YASAY NOTES – NEGOTIABLE INSTRUMENTS LAW

BASIC PRINCIPLES
1. A negotiable instrument is a written contract for the payment of money which is
intended as a substitute for money and passes from one person to another as
money, in such a manner as to give a HOLDER IN DUE COURSE the right to hold the
instrument FREE FROM DEFENSES available to prior parties.
2. The rule that one can pass no better title to personal property than he himself has
does not apply to negotiable instruments.
3. Doubts should be resolved in favor of negotiability.
4. When transferability is limited or restricted, the paper may be said to be non-
negotiable.
5. Negotiability ends when the instrument is (i) restrictively indorsed or (2)
discharged by payment or otherwise.
6. N.I.L. can be applied to non-negotiable instruments only by analogy in cases where
there is no law that can be applied.
7. Two features of a negotiable instruments –
a. Negotiability – right of the holder to hold and collect free from the following
defenses
i. Infirmity in the instrument
ii. Defect in the title of any prior parties
iii. Defenses available to prior parties among themselves
b. Accumulation of secondary contracts – creates liabilities for each indorsee
who indorses and becomes indorsers. There is a series of juridical ties
between the parties thereto that arise either by law or by privity.

NEGOTIABLE NON-NEGOTIABLE
Governed by NIL NIL applies only by analogy
Transferrable by negotiation or assignment
Only by assignment
Can be Transferee can never be a holder in due
course; assignee only
Only real defenses All defenses, real and personal, are available
against the last transferee
For an order instrument, indorsement is Assignment is made by delivery
required for negotiation

SECTION 1. FORM OF NEGOTIABLE INSTRUMENTS

An instrument to be negotiable must conform to the following requirements:
a. 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 to BEARER; and
e. (Applies to BoX) Where the instrument is addressed to a drawee, he must be named
or otherwise indicated therein with reasonable certainty.

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SECTION 2. WHAT CONSTITUTES CERTAINTY AS TO SUM –

A sum payable is a sum certain

Will not affect certainty as to sum:

a. payment with interest
b. by stated installments
c. by stated installments, with accelaration clause (provision that upon default in
payment of any instalment or of interest, the whole shall become due)
d. with exchange, whether at a fixed or current rate
e. with costs of collection or an attorney’s fees, in case payment shall not be made at
maturity

SECTION 3. WHEN PROMISE IS UNCONDITIONAL

- UNQUALIFIED order or promise to pay

Will not affect unconditionality:

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 transaction which gives rise to the instrument.

BUT: An order or promise to pay out of a PARTICULAR FUND is NOT UNCONDITIONAL

Particular fund out of which PAYMENT is to Particular fund out of which

be made REIMBURSEMENT is to be made
NON-negotiable negotiable

SECTION 4. DETERMINABLE FUTURE TIME; WHAT CONSTITUTES

-Expressed to be payable:
a. At a fixed period after date or sight
b. On or before a fixed or determinable future time; 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

BUT: An instrument payable upon a CONTINGENCY is NOT negotiable, and the happening
of the event does not cure the defect.

Once a bearer instrument, always a bearer instrument. Negotiated by mere delivery

SECTION 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.

Negotiability, not affected by a provision which:

a. Authorizes the SALE OF COLLATERAL securities in case the instrument be not paid
at maturity

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b. Authorizes a CONFESSION OF JUDGMENT 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

SECTION 6. OMISSIONS NOT AFFECTING NEGOTIABILITY

a. Not dated
b. Does not specify the value given or that any value had been given therefore
i. Why: because it is presumed that it is given for a consideration
c. Does not specify the place where it is drawn or the place where it is payable
d. Bears a seal
e. Designates a particular kind of current money in which payment is to be made

SECTION 7. WHEN PAYABLE ON DEMAND

a. so expressed to be payable:
i. on demand, or
ii. at sight, or
iii. on presentation
b. no time for payment is expressed

When an instrument is issued, accepted, or indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it, payable on demand.

SECTION 8. WHEN PAYABLE TO ORDER

Drawn payable to:
a. The order of a specified person
b. To him or his order

It may be drawn payable to the order of:

a. A payee who is not the maker, drawer, or drawee
b. The drawee or maker
c. Drawee
d. Two or more payees jointly
e. One or more several payees
f. The holder of an office for the time being

SECTION 9. WHEN PAYABLE TO BEARER

a. So expressed
b. Payable to a person named therein or bearer (e.g. Payable to Jorge or bearer)
c. Order of a FICTITIOUS or NON-EXISTING person, such fact was known to the person
making it so payable
d. Name of the payee does not purport to be the name of any person (e.g. “pay to
cash”)
e. When the only or last indorsement is an INDORSEMENT IN BLANK

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SECTION 14. BLANKS; WHEN MAY BE FILLED – INCOMPLETE, DELIVERED

1. 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.
2. 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.
a. BUT, it must be:
i. Filled up STRICTLY in accordance with the AUTHORITY given and
ii. Within a REASONABLE TIME
3. BUT IF ANY SUCH INSTRUMENT, AFTER COMPLETION, IS NEGOTIATED TO A
HDC, IT IS VALID AND EFFECTUAL FOR ALL PURPOSES IN HIS HANDS, AND HE
MAY ENFORCE IT AS IF IT HAD BEEN FILLED UP STRICTLY WITH THE
AUTHORITY GIVEN AND WITHIN A REASONABLE TIME.

