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Negotiable Instruments Reviewer

Negotiable Instruments Reviewer

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Published by Wenky Yang

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Published by: Wenky Yang on Jun 28, 2012
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Instruments are negotiable when theyconform to all the requirements prescribedby the Negotiable Instruments Law (NIL) -Act 2031 enacted February 3, 1911.
Kinds of negotiable instruments
 Two main groups:
Promissory note (Sec. 184); and
Evidences a promise to paymoney
E.g. normal promissory note,certificate of deposit and thebond
Bill of Exchange (Sec. 126)
An order made by oneperson to another to paymoney to third person
E.g. checks, draft
Verbatim reproduction of UniformNegotiable Instruments Law of US (1896)
 This statute was patterned afterEnglish Bill of Exchange Act (1882)
Since 1911, no amendment to the NIL hasbeen made
NIL applies only to negotiable instrumentsi.e. to those instruments which conformwith the requisites laid down in Sec. 1.
Section 1
Form of negotiable instruments.
An instrument to be negotiable must conform tothe following requirements:
It must be in writing and signedby the maker or drawer;
Must contain an unconditionalpromise or order to pay a sum certain inmoney;
Must be payable on demand, orat a fixed or determinable future time;
Must be payable to order or tobearer; and
Where the instrument isaddressed to a drawee, he must benamed or otherwise indicated thereinwith reasonable certainty.
In effect gives definition of a negotiableinstrument
Any instrument which has the requisites of enumerated therein is negotiable and isgoverned by the NIL. All other instrumentsare non-negotiable.
Note that the fact that an instrument doesnot meet the requisites will not affect itsvalidity. Only consequence is that it will notbe governed by the NIL but by the generallaw on contracts (New Civil Code).
Functions of Negotiable Instruments
A negotiable instrument may serve any of the following functions:
As a substitute for money inpayment for property or services;
As a means of creating andtransferring credit; and
 To facilitate sale of goods
Section 126
Bill of exchange, defined.
A bill of exchange is an unconditional order inwriting addressed by one person to another,signed by the person giving it, requiring theperson to whom it is addressed to pay ondemand or at a fixed or determinable futuretime a sum certain in money to order or tobearer.
Section 184
Promissory note, defined.
A negotiable promissory note within themeaning of this Act is an unconditional promisein writing made by one person to another,signed by the maker, engaging to pay ondemand, or at a fixed or determinable futuretime, a sum certain in money to order or tobearer. Where a note is drawn to the maker'sown order, it is not complete until indorsed byhim.
Parties and the Nature of their Liability 
Parties and the nature of their liabilities
 Two parties to a promissory note:
Maker – the promissory
Payee – the person to whom thepromise to pay is made
 Three parties in a bill of exchange:
Drawer – the person who gives theorder to pay in a bill of exchange
Drawee the addressee of theorder
Payee person to whom thepayment is to be made
Note that when the payee of an instrument transfers it to
another by signing it at theback, he is said to havenegotiated or indorsed thesame and thereby becomesan
 The person to whom henegotiates it is the
who, by such negotiationbecomes the holder of theinstrument.
As to nature of liabilities:
Primary party – is the one who isabsolutely and unconditionallyrequired to pay the instrumentwhen it falls due.
 The maker is the personprimarily liable in apromissory note
No person is primarily liablein a bill of exchange, untiland unless the draweeaccepts the order of thedrawer to pay. If draweeaccepts, he becomes anacceptor who is absolutelybound to pay on the datespecified on the bill. Thedrawer of a bill of exchangeand the indorsers of either anote or a bill are thesecondary parties.
Section 52, RA 7653
Legal Tender Power.
All notes and coins issued by the Bangko Sentralshall be fully guaranteed by the Government of the Republic of the Philippines and shall be legaltender in the Philippines for all debts, both publicand private: Provided, however, That, unlessotherwise fixed by the Monetary Board, coinsshall be legal tender in amounts not exceedingFifty pesos (P50.00) for denominations of  Twenty-five centavos and above, and in amountsnot exceeding Twenty pesos (P20.00) fordenominations of Ten centavos or less.
Does not constitute as a legal tender butoften take place of money as a means of payment.
A 1249 of CC states that a “delivery of promissory notes payable to order or billsof exchange and other mercantiledocuments shall produce the effect of payment only when they have been cashedor when through the fault of the creditorthey have been impaired…”
 Tender of a check is sufficient to compelredemption of foreclosed property sincesuch redemption is not an obligation but aright. However, such tender is not in itself payment that relieves the redemptionerfrom his liability to pay the redemptionprice.
