NEGOTIABLE INSTRUMENTS

FINAL REQUIREMENT

SUBMITTED TO:
ATTY. CHRISTINE NARANJO

SUBMITTED BY:
LAYESE, JOSE RAMIR V.
PROMISSORY NOTE

March 13, 2020

Cebu City
P45,000.00
Four months after date, I promise to pay Karl Mart or to bearer the sum of Forty-five
Thousand (P45,000) Pesos.

(Sgd.) Layese, Jose Ramir V.

(BACK)

Pay to Antonio G. Santos

(Sgd.) Karl Mart
Pay to Marco Pili without recourse
(Sgd.) Antonio G. Santos
Pay to Klaus Santos
(Sgd.) Marco Pili

REQUIREMENTS FOR NEGOTIABILITY

1. It must be in writing and signed by the maker
In order to be negotiable, there must be a writing of some kind, for, if the instrument were not
in writing, there would be nothing to be negotiated from hand to hand. “In writing” includes
“print” and it includes not only what is written with pen or pencil, but also what has been typed.

If the instrument is not in writing, there would be nothing to be negotiated or passed from hand
to hand. Delivery is necessary; no delivery, no issuance. Therefore, the medium of the
negotiable instrument should be transferrable from hand to hand. Thus, it is only logical that the
negotiable instrument is in writing in such a way that it can be transferrable from hand to hand.

The full name may be written. At least, the surname should appear and, generally, the signature
usually is by writing the signers’ name. But it may consist of initials or even numbers. But, where
the name is not signed, the holder must prove that what is written is intended as a signature of
the person sought to be charged.

2. It must contain an unconditional promise to pay a sum certain in money

The instrument must contain a promise or an order to pay. Mere acknowledgement of a debt
does not constitute a promise. There should be an express promise on the face of the
instrument to pay the money. However, the word “promise” is not absolutely necessary. Any
expression equivalent to a promise is sufficient.

A mere admission that the debt is due is not sufficient because such admission it only evidences
the existence of a debt. In addition to the acknowledgement of indebtedness, there must be
other words expressing the intention to pay or from which may be implied such as an intention
to pay. The words “order” and “bearer” are usually referred to as words of negotiability.
However, they may also be used to imply a promise.
The amount of money to be paid must be determinable by inspection and must be stated plainly
on the phase of the instrument, and, like the denomination of money, must be stated in the
body of the instrument.

A note, if it is to be negotiable, cannot be made payable in goods, wares, or merchandise, or in

property, or in labor or services. So also, an instrument is not negotiable if it is made payable in
bonds, corporate stock, state paper, scrip, checks, foreign bills. The real reason for the
requirement that negotiable instruments must be payable in money is obviously is that money is
the one standard of value in actual business. All other commodities may rise and fall in value but
in theory.

The promise to pay can never be conditional because if there is a condition, the instrument may
or may not become a substitute for money. Thus, it is no longer negotiable.

3. It must be payable on demand, or at a fixed or determinable future time

 An instrument, to be negotiable, must be payable either on demand or at a fixed or
determinable future time. If it is not either, the instrument is not negotiable.

The requirement as to certainty of time of payment is for the purpose of informing the holder of
the instrument of the date when he may enforce the payment thereof. Before such time, he
cannot compel the maker of the note, unless there is a valid acceleration provision.

Ideally, a negotiable instrument should be payable on a fixed date but it may be payable at a
determinable future time. The test whether it is payable at a determinable future time is when
the time to pay is ascertainable without the need to negotiable further with the maker as to the
date.
4. It must be payable to order or to bearer
The instrument in order to be considered negotiable must contain the so called “words of
negotiability” – must be payable to order or bearer. These words serve as an expression of
consent that the instrument may be transferred. This consent is indispensable since the maker
assumes greater risks under a negotiable instrument than under a non-negotiable one. Under
Sec. 10 however, the instrument need not follow the language of the law, but any term which
clearly indicates an intention to conform to the legal requirements is sufficient.

2. FURTHER NEGOTIATED

When the payee of an instrument transfers it to another by signing at the back thereof he is said
to have negotiated or indorsed the same and thereby becomes an indorser. An instrument must
be indorsed in full in order to determine the holder of the instrument.