SECTION 15. INCOMPLETE, UNDELIVERED

If completed, it will not be a valid contract in the hands of ANY holder, as against any
person WHOSE SIGNATURE WAS PLACED THEREON BEFORE DELIVERY.

SECTION 16.
Every contract on a negotiable instrument is INCOMPLETE AND REVOCABLE until
delivery of the instrument for the purpose of giving effect thereto.

The defense of want of delivery of complete instrument is a personal defense. Where the
instrument is in the hands of a HDC, a valid delivery thereof by all parties prior to him so as
to make them liable to him is conclusively presumed.

PRESUMPTION OF VALID AND INTENTIONAL DELIVERY: Where the instrument is in 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.

SECTION 17 (e)
Where a signature is so ambiguous that there is doubt whether it is a bill or note, the holder
may treat it as either at his election

SECTION 18.
No person is liable on the instrument whose signature does not appear thereon.
One who signed in a trade or assumed name will be liable to the same extent as if he had
signed in his own name.

SECTION 19. An agent may sign a negotiable instrument on behalf of his principal.

SECTION 20. LIABILITY OF PERSON SIGNING AS AGENT

Not liable if he signed on behalf of the principal or in a representative capacity.

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But the mere addition of words describing him as an agent, or as filling a representative
character, without disclosing the principal, does not exempt him from personal liability.

SECTION 23. EFFECT OF FORGED SIGNATURE

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, i.e.
o Those who warrant
o Those who ratify
o Those who were negligent

Rules on forgery:
1. ONLY THE FORGED SIGNATURE IS WHOLLY INOPERATIVE, not the instrument
itself, and not the genuine signatures
2. Forgery of an indorsement of an order instrument, the following are not liable:
a. The person whose signature was forged
b. All prior to such person
i. Ratio: Payment under a forged signature is not to the drawer’s order
3. 1. In case of forgery of the indorsement of the payee of the check, the DRAWEE
BANK CANNOT DEBIT THE DRAWER’S ACCOUNT and the loss shall be borne by the
drawee bank.
2. The depositary or collecting bank is liable to the drawee in case of forged
indorsement because it guarantees all prior indorsements.
4. When the forged signature is not necessary to the holder’s title, forgery may be
disregarded.

SECTIONS 124 AND 125. MATERIAL ALTERATION

MATERIAL ALTERATION – any alteration which changes the DATE, SUM payable, TIME or
PLACE of payment, number or relation of parties, or medium or currency of payment, or
WHICH ALTERS THE EFFECT OF THE INSTRUMENT IN ANY EFFECT.

EFFECT: It avoids the instrument. Except: as against:

1. The party who made, authorized or assented to the alteration
2. Subsequent indorsers (HDC can enforce it against them according to its original
tenor)

FRAUD IN EXECUTION FRAUD IN INDUCEMENT

Induced to sign an instrument not knowing He knew that it is a N.I. but induced to sign
that it is a N.I. by fraud; consent was vitiated by fraud
Real defense Personal defense

SECTION 29 – LIABILITY OF AN ACCOMMODATION PARTY – SURETY

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He is liable on the instrument to a holder for value.

SECTION 30. WHAT CONSTITUTES NEGOTIATION?

- Bearer instrument – DELIVERY
- Order instrument – DELIVERY + INDORSEMENT

SECTION 48. STRIKING OUT INDORSEMENT

The holder may at any time strike out any indorsement which is not necessary to his title.
The indorser whose indorsement is struck out, and all indorsers subsequent to him, are
thereby RELIEVED from liability on the instrument.

Section 52. What constitutes a HOLDER IN DUE COURSE

A holder who has taken the instrument under the following conditions:
1. It is COMPLETE and REGULAR upon its face
2. He became the holder of it BEFORE IT WAS OVERDUE, and WITHOUT NOTICE that it
has been previously dishonoured, if such was the fact
3. That he took it in GOOD FAITH and FOR VALUE
4. At the time it was negotiated to him, HE HAD NO NOTICE OF ANY INFIRMITY in the
instrument or defect in the tile of the person negotiating it.

Only when there are peculiar defects on the face of the instrument will the holder be required
to make inquiries before accepting.

SECTION 122. RENUNCIATION BY HOLDER

- An absolute and unconditional renunciation made at or after the maturity of the
instrument discharges the instrument.
- But a renunciation does not affect the rights of a HDC without notice.
- A renunciation must be IN WRITING,
o Unless the instrument is delivered up to the person primarily liable thereon.

Promissory note, defined

- an unconditional promise in writing made 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

Check, defined
- a bill of exchange drawn on a bank payable on demand

SECTION 186. WITHIN WHAT TIME A CHECK MUST BE ISSUED

(SHELTER RULE?) A check must be presented for payment WITHIN A REASONABLE TIME
(banking practice – 6 months) after its issue or the drawer will be discharged from liability
thereon to the extent of the loss caused by the delay.