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Commercial Law, Professors Sundiang and Aquino) : Promissory Note Bill of Exchange
Commercial Law, Professors Sundiang and Aquino) : Promissory Note Bill of Exchange
GENERAL CONCEPTS
CHECK - A bill of exchange drawn on a bank payable on demand. (Sec. 185). It is the
NEGOTIABLE INSTRUMENT (NI) most common form of bill of exchange.
A written contract for the payment of money which complies with the requirements of
Sec. 1 of the NIL, which by its form and on its face, is intended as a substitute for money OTHER FORMS OF NI
and passes from hand to hand as money, so as to give the holder in due course (HDC) the 1. Certificate of deposit issued by banks, payable to the depositor or his order, or to
right to hold the instrument free from defenses available to prior parties. (Reviewer on bearer
Commercial Law, Professors Sundiang and Aquino) 2. Trade acceptance
Functions: (Bar Review Materials in Commercial Law, Jorge Miravite, 2002 ed.) 3. Bonds, which are in the nature of promissory notes
1. To supplement the currency of the government. 4. Drafts, which are bills of exchange drawn by one bank upon another
2. To substitute for money and increase the purchasing medium. 5. Debenture
Legal tender – That kind of money which the law compels a creditor to accept in All of these must comply with Sec. 1, NIL.
payment of his debt when tendered by the debtor in the right amount. Note: Letters of credit are not negotiable because they are issued to a specified person.
Note: A NI although intended to be a substitute for money, is not legal tender. However, a
check that has been cleared and credited to the account of the creditor shall be equivalent Instances when a BE may be treated as a PN
to delivery to the creditor of cash. (Sec. 60, NCBA) a. The drawer and the drawee are the same person; or
Features: (Reviewer on Commercial Law, Professors Sundiang and Aquino) b. Drawee is a fictitious person; or
1. Negotiability – That attribute or property whereby a bill or note or check may pass c. Drawee does not have the capacity to contract. (Sec. 130)
from hand to hand similar to money, so as to give the holder in due course the right d. Where the bill is drawn on a person who is legally absent;
to hold the instrument and to collect the sum payable for himself free from e. Where the bill is ambiguous (Sec. 17[e])
defenses.
The essence of negotiability which characterizes a negotiable paper as a Parties to a NI
credit instrument lies in its freedom to circulate freely as a substitute for 1. Promissory Note
money. (Firestone Tire vs. CA, 353 SCRA 601) a. Maker – one who makes promise and signs the instrument
2. Accumulation of Secondary Contracts – Secondary contracts are picked up and b. Payee – party to whom the promise is made or the instrument is payable.
carried along with NI as they are negotiated from one person to another; or in the 2. Bill of Exchange
course of negotiation of negotiable instruments, a series of juridical ties between a. Drawer – one who gives the order to pay money to a third party
the parties thereto arise either by law or by privity. b. Drawee – person to whom the bill is addressed and who is ordered to pay. He
becomes an acceptor when he indicates his willingness to pay the bill
Applicability: c. Payee – party in whose favor the bill is drawn or is payable.
General Rule: The provisions of the NIL are not applicable if the instrument involved is
not negotiable. DISTINCTIONS
Exception: In the case of Borromeo vs. Amancio Sun, 317 SCRA 176, the SC applied
Section 14 of the NIL by analogy in a case involving a Deed of Assignment of shares which PROMISSORY BILL OF EXCHANGE
was signed in blank to facilitate future assignment of the same shares. The SC observed NOTE
that the situation is similar to Section 14 where the blanks in an instrument may be filled up Unconditional promise Unconditional order
by the holder, the signing in blank being with the assumed authority to do so.
