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Ne go tiabl e I nstr ume nt s L aw EH 4 0 3 — M id t e r m s ( 2 018- 2019 ) At t y.

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Negotiable Instruments Law


MIDTERMS (AY 2018-2019)
Based on the Syllabus and Discussions of Atty. Bernardino Amago

Credits to my class EH 403 (2018), EH403 & EH404 Notes (2016-2017), EH403 Notes
(2017-2018), case digests online and other notes. :D

Introduction
A. Historical background of the NIL
B. Application and purpose of the NIL
C. Functions and importance of negotiable instruments (SMMM)
D. Characteristics or features of negotiable instruments

Form and Interpretation


a. Formal requirements of negotiability in general (Sec 1)
i. Must be in writing
ii. Must be signed by the maker or drawer (Sec 18, 19, 21, & 22)
iii. Must contain an unconditional promise or order to pay (Sec. 3)
iv. the instrument must be payable in sum certain in money (Sec. 2)
a. With Interest 6
b. As to installments 7
c. As to default in payment of installment 7
d. As to exchange 7
Acceleration Clause 7
v. Must be payable at a fixed or determinable future time or on demand
(Sec. 4 & 7)
Payable on Demand 8
Payable at a determinable future time 8
vi. Must be payable to order or bearer (Sec. 8 & 9)
Payable to bearer: 9
Payable to the order of: 9
vii. Drawee must be named 9
b. Kinds of Negotiable Instruments
1. Promissory Note (Sec. 184) 9
Types of Promissory Note: 9
2. Bill of Exchange (Sec. 126) 10
i. Bill not an assignment of funds (Sec. 127) 10
ii. Bill addressed to more than one drawee (Sec. 128) 10
iii. Inland and foreign bills of exchange (Sec. 129) 10
iv. When bill may be treated as promissory note (Sec. 130) 10
3. Check (Sec. 185) 10
c. Parties
i. Holder in due course (Sec. 52, 58 & 59) 10
ii. Holder not in due course (Sec. 53) 11
iii. Referee in case of need (Sec. 131) 11
d. Additions and Omissions Not Affecting Negotiability
i. Terms used (Sec. 10) 11
ii. Additions (Sec. 5, 11 & 12) 11
iii. Omissions (Sec. 6) 11
e. Defects (refer also to Sec. 65 & 66)
i. Undated (Sec. 13) 11
ii. Incomplete but delivered (Sec. 14) 12
iii. Incomplete and Undelivered (Sec. 15) 12
iv. Complete but Undelivered (Sec. 16) 12
v. Forgery (Sec. 23) 12
vi. Material Alteration (Sec. 125 and 124) 12
f. Ambiguity (Sec. 17)

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Introduction 3) Medium for immediate payment


‣ Instead of bringing cash, you “tender” payment but
A. HISTORICAL BACKGROUND OF THE NIL it does not really mean it extinguishes the obligation
The practice of using negotiable instrument started during 4) Medium of credit transaction
the Pre-Christian era, or during the medieval times. ‣ What is represented or the value of the negotiable
1. English Bills of Exchange Act of 1882 (BEA) — This instrument is the credibility of the person or his
was the first law codified by the english parliament. credit.
2. Uniform Negotiable Instruments Law of 1896
(UNIL) — which revised and codified the law merchant The value of the negotiable instrument is the credibility of
in the US as there was much confusion and lack of the person who issues it or the credit standing of the
uniformity then in the court decisions. person.
‣ We patterned our NIL to this law with very slight
modifications. D. CHARACTERISTICS OR FEATURES OF
3. Uniform Commercial Code (UCC) — which seeks to NEGOTIABLE INSTRUMENTS
simply and modernize the law of commercial
transactions. Replaced in part by Article 3 and in part Important Features of a Negotiable
by other articles of the Uniform Negotiable Instrument
Instruments Act of US 1896. 1) Negotiability — refers to the quality or attribute of an
instrument to be transferrable from one person to
4. Code of Commerce — law governing negotiable another, and whoever holds that instrument, holds
instruments before the passage of the Act No. 2031. such against defenses of prior parties.
All articles were repealed except those of crossed
checks. 2) Accumulation of secondary contracts — as NI is
being transferred from one person to another, there is
5. Act No. 2031 — our own Negotiable Instruments Law, added an additional party to the instrument.
with the purpose to facilitate transactions in
commercial paper and to promote free flow of credit.
‣ Enacted on: February 3, 1911 Negotiability
✏ What is an important feature of a negotiable instrument?
‣ Published on: March 4, 1911
✤ A: Negotiability
‣ Effectivity: June 2, 1911 (90 days after its publication)

