NEGOTIABLE INSTRUMENTS LAW HOLDER IN DUE COURSE

ACT No. 2031 – February 3, 1911

FUNCTIONS OF NEGOTIABLE INSTRUMENTS
1. They serve as substitute for money.
2. They serve as credit instrument.
LEGAL TENDER
- MONEY is a legal tender
o For Inland Bills – file Notice of
Dishonor
o For Foreign Bills – file a Protest
- NI are not legal tender.
- Checks are not legal tender unless
requested by the drawer.
TYPES OF NEGOTIABLE INSTRUMENTS
Section 52 of the NIL defines a holder in due course as a
holder who has taken the instrument under the following
conditions:
1. That it is complete and regular upon its face;
2. That he became the holder of it before it was
overdue, and without notice that it has been
previously dishonoured, if such was the fact;
3. That he took it in good faith and for value;
4. That at the time it was negotiated to him, he had
no notice of any infirmity in the instrument or
defect in the title of the person negotiating it.

PROMISORY NOTE BILL OF EXCHANGE HOLDER – the payee or indorsee of a bill or note who is
It contains an It contains an in possession of it or the bearer thereof. In other words,
unconditional promise. unconditional order. the payee or indoresee is the holder of an order
There are two parties on There are three parties instrument while the payee or the bearer is the holder of
its face (maker and on its face (drawer, a bearer instrument.
payee) drawee and payee)
The person who signs it is The person who signs it is The following are not Negotiable Instruments:
the maker. the drawer.
The person who signs it is The person who signs it, 1. Letters of Credit – because they do not contain
the maker, is primarily the drawer, is secondarily an unconditional promise or order to pay.
liable. liable. 2. Certificate of Stock – because there is no promise
The person primarily The person primarily or order to pay.
liable is the maker. liable is the drawee- 3. Bill of Lading – because it represent goods rather
than money.
acceptor.
4. Warehouse Receipt – because it represents title
There is only one There are two
to and possession of goods.
presentment; for presentments: (a) for
5. Pawn Ticket
payment. acceptance; (b) for
6. Trust Receipt
payment.

FEATURES OF NEGOTIABLE INSTRUMENTS

SUMMARY OF RULES ON NEGOTIABILITY
1. Negotiability – allows NI’s to be transferred
from one person to another
REQUISITE SUMMARY OF RULES
2. Accumulations of Secondary Contracts –
transferred through negotiation, secondary It must be in writing. It can be written in any
material which is more or
contracts are accumulated because the
indorsers become secondarily liable not only to less permanent and
their immediate transferees but also to any readily transferable.
holder.
Writing can be printed,
handwritten or
typewritten or any other
Section 1 Form of Negotiable Instruments. – an manner.
instrument to be negotiable must conform to the
It must be signed by the The signature can be in
following requirements:
maker or drawer. any form (handwritten,
A. It must be in writing and signed by the maker or
mark, rubber stamp,
the drawer;
word, mark) so long as it
B. Must contain an unconditional promise r order
is adopted as a signature
to pay a sum certain in money;
and authenticates the
C. Must be payable on demand, or at fixed
instrument.
determinable future time;
It must contain a promise The words promise or
D. Must be payable to order or bearer; and
or an order. order need not be used so
E. Where the instrument is addressed to the
long as equivalent words
drawee, he must be named and otherwise
are present.
indicated therein with reasonable certainty.
Mere acknowledgement
is not sufficient promise.
 REQUISITE SUMMARY OF RULES
The promise or order The promise or order to
must be unconditional. pay should be subject to a
future and uncertain
event.
The instrument cannot be
subject to or restricted by
another agreement or
document.
An instrument which
states that payment out
of a particular fund is
conditional.
The instrument is not
conditional if there is an
indication of the account
to be debited or out of
which reimbursement is
to be made.
Sum certain. The amount to be paid
may be a fixed amount or
one that is determinable
on the face of the
instrument.
The following do not
affect the certainty of
sum: (a) stipulation on
payable interest; (b)
payable in instalments;
(c) payable in instalments
with an acceleration
clause.
Money What should be paid need
to be legal tender.
Payment cannot be
goods.
There can be an option to
pay money or deliver
goods provided that the
choice is with the holder.
Payable on demand or at An instrument is payable
a fixed or determinable on demand if:
future time. It is so expressed to be
payable on demand, or at
sight, or on presentation;
OR
No time of payment is
expressed.
Payable to bearer or There are two ways to
order. make an order
instrument: (a) make it
payable “to the order of a
specified person”; or (b)
make it payable “to a
specified person or his
order.”
An instrument is payable
to bearer if: (a) When it is
expressed to be so
payable; or (b) When it is
payable to a person
named therein or bearer;
or (c) When it is payable
to the order of a fictitious
or non-existing person,
and such fact was known
to the person making it so
payable; or (d) When the
name of the payee does
not purport to be the
name of any person; or
(e) When the only or last
indorsement is in an
indorsement in black.
If addressed to a drawee, It can be addressed to
he must be named or two or more drawees
indicated with reasonable jointly.
certainty.
It cannot be addressed to
two or more drawees in
the alternative.
It cannot be addressed to
two or more drawees in
succession.
CROSSED CHECK – The act of crossing a check serves as a
warning to the holder that the check has been issued for
a definite purpose so that he must inquire if he has
received the check pursuant to that purpose. (Hi-Cement
Corp vs Insular Bank of Asia)
The SUPREME COURT ruled that failure to verify despite
knowledge that the petitioner was not party to the loan
but only an agent in the transaction makes him not a
holder in due course. Bad faith was present in the case of
Patrimonio vs Gutierrez GR No. 187769
SHELTER RULE - if a holder is not a holder in due course,
he is subject to the same defences as if it were non-
negotiable. In other words, he cannot recover if the
person primarily or secondarily liable can set up a
defense, whether real or personal.
EXCEPTION: A holder who is not a holder in due
course but derived his title from a holder in due course.
SECTION 58 – When subject to original defense. In the
hands of any holder other than holder in due course, a
negotiable instrument is subject to the same defences 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 firmer holder in
respect of all parties prior to the latter.
INDORSEMENT IN AN ALLONGE
Indorsement may also be made of a separate paper
attached to the instrument called “allonge”.
Section 31. Indorsement; how made. – The indorsement
must be written on the instrument itself or upon a paper
attached thereto. The signature of the indorser, without
additional words, is a sufficient indorsement.
fictitious person or a person not having capacity to
contract, the holder may treat the instrument at his
option either a bill of exchange or as a promisory note.
SAN MIGUEL CORPORATION vs BARTOLOME PUZON JR
(GR No 167567)

