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San Beda College of Law: Negotiable Instruments Law (Nil)
San Beda College of Law: Negotiable Instruments Law (Nil)
6
MEMORY AID IN COMMERCIAL LAW
NEGOTIABLE INSTRUMENTS LAW (NIL)
(Act No. 2031, effective June 2, 1911)
DISTINCTIONS
CHECK - A bill of exchange drawn on PROMISSORY BILL OF
a bank payable on demand. (Sec. 185). It NOTE EXCHANGE
is the most common form of bill of Unconditional Unconditional
exchange. promise order
Involves 2 parties Involves 3 parties
OTHER FORMS OF NI Maker is primarily Drawer is only
1. Certificate of deposit issued by liable secondarily liable
banks, payable to the depositor or Only one Two presentments:
presentment: for for acceptance and
his order, or to bearer
payment for payment
2. Trade acceptance
3. Bonds, which are in the nature of
promissory notes NEGOTIABLE NON-NEGOTIABLE
4. Drafts, which are bills of exchange INSTRUMENTS INSTRUMENTS
Only NI are Application of the
drawn by one bank upon another
governed by the NIL is only by
5. Debenture NIL. analogy.
All of these must comply with Sec. 1, Transferable by Transferable only by
NIL. negotiation or by assignment
Note: Letters of credit are not assignment.
negotiable because they are issued to a A transferee can be A transferee remains
specified person. a HDC if all the to be an assignee
requirements are and can never be a
Instances when a BE may be treated as complied with HDC
a PN A holder in due All defenses
course takes the NI available to prior
a. The drawer and the drawee are
free from personal parties may be
the same person; or defenses raised against the
b. Drawee is a fictitious person; or last transferee
c. Drawee does not have the Requires clean Transferee acquires
capacity to contract. (Sec. 130) title, one that is a derivative title
d. Where the bill is drawn on a free from any only. (Notes and
person who is legally absent; infirmities in the Cases on Banks,
e. Where the bill is ambiguous (Sec. instrument and Negotiable
17[e]) defects of title of Instruments and
prior transferors. other Commercial
(Notes and Cases on Documents, Timoteo
Parties to a NI
Banks, Negotiable B. Aquino)
1. Promissory Note Instruments and
a. Maker one who makes other Commercial
promise and signs the instrument Documents,
b. Payee party to whom the Timoteo B. Aquino)
promise is made or the Solvency of debtor is Solvency of debtor is
instrument is payable. in the sense not guaranteed under
2. Bill of Exchange guaranteed by the Art. 1628 of the NCC
indorsers because unless expressly
a. Drawer one who gives they engage that the stipulated. (Notes
the order to pay money to a instrument will be and Cases on Banks,
third party accepted, paid or Negotiable
b. Drawee person to both and that they Instruments and
whom the bill is addressed and will pay if the other Commercial
who is ordered to pay. He instrument is Documents, Timoteo
dishonored. (Notes B. Aquino)
becomes an acceptor when he and Cases on Banks,
indicates his willingness to pay Negotiable
the bill Instruments and
c. Payee party in whose other Commercial
favor the bill is drawn or is Documents, Timoteo
payable. B. Aquino)
RECEIPT
If originally payable If payable to
to bearer, it will bearer, it will be
always remain so converted into a
payable regardless of receipt deliverable
NEGOTIABLE NEGOTIABLE manner of to order, if
INSTRUMENT DOCUMENT OF indorsement. indorsed specially.
TITLE A holder in due The indorsee, even
Subject is money Subject is goods course may obtain if holder in due
title better than that course, obtains
Is itself the The document is a
of the one who only such title as
property with mere evidence of
negotiated the the person who
value title the things of
instrument to him. caused the deposit
value being the
had over the goods.
goods mentioned in
the document
ASSIGNMENT NEGOTIATION
Has all the Does not have these Pertains to contracts Pertains to NI
requisites of Sec. 1 requisites in general
of NIL
Holder takes the Holder in due
A holder of NI may Intermediate parties instrument subject course takes it free
run after the are not secondarily to the defenses from personal
secondary parties liable if the obtaining among the defenses available
for payment if document is original parties among the parties
dishonored by the dishonored.
