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NEGOTIABLE INSTRUMENTS LAW (Act No. 2031) JUNE 2, 1911

NEGOTIABLE INSTRUMENTS - GENERAL PRINCIPLES

PURPOSE OF CODIFICATION
Chief purpose was to produce uniformity in the laws of the different states upon this important subject, so that the citizens of each state might know the rules which would be applied to their notes, checks, and other negotiable paper in every other state in which the law was enacted, since it is an absolute impossibility for the commercial purchaser Second purpose was to preserve the law as nearly as possible as it then existed

COMMON FORMS OF NEGOTIABLE INSTRUMENTS
1. Promissory notes
2. Bills of exchange
3. Checks, which are also bills of exchange, but of a special kind

PROMISSORY NOTE, SECTION 184
“A negotiable promissory note, within the meaning of this act, is an unconditional promise in writing by one person to another, signed by the maker (1), engaging to pay on demand or at a fixed or determinable future time (2), a sum certain in money

(3) to order or to bearer
(4). Where a note is drawn to the maker’s own order, it is not complete until indorsed by them.” Essentially a promise in writing to pay a sum certain in money The promise is to pay on demand or on a fixed or determinable future time General characteristics: amount; place where contract to pay is executed; due date; absolute promise to pay something; payable to order/bearer; payee; maker of the note

BILL OF EXCHANGE, SECTION 126
“A bill of exchange is an unconditional order in writing addressed by one person to another signed by the person giving it (1), requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time (2) a sum certain in money

(3) to order or to bearer”
General characteristics: the order or command to pay; drawer/maker; drawee

CHECK
A bill of exchange drawn on a bank payable on demand
TO WHOM INSTRUMENTS MAY BE PAYABLE
1. Bearer
2. Order
3. To a specified person

WHEN IS IT PAYABLE TO BEARER?
1. When it is expressed to be so payable
2. When it is payable to a person named therein or bearer

WHEN IS IT PAYABLE TO ORDER?
1. When it is expressed to be payable to the order of a specified person 2. To a specified person or his order

WHEN IS IT PAYABLE TO A SPECIFIED PERSON?
When the instrument is payable to a specified person named in the instrument and no other

PARTIES TO A PROMISSORY NOTE
1. Maker—the person who executes the written promise to pay 2. Payee, if the instrument is payable to order—the person in whose favor the promissory note is made payable 3. Bearer, if the instrument is payable to bearer

PARTIES TO A BILL OF EXCHANGE
1. Drawer—the person who executes the written order to pay 2. Payee, if the instrument is payable to order—the person in whose favor a bill of exchange is drawn payable 3. Bearer, if the instrument is payable to bearer

4. Acceptor—the drawee who signifies his assent to the order of the drawer. It is only when he accepts the bill that he becomes a party thereto and liable thereon.

OTHER PARTIES TO NEGOTIATED INSTRUMENTS
1. Indorser and
2. Indorsee, in the case of instruments payable to order
3. Persons negotiating by mere delivery
4. Persons to whom the instrument is negotiated by delivery

INDORSER AND INDORSEE
When the negotiation is by indorsement completed by delivery, the parties added are the indorser and indorsee Indorser—the one who negotiates the instrument
Indorsee—the one to whom the instrument is negotiated by indorsement

WHERE INSTRUMENT IS PAYABLE TO BEARER
• Where the instrument is payable to bearer, it can be negotiated by mere delivery without necessity of indorsement HOLDER The payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof If the instrument is payable to order, he who is the payee or indorsee and who is in possession thereof If the instrument is payable to bearer, he who is in possession thereof

ISSUE
First delivery of the instrument, complete in form to a person who takes it as a holder

DELIVERY
Consists principally of placing the transferee in possession of the instrument, but it must be accompanied by the intent to transfer title “every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto”

NEGOTIATION
• Transfer of an instrument from one person to another as to constitute the transferee the holder of the instrument • Mode of transferring an instrument
• Effect is to make the transferee the holder of the instrument

HOW INSTRUMENT PAYABLE TO BEARER IS NEGOTIATED
May be negotiated by mere delivery

HOW INSTRUMENT PAYABLE TO ORDER IS NEGOTIATED
Must be negotiated by indorsement completed by delivery
Indorsement is necessary to make the transferee the indorsee and delivery is necessary to place the transferee in possession of the instrument

INDORSEMENT
Legal transaction, effected by the writing of one’s own name on the back of the instrument or upon a paper attached thereto, with or without additional words specifying the person to whom or to whose order the instrument is to be payable whereby one not only transfers one’s full legal title to the paper transferred but likewise enters into an implied guaranty that the instrument will be duly paid