✏ What is negotiability as a characteristic of a negotiable


B. APPLICATION AND PURPOSE OF THE NIL instrument?
(1) Can be transferred;
1. The act applies only to:
a. Negotiable instruments (2) holder in due course free from personal defenses
of prior parties we
b. Those instruments which meet the requirements
laid down in Section 1 of the law. (3) person who receives may have prior rights than
previous holders
2. The Civil code has no effect on its provisions except to
supply any deficiency in cases not covered by the Act.
(Art. 18 of the NCC) ✏ Distinguish assignment from negotiability.
✤ You can only assign rights that you have thus if you
3. For the purpose of facilitating, not hindering or
don't have a right over the object you cannot assign
hampering transactions in commercial paper.
a right even if there is physical transfer
✤ Spring cannot rise higher than its source
The NIL is the primary law governing negotiable
instruments. It finds its relevance that it’s convenient to
deal with it. There is less risk and better security ✏ I stole the mango of your classmate and then I gave it to
compared to dealing with cash. you, will you have rights over the mango?
✤ No. You can only assign rights to what you have. I do
not have rights and so, what I transferred was theft.
C. FUNCTIONS AND IMPORTANCE OF
NEGOTIABLE INSTRUMENTS (SMMM)
Accumulation of secondary contracts
1) Substitute for money ✏ What is another important feature?
‣ Instead of bringing with you loads of money, you can ✤ Accumulation of secondary contracts
just bring with you a checkbook.
‣ Check still cannot be considered as legal tender, it is As negotiable instrument is being transferred from one
still not money. person to another, there is an added party. There are as
2) Medium for exchange many contracts and there are parties. Each contract that
‣ Transactions are perfected by the delivery or he has is separate and distinct.
exchange of negotiable instruments

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Note: It’s because of these two features that NI becomes applicable to a bill of exchange payable on demand
apply to a check.
an important medium in a business transaction. It has also
become a choice of medium for most businessmen.
Because of such popularity, there is a need to regulate ✏ Why is it considered a special kind of bill of exchange?
that. ✤ The Bank is always the drawee.
✤ Another thing it makes it special is that it is always
✏ How would you know what an instrument is negotiable or payable on demand.
not?
✤ General:
The first time of giving or delivery the negotiable
□ Used in commercial transactions instrument is called “issuance”. The subsequent deliver or
□ It conforms to the requirements in Section 1 of transfer or indorsement is called “negotiation”.
the NIL
There is a need to distinguish the type of negotiable
Types of Negotiable Instruments instrument. Once it is paid, discharge.
✏ What are common types of negotiable instruments?
1) Promissory note If it is a bill of exchange, there is an additional step taken.
2) Bill of Exchange It contains an order addressed to the drawee. The drawee
3) Checks must be given the opportunity to accept. He will never be
bound unless he knows about it and accepts to be bound
✏ What can you understand of a promissory note? What is by the drawer.
the codal definition?
Sec. 184. Promissory note defined. – A negotiable Process of Negotiable Instrument from its birth
promissory note within the meaning of this Act is an
unconditional promise in writing made by one person Preparation → Signing → Issuance (first time) to payee →
to another, signed by the maker, engaging to pay on negotiation (subsequent transfers or assignments) →
demand, or at a fixed or determinable future time, a presented for payment to maker → instrument
sum certain in money to order or to bearer. Where a
note is drawn to the maker’s own order, it is not discharged
complete until indorsed by him.

Illustration 1: Atty. A(drawer) issues instrument to Ms.


There are only two parties involved: the one who made Limpangug (payee).
the instrument (maker) and the one who should be paid
(payee). Payee may either:
1) Present to drawee for acceptance
✏ As opposed to a bill of exchange which is? - So that the drawee will know that there is such an
Sec. 126. Bill of exchange defined – A bill of exchange order. Drawee be given the chance to accept or not
is an unconditional order in writing addressed by one
person to another, signed by the person giving it, accept.
requiring the person to whom it is addressed to pay on - Once the drawee accepts, he is considered an
demand or at a fixed or determinable future time a
sum certain in money to order or to bearer. acceptor and he holds himself primarily liable. He
stands in the shoes of the maker.
- Ms. Limpangug (payee) can keep the instrument
There are three persons involved. The one who drafted until maturity or further negotiate. After negotiating,
(drawer), the one to whom the order is addressed they may present the instrument for payment.
(drawee), and the person who is supposed to see what
was being ordered (payee).
2) May further negotiate even before presenting to
drawee for acceptance
✏ What is the difference between the definition of the bill
exchange and promissory note? - Before the instrument matures, present the
✤ Promissory note — Unconditional promise; only 2 instrument for acceptance. Once the instrument
reaches maturity, it is discharged.
parties; maker & payee
✤ Bill of exchange — Unconditional order; 3 parties;
drawer, drawee, payee Illustration 2: There is a bill of exchange, it was drafted
and issued to Ms. Lipangug. She presents it for
acceptance but drawee will NOT accept.
✏ Third common type is check. But it is only a special type of
✏ What happens to the order of the drawer?
negotiable instrument because it is a kind of bill of
exchange. ✤ Dishonored. When the instrument is dishonored,
Sec. 185. Check defined. – A check is a bill of you will have to do certain processes.
exchange drawn on a bank payable on demand. Except
as herein otherwise provided, the provisions of this Act

