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Negotiable Instruments: (chapter 1- 29)

Characteristics of Negotiable instruments:

1. Negotiability – that quality or 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 of the prior parties or defenses available to
them among themselves.

2. Accumulation of secondary contracts – the most important feature of negotiable instruments, as they
are transferred from on person to another. Once an instrument is issued, additional parties can become
involved.

Section 1. Form of negotiable instruments. – An instrument to be negotiable must conform to the

following requirements:

1. It 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 bearer; and
5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated with
reasonable certainty.

Negotiable Instruments Law deals only with two kind or types of instruments, namely:

1. Promissory notes – those in which the issuer has promised to pay; and
2. Bills of exchange – those in which the issuer has ordered a third person to pay.

Checks are a special form or kind of bill of exchange.

Other instruments held negotiable under NIL:

1. PN types – Certificate of deposits, bank notes, due bills, bonds;

2. BOE types – Drafts, trade acceptances, and banker’s acceptances.

Doubt resolved in favor of negotiability

Where there is doubt as to the negotiability of the instrument, the courts have adopted the policy of
resolving in favor of the negotiability of the instrument.

It must be in writing and signed by the maker of drawer

 The instrument must be in writing; otherwise, nothing could be negotiated or passed from hand
to hand.
 The writing may be in ink, print or pencil. It may be upon parchment, cloth, leather or any other
substitute of paper.
 There is no such thing as an oral negotiable instrument

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 It must be signed by the maker or drawer. It may consist of mere initials, numbers or thumb marks,
but the holder must prove that what is written is intended as a signature of the person sought to
be charged.
 His signature is prima facie evidence of his intention to be bound as either maker or drawer.

It must contain an unconditional promise or order to pay a sum certain in money

 The promise or order must be unconditional; it must not be a subject to any condition or
contingency. It must be payable absolutely.
 The sum payable must be certain; hence, it must be definite and specific, to assure clarity in
determining the value of the instrument.

If the instrument calls for an act, other than the payment of money, it is not negotiable.

Except:

 Gives option to the holder to require something to be done in lieu of money. (Section. 5)

Elaborated in sec. 2, Sum is certain even if it is to be paid with:

1. Interest – at fixed rate, or at increased/ reduced rate.

2. In Installments – must be stated in the instrument:
a. Interest of each installment; and
b. Due date of each installment.
3. In installments with acceleration clause – a promise that if any installment or interest is not paid
as agreed, the whole shall become due.
4. With exchange – refers to instruments that are payable in foreign currency.
a. The exchange rate must be stated, otherwise the latest exchange rate will be the basis.
5. Cost of collection or attorney’s fees – in case payment shall not be made at maturity, there shall
be added to the amount due on the note costs of collection or an attorney’s fee.

Elaborated in sec. 3, when promise is unconditional.

1. Indication of particular fund from which the acceptor disburses himself after payment.
a. The particular fund indicated should only be the source of reimbursement and should
not be the direct source of payment; or else it becomes conditional and therefor non-
negotiable.
b. An instrument which contains a direction to debit a particular instrument is negotiable.
2. Statement of the transaction which gives rise to the instrument
a. The statement payable on demand, or at a fixed or determinable future time.

It must be payable on demand, or at a fixed or determinable future time.

Elaborated by Sec. 7, Instrument is payable upon demand if:

1. It is expressed to be so payable on sight or upon presentation

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a. An instrument payable on demand is due and payable immediately after its delivery. It is
a present debt due at once. Other words equivalent to demand: At sight, on presentation,
on call, at any time called for. At sight means that the instrument is payable as soon as it
is seen by the party primarily liable.
2. No period of payment is stipulated
a. When no time is expressed
3. Issued, accepted, or endorsed after maturity – when the maturity date has already lapses
(overdue) and the drawee is willing to pay, then it is payable on demand.