SPECIAL INDORSEMENT
Specifies the person to whom or to whose order the instrument is to be payable

BLANK INDORSEMENT
One that doesn’t specify the person to whom or to whose order the instrument is to be payable

NEGOTIATION, INDORSEMENT, DELIVERY, COMPARED.
1. Indorsement is merely the first step in the process of negotiating an instrument which is payable to order 2. Where the instrument is payable to order, neither is delivery equivalent to negotiation 3. But where the instrument is payable to bearer, delivery is equivalent to negotiation

PRESENTMENT FOR ACCEPTANCE
Exhibiting the bill to the drawee and demanding that he accept it, that is, signify his assent to the order or command of the drawer

ACCEPTANCE
♣ Signification of the drawee of his assent to the order of the drawer

DISHONOR BY ACCEPTANCE
♣ Where the bill is presented for acceptance, and acceptance is refused by the drawee, or cannot be obtained, or where presentment for acceptance is excused, and the bill is not accepted

PRESENTMENT FOR PAYMENT
♣ Consists of exhibiting the instrument to the person primarily liable thereon and demanding payment form him on the date of maturity

DISHONOR BY NON-PAYMENT
♣ Where the instrument is presented for payment and payment is refused or cannot be obtained, or where presentment for payment is excused and the instrument is overdue and unpaid

NOTICE OF DISHONOR
♣ When an instrument has been dishonored by non-payment or non-acceptance

DISCHARGE
• An instrument is discharged by payment in due course by or on behalf of the principal debtor

PARTIES PRIMARILY AND SECONDARILY LIABLE
• Under the Negotiable Instruments Law, the person primarily liable on an instrument is the person who by the terms of the instrument is absolutely required to pay the same • All other parties are secondarily liable

IN BILLS OF EXCHANGE
• The acceptor is the one primarily liable
• He is absolutely required to pay the instrument as he engages that he will pay it according to the tenor of his acceptance

SECONDARY LIABILITY OF DRAWER
• By the mere drawing of the instrument, the drawer assumes the liability stated in Section 61 • The general tenor of the liability of the drawer is that he will pay the bill if the drawee doesn’t accept or pay the bill. • In other words, he is not absolutely required to pay the bill—if the drawee pays, then he is not required to pay. It is only when the drawee doesn’t pay that he will be required to pay.

SECONDARY LIABILITY OF INDORSER
♣ He will pay the instrument if the person primarily liable will not pay.

SECONDARY LIABILITY OF ONE NEGOTIATING BY DELIVERY
♣ By merely delivering an instrument payable to bearer, without saying anything more, the person negotiating by mere delivery assumes the liability mentioned in Section 65. ♣ Under said section, the general tenor of liability is similar to that of an indorser

IN PROMISSORY NOTES
♣ The maker is primarily liable
♣ Agreement of the maker is that he will pay the instrument according to the tenor

FUNCTION OF NEGOTIABLE INSTRUMENTS
1. Substitute for money
2. Increase the purchasing medium in circulation

PAYMENT BY NEGOTIABLE INSTRUMENTS
♣ W/N the giving and taking of a promissory note or bill of exchange is prima facie absolute payment as in the case of money or merely a prima facie conditional payment? ♣ The delivery of the promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when, through the fault of the creditor, they have been impaired

PRINCIPAL FEATURES OF NEGOTIABLE INSTRUMENTS
1. Negotiability
2. Accumulation of secondary contracts as they are transferred from one person to another

NEGOTIABILITY
♣ Attribute or property whereby a bill, note or check passes or 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 sums payable for himself free from defense.

PRIMARY PURPOSE OF NEGOTIABILITY
♣ To allow bills and notes the effect which money, in the form of government bills or notes, supplies in the commercial world ACCUMULATION OF SECONDARY CONTRACTS
♣ Most important characteristic of negotiable instruments is the accumulation of secondary contracts which they pick up and carry with them as they are negotiated from one person to another ♣ Advantage: they improve as they pass from hand to hand, as more debtors are added

I. General Concepts
Negotiable Instrument (2005 Bar Exam) - 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. (Reviewer on Commercial Law, Sundiang and Aquino)

Functions (Purpose) of Negotiable Instrument:
Substitute for money
Medium of exchange
Tool used in commercial transaction.