The NIL was enacted for the purpose of facilitating, not hindering or hampering
Involves 2 parties Involves 3 parties
transactions in commercial paper. Thus, the statute should not be tampered with
haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a Maker is primarily liable Drawer is only secondarily
single case. (Michael Osmeña vs. Citibank, G.R. No. 141278, March 23, 2004 Callejo J.) liable
Only one presentment: Two presentments: for
Kinds of NI for payment acceptance and for
1. PROMISSORY NOTE (PN) payment
An unconditional promise in writing 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 NEGOTIABLE NON-NEGOTIABLE
money to order or to bearer. (Sec. 184) INSTRUMENTS INSTRUMENTS
Only NI are governed by Application of the NIL is only by
2. BILL OF EXCHANGE (BE)
the NIL. analogy.
An unconditional order in writing addressed by one person to another, signed by the
Transferable by Transferable only by
person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed
negotiation or by assignment
or determinable future time a sum certain in money to order or to bearer. (Sec. 126)
assignment.
NEGOTIABLE NEGOTIABLE Solvency of debtor is Solvency of debtor is not
INSTRUMENT DOCUMENT OF TITLE in the sense guaranteed under Art.
Subject is money Subject is goods guaranteed by the 1628 of the NCC unless
indorsers because expressly stipulated.
Is itself the property The document is a mere they engage that the (Notes and Cases on
with value evidence of title – the things instrument will be Banks, Negotiable
of value being the goods accepted, paid or Instruments and other
mentioned in the document both and that they will Commercial Documents,
pay if the instrument Timoteo B. Aquino)
Has all the Does not have these is dishonored. (Notes
requisites of Sec. 1 requisites and Cases on Banks,
of NIL Negotiable
A holder of NI may Intermediate parties are not Instruments and other
run after the secondarily liable if the Commercial
secondary parties document is dishonored. Documents, Timoteo
for payment if B. Aquino)
dishonored by the
party primarily
liable.
A holder, if a holder A holder can never acquire
in due course, may rights to the document better
acquire rights over than his predecessors.
the instrument
better than his
predecessors.
A transferee can be a A transferee remains to be an
HDC if all the assignee and can never be a HDC
requirements are
complied with
A holder in due course All defenses available to prior
takes the NI free from parties may be raised against the
personal defenses last transferee
Payable in sum certain in money Parties are bound because Binds the person secondarily liable
An instrument is still negotiable although the amount to be paid is expressed in currency they took the instrument (and therefore cannot be discharged
that is not legal tender so long as it is expressed in money. (PNB vs. Zulueta, 101 Phil 1071, knowing that there is an from liabilities if:
Sec.6 (e)). extension clause a. He consents or
The certainty is however not affected although to be paid: b. Right of recourse is expressly
a. With interest; or reserved. (Notes and Cases on Banks,
b. By stated installments; or Negotiable Instruments and other
c. By stated installments with an acceleration clause; Commercial Documents, Timoteo B.
Aquino)
d. With exchange; or
e. With cost of collection or attorney’s fees. (Sec. 2)
The dates of each installment must be fixed or at least determinable and the amount to
be paid for each installment. c. Payable on Demand or at fixed or determinable future time
A sum is certain if the amount to be unconditionally paid by the maker or drawee can be
determined on the face of the instrument and is not affected by the fact that the exact PAYABLE AT A FIXED OR
amount is arrived at only after a mathematical computation. (Notes and Cases on Banks, PAYABLE ON DEMAND DETERMINABLE FUTURE TIME
Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino)
a. Where expressed to be a. At a fixed period after date or
payable on demand, at sight;
ACCELERATION INSECURITY EXTENSION sight or on presentation; b. On or before a fixed or
CLAUSE CLAUSE CLAUSE b. Where no period of determinable future time specified
A clause that Provisions in the Clauses in the face payment is stated; therein; or
renders whole debt contract which of the instrument c. Where issued, accepted, c. On or at a fixed period after the
due and allows the holder that extend the or indorsed after maturity occurrence of a specified event,
demandable upon to accelerate maturity dates; (only as between which is certain to happen, though
failure of obligor to payment if he a. At the option of immediate parties). (Sec. the time of happening is uncertain.