Elaborated by sec. 4, Instrument is payable upon a determinable future time if:

1. There is a fixed period after sight/ date.

a. Fixed period/ time: I promise to pay P or order the sum of P10,000 on October 29, 2019.
b. Fixed period after sight: Sixty days after sight, pay to the order of P the sum of P10,000.
c. Fixed period after date: Sixty days after date, I promise to pay P or order the sum of
P10,000
2. On or before a specified date/fixed determinable future time.
a. On or before a fixed time: on or before oct. 10 2010, I promise to pay P or order the sum
of P10K, the maker has the option to pay in advance or on the fixed date.
b. On or before a fixed determinable time: On or before the start of the next school
semester, I promise to pay P or order P10,000.
c. Determinable future time means a time that can be determined with certainty after the
execution of the instrument.
3. On or at a fixed date after the occurrence of an event certain to happen though the exact date is
not certain.
a. On the occurrence of a specified event: I promise to pay P or order the sum of P10,000
upon the death of his father.
b. After the occurrence of a specified event: thirty days after the death of his father, I
promise to pay P or order the sum of P10,000.

If the instrument is payable upon a contingency, the happening of the event does not cure the defect, it
is still non- negotiable.

Contingency – an uncertain future event or an event which may or may not happen.

It must payable to order or to bearer.

 If payable to order – indorsement plus delivery.

 If payable to bearer – delivery only.
 An instrument payable to a specified person only is not an order instrument, it is non- negotiable
as the promise or order is limited to paying one person only.
 The payee must be named or otherwise indicated with reasonable certainty.
 If there is no payee, there would be no one to indorse the instrument payable to order, therefor
useless to be considered negotiable.

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Elaborated by sec. 8, Instrument payable to order:

1. Where it is drawn payable to the order of a specified person – Pay the order of P the sum of P10k.
2. To a specified person or his order – Pay to P or order the sum of P10k.

It may be drawn payable to the order of:

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

2. The drawer or maker; or
3. The drawee; or
4. Two or more payees jointly; or
5. One or some of several payees; or
6. The holder of an office for the time being.

Elaborated by sec. 9, instrument is payable to bearer:

1. When it is expressed to be so payable – I promise to pay bearer P10k;

2. When payable to the person named or bearer – Pay to P or bearer P10k, or Pay to P or holder 10k;
3. Payable to order of fictitious or non-existent person and this fact was known to drawer – pay to
superman or order of P10,000 – since indorsement is obviously impossible, the manifest intention
of the drawer is to make the instrument a bearer paper negotiable by delivery.
4. Name of Payee not name of any person –pay to cash, pay to money, pay to cash or order, in
making the instrument payable to an impersonal payee, the maker or drawer intends the same
to be payable to drawer.
5. Indorsement in blank – blank indorsement is payable to bearer and may be negotiated by delivery.

One a bearer instrument, it is always a bearer instrument. For order instrument, despite indorsement, it
can be negotiated further by mere delivery.

Where the instrument is addressed to a drawee, he must be named or otherwise indicated with
reasonable certainty.

 This provision applies only to bills and checks.

 The reason for this last element is to enable the payee or holder to know upon who he is to call
for acceptance or payment.
 Where a bill is addressed to the treasurer of a corporation, the drawee is sufficiently indicated.

Section 6. The validity and negotiable character of an instrument are not affected by the fact that:

1. It is not dated; or
2. Does not specify the value given or that any had been given; or
3. does not specify the place where it is drawn or payable; or
4. bears a seal; or
5. Designates a particular kind of current money in which payment is to be made.

