NIL THEORY.

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Negotiable Instruments Law

UNIVERSITY OF BAGUIO
SBAA
RFBT REVIEW

Principal characteristics of negotiable instruments

1. Negotiability
2. Accumulation of secondary contracts
Special types of promissory note
(1) Certificate of deposit – a written acknowledgment by a bank of the receipt of money or deposit
which the bank promises to pay to the depositor, bearer, or to some other person or order;
(2) Bond – an evidence of indebtedness issued by a public or private corporation, promising to
pay a sum at a specified time in the future;
(3) Bank note – an instrument issued by a bank for circulation as money payable to bearer on
demand; and
(4) Due bill – an instrument which shows on its face an acknowledgment by a person of his
indebtedness to another.
(5) Mortgage note – a note whereby the maker constitutes, to secure the amount due, a real or chattel
mortgage which the holder may foreclose if the maker defaults in the payment of the sum due.
(6) Title-retaining note – a combination of promissory note and a conditional sales contract whereby the
maker promises to pay the price of the goods he purchased from the payee, and agrees that the title to the
goods shall be retained by the payee until the maker has paid the purchase price in full.
(7) Collateral note – a note whereby the maker pledges securities, such as stocks, bonds or other
security devices, to secure payment of the amount due on the note. The note gives the holder the power to
dispose of the security if the maker defaults in the payment of the sum due.
Special types of bill of exchange
(1) Draft - a bill exchange payable on demand or at some future determinable time. The term is
often used for a bill of exchange. If drawn by a bank against its branch or another bank, it is called a bank
draft;
(2) Trade acceptance – a bill of exchange drawn by the seller on the purchaser of goods and
accepted by the latter; if the instrument is drawn against a bank instead of the purchaser, it is called banker’s
acceptance;
(3) Documentary bill of exchange – bill to which are attached the documents if title to be
surrendered to the drawee when he accepts or pays the bill; and
(4) Clean bill of exchange – bill to which such documents or title are not attached.

What instruments are beyond the scope of the Negotiable Instruments Law?
(1) Letter of credit- a letter issued by one merchant to another, or for
the purpose of attending to a commercial transaction. Reason: It is in favor of a determined person and not
to order. In Edit
modernwith the Docs
banking app
practice, it refers to an instrument or letter issued by a bank in behalf and for
the accountMake
of a buyer of merchandise
tweaks, leave comments, authorizing the seller
and share with to draw on the buyer for an amount on certain
terms stipulated;
others to edit at the same time.
(2) Treasury warrant – a warrant payable out of the funds of the national treasury or out of a
specific appropriation. Reason: It is an to pay out of a particular fund;
(3) Postal money NOorder – a specie orGET
THANKS draftTHE
drawn
APP by one post office upon another for an amount of
money deposited at the first office by the person purchasing the money order, and payable at the latter office
 (3) Postal money NOorder – a specie orGET
THANKS draftTHE
drawn
APP by one post office upon another for an amount of
money deposited at the first office by the person purchasing the money order, and payable at the latter office
to the payee named in the order. Reason: It is subject to restrictions under postal laws and regulations (e.g.,
only one indorsement is allowed) inconsistent with the character of a negotiable instrument. Moreover, in
establishing and operating a postal money order, the government is not engaged in commercial transactions
but merely exercises a governmental power for the public benefit;
(4) Bill of lading – a contract or receipt for the transport of goods and their delivery to the person
named therein, to order or to bearer. Reason: It is without an unconditional promise or order to pay a sum
certain in money;
(5) Certificate of stock – a written evidence of the holder’s ownership of shares in a corporation.
Reason: Same; and
(6) Warehouse receipt – a contract or for goods deposited with a warehouseman containing the
latter’s undertaking to hold and deliver the said goods to a specified person, to order or to bearer. Reason:
Same.

Requisites of negotiable instrument

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

Most common forms of negotiable instrument

1. Promisory note
Parties
1) Maker – the person who executes the written promise to pay.
2) Payee – the person in whose favor the promissory note is made payable.
Requisites of negotiable promissory note
1) It must be in writing and signed by the maker.
2) It must contain an unconditional promise to pay a sum certain in money.
3) It must be payable on demand or at a fixed or determinable future time.
4) It must be payable to order or to bearer.
2. Bill of Exchange
Parties
1) Drawer – the person who executes the written order to pay.
2) Payee – the person to whom the bill of exchange is drawn payable.
3) Drawee – the person who is given the command by the drawer to pay the payee.

Requisites of a negotiable bill of exchange

1) It must be in writing and signed by the drawer.
2) It must contain an unconditional order to pay a sum certain in money.
3) It must be payable on demand or at a fixed or determinable future time.
4) It must be payable to order or to bearer.
5) The drawee must be named or otherwise indicated therein with reasonable certainty.
3. Check
A check is a bill of exchange drawn on a bank payable on demand.
Parties
1) Drawer- he owns an account in the bank; the person who executes the written order to pay.
2) Payee- the person to whom the check is drawn payable.
 3) Drawee- the bank; the person who is given the command the drawer to pay the payee.
Requisites of a negotiable check
•Same as those for a bill of exchange except that a check is payable on demand.