party primarily Governed by the Governed by the
liable. Civil Code NIL
A holder, if a A holder can never
holder in due acquire rights to the II. NEGOTIABILITY
course, may document better Form of NI: (Sec. 1) Key: WUPOA
acquire rights over than his 1. Must be in Writing and signed by the
the instrument predecessors. maker or drawer;
better than his 2. Must contain an Unconditional
predecessors.
promise or order to pay a sum
certain in money;
BILLOF EXCHANGE CHECK 3. Must be Payable on demand, or at a
Not necessarily It is necessary that fixed or determinable future time;
drawn on a deposit. a check be drawn
4. Must be payable to Order or to
The drawee need not on a bank deposit.
be a bank Otherwise, there
bearer; and
would be fraud. 5. When the instrument is addressed to
a drawee, he must be named or
Death of a drawer of Death of the otherwise indicated therein with
a BOE, with the drawer of a check, reasonable certainty.
knowledge of the with the
bank, does not knowledge of the
revoke the authority bank, revokes the
Determination of negotiability:
of the drawee to authority of the a. Whole instrument
pay. banker to pay. b. What appears on the face of the
May be presented for Must be presented instrument
payment within for payment within c. Requisites enumerated in Sec.1 of the
reasonable time a reasonable time NIL
after its last after its issue. d. Should contain words or terms of
negotiation. negotiability. (Gopenco, Commercial Law
Bar Reviewer, cited in Aquino, p. 23)
May be payable on Always payable on
demand or at a fixed demand
or determinable In determining the negotiability of an
future time instrument, the instrument in its
entirety and by what appears on its face
NEGOTIABLE NEGOTIABLE must be considered. It must comply
INSTRUMENT WAREHOUSE
COMMERCIAL LAW COMMITTEE
CHAIRPERSON: Garny Luisa Alegre ASST. CHAIRPERSON:Jayson OS Ramos EDP: Beatrix I. Ramos SUBJECT HEADS:
Marichelle De Vera (Negotiable Instruments Law); Jose Fernando Llave (Insurance); Aldrich Del Rosario
(Transportation Laws);
Shirley Mae Tabangcura, Bon Vincent Agustin (Corporation Law); Karl Steven Co (Special Laws); John Lemuel
Gatdula (Banking Laws); Robespierre CU (Law on Intellectual Property)
San Beda College of Law
9
MEMORY AID IN COMMERCIAL LAW
with the requirements of Sec. 1 of the the drawee pays particular fund
NIL. (Caltex Phils. v. CA, 212 SCRA 448) himself from the indicated. Payment
particular fund is subject to the
indicated. condition that the
The acceptance of a bill of exchange fund is sufficient.
is not important in the determination of Particular fund Particular fund
its negotiability. The nature of indicated is NOT the indicated is the
acceptance is important only on the direct source of direct source of
determination of the kind of liabilities of payment but only the payment.
source of
the parties involved (PBCOM vs. Aruego,
reimbursement.
102 SCRA 530)
Postal money orders are not negotiable
REQUISITES OF NEGOTIABILITY
a. It must be writing and signed by the instruments. Some of the restrictions
maker or drawer imposed by postal laws and regulations
Any kind of material that substitutes are inconsistent with the character of
negotiable instruments. (Phil. Education
paper is sufficient.
Co. vs. Soriano, 39 SCRA 587)
With respect to the signature, it is
enough that what the maker or drawer Treasury warrants are non-negotiable
affixed shows his intent to authenticate
because there is an indication of the
the writing. (Notes and Cases on Banks,
fund as the source of payment of the
Negotiable Instruments and other
disbursement. (Metrobank vs. CA, 194
Commercial Documents, Timoteo B.
SCRA 169)
Aquino)
b. Unconditional Promise or Order to
Payable in sum certain in money
pay a sum certain in money
An instrument is still negotiable
Unconditional promise or order
Where the promise or order is made to although the amount to be paid is
expressed in currency that is not legal
depend on a contingent event, it is
tender so long as it is expressed in
conditional, and the instrument involved
money. (PNB vs. Zulueta, 101 Phil 1071,
is non-negotiable. The happening of the
Sec.6 (e)).
event does not cure the defect.