comply with certain deems himself the holder; 7) (Sec. 4)
conditions. insecure. b. Extension to a
further definite time If the day and the month, but not the year of payment is given, it is not negotiable due to
at the option of the its uncertainty. (Pandect of Commercial Law and Jurisprudence, Justice Jose Vitug, 1997
maker or acceptor ed.)
c. Automa –tically
upon or after a d. Payable to Order or to Bearer
specified act or Payable to Order
event. The instrument is payable to order where it is drawn payable to the order of a specified
Instrument is still Instrument is Instrument is still person, or to him or his order. (Sec. 8)
negotiable rendered non- negotiable (Notes The payee must be named or otherwise indicated therein with reasonable certainty.
negotiable and Cases on The instrument may be made payable to the order of:
because the Banks, Negotiable a. A payee who is not the maker, drawer or drawee
holder’s whim and Instruments and b. The drawer or maker
caprice prevail other Commercial c. The drawee
without the fault Documents, d. 2 or more payees jointly
and control of the Timoteo B. Aquino) e. One or some of several payees
maker f. The holder of an office for a time being
Payable to Bearer
The instrument is payable to bearer:
a. When it is expressed to be so payable; or III. INTERPRETATION OF NEGOTIABLE INSTRUMENTS (Sec. 17)
b. When it is payable to a person named therein or to bearer; or
c. When it is payable to the order of a fictitious or non-existing person, and such fact was a. Discrepancy between the amount in figures and that in words – the words prevail, but if
known to the person making it so payable; or the words are ambiguous, reference will be made to the figures to fix the amount.
d. When the name of the payee does not purport to be the name of any person; or b. Payment for interest is provided for – interest runs from the date of the instrument, if
e. When the only or last indorsement is an indorsement in blank. (Sec. 9) undated, from issue thereof.
c. Instrument undated – consider date of issue.
Note: An instrument originally payable to bearer can be negotiated by mere delivery even if d. Conflict between written and printed provisions – written provisions prevail.
it is indorsed especially. If it is originally a BEARER instrument, it will always be a BEARER e. When the instrument is so ambiguous that there is doubt whether it is a bill or note, the
instrument. holder may treat it as either at his election;
As opposed to an original order instrument becoming payable to bearer, if the same is f. If one signs without indicating in what capacity he has affixed his signature, he is
indorsed specially, it can NO LONGER be negotiated further by mere delivery, it has to be considered an indorser.
indorsed. g. If two or more persons sign “We promise to pay,” their liability is joint (each liable for his
part) but if they sign “I promise to pay,” the liability is solidary (each can be
A check that is payable to the order of cash is payable to bearer. Reason: The name of compelled to comply with the entire obligation). (Sec. 17)
the payee does not purport to be the name of any person. (Ang Tek Lian vs. CA, 87 Phil.
383) IV. TRANSFER AND NEGOTIATION
PRIMARY AND
SECONDARY WARRANTIES OF PARTIES DRAWER GENERAL IRREGULAR INDORSER
LIABILITY OF PARTIES INDORSER
Impose no direct obligation to
Makes the parties liable pay in the absence of breach
to pay the sum certain in thereof. In case of breach, the A. Admits the A. Warrants all A person, not
money stated in the person who breached the existence of the subsequent HDC otherwise a party to
instrument. same may either be liable or payee and his - an instrument, places
barred from asserting a capacity to his signature thereon
indorse; a. That the in blank before
particular defense.
instrument is delivery. (Sec. 64)
Conditioned on Does not require presentment B. Engages that genuine and in
presentment and notice and notice of dishonor. the instrument all respect what A. If instrument
of dishonor (Campos and (Campos and Lopez-Campos, will be it purports to be payable to the order
Lopez-Campos, Negotiable Instruments Law, accepted or of a 3rd person, he is
paid by the b. He has good liable to the payee
Negotiable Instruments 1994 ed.) title to it;
Law, 1994 ed.) party primarily and subsequent
liable; and c. All prior parties.
