NEGOTIABLE INSTRUMENTS QandA NOTES

1. What are negotiable instruments?

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.
2. Requisites of section 1?
a. It must be in writing and signed by the maker or drawer
b. Must contain an unconditional promise or order to pay a sum certain in money
c. Must be payable on demand or at a fixed or determinable future time
d. Must be payable to order or bearer;
e. Drawee must be named or indicated with reasonable certainty
3. What is a non-negotiable instrument?
An instrument which does not meet the requirements laid down in section 1 of the NI law to
qualify an instrument as a negotiable one.
4. What are the functions and importance of Negotiable Instruments?
1. Although they do not constitute legal tender, they are used as a substitute for money
2. Negotiable papers, particularly checks, constitute, at present, the media of exchange for most
commercial transactions
3. They also serve as a medium of credit transactions
5. Distinguish from document of title?
6. Characteristics of a negotiable instrument?
NI have 2 important features, namely: negotiability and accumulation of secondary contracts as
they pass from one person to another
7. What do you mean by negotiability?
Negotiability is that quality of attribute of a bill or note whereby it may pass from one person to
another similar to money, so as to give the holder in due course the right to collect on the instrument the
sum payable for himself free from any defect in the title of any prior parties or defenses available to them
among themselves.
8. What must be considered to determine negotiability?
a. Whole instrument
b. What appears on the face of the instrument
c. Requisites enumerated in Sec.1 of the NIL
d. Should contain words or terms of negotiability.
9. Why does it need to be in writing?
The term instrument indicates a writing. The instrument must be in writing or reduced in tangible
form otherwise nothing could be negotiated or passed from hand to hand.
10. Why does it need to be signed by the maker or drawer?
Because his signature is prima facie evidence of his intention to be bound as either maker or
drawer.
11. is a thumbmark sufficient?
Any mark will be sufficient, provided that such signature be used as a substitute and the maker or
drawer intends to be bound by it.
12. Parties to a NI?
1. Promissory Note
a. Maker – one who makes promise and signs the instrument
b. 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.
13. What is a promissory note? What is a bill of exchange?
1. PROMISSORY NOTE (PN) An unconditional promise in writing by one person to another
signed by the maker engaging to pay on demand or at a fixed or determinable future time, a sum certain in
money to order or to bearer.
-A written promise to pay a sum of money
2. BILL OF EXCHANGE (BE) 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.
-An order made by one person to another to pay money to a third person

14. When is a promise unconditional?

-It must not be subject to any condition or contingency except implied conditions of presentment,
protests and notice of dishonor as provided in law. In other words, the note or bill must be payable
absolutely.
-Reason: greatly enhances the ability of the instrument to circulate freely from one person to
another.

15. What does money include?

Money, as used in law, is not necessarily limited to legal tender. It includes any particular kind of
current money or foreign money which has fixed value in relation to our money
16. What is a legal tender?
Legal tender is a medium of payment recognized by a legal system to be valid for meeting a
financial obligation
17. What constitutes certainty as a sum?
-It meets the “sum certain” requirement if the holder can determine from the instrument itself the
amount he is entitled to receive at maturity.
Sec. 3. When promise is unconditional.
An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled
with –
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 the transaction which gives rise to the instrument

But an order or promise to pay out of a particular fund is not unconditional.

Sec. 5. Additional provisions not affecting negotiability –

An instrument which contains an order or promise to do any act in addition to the payment of money is
not negotiable. (General Rule)
But the negotiable character of an instrument otherwise negotiable is not affected by a provision which –
(Exception)
a. Authorizes the sale of collateral securities in case the instrument be not paid at maturity
b. Authorizes a confession of judgement if the instrument be not paid at maturity
c. Waives the benefit of any law intended for the advantage or protection of the obligor
d. Gives the holder an election to require something to be done in lieu of payment of money
But nothing in this section shall validate any provison or stipulation otherwise illegal.

Incidents in the life of a negotiable instrument?

1. Preparation and signing – complete w/ all the req. of sec 1 of NIL
2. Issuance – first delivery of instrument to payee (from maker or drawer to payee/bearer)
3. Negotiation – transfer from one person to another so as to constitute the transferee as holder
4. Presentment for acceptance – for certain kind of bill of exchange – boe shall be presented to drawee
5. Acceptance – written assent of the drawee to the order
6. Dishonor by non acceptance – refusal to accept by the drawee
7. Presentment for payment – instrument is shown to the maker or drawee/acceptor for payment
8. Dishonor by non payment – refusal to pay by maker or drawee/acceptor
9. Notice of dishonor – notice to the person secondarily liable that the maker or drawer/acceptor refused
to pay or to accept the instrument
10. Protest – in some cases
When can a bill of exchange be a promissory note?
Sec. 130. When bill be treated as a promissory note. –
Where in a bill the drawer and drawee are the same person, or where the drawee is fictitious person, or a
person not having capacity to contract, the holder may treat the instrument, at his option either as a bill of
exchange or promissory note.