In my promissory note “pay to Antonio G. Santos” is a special indorsement as it specifies the

person to whom to whom the instrument is payable to. Where the instrument is originally
payable to bearer it can be further negotiated by mere delivery, even if the original bearer
negotiated it by special indorsement.

Where the instrument is originally payable to order and it is negotiated by the special
indorsement, it can be further negotiated by the indorsee by indorsement completed by
delivery.

On the other hand an indorsement in blank specifies no indorsee, and an instrument so indorsed
is payable to bearer, and may be negotiated by delivery. Where the instrument is originally
payable to order and it is negotiated by the payee by blank indorsement, it can be further
negotiated by the holder by mere delivery. The reason is that the effect of a blank indorsement
is to make the instrument payable to bearer.

Where the instrument is originally payable to bearer it can be further negotiated by mere
delivery, even if the original bearer negotiated it by special indorsement.
 The second indorsement “Pay to Marco Pili without recourse” is a qualified indorsement. A
qualified indorsement constitutes the indorser as a mere assignor of the title to the instrument.
‘Without recourse’ means without resort to a person who is secondarily liable after the default
of the person who is primarily liable. An indorser by his indorsement impliedly enters into two
contracts: (1) a contract of sale or assignment of the instrument and (2) a contract to pay the
instrument if the maker is unable to pay on maturity. By adding the words “without recourse”
above his signature, he expressly rids himself of the second contract.
A qualified indorser therefore merely assumes the first contract and agrees merely to transfer
legal title to the instrument. The transfer would still be negotiation and the transferee would
still be a holder capable of acquiring a title free from defenses of prior parties. The only effect of
the qualified indorsement is to relieve the qualified indorser of his liability to pay the instrument
should the maker be unable to pay at maturity.
The qualified indorser is not entirely free from secondary liability. He is secondarily liable on his
warranties as an indorser under Section 65. He is liable if the instrument is dishonored by non-
acceptance or non-payment due to forgery, lack of good title on the part of the indorser, lack of
capacity to indorse on the part of the prior parties, or the fact, at the time of the indorsement,
that the instrument was valueless or not valid and knew of that fact.

An instrument which is originally payable to bear is always payable to bearer. Hence, even when
specially indorsed, it can be negotiated by mere delivery. A special indorser of an originally
payable to bearer instrument is not liable to a holder who became a holder through delivery
because delivery was sufficient to transfer title. However, a special indorser is liable to special
indorsee/s because they acquire their title over the instrument through the special indorsement
as they can trace their title through a series of unbroken indorsements.

3. DISHONORED
A promissory note can only be dishonored through non-payment as only the bill of needs
acceptance from the drawer. It is said to be dishonoured by non-payment when the maker of
the note, commit default in payment upon being duly required to pay the same.

The instrument is dishonored by non-payment when:

(a) It is duly presented for payment and payment is refused or cannot be obtained; or
(b) Presentment is excused and the instrument is overdue and unpaid.

As to holder, after an instrument is dishonored by non-payment, the persons secondarily liable

thereon ceases to be secondarily liable. They become principal debtors and their liability
becomes the same as that of the original debtor, provided that notice of dishonor is given to
them. If no notice of dishonor is given to them, they are discharged. In other words, notice of
dishonor must be given to them first, after which the holder can bring an action against any one
of them, without necessity of first bringing an action against the person primarily liable. But
where persons secondarily liable are charged by dishonor and notice, while it is true that they
become principal debtors as to the holder, yet among themselves, persons secondarily liable are
presumed liable in the order they become parties to the instrument.

When an instrument is dishonored by non-payment of a note, notice of such dishonor must be

given to persons secondarily liable, namely, the drawer and indorsers. Otherwise, such parties
are discharged. Persons primarily liable need not be given notice of dishonor in order to charge
them because they are the very ones who dishonor the instrument. Thus, a joint maker and an
accommodation maker is not entitled to notice.

The purpose is to notify the drawer and/or the indorsers that the holder is enforcing his right
against them under their contract to pay should the instrument not be paid or accepted at
maturity. Without this notice, no secondary party may be held liable, except in the cases where
the law provides otherwise.