The instrument need not to follow the language of the law, any terms are sufficient which clearly indicate
an intention to conform to the requirements hereof. (sec. 10)

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If the instrument bears a date, it is presumed that said date is the date when it was made by the maker,
drawn by the drawer, accepted by the drawee, or indorsed by the payee or holder. (Sec. 11)

Ante-dating or post-dating an instrument does not render it invalid or non-negotiable provided this is not
done for an illegal purpose or to commit fraud. (Sec. 12)

The date may be inserted in an instrument when: (sec. 13)

1. An instrument expressed to be payable at a fixed period after date is issued undated.

2. Where acceptance of an instrument payable at a fixed period after sight is undated.

Effects:

1. Any holder may insert the true date of issuance or acceptance.

2. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder
in due course.
3. As to the holder in due course, the date inserted (even if it be the wrong date) is regarded as the
true date.

Steps in issuance of NI:

1. The mechanical act of writing the instrument completely and in accordance with the requirements
of Sec.1 NIL;
2. The delivery of the complete instrument by the maker or drawer to the payee or holder with the
intention of giving effects to it.

Requisites for a holder in Due Course: (sec. 52)

1. Receives the instrument complete and regular on its face;

2. Became a holder before it was overdue and had no notice that it had been previously dishonored
if such was the fact;
3. Takes the instrument for value and in good faith;
4. At the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect
in the title of the person negotiating it.

Presumption of consideration (sec. 24)

Every Negotiable instrument is deemed prima facie to have been issued for a valuable consideration, and
every person whose signature appears thereon to have becomes a party thereto for value.

The presumption is only prima facie, It may be rebutted or disproved by evidence to the contrary.

What Constitutes Value (sec. 25)

Value is any consideration sufficient to support a simple contract, an antecedent or pre-existing debt
constitutes value; and is deemed such whether the instrument is payable on demand or at a future time.

Abnormal Instruments:

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1. Incomplete but Delivered (sec. 14)

Two kinds:

1. Incomplete instrument but delivered

2. A signature and a blank piece of paper signed by the person for the purpose of converting it into
a negotiable instrument

Two requisites to bind the person who signed the instrument before delivery:

1. It must be filled-up strictly with the authority given; and

2. Within a reasonable time.

Effects to a holder in due course:

 If the instrument falls on the hands of a holder in due course, it is valid and effectual for all purpose
as though it was filled up strictly in accordance with the authority given and within a reasonable
time.

Rules where instrument is incomplete but delivered:

1. Authority to fill-up the blanks – the holder or the person in possession has prima facie authority
to complete an incomplete instrument by filling up the blanks therein.
2. Authority to put up any amount – a signature on a blank paper delivered in order that may be
converted into a Negotiable instrument operates as a prima facie authority to fill it up as such for
any amount.
3. Rights against party prior to complete – the instrument may be enforced only against a party
prior to completion if filled up strictly in accordance with the authority given and within a
reasonable time.

Note:

 In both cases 1 & 2, the presumption is that the blank was filled up in accordance with the
authority given and within reasonable time.
 The defense that the instrument had not been filled up in accordance with the authority given
and within reasonable time is not available as against a holder in due course.
 Sec. 14 raises a personal defense – if the last holder is a HIDC, maker is liable to pay.

2. Incomplete and undelivered (sec. 15)

Before delivery:

 An incomplete and undelivered instrument which is completed and negotiated without authority
is not a valid contract in the hands of ANY holder as against the person who signed the instrument.

After delivery:

 However, after delivery, persons who signed the instrument can be held liable to HIDC.
Persons liable:

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 General indorsers are liable because they warrant that the instrument is genuine and valid; thus,
they are estopped to deny the validity of the instrument
Note:
 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 against any person who signed
before delivery.
 The invalidity of the instrument is only with reference to the parties whose signatures appear
before and not after delivery.
 Sec. 15 raises a Real Defense – even if the last holder is a HIDC, Maker is not liable to pay.
(Indorsers are liable because they warrant that the instrument is genuine and in all respects what
it purports to be. As their signatures appear on the instrument after delivery, the instrument is
valid as to them.)
3. Complete but undelivered (sec. 16)
Effects of a complete but undelivered instrument:
 If a complete instrument is undelivered, then it is inoperative because delivery is a requisite to
liability. It is considered incomplete; thus, revocable.
 In the absence of delivery, the instrument though complete in all its particulars, there is no
contract.
In possession of an immediate party or a remote party:
 Immediate party – a party having been held to know of the conditions or limitations placed upon
the delivery of the instrument.
 Remote party – a party who is not in direct contractual relation to each other. They can be
transformed into “immediate party.”
 If a complete instrument is found in their possession, there is a prima facie presumption of
delivery (but subject to rebuttal).
Delivered conditionally or for a special purpose
 If delivery was conditional or for a special purpose only, then it is not for the purpose of
transferring title to the instrument. However, it is presumed to be made with the intention to
transfer title – this can be rebutted.
Effects to a HIDC:
 If a complete instrument is in the hands of a HIDC, a valid delivery thereof by all parties prior to
him is CONCLUSIVELY presumed.
Note:
 If the instrument is no longer in the possession of the 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.
 Sec. 16 raises a Personal Defense – if the last holder is a HIDC, Maker is liable to pay.

Rules of construction in case of ambiguity or omission: (Sec. 17 NIL)

1. Sums expressed in words and in figures are different.
 When there is a discrepancy between the sum expressed in words and the sum expressed in
figures, the words control.

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 However, when the words are ambiguous, reference may be had to the figures to determine the
true amount.
2. Date when stipulated interest to run not specified
 If the date when the stipulated interest is to run is not specified, the interest runs from the date
of the instrument or if undated from the date of its issue.
3. An undated instrument is considered dated as of the date of its issue.
4. Written and printed words in conflict
 In case of conflict between the written and printed provisions, the written provisions prevail.
Written words are deemed to express the true intention of the maker or drawer because they are
placed there by him.
5. Whether instrument bill or note in doubt
 In case of doubt as to whether the instrument is a bill or note, the holder may treat either at his
election.
6. Capacity in which the person signed in doubt
 In case of doubt due to the ambiguous location of the signature, the party who signed is deemed
to be an indorser, who assumes the least liability, and not as a maker or drawer.
7. Instrument signed by two or more persons – their liability may either be solidary or joint.
 I promise to pay, signed by two or more persons gives rise to solidary liability.
 We promise to pay, signed by two or more persons gives rise to joint liability.

Liability of person signing in trade (sec. 18)

General rule: A person whose signature does not appear on the instrument is NOT liable.
Exceptions:
1. One who signed in trade or assumed name (sec. 18)
2. A duly authorized agent (sec. 19)
3. A forger (sec. 23)

Liability of a person signing as agent (sec. 20)

General rule: An agent is not liable on the instrument if he were duly authorized to sign for or on behalf
of a principal.

Requisites:
1. He must be duly authorized:
2. He must add words to his signature indicating that he signs as an agent; and
3. He must disclose his principal.
If an agent does not disclose his principal, the agent is personally liable on the instrument.

Signature by procuration – operates as notice that the agent has a limited authority to sign.
Effects:
 The principal is only bound if the agent acted within the limits of the authority given.
 The person who takes the instrument is bound to inquire into the extent and nature of the
authority given.

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Effect of endorsement by infant or corporation (sec. 22)

General rule: Infants and corporations incur no liability by their indorsement or assignment of an
instrument.
 No liability attached to the infant or the corporation.
 The instrument is still valid and the indorsee acquires title.