Differentiate promissory note and bill of exchange

Instruments with limited liability?

Is crossed check a NI?

It is one which bears across its face 2 parrallel lines drawn diagonally, usually on the upper left side.
The purpose of crossing a check is to insure payment to the payee particularly when it is forwarded by
mail or when it is entrusted to an agent. Crossing a check does not destroy its negotiability.

Where is the signature generally placed?

Diffrentiate between bill of exchange and check

1. a check is drawn on a bank while BOE may or may not be drawn on a bank

Sec. 3 When promise is unconditional

An unqualified order or promise to pay is unconditional though coupled with
a. an indication of a particular fund out of which reimbursement is to be made or a particular account to
be debited
b. a statement of the transaction which gives rise to the instrument
But an order or promise to pay out of a particular fund is not unconditional
Sec. 5 Additional provisions not affecting negotiability
General rule: instrument is non-negotiable if it contains a promise or order to do any act in addition to
payment of money except
Provisions which:
a. authorizes the sale of collateral securities if not paid at maturity
b. authorizes a confession of judgement if not paid at maturity
c. waives the benefit of any law intented for the protection of the obligor
d. gives the holder an election to require something to be done in lieu of money
Nothing shall validate anything illegal

Sec. 6 Validity and negotiability are not affected by the fact that:
a. it is not dated
b. does not specify the value given
c. does not specify the place
d. bears a seal
e. designates a particular kind of current money for payment

Sec. 8 When payable to order

When it is drawn payable to the order of a specified person or to him or his order. It may be drawn
payable to the order of:
a. a payee who is not a drawer, maker or drawee
b. the drawer or maker
c. the drawee
d. two or more payees jointly
e. one or more of several payees
f. the holder of an office for the time being
The payee must be named or otherwise indicated with certainty
Sec. 9 When payable to bearer
a. when it is expressed to be so payable
b. when payable to person named therein or bearer
c. when payable to the order of fictitious person or non-existing person and such fact was known to the
person making it so payable
d. when the name of the payee does not purport to be the name of any person
e. when the only or last indorsement is in blank

What is delivery?
Delivery means the transfer of possession, actual or constructive, from one person to another. It may be
by the maker or drawer or thru authorized agent.

Are negotiable instruments legal tender?

No, Section 52 of the new cemtral bank act provides that only notes and coins issued by bangko sentral
are considered as legal tender.

What is restrictive endorsement?

a. prohibits further negotiation of the instrument
b. constitutes the indorsee the agent of the indorser
c. vests title in the indorsee in trust for or to use of some other person
But the mere absence of words implying power to negotiate does not make it restrictive.

What is accommodation party?

Sec. 29 An accommodation party is one who has signed the instrument as maker, drawer, acceptor or
indorser, without receiving value therefor, and for the purpose of lending his name to some other person.
Such a person is liable on the instrument to a holder for value, notwithstanding such holder at the time of
taking the instrument knew him to be only an accommodation party.
What is ante dated and post dated?
Ante dated: when it contains a date earlier than the true date of its issuance
Post dated: when it contains a date later than the true date of its issuance
Sec. 12
The instrument is not invalid for the reason that it is ante-dated or post-dated, provided it is not done for
illegal purpose. The person to whom an instrument so dated is delivered acquires the title thereto as of the
date of delivery

Sec. 14. Blanks; when may be filled. – (Complete Delivered)

Where the instrument is wanting in any material particular, the person in possession thereof has a prima
facie authority to complete it by filling up the blanks therein.
And a signature on a blank paper delivered by the person making the signature in order that the paper may
be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any
amount.
In order, however, that any such instrument when completed may be enforced against any person who
became a party thereto prior to its completion, it must be filled up strictly in accordance with the authority
given and within a reasonable time.
But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and
effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in
accordance with the authority given and within a reasonable time.

Sec. 15. Incomplete instrument not delivered. – (Incomplete Undelivered)

Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without
authority, be a valid contract in the hands of any holder, as against any person whose signature was placed
thereon before delivery.