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Since nobody knows it was dishonored, Ms. Limpangog c. Must be payable on demand, or at a fixed or
can further negotiate. So she negotiates it and it reaches determinable future time
to Mr. Ibarita and he presents it for acceptance but d. Must be payable to order or to bearer
drawee still does not accept. e. Where the instrument is addressed to a drawee,
Mr. Ibarita must follow the process and he must send he must be named or otherwise indicated therein
notice of dishonor to other indorsers. If he fails to notify, with reasonable certainty.
the other parties of the instrument will be deemed
discharged.
i. MUST BE IN WRITING
❏ Dishonor by non-payment — dishonored because it ✏ Can I write the negotiable instrument on this table?
was not paid. ✤ Negotiable because there is no hard and fast rule as
❏ Dishonor by non-acceptance — dishonored because it to where it can be written for as long as it can be
was not accepted. transferred from one hand to another
✤ May however affect acceptability
✤ Writing may be made upon leather, cloth or any
Form and Interpretation substitute for paper as long as it is movable in
nature.
A. Formal Requirements of
Negotiability in General (Sec 1) ✏ It requires in writing, can I type it?
✤ Yes. It can be printed, stamped, etc. The only
✏ How do you draft a negotiable instrument? MEMORIZE!
requirement is that it must be in writing.
Sec. 1. Form of negotiable instruments. - An
instrument to be negotiable must conform to the
following requirements: (W-U-P-P-A)
(a) It must be in writing and signed by the maker or
ii. MUST BE SIGNED BY THE MAKER OR
drawer; DRAWER (SEC 18, 19, 21, & 22)
(b) Must contain an unconditional promise or order to Sec. 18. Liability of person signing in trade or
pay a sum certain in money; assumed name. - No person is liable on the instrument
(c) Must be payable on demand, or at a fixed or whose signature does not appear thereon, except as
determinable future time; herein otherwise expressly provided. But one who signs
in a trade or assumed name will be liable to the same
(d) Must be payable to order or to bearer; and extent as if he had signed in his own name.
(e) Where the instrument is addressed to a drawee, he Sec. 19. Signature by agent; authority; how shown. -
must be named or otherwise indicated therein with The signature of any party may be made by a duly
reasonable certainty. 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.
✏ If you look at all the requisites, does it apply to all Sec. 21. Signature by procuration; effect of. - A
negotiable instruments? signature by "procuration" operates as notice that the
✤ No. Distinguish first if the negotiable instrument is agent has but a limited authority to sign, and the
principal is bound only in case the agent in so signing
promissory note or bill of exchange. acted within the actual limits of his authority.
✤ Sec. 1 (a) to (d) applies to both promissory note and Sec. 22. Effect of indorsement by infant or
corporation.- The indorsement or assignment of the
bill of exchange. instrument by a corporation or by an infant passes the
✤ Sed 1 (e) applies only to bill of exchange. property therein, notwithstanding that from want of
capacity, the corporation or infant may incur no
liability thereon.
✏So what are the requisites for a promissory note to be
negotiable?
Illustration 1:
Negotiable Promissory Note
a. It must be in writing and signed by the maker I promise to Ms . Wee to pay Php 100,000.
b. Must contain an unconditional promise to pay a
sum certain in money 🦋
c. Must be payable on demand, or at a fixed or ✏ Is this a valid negotiable instrument?
determinable future time
✤ Not valid
d. Must be payable to order or to bearer
1. No words of negotiability (e.g. “payable to the
order”)
✏What are the requisites bill of exchange to be negotiable? 2. First requisite is not complete. Only signature
Negotiable Bill of Exchange (butterfly) is there. No name of the maker so how
a. It must be in writing and signed by the drawer would you know who is the maker.
b. Must contain an unconditional order to pay a sum
certain in money

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Even if a cross is placed as a signature or a butterfly, it still ✤ It is made to depend on the sufficiency of the funds.
complies. What is important is that there is an intention to
be bound by the signature. ✏ From what case is this from?
✤ Metrobank vs CA
iii. MUST CONTAIN AN UNCONDITIONAL
PROMISE OR ORDER TO PAY (SEC. 3) Metrobank vs CA
Sec. 3. When promise is unconditional. - An ISSUE:
unqualified order or promise to pay is unconditional 1) Whether or not Metrobank can demand refund agaist Golden
within the meaning of this Act though coupled with: Savings with regard to the amount withdraws to make up with the
(a) An indication of a particular fund out of which deficit as a result of the dishonored treasury warrants.
reimbursement is to be made or a particular 2) Whether or not treasury warrants are negotiable instruments
account to be debited with the amount; or
(b) A statement of the transaction which gives rise to HELD: No. Metrobank is negligent in giving Golden Savings the
the instrument. impression that the treasury warrants had been cleared and that,
consequently, it was safe to allow Gomez to withdraw.
But an order or promise to pay out of a particular fund
is not unconditional. Without such assurance, Golden Savings would not have allowed the
withdrawals. Indeed, Golden Savings might even have incurred
■ Condition — Any future event which may or may not liability for its refusal to return the money that all appearances
belonged to the depositor, who could therefore withdraw it anytime
happen. It could also refer to a past event not known to and for any reason he saw fit.
the parties which give rise to an obligation or It was, in fact, to secure the clearance of the treasury warrants that
extinguishes an obligation. Golden Savings deposited them to its account with Metrobank.
■ Unconditional — It is not contingent on the happening Golden Savings had no clearing facilities of its own. It relied on
Metrobank to determine the validity of the warrants through its own
of a future event; not subject to any condition. services. The proceeds of the warrants were withheld from Gomez
until Metrobank allowed Golden Savings itself to withdraw them
from its own deposit.
Unconditional though coupled with: Metrobank cannot contend that by indorsing the warrants in general,
1) An indication of a particular fund out of which Golden Savings assumed that they were genuine and in all respects
reimbursement is to be made or what they purport to be,ǁ in accordance with Sec. 66 of NIL. The
simple reason that NIL is not applicable to non negotiable
2) A particular account to be debited with the amount; or instruments, treasury warrants.
3) A statement of the transaction which gives rise to the No. The treasury warrants are not negotiable instruments. Clearly
stamped on their face is the word: non negotiable.ǁ Moreover, and this
instrument. is equal significance, it is indicated that they are payable from a
particular fund, to wit, Fund 501. An instrument to be negotiable
instrument must contain an unconditional promise or orders to pay a
Illustration 1: sum certain in money. As provided by Sec 3 of NIL an unqualified
order or promise to pay is unconditional though coupled with: 1st, an
indication of a particular fund out of which reimbursement is to be
I promise to pay X or his order Php 10,000 on or before 16 Aug. 2018. made or a particular account to be debited with the amount; or 2nd, a
statement of the transaction which give rise to the instrument. But an
Sgd. CK order to promise to pay out of particular fund is not unconditional.
The indication of Fund 501 as the source of the payment to be made
on the treasury warrants makes the order or promise to pay ―not
✏ Is this a negotiable instrument? Is it an unconditional conditionalǁ and the warrants themselves non-negotiable. There
should be no question that the exception on Section 3 of NIL is
promise? applicable in the case at bar.
✤ Yes