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

1. Promise to pay
a. The word “promise” need not be used. Words of similar import may be used or that the promise is
implied from the wordings of the instrument
b. Mere acknowledge of a debt without a promise is not enough.
2. Order to pay
a. The word “order” or the phrase “I order you to pay” need not be used. Words of similar import
showing the drawer’s will that the instrument should be paid by the person to whom the order is given are
sufficient.
3. The promise or order should be unconditional
The promise or order should be absolute. If it is subject to be a condition, the instrument is not
negotiable and the happening of the condition does not cure the defect.
4. Sum payable must be certain in money and in money only
The sum payable must be certain in money and must be indicated in the instrument.

When the instrument is payable to order

An instrument is payable to order when it is drawn payable to the order of a specified person or to him
or his order. If the instrument is not payable to order it is rendered non- negotiable.
An instrument may be drawn payable to the order of:
1. A payee who is not the maker, drawer or drawee.
2. The drawer or maker.
3. The Drawee.
4. Two or more payees jointly.
5. One or some of several payees
6. To the holder of an office for the time being.

When the instrument payable to bearer

1. When it is expressed to be payable to bearer
2. When it is expressed to be payable to a person named therein (SPECIFIED PERSON) or bearer
3. When it is payable to the order of a fictitious or non-existing person, and such fact is known to the
person making it so payable.
4. When the name of the payee does not support to be the name of any person

The drawee must be named or otherwise indicated in the instruments with reasonable certainly
This requisites applies to a bill of exchange.

Mechanically incomplete but delivered instrument

a. Prima facie authority to fill up the blanks
b. Prima facie authority to fill up the instrument for any amount
Rights and obligations of parties in case of wrongful completion
a. Holder in due course
He can enforce the instrument as if it had been filled up strictly in accordance with the
authority given and within a reasonable time against;
1) the parties prior to the wrongful completion,
 1) the parties prior to the wrongful completion,
2) the party guilty thereof, and
3) the parties subsequent to the wrongful completion.

b. Holder not in due course

He can enforce the instrument as completed against:
1) the party guilty of the wrongful completion, and
2) the parties subsequent thereto.

Mechanically incomplete and undelivered instruments

The instruments shall not be valid in the hands of any holder, as against any person whose
signature was placed thereon before delivery.

Mechanical complete but undelivered instruments

An instrument although complete in form is an incomplete and revocable contract until the same
is delivered for the purpose of giving effect thereto. Stated otherwise, delivery is needed in order to make
the contract on the instrument complete. Accordingly, before delivery, the maker or drawer may cancel the
instrument. The contract under the instrument being revocable does not vest any right on the payee until the
same is delivered to him.

Signature by procuration
1. Procuration
“Procuration” means the act of appointing another as one’s agent or attorney.
2. Effect of signature by “procuration”
A signature by procuration operates as a notice that the agent has but limited authority to
sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his
authority.

Effect of indorsement or assignment of minor or a corporation

Title to the instrument passes. However, the minor does not incur any liability on the instrument
even to the holder in due course because his lack of capacity is a complete defense.
Forgery
By forgery is meant the counterfeit making the fraudulent alteration of any writing, and may consist in
the signing of another’s name, or the alteration of an instrument in the name, amount, description of the
person and the like, with intent to defraud.

Consideration
Consideration
Consideration is the cause of a contract
Two presumptions
1. Every negotiable instrument is deemed prima facie to have been issued for a consideration.
2. Every person whose signature appears on the instrument is presumed to have become party thereto
for value.

Holder for value

A holder for value is one who has given valuable consideration for an instrument issued or
negotiated to him. Where value has at any time been given to the instrument, the holder is also deemed a
holder for value with respect to all parties who become such prior to that time
Value is any consideration sufficient to support a simple contract. An antecedent or pre-existing debt
 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 a future time.

When lien on instrument constitutes holder for value

Where the holder has a lien on the instrument either arising from contract or by implication of law, he is
deemed a holder for value to the extent of his lien.

Concept, effect of want or absence, total failure, or partial failure, of consideration

1. Want of consideration
There is want or absence of consideration if no consideration was intended to pass
2. Failure of consideration
There is failure of consideration if consideration was intended to pass but there was inability to
have it performed or given
3. Partial failure of consideration
The consideration here was not completely given or performed

Accommodation party
An accommodation party is one who has signed the instrument as maker, drawer, acceptor or
indorser, without receiving value therefore, and for the purpose of lending his name to some other person.