1. Primarily Liable (Sec. 60 and 62, NIL) C. Engages that parties had B. If instrument
if the capacity to payable to order of
MAKER ACCEPTOR OR DRAWEE instrument is contract maker or drawer or to
A. Engages to pay A. Engages to pay according dishonored and d. The bearer, he is liable to
according to the tenor of to the tenor of his acceptance; proper instrument is, at all parties subsequent
the instrument; and B. Admits the existence of the proceedings are the time of to the maker or
B. Admits the existence drawer, the genuineness of his brought, he will endorse-ment, drawer.
of the payee and his signature and his capacity and pay to the party valid and
capacity to indorse. authority to draw the entitled to be C. If he signs for
subsisting. accommo-dation of
instrument; and paid.
C. Admits the existence of the B. Engages that the payee, he is liable
payee and his capacity to the instrument to all parties
indorse. will be accepted subsequent to the
or paid, or both, payee.
A bill of itself does not as the case may
operate as an assignment of be, according to
funds in the hands of the its tenor; and
drawee available for the
payment thereof and the C. If the
drawee is not liable unless and instrument is
until he accepts the same dishonored and
(Sec.127) necessary
proceedings on
dishonor be duly
taken, he will
pay to the party
entitled to be
paid.
3. Limited Liability (Sec. 65; Metropol Financing v. Sambok, 120 SCRA 864) ORDER OF LIABILITY
There is no order of liability among the indorsers as against the holder. He is free to
choose to recover from any indorser in case of dishonor of the instrument. (Notes and
Cases on Banks, Negotiable Instruments and other Commercial Documents, Timoteo B.
QUALIFIED INDORSER PERSON NEGOTIATING Aquino)
BY DELIVERY As respect one another, indorsers are liable prima facie in the order in which they indorse
unless the contrary is proven (Sec.68)
GENERAL RULE: One whose signature does not appear on the instrument shall not be
Every person negotiating A. Warranties same as liable thereon.
instrument by delivery or by those of qualified
a qualified endorsement indorsers; and EXCEPTIONS:
warrants that: 1. The principal who signs through an agent is liable;
B. Warranties extend to
2. The forger is liable;
A. Instrument is genuine and immediate transferee only.
3. One who indorses in a separate instrument (allonge) or where an acceptance is
in all respects what it
written on a separate paper is liable;
purports to be;
4. One who signs his assumed or trade name is liable; and
B. He has good title to it;
5. A person negotiating by delivery (as in the case of a bearer instrument) is liable to his
C. All prior parties had immediate indorsee.
capacity to contract;
D. He has no knowledge of VII. DEFENSES
any fact which would impair
the validity of the REAL DEFENSES PERSONAL DEFENSES
instrument or render it
valueless. Those that attach to the Those which are available
instrument itself and are only against a person not a
available against all holders, holder in due course or a
whether in due course or subsequent holder who
not, but only by the parties stands in privity with him.
PERSON NEGOTIATING entitled to raise them. (a.k.a (a.k.a. equitable defenses)
BY MERE DELIVERY OR absolute defenses)
GENERAL INDORSER
BY QUALIFIED
INDORSEMENT 1. Material Alteration;
2. Want of delivery of 1. Absence or failure of
incomplete instrument; consideration, partial or
3. Duress amounting to total;
No secondary liability; but is There is secondary
liable for breach of warranty liability, and warranties forgery; 2. Want of delivery of
4. Fraud in factum or fraud complete instrument;
in esse contractus; 3. Insertion of wrong date
Warrants that he has no Warrants that the 5. Minority (available to in an instrument;
knowledge of any fact which instrument is, at the time the minor only); 4. Filling up of blank
would impair the validity of of his indorsement, valid 6. Marriage in the case of a contrary to authority given
the instrument or render it and subsisting wife; or not within reasonable
valueless 7. Insanity where the time;
insane person has a guardian 5. Fraud in inducement;
appointed by the court; 6. Acquisition of instrument
8. Ultra vires acts of a by force, duress, or fear;
corporation 7. Acquisition of the
9. Want of authority of instrument by unlawful
agent; means;
10. Execution of instrument 8. Acquisition of the
between public enemies; instrument for an illegal E. COMPLETE BUT UNDELIVERED NI (Sec. 16)
11. Illegality – if declared consideration; 1. Between immediate parties and those who are similarly situated, delivery must be
void for any purpose 9. Negotiation in breach of coupled with the intention of transferring title to the instrument.