✏ What is a condition? Why was the secretary persistent? In order to be cleared


✤ Any future event which may or may not happen. and to allow Mr. Gomez to withdraw.
What was the term used in the case? Exasperated.
✏ Is it only applicable to future event? What if it was a past What was the reason why it wasn’t cleared? There was
event? forgery in the signatures of some payees.
✤ It could also refer to a past event not known to the What did the SC discuss about the nature of the treasury
parties which give rise to an obligation or warrants?
extinguishes an obligation.
Note: Not all treasury warrants are non-negotiable. It was
Illustration 2: just in this case that it was from a particular fund which
makes it non-negotiable.
I promise to pay X or his order Php 10,000 on or before 16 Aug. 2018.

Sgd. CK Illustration 3:
I promise to pay X or his order Php 10,000 on or before 16 Aug. 2018
and reimburse yourself from my salary.
✏ Is this negotiable? Sgd. CK
✤ No. This is a non-negotiable instrument.

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✏ What if I change it into this statement (above), does it ■ Supposed procedure: You give money and then the post
change anything? office will give the postal order. Instead of charging it to
✤ In this case, it makes the document negotiable. The their account, they charged it to the Bank of America.
reimbursement is not based on the particular fund. There was negligence on the part of Bank of America.
It does not affect the promise. The promise to pay is Postal money orders are not supposed to be negotiable
still an unconditional promise. instruments.

Illustration 4: Reasons why postal money order is not a negotiable


instrument.
I promise to pay X or his order Php 10,000 on or before 16 Aug. 2018
based on the terms of our contract. 1) Government in rendering service is not engaged in
commercial but in a governmental function.
Sgd. CK 2) Postal Money orders are subject to conditions which
does not fall with Section 3.
✏ What do you think of this instrument?
✤ It is still a negotiable instrument.
What other instruments did the SC say that was not a
✤ Basis: Sec. 3(b) The statement of the transaction
negotiable instrument in our cases in the syllabus?
which gives rise to the instrument.
✤ This is different with the terms and conditions. In this 1) Special withdrawal slips
document, it is merely stated that this was just a 2) Pawn Tickets
statement or basis of an obligation.
✤ A statement of what gave rise of the obligation to iv. THE INSTRUMENT MUST BE PAYABLE IN
pay does not render the order or the promise SUM CERTAIN IN MONEY (SEC. 2)
conditional. Sec. 2. What constitutes certainty as to sum — The
sum payable is a sum certain within the meaning of
this Act, although it is to be paid:
Is death a condition? (a) with interest; or
No. Death is not considered a condition because everyone (b) by stated installments; or
is certain to die. It is the exact time when death will (c) by stated installments, with a provision that, upon
happen is uncertain but death itself is certain. It is just a default in payment of any installment or of interest,
period. the whole shall become due; or
(d) with exchange, whether at a fixed rate or at the
current rate; or
Illustration 5: (e) with costs of collection or an attorney's fee, in case
payment shall not be made at maturity.
I promise to pay X or his order Php 10,000 on or before 16 Aug. 2018 if
I die.
Sgd. CK The sum payable is a sum certain
a. with interest; or
✏ What do you think of this instrument? b. by stated installments; or
✤ This is conditional because it is not sure if you die on c. by stated installments, with a provision that, upon
that certain date. default in payment of any installment or of interest, the
whole shall become due; or
✏ What if it says I die of cancer? d. with exchange, whether at a fixed rate or at the current
✤ It is still conditional because rate; or
e. with costs of collection or an attorney's fee, in case
payment shall not be made at maturity
Philippine Educators Co vs Soriano
ISSUE:Whether or not the postal money order in question is a
negotiable instrument. Sum certain in money — There is clarity as to the amount
HELD: No. It is not disputed that the Philippine postal statutes were to be received by the holder of the instrument.
patterned after similar statutes in force in United States.
The Weight of authority in the United States is that postal money
orders are not negotiable instruments, the reason being that in A. WITH INTEREST
establishing and operating a postal money order system, the
government is not engaged in commercial transactions but merely Illustration 1:
exercises a governmental power for the public benefit. Moreover,
some of the restrictions imposed upon money orders by postal laws I promise to pay X or his order Php 10,000 on 25 December 2018 with
and regulations are inconsistent with the character of negotiable interest.
instruments. For instance, such laws and regulations usually provide
for not more than one endorsement; payment of money orders may be Sgd. Y
withheld under a variety of circumstances.

■ Postal money orders are subject to conditions. ✏ Is that negotiable?

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✤ Yes. Even if there was indicated of how much 2) Exchange rate


interest, it is presumed to be paid with the legal
interest of 6%. The denomination or currency must be stated.