Sec. 16. Delivery; when effectual; when presumed. – (Complete Undelivered)

Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for
the purpose of giving effect thereto.
As between immediate parties and as regards a remote party other than a holder in due course, the
delivery, in order to be effectual, must be made either by or under the authority of the party making,
drawing, accepting, or indorsing, as the case may be; and, in such case, the delivery may be shown to
have been conditional, or for a special purpose only, and not for the purpose of transferring the property
in the instrument.
But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties
prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no
longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by
him is presumed until the contrary is proved.
Exceptions to persons not liable on the instrument not named
General rule – as a general rule, only person whose signatures appear on an instrument are liable thereon
Exceptions:
a. Where a person signs in a trade or assumed name
b. the principal is liable if a duly authorized agent signs on his own behalf
c. in case of forgery, the forger is liable even if his signature does not appear on the instrument
d. where the acceptor makes his acceptance of a bill on a separate paper
e. where a person makes a written promise to accept a bill before it is drawn

Sec. 17
Sec. 23 Forged signature; effect of. - When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or
to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired
through or under such signature, unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.
What is a material particular?
A material particular is not limited to sec. 1 It may include any important detail that affects the tenor of
the instrument or the rights of the parties.
Sec. 18 Liability of person signing in trade or assumed name. - No person is liable on the instrument
whose signature does not appear thereon, except as herein otherwise expressly provided. But one who
signs in a trade or assumed name will be liable to the same extent as if he had signed in his own name.
Sec. 19 Signature by agent; authority; how shown. - 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 be established as in other cases of agency.
Sec. 20 Liability of person signing as agent, and so forth. - Where the instrument contains or a person
adds to his signature words indicating that he signs for or on behalf of a principal or in a representative
capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words
describing him as an agent, or as filling a representative character, without disclosing his principal, does
not exempt him from personal liability.
1. duly authorized
2. adds words to his signature indicating that he signs as an agent
3. disclose his principal
Sec. 21 Signature by procuration; effect of. - A signature by "procuration" operates as notice that the
agent has but a limited authority to sign, and the principal is bound only in case the agent in so signing
acted within the actual limits of his authority.
Sec. 22. Effect of indorsement by infant or corporation.- The indorsement or assignment of the
instrument by a corporation or by an infant passes the property therein, notwithstanding that from want of
capacity, the corporation or infant may incur no liability thereon.
Sec. 23. Forged signature; effect of. - When a signature is forged or made without the authority of the
person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or
to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired
through or under such signature, unless the party against whom it is sought to enforce such right is
precluded from setting up the forgery or want of authority.
What is negotiation?
Is the transfer of a negotiable instrument from one person to another made in such a manner as to
constitute the transferee the holder thereof.

How is a bearer instrument negotiated?

If the instrument is payable to bearer, it is negotiated by mere delivery alone without indorsement

Sec. 33 Kinds of indorsement. - An indorsement may be either special or in blank; and it may also be
either restrictive or qualified or conditional.

How is an indorsement made?

Sec. 31 The indorsement must be written on the instrument itself or upon a paper attached thereto. The
signature of the indorser, without additional words, is a sufficient indorsement.

Absence of consideration? Sec. 28

Sec. 28. Effect of want of consideration. - Absence or failure of consideration is a matter of defense as
against any person not a holder in due course; and partial failure of consideration is a defense pro tanto,
whether the failure is an ascertained and liquidated amount or otherwise.
Absence of consideration means a total lack of any valid consideration for the contract, in consequence of
which the alleged contract must fail.
Failure of consideration means the failure or refusal of one of the parties to do, perform or comply with
the consideration agreed upon. Something was agreed upon as consideration but for some cause, such
agreed consideration failed to materialize.
INSTANCES OF A LIFE OF A NEGOTIABLE INSTRUMENT
1. Preparation and signing
2. Issue
3. Negotiation
4. Presentment for Acceptance in some BOE
5. Acceptance
6. Dishonor by non-acceptance

Fictitious Payee Rule:

If an actual, existing and living payee is not the intended recipient of the proceeds of the check, the payee
is considered a fictitious payee and the check is a bearer instrument/
Exception:
A showing of commercial bad faith on the part of the drawee bank, or any transferee will work to strip it
of this defense.

