bill of exchange.
(1) Drawer has funds in the hands of drawee (or drawee must owe the drawer a debt to be offset)
(2) Liability of drawee for non-payment
a. Drawee refuses to accept when he has funds – liable to the drawer
b. Drawee has no funds – go after the drawee for reimbursement
Source: De Leon, H. M., & De Leon, H. S. (2016, August). The law on negotiable instruments. Quezon City: REX Printing Company, Inc.
MACASAET, LENIA JANEL L. OF BSA – A3A
Sec. 2. Certainty as to sum; what constitutes.
(a) – (e) on p. 23 Only relates to the manner of payment. Amount due can still be ascertained.
- A requisite for negotiability to assure clarity and certainty in determining the value of the instrument
(1) Payment of fixed amount of money
– since a negotiable instrument intends to take the place of money, it should represent a fixed amount to be
paid wholly in money; amount to be paid must be determinably and plainly stated on the face of the instrument
– holder must be able to determine from the instrument itself the amount he is entitled to receive at maturity
– if the instrument calls for an act, other than the payment of money non-negotiable
(2) Permissible clauses or stipulations (letters a-e on p. 23)
– the basic test: whether the holder can determine by calculation or computation the amount payable when the
instrument is due
Acceleration – a promise that if any installment or interest is not paid as agreed, the whole shall become due
*Inland or domestic bill – drawn and payable at the same place exchange is not applicable
*Letters (a) – (e), except (c) 2., does not render an instrument non-negotiable.
Source: De Leon, H. M., & De Leon, H. S. (2016, August). The law on negotiable instruments. Quezon City: REX Printing Company, Inc.
MACASAET, LENIA JANEL L. OF BSA – A3A
Sec. 3. When promise is unconditional.
(1) Implied promise to pay – any words equivalent to a promise should be used
(2) Bare acknowledgment of indebtedness – non-negotiable
(1) Instrument payable at all events – payment will certainly become due and demandable one time or another
(2) When time of payment certain – holder may call for payment at any time (demand/sight instrument)
(3) Reasons why time must be certain – to know when an obligation will arise
*Contingency – not negotiable because it does not appear on its face whether or not it will be paid
*After sight – after the instrument is seen by the drawee upon presentment for acceptance
Source: De Leon, H. M., & De Leon, H. S. (2016, August). The law on negotiable instruments. Quezon City: REX Printing Company, Inc.
MACASAET, LENIA JANEL L. OF BSA – A3A
Sec. 5. Additional provisions not affecting negotiability.
Matter Negotiability/Discussion
Effect of omission of date. (1) Date of instrument generally not necessary – no date
(considered issue date) Negotiable
(2) When date necessary – to determine the date of maturity
a. Maturity date is tied to the date of issue
b. Interest is stipulated – to know when it is to run
c. To determine whether a party acted within a reasonable time in
making presentment for payment
(3) Date stated not in calendar – deem the nearest date of the month the
date intended (e.g. Feb. 30 Feb 28.)
Effect of omission of value. Negotiable – it is usual to state in the instrument that it is given for value
received without specifying what that value is; consideration presumed
Effect of omission of place. Negotiable – presumed to be payable at the place of residence or business of
the maker or drawer
Effect of presence of seal. Negotiable
Effect of designation of particular Negotiable – the law does not require that payment should be made in legal
kind of current money payable. tender
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.
*Payable on demand – due and payable immediately after delivery demand instrument
*Not payable on demand time instrument
Secs. 8 and 9. Better refer to the book (pp. 47-55) or to your own notes
Source: De Leon, H. M., & De Leon, H. S. (2016, August). The law on negotiable instruments. Quezon City: REX Printing Company, Inc.
MACASAET, LENIA JANEL L. OF BSA – A3A
Sec. 10. Terms, when sufficient.
Criterion of negotiability – it is not required to use the exact words of the law
Presumption as to date.
– date on the instrument presumed to be the date when it is made by the maker, drawn by the drawer, accepted by
the drawee, or indorsed by the payee or holder
*He who claims that some other date is the true date had the burden to establish such claim.