Even if an interest rate is added it still complies with the Illustration: (wrong illustration)
requirement that it is a sum certain in money because
additional statement with legal interest does not affect the To BPI
negotiability of the instrument. Pay Ms Y or order P10,000 based on the current exchange rate on 16
Aug 18.
However, if there is no specific legal interest rate, it is still a
common commercial knowledge that legal interest rate Sgd. Ms. V
is at 6%.
It may comply with the current exchange rate. However,
B. AS TO INSTALLMENTS there is no currency stated.
As to installments, it should specify:
1) amount of of installment Correct illustration:
2) specific due date To BPI
Pay Ms Y or order P10,000 based on the current exchange rate on 16
Without it, it renders the instrument non-negotiable. Aug 18 rate of Philippine peso to US dollars.

Sgd. Ms. V
Illustration 2:
I promise to pay X or his order Php 10,000 on two(2) equal monthly
installments e. As to Attorney’s Fees
This will not affect the negotiability of the instrument
Sgd. Y because when there is an imposition of attorney’s fee, it
presupposes that the obligation had already matured.
And once the instrument had already matured, it ceases
✏ Is that negotiable? to be negotiable, thus the stipulation of attorney’s fee and
✤ No. collection cost is irrelevant for negotiability.
A payment maybe made in installment but it should
contain due dates. On the given example, it does not Illustration: (wrong illustration)
contain any due dates. It should contain the exact dates,
the year, the month and the day of payment, along with To BPI
the amount to be paid on each installment dates. Pay Ms Y or order P10,000 based on the current exchange rate on 16
Aug 18 and attorney’s fees.

✏ If the instrument does not contain a date, is there no Sgd. Ms. V


presumption?
✤ Payable on demand This is non-negotiable because the attorney's fees in this
case does . This renders the amount uncertain already.
C. AS TO DEFAULT IN PAYMENT OF INSTALLMENT
Illustration 3: ACCELERATION CLAUSE
Does NOT affect the negotiability of the instrument.
To BPI
Pay Ms Y or order Php 10,000 on equal installments on 1 Dec. 2018 &
1 Jan 2019. Upon default, the entire amount must be paid. v. MUST BE PAYABLE AT A FIXED OR
DETERMINABLE FUTURE TIME OR ON
Sgd. Ms. V DEMAND (SEC. 4 & 7)
✏ Is that negotiable? Sec. 4. Determinable future time; what constitutes. -
An instrument is payable at a determinable future
✤ Yes. time, within the meaning of this Act, which is
expressed to be payable:
(a) At a fixed period after date or sight; or
D. AS TO EXCHANGE (b) On or before a fixed or determinable future time
To be negotiable then you have to indicate what are the specified therein; or
currencies involved. (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.
It should specify: An instrument payable upon a contingency is not
negotiable, and the happening of the event does not
1) Currency cure the defect.

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Sec. 7. When payable on demand. - An instrument is ■ Applies to both promissory note and bill of exchange.
payable on demand:
(a) When it is so expressed to be payable on demand, or
at sight, or on presentation; or d. No time for payment is expressed
(b) In which no time for payment is expressed. I promise to pay X or bearer Php 10,000.
Where an instrument is issued, accepted, or indorsed
when overdue, it is, as regards the person so issuing, Sgd. Y
accepting, or indorsing it, payable on demand.

PAYABLE ON DEMAND An Instrument which is OVERDUE


Where an instrument is issued, accepted, or indorsed
a. Expressed to be payable on demand, or
when overdue, it is, as regards the person so issuing,
b. At sight, or accepting, or indorsing it, payable on demand.
c. On presentation; or
d. No time for payment is expressed It is payable on demand to those persons:
1) Issuing
Illustration 1: 2) Accepting
I promise to pay X or bearer 10,000. 3) Indorsing

Sgd. Y
When someone negotiated this instrument now, indorsed
This is not a sum certain in money. There is no currency. it, or in the case of the bill of exchange someone must
have accepted it even the date stated there has already
elapsed then the instrument is deemed payable on
Illustration 2: demand.
I promise to pay X or bearer Php 10,000.

Sgd. Y PAYABLE AT A DETERMINABLE FUTURE TIME


a. At a fixed period after date or sight; or
It is now negotiable. Even if there is no date stated, it is b. On or before a fixed or determinable future time
payable upon demand. specified therein; or
c. On or at a fixed period after the occurrence of a
a. Expressed to be payable on demand specified event which is certain to happen, though the
I promise to pay X or bearer Php 10,000 upon demand. time of happening be uncertain.

Sgd. Y
a. At a Fixed Period after date or sight
I promise to pay X or bearer Php 10,000 30 days after date.
b. At sight
Sgd. Y
Means payable as soon as soon it is seen by the party
primary liable (drawee). “Date” here means the date of the instrument.
When there is no date stated, it pertains to the date when
■ Applies only to bill of exchange. the instrument was issued.
■ When it is presented to the drawee for acceptance.
b. On or before a fixed or determinable
There is no need for the instrument to be accepted. I promise to pay X or bearer Php 10,000 on or before 10 Dec 2018.
What it is required is it to be presented for acceptance.
Then it goes without saying that if the instrument is not Sgd. Y
accepted that you can order the acceptance of such
instrument.
c. On or at a fixed period after the
c. On Presentation occurrence of a specified event which is
certain to happen
I promise to pay X or bearer Php 10,000 on presentation. Illustration 1:
Sgd. Y I promise to pay X or bearer Php 10,000 15 days after his father’s death.