TRANSFER AND NEGOTIATION

1. Type of transfer
2. Distinction between negotiation and assignment
3. Methods of Negotiation.
4. Indorsement

TYPES OF TRANSFER
1. Assignment:
Transfer of title to the instrument, with the assignee generally taking only such title as his assignor has,
subject to all defenses available against his assignor.
2. Negotiation:
Transfer of a negotiable instrument from one person to another made in such a manner as to constitute the
transferee the holder thereof
3. By Operation of Law:
Such as by succession, by insolvency

NEGOTIATION VS ASSIGNMENT
N – refers only to NI
A- refers generally to a ordinary contract

N – the transferee is a holder

A – the transferee is an assignee

N – a holder in due course may acquire a better right than that of priority
A – Generally, an assignee merely steps into the shoes of the assignor

N - a general indorser warrants the solvency of prior parties

A – assignor does not warrant the solvency unless expressly stipulated or insolvency is known to him.

N – indorser is not liable unless there be presentment and notice of dishonor

A – an assignor is liable even without notice of dishonor

N – governed by NIL
A – Art. 1624 to 1635 Civil Code

METHODS OF NEGOTIATION
1. Ordere instrument
2. Bearer insturument

INDORSEMENTS
Legal transaction effected by the writing of ones own name at the back or paper attached
General Rule: indorsement must be of the entire instrument (but partial indorsement may constitute a
valid assignement binding between parties)
Exception: where instrument has been paid in part, it may be indorsed as to the residue
KINDS OF INDORSEMENTS
Special Indorsement:
Specifies the person to whom or tot whose order; the instrument is to be payable for

Blank Indorsement:
Specifies no indorsee, payable to bearer and may be negotiated by delivery
May be converted to special indorsement by contract consistent with character of indorsement.

Restrictive Indorsement:
When the indorsement either:
1. prohibit further negotiation of instrument
2. constitutes the indorsee the agent of the indorser
3. Vests the title in the indorsee in trust for or to use of some other persons. But mere absence of words
implying power to negotiate does not make an indorsement restrictive.

Qualified Indorsement:
Constitutes the indorser a mere assignor of the title to the instrument.

Conditional Indorsement:
Right of the indorsee is made to depend on the happening of a contingent event.

Absolute Indorsement:
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

Joint Indorsement
Indorsement of instrument payable to 2 or more persons; all must indorse in order for the transaction to
operate as a negotiation.
Irregular Indorsement
A person who, not otherwise a party to an instrument, places thereon his signature in blank before
delivery.

RULES ON INDORSEMENT
1. effect of transfer without indorsement
2. indorsement of a bearer instrument
3. striking out the indorsement
4. when prior party (reacquire) may negotiate

Effect of transfer without indorsement

a. transfer vests in the transferee such title as the transferor had therin (assignment) and
b. the right to have the indorsement of the transferor

Indorsement of a bearer instrument

Where an instrument, payable to bearer is indorsed specially, it may nevertheless be further negotiated by
delivery, but the person indorsing specially is liable as indorser to only such holders as make title through
his indorsement.

Striking out indorsements

The holder may
CREDIT TRANSACTIONS
Warehouse Receipts Law
General Bonded Warehouse Law
Letters of Credit
Trust Receipts Law

Negotiable Documents of Title

What is a negotiable document of title? 3 types?

Art. 1507. A document of title in which it is stated that the goods referred to therein will be delivered to
the bearer, or to the order of any person named therein is a negotiable document of title.
Bill of Lading – a document that serves as evidence of receipt of goods for shipment issued by a common
carrier.
Quedan – a document of title which is being issued covering sugar that are stored in a warehouse
Warehouse Receipt – a document of title which is issued by a warehouseman. Under the said law the
warehouseman is a person lawfully engaged in the business of storing goods for profit
Dock Warrant – is an instrument given by dock owners to an importer of goods warehoused on the dock
recognizing the importers title to the said goods.

What are the three-fold purpose of a warehouse receipt?

1. it is a receipt. The document of title is proof that the carrier or the warehouseman received the goods
2. It is a contract. It is an evidence of the agreement of the parties and is proof of the terms and conditions
of the contract
3. As a negotiable document of title, it can be negotiated and the goods follow the document of title
whenever it is negotiated.

Warehouse Recipts
Who is a warehouseman?
is a person lawfully engaged in the business of storing goods for profit

Are warehouse receipts negotiable?

CC, A document of title is negotiable if:
a. the document states that the goods will be delivered to the bearer
b. the goods are to be delivered to the order of a person named in the document
Cases where warehouse receipts are non-negotiable?
Sec. 4 WRL, A receipt in which it is stated that the goods received will be delivered to the depositor or to
any other specified person, is a non-negotiable receipt.

How do you negotiate warehouse receipts?