12. Forgery. faith; 2. As to HDC, it is conclusively presumed that there was valid delivery; and
10. Negotiation under 3. As against an immediate party and remote party who is not a HDC, presumption of a
circumstances that amount valid and intentional delivery is rebuttable.
to fraud;
11. Mistake; F. FRAUD
12. Intoxication (according FRAUD IN FACTUM OR FRAUD IN ESSES
to better authority); FRAUD IN CONTRACTUS OR FRAUD IN
13. Ultra vires acts of INDUCEMENT EXECUTION
corporations where the The person who signs The person is induced to sign an
corporation has the power the instrument intends to instrument not knowing its
to issue negotiable paper sign the same as a NI character as a bill or note
but the issuance was not but was induced by fraud
authorized for the
particular purpose for which G. ABSENCE OR FAILURE OF CONSIDERATION (Sec. 28)
it was issued; Personal defense to the prejudiced party and available against any person not HDC.
14. Want of authority of
agent where he has H. PRESCRIPTION
apparent authority; Refers to extinctive prescription and may be raised even against a HDC. Under the Civil
15. Insanity where there is Code, the prescriptive period of an action based on a written contract is 10 years from
no notice of insanity on the accrual of cause of action.
part of the one contracting
with the insane person; and I. MATERIAL ALTERATION
16. Illegality of contract Any change in the instrument which affects or changes the liability of the parties in any
where the form or way.
consideration is illegal. Effects:
1. Alteration by a party – Avoids the instrument except as against the party who made,
authorized, or assented to the alteration and subsequent indorsers.
EFFECTS OF CERTAIN DEFENSES However, if an altered instrument is negotiated to a HDC, he may enforce payment
A. MINORITY thereof according to its original tenor regardless of whether the alteration was innocent or
Negotiation by a minor passes title to the instrument. (Sec.22). But the minor is not liable fraudulent.
and the defense is personal to him
Note: Since no distinction is made, it does not matter whether it is favorable or unfavorable
B. ULTRA VIRES ACTS to the party making the alteration. The intent of the law is to preserve the integrity of the
A real defense but the negotiation passes title to the instrument. (Sec. 22) negotiable instruments.
Note: A corporation cannot act as an accommodation party. The issuance or
indorsement of negotiable instrument by a corporation without consideration and for the 2. Alteration by a stranger (spoliation)- the effect is the same as where the alteration is
accommodation of another is ultra vires. (Crisologo-Jose v. CA, 117 SCRA 594) made by a party which a HDC can recover on the original tenor of the instrument. (Sec.
124)
C. INCOMPLETE AND UNDELIVERED NI (Sec. 15)
If completed and negotiated without authority, not a valid contract against a person who Changes in the following constitute material alterations:
has signed before delivery of the contract even in the hands of HDC but subsequent a. Date;
indorsers are liable. This is a real defense. b. Sum payable, either for principal or interest;
c. Time or place of payment;
D. INCOMPLETE BUT DELIVERED NI (Sec. 14) d. Number or relations of the parties;
1. Holder has prima facie authority to fill up the instrument. e. Medium or currency in which payment is to be made;
2. The instrument must be filled up strictly in accordance with the authority given and within f. That which adds a place of payment where no place of payment is specified; and
reasonable time g. Any other change or addition which alters the effect of the instrument in any
3. HDC may enforce the instrument as if filled up according to no. 2. respect. (Sec. 125) A serial number is an item which is not an essential requisite
for negotiability under Sec. 1, NIL, and which does not affect the rights of the
parties, hence its alteration is not material. (PNB vs. CA, 256 SCRA 491)