When the negotiable instrument is presented to the Sgd. Y


drawee or maker for payment.
Yes, it is determinable.

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The death of X’s father is an event which is certain to PAYABLE TO THE ORDER OF:
happen. 1) A payee who is not maker, drawer, or drawee;
2) Drawer or maker; or
Illustration 2: 3) Drawee; or
I promise to pay X or bearer Php 10,000 5 days before his death. 4) Two or more payees jointly; or
5) One or some of several payees; or
Sgd. Y
6) The holder of an office for the time being.
This is a non-negotiable instrument. The law states “after
the occurrence of a specified event”.

vii. DRAWEE MUST BE NAMED


Illustration 3:

I promise to pay X or bearer Php 10,000 5 days after his death


from malaria.
B. Kinds of Negotiable Instruments
Sgd. Y
1. PROMISSORY NOTE (SEC. 184)

This is a non-negotiable instrument. Sec. 184. Promissory note, defined. - A negotiable


This sets a condition that he must die of malaria. promissory note within the meaning of this Act is an
unconditional promise in writing made by one person
This creates a contingency. 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. Where a
vi. MUST BE PAYABLE TO ORDER OR BEARER note is drawn to the maker's own order, it is not
complete until indorsed by him.
(SEC. 8 & 9)
Sec. 8. When payable to order. - The instrument is
payable to order where it is drawn payable to the order
of a specified person or to him or his order. It may be
TYPES OF PROMISSORY NOTE:
drawn payable to the order of: 1. Bond — Evidence of an indebtedness of a public or
(a) A payee who is not maker, drawer, or drawee; or private corporation.
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or Difference of a bond from other types of PM is that (1) they
(e) One or some of several payees; or are made for relatively large sums of money, and (2) they
(f) The holder of an office for the time being.
are for long term purposes.
Where the instrument is payable to order, the payee
must be named or otherwise indicated therein with
reasonable certainty. 2. Certificate of Deposit — issues by a bank whenever a
Sec. 9. When payable to bearer. - The instrument is deposit is made to the bank.
payable to bearer:
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or Differentiated from a Savings Deposit in that there is a
bearer; or separate piece of paper that requires the bank to pay a
(c) When it is payable to the order of a fictitious or non- sum certain in money at a fixed or determinable future
existing person, and such fact was known to the time, whereas there is no promise made when you
person making it so payable; or
deposit to a Savings Deposit. The deposit slip is merely an
(d) When the name of the payee does not purport to be
the name of any person; or acknowledgement that a certain amount was deposited
(e) When the only or last indorsement is an indorsement to the bank for safe keeping.
in blank.
Differentiated from a Bank Note in that a Bank Note does
not refer to a certain bank account or particular deposit
PAYABLE TO BEARER: account, usually time deposit
1) Expressed to be so payable; or
2) Person named therein or bearer; or
3. Due Bill — Not just a mere acknowledgement that a
3) Order of a fictitious or non-existing person, and such debt is due and demandable, but one which contains
fact was known to the person making it so payable words of negotiability.
4) Name of the payee does not purport to be the name
of any person;
4. Mortgage Note
5) Only or last indorsement is an indorsement in blank.

2 Kinds:
1) Chattel Mortgage Note

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2) Real Estate Mortgage Note Sec. 129. Inland and foreign bills of exchange. - An
inland bill of exchange is a bill which is, or on its face
purports to be, both drawn and payable within the
PN with a stipulation that if the obligation is not paid on Philippines. Any other bill is a foreign bill. Unless the
contrary appears on the face of the bill, the holder may
demand or at the fixed or determinable future time, the treat it as an inland bill. 

mortgage of the property mentioned may be foreclosed.  

Sec. 130. When bill may be treated as promissory note.
- Where in a bill the drawer and drawee are the same
person or where the drawee is a fictitious person or a
Differentiated from a Collateral Note in that the latter is person not having capacity to contract, the holder may
secured by a pledge, not a mortgage. treat the instrument at his option either as a bill of
exchange or as a promissory note.
1. Title Retaining Note
Made by the Buyer and held by the Vendor when payment
for goods are not yet due. i. BILL NOT AN ASSIGNMENT OF FUNDS (SEC. 127)
Allows the seller to negotiate it even before the buyer has Sec. 127. Bill not an assignment of funds in hands of
paid for the goods. Title to the goods are retained by the drawee. - A bill of itself does not operate as an
assignment of the funds in the hands of the drawee
seller until full payment of the purchase price. available for the payment thereof, and the drawee is
2. Judgement Note not liable on the bill unless and until he accepts the
same.
Creates a power of attorney that states that the maker is
willing to accept whatever judgment in favor of the payee
on the debt in case the note is not paid, without going to ii. BILL ADDRESSED TO MORE THAN ONE DRAWEE
trial. (SEC. 128)
Not valid for being contrary to public policy as held in the Sec. 128. Bill addressed to more than one drawee. - A
case PNB vs Manila Oil Case: bill may be addressed to two or more drawees jointly,
whether they are partners or not; but not to two or
Confession of judgement that allows the payee to acquire more drawees in the alternative or in succession.
a judgement against a debtor is void for being against
public policy. It enlarges the field of fraud by allowing
creditor to bring cases to court even after payment is iii. INLAND AND FOREIGN BILLS OF EXCHANGE (SEC.
made, is tantamount to bargaining away 129)
Sec. 129. Inland and foreign bills of exchange. - An
the debtor’s right to a day in court, and deprives the inland bill of exchange is a bill which is, or on its face
debtor of his right to appeal. purports to be, both drawn and payable within the
Philippines. Any other bill is a foreign bill. Unless the
Distinguished from: contrary appears on the face of the bill, the holder may
treat it as an inland bill.
Cognavit actionem – the defendant acknowledges his
indebtedness to the plaintiff after the action has been iv. WHEN BILL MAY BE TREATED AS PROMISSORY
filed. NOTE (SEC. 130)
Relicta verificationem – the defendant withdraws his Sec. 130. When bill may be treated as promissory
defense. note. - Where in a bill the drawer and drawee are the
same person or where the drawee is a fictitious person
In both cases (Cognavit actionem and Relicta or a person not having capacity to contract, the holder
verificationem) there is a case filed before the court. may treat the instrument at his option either as a bill
of exchange or as a promissory note.
Acknowledgement of debt or withdrawal of defense has
happened when the trial has already begun.
Compared to judgment note, there is no trial at all. The 3. CHECK (SEC. 185)

