NOTES ON NEGOTIABLE INSTRUMENTS

1

Section I gives the definition of a negotiable instrument. In determining negotiability, what must be considered is the face of the instrument and whether it complies with the NIL, specifically Section 1. Although they do not constitute legal tender, they are used as substitute for money, which allows such freedom of transaction and takes the place of money on the commercial world free from all personal defences available as against the original owner. There is no such animal as an oral negotiable instrument. It must be signed by the maker or drawer, which can appear anywhere in the instrument. The instrument must contain an unconditional promise or order to pay, a sum certain in money, at a fixed or determinable future time on demand, payable either to order or to bearer and as to bills and checks, the drawee must be named. Negotiability is that quality of a bill or note which gives the holder in due course the right to be paid the sum payaeble named in the instrument for himself, free from any defect in the title of any of the prior parties or defences available to them among themselves. A negotiable promissory note is 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. It may be demand instrument or a time instrument. A bare acknowledgement of a debt is not unconditional. It need not contain promissory words but the written and unconditional promise to pay may be inferred. A negotiable bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, and 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. It is an order made by one person to another, usually a bank, to pay money to third person. It requires three parties, drawer, drawee and payee, but they do not need to be distinct persons. An indication of a particular fund out of which payment is to be made makes an instrument non-negotiable but if for reimbursement only, then, it is negotiable. Recital of the transaction does not make it conditional. It is also not required to use the exact words of the law to determine negotiability. A promise or order to do any act in addition to the payment of money makes the instrument non-negotiable. The date on a bill or note is not necessary. The instrument will simply be considered to be dated at the time it was issued. Ante-dating or post-dating an instrument does not make it nonnegotiable. The insertion of a wrong date is a material alteration. Issuance of a negotiable instrument requires the mechanical act of writing the instrument and the delivery of the instrument by the maker or drawer with the intention of giving effect to it. The holder of a negotiable instrument, while free from personal defences available to prior parties, among themselves, is subject to real defences that might have obtained between them.

2) authority to put in any amount. Rules where instrument is incomplete but delivered: 1) Authority to fill up the blanks.the holder or the person in possession has prima facie authority to complete an incomplete instrument by filling up the blanks therein.the fact that an incomplete instrument. The authority to complete is not an authority to alter. due date name of payee. If a blank paper is delivered by the person making the signature. Thus. 3) right against party prior to completion – the instrument may be enforced only against a party prior to completion if filled up strictly in accordance with the authority given and within a reasonable time. the holder has prima facie authority to fill up the blanks thereon. It may be negotiated before or after the date given as long as it not negotiated after its maturity. blanks for date. or to insert the words “or order” or “to bearer” after the name of the payee. and the bills of exchange or those to which the issuer has ordered a third person to pay. is a defense even against a holder in due course. 4) right of holder in due course-the defense that the instrument had not been filled up in accordance with the authority given and within a reasonable time is not available as against a holder in due course. namely. Remember. . Every instrument even if it is completely written is incomplete and revocable until its delivery for the purpose of giving it effect. amount or rate of interest may be filled in. In either case. 2 The date in a bill or note is not necessary as such omission will not make the instrument nonnegotiable but will only consider the instrument as dated as of the time it was issued. Where the instrument is incomplete and undelivered: defense even against a holder in due course.a signature on a blank paper delivered in order that it may be converted into a negotiable instrument operates as a prima facie authority to fill it up for any amount. the loss must fall upon the one who reposed confidence and made it possible for the loss to occur. The rule is that where one of two persons must suffer by the bad faith of another. So.NOTES ON NEGOTIABLE INSTRUMENTS The NIL deals only with two kinds or types of instruments. the holder has prima facie authority to fill it up for any amount if the person making the signature intended to convert it into a negotiable instrument. the promissory note or those in which the issuer has promised to pay. There are two steps involved in the issuance of every negotiable instrument. the holder has no authority to change the amount after it has been filled in. namely: the mechanical act of writing the instrument completely and in accordance with the requirements of Section 1 and the delivery of the complete instrument by the maker or the drawer to the payee or holder with the intention of giving effect to it. Ante-dating or post dating does not render it invalid or non-negotiable by that fact alone prided this is not done for an illegal or fraudulent purpose. If an instrument is incomplete when delivered. completed without authority. that there is a prima facie presumption of delivery which may be rebuttable. “Any material particular” proper to be inserted to make it complete. the presumption is that the blank was filled in accordance within the authority given and within a reasonable time. Section 14 is merely a personal defense. had not been delivered.