Where a party receives notice of dishonor, he has, after the receipt of such notice, the same
time for giving notice to antecedent parties that the holder has after the dishonor. Notice of
dishonor is dispensed with when, after the exercise of reasonable diligence, it cannot be given
to or does not reach the parties sought to be charged.
 BILL OF EXCHANGE

Cebu City, Cebu

January 23, 2020

Pay to Desmond Myles and Max Peyne
P110,000

At sight (Sgd.)Lara Craft

pay to order of Lara Craft One Hundred Ten Thousand (P 110,000) Pesos for value
received.
Pay to Nathan Drape as agent of Ezio Auditobe

(sgd.) Max Peyne

Drawee:

Ilvenmory Publishing Inc.

2876 Bagong Dan Yati Lilo-an, Cebu

Drawer:

(Sgd.)Layese, Jose Ramir V.

(BACK)

REQUIREMENTS FOR NEGOTIABILITY

1. It must be in writing and signed by the drawer
In order to be negotiable, there must be a writing of some kind, for, if the instrument were
not in writing, there would be nothing to be negotiated from hand to hand. The signature is
binding whether it is in one’s handwriting, or printed, engraved, lithographed or
photographed, so long as it is intended or adopted as the signature of the signer or made
with his authority. It will be valid and binding so long as the intention to make the
instrument the maker’s or drawer’s is shown. The drawer of a bill must sign the instrument
and his signature is usually written at the lower right hand corner thereof. The drawee’s
name is usually written on the lower left hand corner, although in checks the bank’s name
sometimes appears across the top. The payee and the successive indorsees negotiate the
instrument by signing on the back. As long as the parties to the bill or note comply with
these long established and recognized customs, it would be clear in what capacity the
parties signed. However, once a party to an instrument deviates from the commercial usage
with respect to the place of signature, and it is not clear from the instrument in what
capacity he signs, ambiguity arises. The law solves this by considering such a person as an
indorser, and not as a maker or drawer.

2. It must contain an unconditional order to pay a sum certain in money

 The signature is binding whether it is in one’s handwriting, or printed, engraved,
lithographed or photographed, so long as it is intended or adopted as the signature of the
signer or made with his authority. It will be valid and binding so long as the intention to
make the instrument the maker’s or drawer’s is shown. The maker of a note or the drawer
of a bill must sign the instrument and his signature is usually written at the lower right hand
corner thereof. The drawee’s name is usually written on the lower left hand corner,
although in checks the bank’s name sometimes appears across the top. The payee and the
successive indorsees negotiate the instrument by signing on the back. As long as the parties
to the bill or note comply with these long established and recognized customs, it would be
clear in what capacity the parties signed. However, once a party to an instrument deviates
from the commercial usage with respect to the place of signature, and it is not clear from
the instrument in what capacity he signs, ambiguity arises. The law solves this by
considering such a person as an indorser, and not as a maker or drawer.

In a bill of exchange the order to pay is a directive to pay/settle an obligation but, in fact, it
instructs another person to make the payment. The bill makes an order for the settlement
of an obligation. In this case, the drawee of the bill is the debtor to the drawer.

A bill, if it is to be negotiable, cannot be made payable in goods, wares, or merchandise, or

in property, or in labor or services. So also, an instrument is not negotiable if it is made
payable in bonds, corporate stock, state paper, scrip, checks, foreign bills.
The real reason for the requirement that negotiable instruments must be payable in money
is obviously is that money is the one standard of value in actual business. All other
commodities may rise and fall in value but in theory, at least, money always remain
measures this rise and fall and remains the same.

The amount payable must be certain. An instrument cannot function properly as a

substitute for money unless the amount for which it stands for is specified and definite. An
agreement to pay interest does not however render the sum uncertain. The exact amount
thereof can be computed without looking beyond the instrument

3. It must be payable on demand, or at a fixed or determinable future time

In this instrument the phrase “at sight” means it is payable on demand. exchange.
Presentment is necessary because it is essential to check if the signature of the
maker/drawer is authentic and the drawee has every right to ascertain whether or not the
order to pay is genuine. From the time the drawee sees the instrument, he can either accept
the instrument or reject it. By accepting it, the order of the maker was accepted and
becomes the party liable on the bill of exchange. The drawee is not a party to the
transaction until the instrument is accepted.