debtor is precluded from participating in the trial. Sec. 185. Check, defined. - A check is a bill of
TN: The judgment note even though against public policy exchange drawn on a bank payable on demand. Except
as herein otherwise provided, the provisions of this Act
is still negotiable it’s just that the stipulation is void and the applicable to a bill of exchange payable on demand
rest of the instrument that is valid is still enforceable. apply to a check.
8. Installment Note
A note which allows payment of installment. C. PARTIES
i. HOLDER IN DUE COURSE (SEC. 52, 58 & 59)
Sec. 52. What constitutes a holder in due course. - A
holder in due course is a holder who has taken the
2. BILL OF EXCHANGE (SEC. 126)
instrument under the following conditions:
Sec. 126. Bill of exchange, defined. - A bill of (a) That it is complete and regular upon its face;
exchange is an unconditional order in writing (b) That he became the holder of it before it was
addressed by one person to another, signed by the overdue, and without notice that it has been
person giving it, requiring the person to whom it is previously dishonored, if such was the fact;
addressed to pay on demand or at a fixed or
determinable future time a sum certain in money to (c) That he took it in good faith and for value;
order or to bearer. 

 


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(d) That at the time it was negotiated to him, he had no Sec. 12. Ante-dated and post-dated. - The instrument
notice of any infirmity in the instrument or defect in is not invalid for the reason only that it is ante-dated or
the title of the person negotiating it. post-dated, provided this is not done for an illegal or
Sec. 58. When subject to original defense. - In the fraudulent purpose. The person to whom an
hands of any holder other than a holder in due course, instrument so dated is delivered acquires the title
a negotiable instrument is subject to the same defenses thereto as of the date of delivery.
as if it were non-negotiable. But a holder who derives
his title through a holder in due course, and who is not
himself a party to any fraud or illegality affecting the
instrument, has all the rights of such former holder in
iii. OMISSIONS (SEC. 6)
respect of all parties prior to the latter. Sec. 6. Omissions; seal; particular money. - The
validity and negotiable character of an instrument are
Sec. 59. Who is deemed holder in due course. - Every not affected by the fact that:
holder is deemed prima facie to be a holder in due (a) it is not dated; or
course; but when it is shown that the title of any
person who has negotiated the instrument was (b) does not specify the value given, or that any value
defective, the burden is on the holder to prove that he had been given therefor; or
or some person under whom he claims acquired the (c) does not specify the place where it is drawn or the
title as holder in due course. But the last-mentioned place where it is payable; or
rule does not apply in favor of a party who became (d) bears a seal; or
bound on the instrument prior to the acquisition of (e) designates a particular kind of current money in
such defective title. which payment is to be made.
But nothing in this Sec. shall alter or repeal any statute
requiring in certain cases the nature of the
ii. HOLDER NOT IN DUE COURSE (SEC. 53) consideration to be stated in the instrument.
Sec. 53. When person not deemed holder in due
course. - Where an instrument payable on demand is
negotiated on an unreasonable length of time after its
issue, the holder is not deemed a holder in due course.
E. DEFECTS (REFER ALSO TO SEC. 65 & 66)
Sec. 65. Warranty where negotiation by delivery and
so forth. — Every person negotiating an instrument by
delivery or by a qualified indorsement warrants:
iii. REFEREE IN CASE OF NEED (SEC. 131)
(a) That the instrument is genuine and in all respects
Sec. 131. Referee in case of need. - The drawer of a what it purports to be;
bill and any indorser may insert thereon the name of a
person to whom the holder may resort in case of need; (b) That he has a good title to it;
that is to say, in case the bill is dishonored by non- (c) That all prior parties had capacity to contract;
acceptance or non-payment. Such person is called a
referee in case of need. It is in the option of the holder (d) That he has no knowledge of any fact which would
to resort to the referee in case of need or not as he may impair the validity of the instrument or render it
see fit. valueless.
But when the negotiation is by delivery only, the
warranty extends in favor of no holder other than the
D. ADDITIONS AND OMISSIONS NOT immediate transferee.
AFFECTING NEGOTIABILITY The provisions of subdivision (c) of this Sec. do not apply
to a person negotiating public or corporation securities
other than bills and notes.
i. TERMS USED (SEC. 10)
Sec. 66. Liability of general indorser. - Every indorser
Sec. 10. Terms, when sufficient. - The instrument who indorses without qualification, warrants to all
need not follow the language of this Act, but any terms subsequent holders in due course:
are sufficient which clearly indicate an intention to
conform to the requirements hereof. (a) The matters and things mentioned in subdivisions
(a), (b), and (c) of the next preceding Sec.; and 