Effect of payment of the instrument

a. Payment by the party accommodated
Payment in due course by the party accommodated if the instrument was made or accepted for his
accommodation discharges the instrument.He has no recourse against the accommodation party.
b. Payment by the accommodation party
When the payment is made by the accommodation party, he has the right to recover from
the accommodated party since the relation of the parties is that of principal and surety, the accommodation
party being the surety.

Negotiation
Modes of transfer of negotiable instrument
1. By assignment
2. By operation of law
3. By negotiation
Negotiation is the transfer of a negotiable instrument from one person to another in such a manner
as to constitute the transferee the holder of the instrument. Negotiation may be made as follows:
a. If the instrument is payable to order, negotiation may be made by indorsement completed by delivery.
b. If the instrument is payable to bearer, negotiation may be made by:
1) Mere delivery

Define indorsement.
Indorsement is the writing of the name of the indorser on the instrument itself or upon a paper attached
thereto in evidence of his transfer of the title to it, or of his assuring its payment, or both. The signature of
the indorser, without additional words, is a sufficient indorsement.

Kinds of Indorsement
1. Special Indorsement
2. Blank Indorsement
3. Restrictive Indorsement
3. Restrictive Indorsement
a. Kinds of restrictive indorsement – An indorsement that either:
1) Prohibits the further negotiation of the instrument.
2) Constitute the indorsee the agent of the indorser (Agency type)
3) Vests title in the indorsee in trust for or to the use of some other person. (Trust type)
4. Qualified indorsement
5. Conditional indorsement

Time of negotiation or indorsement

Every negotiation is deemed prima facie to have been effected before the instrument was overdue.
Exception: Where the indorsement bears a date after the maturity of the instrument.

Place of indorsement, presumption

Every indorsement is presumed prima facie to have been made at the place where the instrument is
dated, except where the contrary appears.

Continuation of negotiable character

An instrument negotiable in origin continues to be negotiable until:
1. It is respectively indorsed
2. It is discharged by payment or otherwise.

Liabilities of a person negotiating by qualified indorsement.

1. He warrants that the instrument is genuine and in all respects what it purports to be.
2. He warrants that he has good title to it.
3. He warrants that all prior parties had capacity to contract.
4. He warrants that he has no knowledge of any fact which would impair the validity of the instrument
or render it valueless.
Liabilities of a general indorser
Warranties 1, 2, and 3 – Same as the warranties of a person negotiating by delivery or by qualified
indorsement.
4. He warrants that the instrument is valid and subsisting.
5. He engages that on due presentment, the bill will be accepted or paid or both and that if it be
dishonored, he shall pay the bill to the holder or to any subsequent indorsee who may be compelled to pay it
to the holder

Presentment for Payment

It is the production of a bill of exchange to the drawee or acceptor for payment, or of a promissory note
to the party liable for payment of the same. The instrument must be exhibited to the person from whom
payment is demanded, and when it is paid must be delivered up to the party paying it.

Notice of Dishonor
means bringing either orally or in writing, to the knowledge of the drawer or indorser of an instrument
the fact that a specified negotiable instrument, upon proper proceedings taken, has not been accepted or has
not been paid, and that the party notified is expected to pay it.

Purpose of notice of dishonor

Purpose of notice of dishonor
The purpose is to enable the party to be charged or preserve and protect his rights against prior parties.
Grounds for the giving of notice of dishonor
1. Non-acceptance of the instrument, or
2. Non-payment of the instrument.

Effect of failure to give notice

Any drawer or indorser to whom such notice is not given is discharged.

Discharge of Negotiable Instruments

1. By payment in due course by or on behalf of the principal debtor.
2. By payment in due course by the party accommodated, where the instrument was made or accepted
for his accommodation.
3. By the intentional cancellation of the instrument by the holder.
4. By any other act which discharges a simple contract for the payment of money.
5. When the principal debtor becomes the holder of the instrument at or after maturity in his own right.

Checks

Kinds of checks
1. Memorandum check- a check which, across its face, is written the word “Memorandum” or “Memo”.
It is regarded as a contract whereby the drawer engages to pay the bona fide holder absolutely and not upon
a condition to pay upon presentment and non-payment.
2. Cashiers check – a check a drawn by the cashier of a bank in the name of the bank and against the
bank itself payable to a third person or order. It is accepted in advance by the bank by the act of its issuance.
3. Managers check – a check drawn by the manager of a bank in the name of the bank and against the
bank itself payable to a third person or order. Its effect and use is the same as those of a cashiers check.
4. Travellers check – a check used by traveler to supply him with funds in lieu of cash. It is signed by
the holder upon issuance, and countersigned by him before it is paid.
5. Certified check – a check which bears the word “certified” on its face, signifying that the check is
recognized and accepted by the bank as a valid appropriation of the amount specified thereon, and as drawn
against funds held by the bank.
6. Crossed check – a check which bears two parallel lines usually drawn diagonally on the upper left
portion of its face.