A bank or drawee is not liable to an instrument until it accepts it. A bank may dishonor an
instrument for insufficient funds but it may still honor it, resulting in an overdraft facility. A
bank or drawee is not liable to an instrument until it accepts it. A bank may dishonor an
instrument for insufficient funds but it may still honor it, resulting in an overdraft facility.
4. It must be payable to order or to bearer
The instrument in order to be considered negotiable must contain the so called “words of
negotiability” – must be payable to order or bearer. These words serve as an expression of
consent that the instrument may be transferred. This consent is indispensable since the
maker assumes greater risks under a negotiable instrument than under a non-negotiable
one. Under Sec. 10 however, the instrument need not follow the language of the law, but
any term which clearly indicates an intention to conform to the legal requirements is
sufficient.

An instrument payable on demand is payable at any time on demand of the payee or holder.
In a bill of exchange, before the drawee can be liable, he must accept it. If he does not
accept the instrument, that instrument is dishonored by non-acceptance. At that particular
time, drawer will become liable to the payee or holder. The drawer’s liability is secondary
and he can only be ran after if the drawee dishonored the instrument.
If the drawee accepts, the payee or holder must make a demand before he is paid. When
the payee or holder demands for payment, it is essential that he brings the instruments. If
he fails to, the drawee may dishonor his demand. The moment the payee or holder brings
the instrument to the drawee, the latter must inspect the instrument and check if it is
genuine. Then he should pay.

When an instrument is payable to order, the promise to pay is towards the payee or at his
instruction. This indicates that the ultimate payee of the instrument need not be the payee
because he can transfer his rights to another person. This indicates the negotiability of the
instrument and if this is missing, the instrument cannot be negotiable. As far as the maker is
concerned, he issues an instrument that is intended to pass from hand to hand.

5. The drawee must be named or otherwise indicated therein with reasonable certainty

A bank or drawee is not liable to an instrument until it accepts it. A bank may dishonor an
instrument for insufficient funds but it may still honor it, resulting in an overdraft facility. A
simple signature will not constitute acceptance because the law provides that signature
without indication in what capacity is deemed to be an indorser. The name of the person on
whom a bill is drawn should appear on its face. Otherwise the instrument would not be
negotiable. But under Section 14, the drawee’s name may be omitted and be filled in under
implied authority like any other blank. And, an acceptance may supply the omission of a
designation.
FURTHER NEGOTIATED

When the payee of an instrument transfers it to another by signing at the back thereof he is said
to have negotiated or indorsed the same and thereby becomes an indorser. An instrument must
be indorsed in full in order to determine the holder of the instrument.

In the bill provided the instrument is negotiated to Desmond Myles and Max Peyne, this is a
where an instrument is payable to the order of two or more payees or indorsees. As such all
must indorse unless the one indorsing has authority to indorse for the others.

Section 41 of the Negotiable Interessts Act applies only to instruments payable to two or more
payees jointly. It does not apply to instruments to two or more payees severally and such
instrument so payable may be negotiated by the indorsement of one payee.

If only one payee indorses, he passes only his part of the instrument. Such an indorsement
would not operate as such because it would not be an indorsement of the entire instrument.
But the following are exceptions to the rule requiring joint indorsement:
1) where the payee or indorsee indorsing has authority to indorse for the others, and
2) where the payees or indorsees are partners.

Where the instrument is payable or indorsed to “A and B”, they are joint payees and an
indorsement by either A or B only will not constitute a valid negotiation so as to free the
instrument from defenses, unless the one indorsing is authorized by the other.

The second indorsement where Nathean Drape is acting only in a capacity as an agent of Ezio
Auditobe, such indorsement is a restrictive one. A restrictive indorsement either restricts the
right of the indorsee to further negotiate the instrument or reserves beneficial interest therein
in the indorser or in a third person. In the latter case, although the instrument may be further
negotiated, all subsequent indorsees take subject to the rights of the restrictive indorser or the
third person. Under this restrictive indorsement, the indorsee does not acquire title over the
instrument as against the indorser. He merely becomes the agent of the indorser. Hence, any
action the indorsee may file is subject to defenses available against the indorser, such as lack of
consideration.