Two Distinctive Features/Characteristics of NI: (2005 Bar Exam) Negotiability - it is that attribute or property whereby a bill or note or check 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 to collect the sum payable for himself free from defenses. Requisites of Negotiability: (1996 Bar Exam)

It must be in writing and signed by the maker or drawer;
Must contain an unconditional promise or order to pay a sum certain in money; Must be payable on demand, or at a fixed or determinable future time; Must be payable to order or to bearer; and
Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

Accumulation of Secondary Contracts - secondary contracts are picked up and carried along with Negotiable Instruments as they are negotiated from one person to another; or in the course of negotiation of negotiable instruments, a series of juridical ties between the parties thereto arise either by law or by privity. The indorsers become secondarily liable to the holder.

Distinctions between Negotiable Instruments and Non-Negotiable Instruments

|Negotiable INSTRUMENTS |Non-Negotiable INSTRUMENTS | |1. Must contain all requisites of sec.1 |1. Does not contain all requisites of sec.1 | |2. Transferable by negotiation and assignment. |2. Transferable by assignment only | |3. HDC can have rights better than his transferor |3. A transferee acquires no better right than his transferor | |4. Prior parties warrant payment (secondary liability). |4. Prior parties do not warrant payment but merely the legality of his title. | |5. Governed by NIL |5. NIL only applies by analogy | |6. Transferee is a holder in due course. |6. Transferee is assignee only. | |7. Defenses generally not available. |7. All defenses available against last transferee. |

Classes of Negotiable Instruments: (2002 Bar Exam)
Promissory Note (PN) - 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. 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. Check- a bill of exchange drawn on a bank payable on demand. Kinds:

Manager’s / Cashier’s Check – drawn by a bank on itself and therefore, it is a primary obligation of the bank. It is accepted in advance by the act of its issuance and is not subject to countermand by the payor after indorsement. The bank’s manager signs manager’s check while cashier’s check is signed by the bank cashier. Memorandum Check – it is like an ordinary check except that the word “memorandum,” “mem” or “memo” is written upon the face of the check, signifying that the drawer engages to pay the bona fide holder absolutely, and not upon a condition to pay upon presentment at maturity and if due notice of the presentment and non-payment should be given. Certified Check – one drawn by a depositor upon funds to his credit in a bank which a proper officer of the bank certifies will be paid when duly presented for payment Traveler’s check – one upon which the holder’s signature must appear twice, one to be affixed by him at the time it is issued and the second o counter-signature, to be affixed by him in the presence of the payee before it is paid, otherwise it is incomplete Crossed check (1995, 1996, 2004, 2005 Bar Exams) – when 2 parallel lines are drawn across its face or across a corner thereof. If the name of a bank appears between the parallel lines, the check is said to be specially crossed, and payment should be made only if presented by the named bank. If no name appears between the parallel lines, the check is said to be generally crossed, and payment should be made only upon presentment by some bank. Effects of crossing a check:

That the check may not be encashed but only be deposited in the bank; That the check may be negotiated only once to one who has an account with a bank; and That the act of crossing the check serves as a warning to the holder that the check has been issued for a definite purpose so that he must inquire if he has received the check pursuant to that purpose. Stale check – one which has not been presented for payment within a reasonable time after its issue

Iron Clad Rule: Prohibits the countermanding of payment of certified checks. (Republic of the Philippines v. PNB. GR No. 16106. December 1, 1961)

Bills in Set: one composed of several parts, each part numbered and containing a reference to the other parts, the whole of the parts constituting but one bill. Rights of holders where parts are negotiated separately:

If both are HDC, the holder whose title first accrues is considered the true owner of the bill. But the person who accepts or pays in due course shall not be prejudiced. Obligations of holder who indorses 2 or more parts of the Bill in Set: The person shall be liable on every such part.

Every indorser subsequent to him is liable on the part he has himself indorsed, as if such parts were separate bills.

Distinctions between a Negotiable Instrument and a Negotiable Document of Title (2005 Bar Exam)

|NEGOTIABLE INSTRUMENT |NEGOTIABLE DOCUMENT OF TITLE | |The subject is Money |1. The subject is goods | |2. Is itself the property with value |2. The document is a mere evidence of title – the things of value being the goods | | |mentioned in the document | |3. Has all the requisites of Sec 1 of NIL |3. Does not have these requisites | |4. A holder of NI may run after the secondary parties for payment if |4. Intermediate parties are not secondarily liable if the document is dishonored | |dishonored by the party primarily liable | | |5. A holder, if HDC, may acquire rights over the instrument better than |5. A holder can never acquire rights to the document better than his predecessors | |his predecessors | |

|Promissory Note |Bill of Exchange | |1.Unconditional...

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