Article 1636, CC
"Document of title to goods"
includes any bill of lading, dock warrant, "quedan," or warehousereceipt or order for the delivery of goods, or anyother document used in the ordinary course of business in the sale or transfer of goods, as proof of the possession or control of the goods, orauthorizing or purporting to authorize thepossessor of the document to transfer or receive,either by endorsement or by delivery, goodsrepresented by such document.
Letter of Credit Certificate of StocksCertificate of Deposit 
Is an instrument issued by a bank reciting adeposit of certain sum of money, payableeither at a fixed time or on demand, to thedepositor named therein.Other instruments:
Bond is an evidence of indebtednessissued by a corporation, public or private,payable at a definite date in the future,usually for a long term. It is in effect awritten promise of the corporation to pay adefinite sum of money.
Draft – is a form of bill of exchange usedmainly in transactions between personsphysically remote from each other. It is anorder made by one person (e.g. buyer of goods) addressed to a person having in hispossession funds of such buyer, orderingaddressee to pay the purchase price to theseller of goods.
Where irder is made by one bank toanother bank it is referred to as abank draft.
Estoppel – see
Banco de Oro v Equitable Bank 
Section 18
Liability of person signing in trade or assumedname.
- No person is liable on the instrumentwhose signature does not appear thereon,except as herein otherwise expressly provided.But one who signs in a trade or assumed namewill be liable to the same extent as if he hadsigned in his own name.
Section 19
Signature by agent; authority; how shown.
- Thesignature of any party may be made by a dulyauthorized agent. No particular form of appointment is necessary for this purpose; andthe authority of the agent may be establishedas in other cases of agency.
In writing includes print and includes notonly what is written with pen or pencil, butalso what has been typed.
Signature is binding whether it is one’shandwriting, or printed, engraved,lithographed or photographed, as long as itis intended or adopted as the signature of the signer or made with his authority.
Signature may appear on any part of theinstrument (usually appears at lower righthand corner)
If signature is so placed upon aninstrument that it is not clear in whatcapacity the person intended to sign, he isdeemed an indorser (Sec. 17f)
Section 3
When promise is unconditional. -
An unqualifiedorder or promise to pay is unconditional withinthe meaning of this Act though coupled with:(a)An indication of a particular fundout of which reimbursement is to bemade or a particular account to bedebited with the amount; or
A statement of the transactionwhich gives rise to the instrument.But an order or promise to pay out of aparticular fund is not unconditional.
Mere acknowledgement of debt does notconstitute a promise. There should be anexpress promise on the face of theinstrument to pay the money.
In a bill of exchange, words which areequivalent to an order are sufficient. Orderis a command or imperative direction. Mererequest or authority to pay does notconstitute an order. But mere use of politewords does not deprive the instrument itscharacteristics as an order.
When unconditional
 The promise or order to pay to beunconditional must be unqualified.
Rationale: realty increases theability of a negotiable instrument topass freely from one person toanother.
On bills of exchange, mere indication of theparticular fund out of which reimbursementis to be made, or an indication of aparticular account to be debited with theamount will not render an orderunconditional.
Reimbursement also presupposesprevious disbursement.
Note that reimbursement and debitrefers to a separate transactionbetween the drawer and the drawee(Vasquez)
As a rule, unless reference to thefund clearly indicates an intentionthat such fund alone should be thesource of payment, courts usuallydecide in favour of negotiability.
Recital of the transaction for which theinstrument was issued does not make thepromise or order unconditional unless:
It appears through the recital that itqualifies the time of payment or thesum to be paid (
Powell v Greenleaf 
 The fact that the condition appearing onthe instrument has been fulfilled will notconvert it to a negotiable one (Sec. 4) 
Section 2
What constitutes certainty as to sum.
- The sumpayable is a sum certain within the meaning of this Act, although it is to be paid:
with interest; or
by stated installments; or
by stated installments, with aprovision that, upon default in paymentof any installment or of interest, thewhole shall become due; or
with exchange, whether at afixed rate or at the current rate; orwith costs of collection or an attorney's fee, incase payment shall not be made at maturity.
 The amount payable must be certain.
Rationale: An instrument cannot functionproperly as a substitute for money unless

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