An indorsee makes a restrictive indorsement to an agent or a trustee because he is dealing with

an agent or trustee and not the principal or beneficiary. This protects himself because the
restrictive indorsement acts as a constructive notice to subsequent indorsees that his immediate
indorsee is acting as a mere agent or trustee.
While the indorsee is entitled to enforce the instrument, the person is not the beneficial owner
of the proceeds. Indorsee will be paid the amount but, upon receipt of payment, it is for the
account of someone else. The person for whom the collection or enforcement being made is the
one protected in this nature of the instrument since each indorsee will be charged with the
fidelity of an agent or trustee.
The indorsement passes the legal title over the note to the indorsee so as to enable him to
demand and receive payment of the value of the instrument. A representative must indorse in
the same manner as an agent of the maker, drawer or acceptor should in order to escape
personal liability under Section 20. In short, (1) he must add words describing himself as an
agent; and (2) at the same time disclose his principal. Of course, (3) he must be duly authorized.
It has been held that an agent may indorse by merely signing the name of the principal. An
instrument may be indorsed either personally or through an agent. And the authority of the
agent need not be in writing. In so signing, an agent should make it plain that he is merely
signing in behalf of the principal, otherwise he may be held personally liable.

Where a an agent negotiates an instrument without indorsement, he incurs all the liabilities of
an indorser through delivery, unless he discloses the name of his principal and the fact that he is
acting only as agent. As agent of the principal, there are no warranties. Rather it is actually the
agent’s principal that gives warranty.
DISHONOURED

A bill of exchange can be dishonored through non-payment or for non-acceptance.

The instrument is dishonored by non-payment when:

a. It is duly presented for payment and payment is refused or cannot be obtained;
b. Presentment is excused and the instrument is overdue and unpaid.

A bill is said to be dishonoured by non-acceptance in the following circumstances.

a. When the drawee or one of the several drawees, not being partners, commit default in
acceptance upon being duly required to accept the bill. In this regard Section 63 expressly
provides that the holder must, if so required by the drawee of a bill of exchange presented
to for acceptance, allow the drawee forty-eight hours (exclusive of public holidays) to
consider whether he will accept it.
b. Where presentment is required and the bill remains unrepresented.
c. Where the drawee is incompetent to enter into a valid contract.
d. Where the bill is given a qualified acceptance.
e. If the drawee is a fictitious person.
f. If the drawee cannot be found even after reasonable search.
g. Where the drawee has either become insolvent or is dead and the holder does not present
the bill to the assignee or legal representative of the insolvent or deceased drawee.

When an instrument is dishonored by non-acceptance of a bill or non-payment of a bill, notice

of such dishonor must be given to persons secondarily liable, namely, the drawer and indorsers.
Otherwise, such parties are discharged.

Persons primarily liable need not be given notice of dishonor in order to charge them because
they are the very ones who dishonor the instrument. Thus, a joint maker and an
accommodation maker is not entitled to notice.

Notice of dishonor is bringing either verbally or in writing, to the knowledge of the drawer or the
indorser of the 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. The purpose is to notify the drawer and/or the indorsers that the holder is
enforcing his right against them under their contract to pay should the instrument not be paid
or accepted at maturity. Without this notice, no secondary party may be held liable, except in
the cases where the law provides otherwise.

Where the instrument has been dishonored in the hands of an agent, he may either himself give
notice to the parties liable thereon, or he may give notice to his principal. If he gives notice to
his principal, he must do so within the same time as if he were the holder, and the principal,
upon the receipt of such notice, has himself the same time for giving notice as if the agent had
been an independent holder.
If the agent chooses to give notice to his principal, he must give notice within the time allowed
by law as if he were a holder. The principal has also the same time to give notice to the parties
secondarily liable.

Where due notice of dishonor by non-acceptance has been given, notice of a subsequent
dishonor by non-payment is not necessary unless in the meantime the instrument has been
accepted. A dishonor by non-acceptance confers upon the holder an immediate right against all
secondary parties. If the holder then gives due notice of dishonor, he may enforce his rights
against them by an action. If he fails to give notice of dishonor by non-acceptance, his rights
against secondary parties are lost and such rights will not be revived by a subsequent
presentment for payment.