The certainty is however not affected
The unconditional nature of the
although to be paid:
promise or order is not affected by:
a. With interest; or
a) An indication of a particular fund out
b. By stated installments; or
of which reimbursement is to be
c. By stated installments with an
made, or a particular account to be
acceleration clause;
debited with the amount; or
d. With exchange; or
b) A statement of the transaction which
e. With cost of collection or
gives rise to the instrument
attorneys fees. (Sec. 2)
Where the promise or order is subject
to the terms and conditions of the The dates of each installment must be
transaction stated, the instrument is
fixed or at least determinable and the
rendered non-negotiable. The NI must be
amount to be paid for each installment.
burdened with the terms and conditions
A sum is certain if the amount to be
of that agreement to destroy its
negotiability. (Cesar Villanueva, unconditionally paid by the maker or
Commercial Law Review, 2004 ed.) drawee can be determined on the face
But an order or promise to pay out of of the instrument and is not affected by
the fact that the exact amount is arrived
a particular fund is NOT unconditional.
at only after a mathematical
(Sec. 3)
computation. (Notes and Cases on Banks,
Negotiable Instruments and other
FUND FOR PARTICULAR FUND
REIMBURSEMENT FOR PAYMENT Commercial Documents, Timoteo B.
Drawee pays the There is only one Aquino)
payee from his own act- the drawee pays
funds; afterwards, directly from the ACCELERATION INSECURITY EXTENSION
COMMERCIAL LAW COMMITTEE
CHAIRPERSON: Garny Luisa Alegre ASST. CHAIRPERSON:Jayson OS Ramos EDP: Beatrix I. Ramos SUBJECT HEADS:
Marichelle De Vera (Negotiable Instruments Law); Jose Fernando Llave (Insurance); Aldrich Del Rosario
(Transportation Laws);
Shirley Mae Tabangcura, Bon Vincent Agustin (Corporation Law); Karl Steven Co (Special Laws); John Lemuel
Gatdula (Banking Laws); Robespierre CU (Law on Intellectual Property)
San Beda College of Law
10
MEMORY AID IN COMMERCIAL LAW
3. The purpose is to lend his name or surety obligation need not pass directly
credit. (Sec. 29) to the surety, a consideration need not
Note: without receiving value pass directly to the surety, a
therefor, means without receiving consideration moving to the principal
value by virtue of the instrument. alone being sufficient. (Spouses Eduardo
(Clark vs. Sellner, 42 Phil. 384) Evangelista vs. Mercator Finance Corp,
Effects: The person to whom the G.R. No. 148864, August 21, 2003)
instrument thus executed is
subsequently negotiated has a right of VI. PARTIES WHO ARE LIABLE
recourse against the accommodation PRIMARY AND WARRANTIES OF
party in spite of the formers knowledge SECONDARY PARTIES
that no consideration passed between LIABILITY OF
the accommodation and accommodated PARTIES
parties. (Sec. 29) Makes the parties Impose no direct
Rights & Legal Position: liable to pay the obligation to pay in
1. AP is generally regarded as a surety sum certain in the absence of
money stated in the breach thereof. In
for the party accommodated;
instrument. case of breach, the
2. When AP makes payment to holder of person who
the note, he has the right to sue the breached the same
accommodated party for may either be
reimbursement. (Agro liable or barred
Conglomerates, Inc. vs. CA, 348 SCRA from asserting a
450) particular defense.
Liability: Liable on the instrument to a Conditioned on Does not require
holder for value notwithstanding such presentment and presentment and
notice of dishonor notice of dishonor.
holder at the time of the taking of the
(Campos and Lopez- (Campos and
instrument knew him to be only an Campos, Negotiable Lopez-Campos,
accommodation party. Hence, As Instruments Law, Negotiable
regards, an AP, the 4 th condition, i.e., 1994 ed.) Instruments Law,
lack of notice of infirmity in the 1994 ed.)
instrument or defect in the title of the
persons negotiating it, has no 1. Primarily Liable (Sec. 60 and 62,
application. (Stelco Marketing Corp. vs. NIL)
Court of Appeals, 210 SCRA 51) MAKER ACCEPTOR OR
Rights of APs as against each other: DRAWEE
May demand contribution from his co- A. Engages to pay A. Engages to pay
accommodation party without first according to the according to the
directing his action against the principal tenor of the tenor of his
debtor provided: instrument; and acceptance;
a. He made the payment by virtue B. Admits the B. Admits the
of judicial demand; or existence of the existence of the
payee and his drawer, the
b. The principal debtor is insolvent. capacity to indorse. genuineness of his
The relation between an signature and his
accommodation party is, in effect, one capacity and
of principal and surety the authority to draw
accommodation party being the surety. It the instrument;
is a settled rule that a surety is bound and
equally and absolutely with the principal C. Admits the
and is deemed an original promissory and existence of the
payee and his
debtor from the beginning. The liability
capacity to
is immediate and direct. (Romeo Garcia indorse.