the drawer is not liable on the bill and the drawee may not debit the drawer’s account. prior to the party ehose signature is forged are also not liable to any holder. there is a prima facie presumption of delivery but subject to rebuttal. can only be negotiated by indorsement completed by delivery. Where. being payable to order. The indorsement. it cannot operate to transfer any title or right over the instrument. the party whose indorsement is forged is not liable to any holder. . originally payable to order. the party whose indorsement is forged is not liable to any holder not even a holder in due course but as the forged indorsement is wholly inoperative. 3 If delivery was or authorized. Other parties. It makes the forged or unauthorized signature to be inoperative. Persons precluded from setting up the defense of forgery: 1) those who by their silence or negligence are stopped from setting up the defense of forgery. When delivery is made.NOTES ON NEGOTIABLE INSTRUMENTS If a complete instrument is found in the possession of an immediate party or a remote party other than a holder in due course. If the drawee pays under a forged indorsement. is complete. In case of doubt in what capacity the person making the instrument intended to sign. including the maker. and 2) those who warrant or admit the genuineness of the signatures in question. Where the bill is payable. FORGERY Forgery is a real defense even against a holder in due course. even a holder in due course. it may be shown to have been conditional or for a special purpose only and not for the purpose of transferring the title to the instrument. In the hands of a holder in due course. there are exceptions: 1) If the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority and 2) where the forged signature is not necessary to the holder’s title in which case. The instrument. However. Since the indorsement is forged. forgery may be disregarded. The above rules do not apply to an instrument which is not complete. it must be considered as making the payment out of its own funds and cannot ordinarily charge the amount to the account of its depositor whose signature was forged. A bank is bound to know the signature of its drawers and if it pays a forged check. being forged. is inoperative. namely indorsers. a valid delivery thereof by all parties prior to him is conclusively presumed. he is deemed to be an indorser. Where the note is payable to order. acceptors and persons negotiating by delivery. it is inoperative and therefore. it is presumed to be made with the intention to transfer ownership of the instrument to the payee.

. In case it is indorsed. the checks are received merely for collection and deposit. the party whose indorsement is forged is not liable to any holder. An instrument originally payable to order may be negotiated only by the indorsement of the payee completed by delivery. the drawer is not liable on the bill and the drawee may not debit the drawer’s account. the bank. the checks are received merely for collection and deposit. the bank as agent. BPI & China Banking Corp). BPI) An instrument payable to bearer on its face may be negotiated by mere delivery without indorsement. A bank is bound to know the signatures of its customers (drawers) and if it pays a forged check. as agent cannot be expected to know or ascertain the genuineness of all prior indorsements. the holder may strike out all intervening indorsement or any of them for none of them is necessary to his title. however. 40. If the drawee pasys under a a forged i9ndorsement. (Jai-Alai vs. Where. 4 Where the bill is payable to order. the holder may strike out all intervening indorsements or any of them as they are unnecessary for his title. even a holder in due course.NOTES ON NEGOTIABLE INSTRUMENTS however. At the option of the holder. In case it is endorsed. it must be considered as making the payment out of its own funds and cannot ordinarily charge the amount so paid to the account of the customer/depositor/drawe(San Carlos Milling vs. An instrument payable to bearer on its face may be negotiated by mere delivery without indorsement. The forged indorsement is wholly inoperative. By Sec. cannot be expected to know the genuineness of all prior indorsements. it remains a bearer instrument and may be further negotiated by mere delivery. it remains a bearer instrument and may be further negotiated by mere delivery.

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