How to negotiate.
Basic Rules:
Bearer document of title – by mere delivery
Order document of title – indorsement plus delivery
Indorsement can be special or blank
NEGOTIATION OF WAREHOUSE RECEIPTS
A. By Delivery
1. Where by the terms of the receipt, the warehouseman undertakes to deliver the goods to the bearer; or
2. Where by the terms of the receipt, the warehouseman undertakes to deliver the goods to the order of a
specified person, and such person or a subsequent indorsee of the receipt has indorsed it in blank or
bearer.
The bearer document is not always a bearer document. A special indorsement has the effect of converting
the bearer instrument into an order instrument.

B. By Indorsement Coupled with Delivery (Warehouse receipt negotiated by indorsement coupled by

delivery)
1.If the receipt states that the goods are to be delivered to the order of a person named therein;
2. Effects when indorsement is necessary but the negotiable receipt was only delivered:
a. The transferee acquires title against the transferor;
b. There is no direct obligation of the warehouseman to deliver the goods to such holder of the receipt;
c. The transferee can compel the transferor to complete the negotiation by indorsing the instrument
(Sec.43, WRL).The negotiation takes effect on the date of the indorsement only.

Instances where warehouse receipts may be negotiable by delivery

Two types of bearer documents,
First – a document of title that states that the goods shall be delivered to bearer. In other words, what
appears on the face of the document is the undertaking of the carrier or warehouseman to deliver the
goods to bearer.
Second – a document that is originally an order document of title in the sense that the goods are to be
delivered to the order of a specified person but it was subsequently indorsed in blank or to bearer.
Both cases, negotiation may be by delivery.

Is a bearer document of title always a bearer document?

Clearly, an indorsement in blank converts an order document of title into a bearer document of title.
However, even if the document is originally a bearer document of title because of its face it states that the
goods are to be delivered to bearer, a special indorsement can be made and such special indorsement
converts the document to an order instrument in the sense that the document can be negotiated only
through indorsement and delivery.
In other words, a bearer document of title is not always a bearer document of title

Effects of negotiation of a warehouse receipt?

Negotiation of the document has the effect of manual delivery so as to constitute the transferee the owner
of the goods.

Obligation of the warehouseman?

Under the WRL
1. Deliver the goods upon a demand made either by the holder of a receipt for the goods or depositor.
2. Obligation to deliver arises only if the demand is accompanied by:
a. An offer to satisfy the warehouseman‟s lien;
b. An offer to surrender the receipt, if negotiable, with such indorsement as may be necessary for the
negotiation of the receipt; and
c. A readiness and willingness to sign, when the goods are delivered, an acknowledgement that they have
been delivered, if such signature is requested by the warehouseman.

Persons who may issue warehouse receipts?

By any warehouseman
Warehousemans defenses for undelivery or misdelivery?
1. Loss or destruction of the goods without the fault of the bailee
2. Failure to satisfy the bailee‟s lien
3. Failure to surrender a negotiable document of title
4. Lack of willingness to sign acknowledgement
5. Delivery to a claimant with better right
6. Where the document of title is attached by a creditor
7. Receipt by the bailee of a request by or on behalf of the person lawfully entitled to a right of property
or possession in the goods, not to make such delivery
8. The bailee has information that the delivery about to be made was to one not lawfully entitled to the
possession of the goods
9. Attachment/levy of the goods by a creditor where the document is surrendered or its negotiation is
enjoined or the document is impounded

Letters of Credit
What is a letter of credit?
Is a letter from a merchant or bank or banker in one place, addressed to another, in another place
requesting the addressee to pay money or deliver goods to a third party named therein, the writer of the
letter undertaking to provide him the money for the goods to repay him.
Parties to a letter of credit?
1. the buyer or importer
2. the seller, also referred as the beneficiary
3. the opening bank which is usually the buyers bank which actually issues the letter of credit;
4. the notifying bank
Distinct and independent contracts of letter of credit?
Contract between the buyer and seller?
Who issues letter of credit?

Independence principle?
What characterizes letters of credit, as distinguished from other accessory contract, is the
ENGAGEMENT OF THE ISSUING BANK TO PAY THE SELLER ONCE THE DRAFT AND
THE REQUIRED SHIPPING DOCUMENTS ARE PRESENTED TO IT.
In turn, this arrangement ASSURES THE SELLER OF PROMPT PAYMENT, INDEPENDENT
OF ANY BREACH OF THE MAIN SALES CONTRACT.

Doctrine of strict compliance?