Forgery (sec. 23)

Two kinds:
1. Forged signature; and
2. Signature made without authority.
Effects:
1. No right to retain;
2. No right to give a discharge; and
3. No right to enforce payment can be acquired.
It is only the forged signature or unauthorized signature that is declared to be inoperative.
 The instrument or other signatures which are genuine may still exist and be enforced.
Exceptions: Forged or unauthorized signature may produce rights or title, if:
A. The party against whom it is sought to enforce such right is precluded (prevented) from setting up the
forgery or want of authority.
Persons precluded from setting up the defense of forgery:
 The forger himself;
 Those who warrant or admit the genuineness of the signature in question (indorsers, persons
negotiating by delivery, and acceptors of BOE).
 Those who, by their acts, silence or negligence, are estopped from setting up the defense of
forgery, Estoppel.
B. Where the forged signature is not necessary to the holder’s title, in which case the forgery may be
disregarded.
Rights of parties in cases of forged indorsements:
1. Payable to order (PN) – the party whose signature was forged is not liable to any holder, even to
a HIDC. The indorsement, being forged is inoperative.
2. Payable to bearer (PN) – the party whose signature is forged is liable to a HIDC, but not to the
one who is not a HIDC. The reason is that the instrument being originally payable to bearer, it can
be negotiated by mere delivery. Hence, even if the indorsement is forged, the forgery may be
disregarded.
3. Payable to order (BOE) – the party whose signature was forged is not liable to any holder, even
to a HIDC. The indorsement, being forged is inoperative.
4. Payable to bearer (BOE) – when the bill is originally payable to bearer, the drawee may debit the
drawer’s account in spite of the forged indorsement. The reason is that the forged indorsement
is not necessary to the title of the holder.
Notes:
 Section 23 applies only to forged signatures or signatures made without authority.

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 Alterations such as to amounts or like fall under Section 124.

 Drawee bank is conclusively presumed to know the signature of its drawer.
 Forgery is a Real Defense.

What constitutes holder for value (sec. 26)

Holder for value – is one who has given a valuable consideration for the instrument issued or negotiated
to him.
 A holder of a NI is presumed to be a holder for value until the contrary is shown by any party who
claims otherwise.
When lien on instrument constitutes holder for value (sec. 27)
Where the holder has a lien on the instrument arising either from contract or by implication of law, he is
deemed a holder for value to the extent of his lien.
 One who has taken a NI as collateral security for a debt has lien on the instrument.

Effects of want of consideration (sec. 28)

 Absence or failure of consideration may be set up against a holder not a HIDC.
 Partial failure of consideration is a defense pro tanto.
Pro tanto defense is a defendant's counterclaim against the plaintiff for one-half the requested damages,
to the extent of the failure.
Absence of consideration means a total lack of any valid consideration on the contract, in consequence
of which the alleged contract must fail.
Failure of consideration means the failure or refusal of one party to do, perform or comply with the
consideration agreed upon.
 The defense of want of consideration is ineffective against a HIDC.
 A drawee who accepts the bill cannot allege want of consideration against the drawer.

Liability of an accommodation party (sec. 29)

Accommodation party - is one who signs the instrument as maker, drawer, acceptor, or indorser without
receiving value therefor and for the purpose of lending his name to some other person.
Effects:
 An accommodation party is liable to the holder for value notwithstanding that such holder knew
that of the accommodation.
 Want of consideration cannot be interposed by the accommodation party.
 An accommodation maker may seek reimbursement from a co-maker even in the absence of any
provision in the NIL; the deficiency is supplied by the New Civil Code.
 He may do this even without first proceeding against the debtor provided: a. He paid by virtue of
judicial demand; b. Principal debtor is insolvent.
Accommodation party vs. Regular Party:
Accommodation Party:
 Signs an instrument without receiving value therefore.
 Signs an instrument for the purpose of lending his name to some other person.

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 May always show by parol evidence that he is only such an accommodation party.
 Cannot avail of the defense of absence or failure of consideration against a HIDC.
 After paying the holder, may sue for reimbursement the accommodated party.

Regular Party:
 Signs the instrument for value.
 Does not sign for the purpose of lending his name to other person.
 Cannot disclaim or limit his personal liability as appearing on the instrument by parol evidence.
 May avail the defense of absence or failure of consideration against a HIDC.
 May not sue any subsequent party for reimbursement.

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