vs. Dionisio Llamas, G.R. No. 154127,
December 8, 2003) A bill of itself
Well-entrenched is the rule that the does not operate as
consideration necessary to support a an assignment of
funds in the hands
COMMERCIAL LAW COMMITTEE
CHAIRPERSON: Garny Luisa Alegre ASST. CHAIRPERSON:Jayson OS Ramos EDP: Beatrix I. Ramos SUBJECT HEADS:
Marichelle De Vera (Negotiable Instruments Law); Jose Fernando Llave (Insurance); Aldrich Del Rosario
(Transportation Laws);
Shirley Mae Tabangcura, Bon Vincent Agustin (Corporation Law); Karl Steven Co (Special Laws); John Lemuel
Gatdula (Banking Laws); Robespierre CU (Law on Intellectual Property)
San Beda College of Law
16
MEMORY AID IN COMMERCIAL LAW
but subsequent indorsers are liable. This Any change in the instrument which
is a real defense. affects or changes the liability of the
D. INCOMPLETE BUT DELIVERED NI parties in any way.
(Sec. 14) Effects:
1. Holder has prima facie authority to 1. Alteration by a party Avoids the
fill up the instrument. instrument except as against the
2. The instrument must be filled up party who made, authorized, or
strictly in accordance with the assented to the alteration and
authority given and within subsequent indorsers.
reasonable time However, if an altered instrument
3. HDC may enforce the instrument as is negotiated to a HDC, he may
if filled up according to no. 2. enforce payment thereof according
to its original tenor regardless of
E. COMPLETE BUT UNDELIVERED NI whether the alteration was innocent
(Sec. 16) or fraudulent.
1. Between immediate parties and
those who are similarly situated, Note: Since no distinction is made, it
delivery must be coupled with the does not matter whether it is
intention of transferring title to the favorable or unfavorable to the party
instrument. making the alteration. The intent of
2. As to HDC, it is conclusively the law is to preserve the integrity
presumed that there was valid of the negotiable instruments.
delivery; and
3. As against an immediate party and 2. Alteration by a stranger (spoliation)-
remote party who is not a HDC, the effect is the same as where the
presumption of a valid and alteration is made by a party which a
intentional delivery is rebuttable. HDC can recover on the original
tenor of the instrument. (Sec. 124)
F. FRAUD
FRAUD IN FACTUM FRAUD IN Changes in the following constitute
OR FRAUD IN ESSES material alterations:
INDUCEMENT CONTRACTUS a. Date;
OR FRAUD IN b. Sum payable, either for principal
EXECUTION or interest;
The person who signs The person is c. Time or place of payment;
the instrument induced to sign an d. Number or relations of the
intends to sign the instrument not
parties;
same as a NI but was knowing its
induced by fraud character as a bill e. Medium or currency in which
or note payment is to be made;
f. That which adds a place of
G. ABSENCE OR FAILURE OF payment where no place of
CONSIDERATION (Sec. 28) payment is specified; and
Personal defense to the prejudiced g. Any other change or addition
party and available against any person which alters the effect of the
not HDC. instrument in any respect. (Sec.
125)
H. PRESCRIPTION
A serial number is an item which
Refers to extinctive prescription and
is not an essential requisite for
may be raised even against a HDC. Under
negotiability under Sec. 1, NIL, and
the Civil Code, the prescriptive period of
which does not affect the rights of
an action based on a written contract is
the parties, hence its alteration is
10 years from accrual of cause of action.
not material. (PNB vs. CA, 256 SCRA
491)
I. MATERIAL ALTERATION
Completeness 1. Wanting in any material 1. Blank paper with Mechanically incomplete Mechanically complete
particular signature
Authority of person 1. Prima facie authority to 1.Signature operates as a No authority to complete and/or May negotiate if delivered to him by
in possession complete it by filling up prima facie authority to negotiate instrument or under the authority of the party
the blanks therein fill it up as such for any making, indorsing, drawing or
amount accepting, as the case may be.
When enforceable If filled up strictly in accordance with authority given Not enforceable When delivery is made by or under
and within a reasonable time authority of the party making,
indorsing, drawing or accepting, as
the case may be.