Source: De Leon, H. M., & De Leon, H. S. (2016, August). The law on negotiable instruments. Quezon City: REX Printing Company, Inc.
MACASAET, LENIA JANEL L. OF BSA – A3A
Effect of insertion of wrong date.
(1) As to holder with knowledge – will avoid the instrument as to him, not as to a subsequent holder in due course
(2) As to subsequent holder in due course – wrong date will be regarded as the true date
Secs. 14-16. Better refer to the book (pp. 62-70) or to your own notes
(1) General rule – only persons whose signatures appear on an instrument are liable
(2) Exceptions
a. A person signs in a trade or assumed name
– liable as if he signed in his own name; not really an exception, but rather an instance
b. The principal is liable if a duly authorized agent signs on his own behalf
c. The forger is liable even if his signature does not appear on the instrument
d. An acceptor who makes his acceptance of a bill on a separate paper maarte
e. A person who makes a written promise to accept a bill before it is drawn excited
Source: De Leon, H. M., & De Leon, H. S. (2016, August). The law on negotiable instruments. Quezon City: REX Printing Company, Inc.
MACASAET, LENIA JANEL L. OF BSA – A3A
Sec. 20. Liability of person signing as agent, etc.
Procuration – the act by which a principal gives power to another to act in his place as he could himself
(1) Minors. – General rule: Contracts entered into by a minor are voidable.
a. Just because one is a minor, that doesn’t mean he/she cannot transfer title. He/She won’t be bound for
that title he/she transferred by defense of minority. real defense
b. A minor may also disaffirm and recover the instrument from a holder in due course.
c. A minor may be held bound by his signature fraud stating he/she is of age when in fact he’s not
(2) Other incapacitated persons. – No capacity to give consent insane or demented persons and deaf-mutes who
do not know how to write real defense
Forgery – the counterfeit-making or fraudulent alteration of any writing; may consist in the signing of another’s name or
alteration of an instrument, with intent thereby to defraud
Source: De Leon, H. M., & De Leon, H. S. (2016, August). The law on negotiable instruments. Quezon City: REX Printing Company, Inc.
MACASAET, LENIA JANEL L. OF BSA – A3A
Cases of forgery in general.
*All the foregoing are qualified in those cases where there is estoppel against the party desiring
to set-up the defense of forgery.
Source: De Leon, H. M., & De Leon, H. S. (2016, August). The law on negotiable instruments. Quezon City: REX Printing Company, Inc.
MACASAET, LENIA JANEL L. OF BSA – A3A
CHAPTER II
CONSIDERATION
Sec. 24. Presumption of consideration.
- Every negotiable instrument deemed prima facie to have been issued for a valuable consideration
- Every person whose signature appears thereon deemed to have become a party thereto for value
- One who has given a valuable consideration for the instrument issued or negotiated to him, in respect to all
those who became parties prior to the time when value was given.
- Holder for value holder of a negotiable instrument, unless a contrary is shown and proven by those claiming
otherwise
- Holder with a lien on the instrument holder for value to the extent of his lien encumbrance
Source: De Leon, H. M., & De Leon, H. S. (2016, August). The law on negotiable instruments. Quezon City: REX Printing Company, Inc.
MACASAET, LENIA JANEL L. OF BSA – A3A
Sec. 28. Effect of want of consideration.
- Absence or failure of consideration – a matter of defense as against any person not a holder in due course
personal defense not available/not valid against a holder in due course
Failure of consideration.
– the failure or refusal of one of the parties to do, perform or comply with the consideration agreed upon
- One who has signed the instrument as maker, drawer, acceptor or indorser, without receiving value therefor, for
the purpose of lending his name to some other person
Definition of terms.
*Defense than an accommodated party can set up can also be set up by the accommodation party.
--END—
Source: De Leon, H. M., & De Leon, H. S. (2016, August). The law on negotiable instruments. Quezon City: REX Printing Company, Inc.