Allonge may not be utilized if there is still sufficient space
at the dorsal portion of the instrument itself. However, it
is believed that the contrary view is more sound.
Section 23 – Forged signature, effects 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 for setting up
the forgery or want of authority.
FORGED SIGNATURE is replicating someone’s signature
for the purpose of implying the person’s intent to agree
with circumstance provided by that document.
Delivery of a negotiable instrument means “that every
party delivering did so for the purpose of giving effect
thereto. Otherwise, it cannot be said that there has been
delivery of the negotiable instrument. Once there is
delivery, the person to whom the instrument is delivered
gets the title to the instrument completely and
irrevocably. (Delivery is essential)
PNB vs RODRIGUEZ (Fictitious Payee Rule)
The COURT explained the fictitious payee rule under
which the collecting bank and drawee are relieved from
liability even if the signature of the payee-indorser was
forged. The drawer cannot ask for the return the amount
debited from his account. The forged indorsement is not
necessary for the title of the transferee as a holder.

EFFECT WHEN THERE IS FORGERY OF A SIGNATURE IN A
NEGOTIABLE INSTRUMENT
It does not render the instrument void. The signature is
wholly inoperative and no right to retain the instrument,
or to give a discharge thereof against any party to it, is
acquired through or under such signature. (CUT OFF
RULE)
ANG TEK LIAN vs CA (GR No L-2516)
Indorsemnt is no longer necessary. Under the NIL Section
9 (d), a check drawn payable to cash is a check payable
to bearer, and the bank may pay it to the person
presenting it for payment without the drawer’s
indorsement. Being a bearer instrument, negotiation
may be done by mere delivery of the instrument.

ACCELERATION CLAUSE VS INSECURITY CLAUSE

Acceleration Clause – the non-payment of any

instalment is the circumstance that triggers the
acceleration of the maturity date of the entire balance.
The act or omission of the maker makes the acceleration
clause operate – non-payment of any instalment. THE
INSTRUMENT IS NEGOTIABLE.

Insecurity Clause – payment can be demanded

whenever he feels that there is danger that the maker
will not be able to pay on the due date of the instrument.
MAKES THE INSTUMENT NON-NEGOTIABLE.

PAY TO ORDER VS PAY TO BEARER

Pay to Order – Indorsement should be signed coupled

with delivery

Pay to Bearer – No indorsement needed only delivery

Section 130 – When bill of exchange be treated as

promisory note. – When in a bill of the drawer and
drawee are the same person or where the drawee is a