ii. ADDITIONS (SEC. 5, 11 & 12) (b) That the instrument is, at the time of his
indorsement, valid and subsisting;
Sec. 5. Additional provisions not affecting And, in addition, he engages that, on due presentment,
negotiability. - An instrument which contains an it shall be accepted or paid, or both, as the case may
order or promise to do any act in addition to the be, according to its tenor, and that if it be dishonored
payment of money is not negotiable. But the negotiable and the necessary proceedings on dishonor be duly
character of an instrument otherwise negotiable is not taken, he will pay the amount thereof to the holder, or
affected by a provision which: to any subsequent indorser who may be compelled to
(a) authorizes the sale of collateral securities in case the pay it.
instrument be not paid at maturity; or
(b) authorizes a confession of judgment if the
instrument be not paid at maturity; or i. UNDATED (SEC. 13)
(c) waives the benefit of any law intended for the Sec. 13.  When date may be inserted. - Where an
advantage or protection of the obligor; or instrument expressed to be payable at a fixed period
(d) gives the holder an election to require something to after date is issued undated, or where the acceptance
be done in lieu of payment of money. of an instrument payable at a fixed period after sight is
undated, any holder may insert therein the true date of
But nothing in this Sec. shall validate any provision or issue or acceptance, and the instrument shall be
stipulation otherwise illegal. payable accordingly. The insertion of a wrong date does
Sec. 11. Date, presumption as to. - Where the not avoid the instrument in the hands of a subsequent
instrument or an acceptance or any indorsement holder in due course; but as to him, the date so
thereon is dated, such date is deemed prima facie to be inserted is to be regarded as the true date.
the true date of the making, drawing, acceptance, or
indorsement, as the case may be. 

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ii. INCOMPLETE BUT DELIVERED (SEC. 14) (b)


(c)
The sum payable, either for principal or interest;
The time or place of payment:
Sec. 14. Blanks; when may be filled. - Where the (d) The number or the relations of the parties;
instrument is wanting in any material particular, the (e) The medium or currency in which payment is to be
person in possession thereof has a prima facie made;
authority to complete it by filling up the blanks therein.
And a signature on a blank paper delivered by the (f) Or which adds a place of payment where no place of
person making the signature in order that the paper payment is specified, or any other change or
may be converted into a negotiable instrument operates addition which alters the effect of the instrument in
as a prima facie authority to fill it up as such for any any respect, is a material alteration.
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 F. AMBIGUITY (SEC. 17)
authority given and within a reasonable time. But if
any such instrument, after completion, is negotiated to Sec. 17. Construction where instrument is
a holder in due course, it is valid and effectual for all ambiguous. - Where the language of the instrument is
purposes in his hands, and he may enforce it as if it ambiguous or there are omissions therein, the following
had been filled up strictly in accordance with the rules of construction apply:
authority given and within a reasonable time. (a) Where the sum payable is expressed in words and
also in figures and there is a discrepancy between
the two, the sum denoted by the words is the sum
payable; but if the words are ambiguous or
iii. INCOMPLETE AND UNDELIVERED (SEC. 15) uncertain, reference may be had to the figures to fix
Sec. 15. Incomplete instrument not delivered. - the amount;
Where an incomplete instrument has not been (b) Where the instrument provides for the payment of
delivered, it will not, if completed and negotiated interest, without specifying the date from which
without authority, be a valid contract in the hands of interest is to run, the interest runs from the date of
any holder, as against any person whose signature was the instrument, and if the instrument is undated,
placed thereon before delivery. from the issue thereof;
(c) Where the instrument is not dated, it will be
considered to be dated as of the time it was issued;
iv. COMPLETE BUT UNDELIVERED (SEC. 16) (d) Where there is a conflict between the written and
Sec. 16. Delivery; when effectual; when presumed. - printed provisions of the instrument, the written
Every contract on a negotiable instrument is provisions prevail;
incomplete and revocable until delivery of the (e) Where the instrument is so ambiguous that there is
instrument for the purpose of giving effect thereto. As doubt whether it is a bill or note, the holder may
between immediate parties and as regards a remote treat it as either at his election;
party other than a holder in due course, the delivery, in
order to be effectual, must be made either by or under (f) Where a signature is so placed upon the instrument
the authority of the party making, drawing, accepting, that it is not clear in what capacity the person
or indorsing, as the case may be; and, in such case, the making the same intended to sign, he is to be
delivery may be shown to have been conditional, or for deemed an indorser;
a special purpose only, and not for the purpose of (g) Where an instrument containing the word "I promise
transferring the property in the instrument. But where to pay" is signed by two or more persons, they are
the instrument is in the hands of a holder in due deemed to be jointly and severally liable thereon.
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.

v. FORGERY (SEC. 23)


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.

vi. MATERIAL ALTERATION (SEC. 125 AND 124)


Sec. 124. Alteration of instrument; effect of. - Where
a negotiable instrument is materially altered without
the assent of all parties liable thereon, it is avoided,
except as against a party who has himself made,
authorized, or assented to the alteration and
subsequent indorsers. 

But when an instrument has been materially altered
and is in the hands of a holder in due course not a
party to the alteration, he may enforce payment thereof
according to its original tenor.
Sec. 125. What constitutes a material alteration. -
Any alteration which changes:
(a) The date;

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