NEGOTIABLE INSTRUMENTS LAW

January 24, 2021

1st examination

REMINDER : NO CHEATING!
2HRS. 10 QUESTIONS.
SUBMIT YOUR ANSWERS VIA EMAIL TO THE DEAN’S OFFICE.

1. Explain in your own words the : i) functions; and ii) characteristics of a negotiable
instrument.

FUNCTIONS OF A NEGOTIABLE INSTRUMENT:

a. A negotiable instrument is used in commercial transactions because it can be a
substitute for money or legal tender and can be used for the payment of
transactions.
b. A negotiable instrument is used as a substitute for money or legal tender as
mentioned in the first function since it is used in a commercial transaction.
c. A negotiable instrument is widely used in credit transactions. These instruments are
being used to enter into contracts or any other transactions.
d. A negotiable instrument is a proof of indebtedness. In such case, the creditor is able
to prove that there is still a debt to be paid.
e. A negotiable instrument increases the level of security when such instruments are
used in transactions because which must again, satisfy the requirements provided
under sec. 1 of Act.

CHARACTERISTICS OF A NEGOTIABLE INSTRUMENT:

A Negotiable instrument can be characterized as an instrument that can be further

negotiated. It can transfer a title or right to another person better than the right a
transferor has. It basically a substitute for money or legal tender that is being used in
commercial transactions.

2. How is negotiability determined? Explain.

Negotiability is determined when all of the following requisites provided under sec. 1 of
Act. No. 2031 is present in order to determine that the instrument is negotiable.

1. Must be in writing and signed by the maker or drawer

2. Must contain an unconditional promise to pay a sum certain in money
3. Must be payable upon demand or fixed or determinable future time
 4. Must be payable to order or bearer
5. Where the instrument is addressed to a drawee his name must be named or
otherwise indicated therein with reasonable certainty

Absence of any of these requisites will render the instrument as non-negotiable.

3. Enrique Montinola sought to purchase from the Manila Post Office ten (10) money
orders each payable to E.P. Montinola. After the postal teller had made out money
orders, Montinola offered to pay for them with a private check. Since private checks
were not generally accepted in payment of money orders, the teller advised him to see
the Chief of the Money Order Division, but instead of doing so, Montinola managed to
leave the building with his own check and the ten (10) money orders without the
knowledge of the teller. Upon discovery of the disappearance of the unpaid money
orders, an urgent message was sent to all postmasters and the following day, notice was
likewise served upon all banks, instructing them not to pay anyone of the money orders
aforesaid if presented for payment. The Bank of America received a copy of said notice
three days later. It debited appellant’s account with the same amount and gave it advice
thereof by means of a debit memo. Who shall bear the loss?

The one who shall bear the loss is the Bank of America because postal money orders are
not negotiable instruments.

4. Nell Company issued a check to help Casals and Casville Enterprises obtain a letter of
credit from Equitable Banking in connection with an equipment, a garrett skidder, which
Casals and Casville were buying from Nell. Nell indicated the payee as follows:

EQUITABLE BANKING CORPORATION A/C CASVILLE ENTERPRISES INC. Casals deposited

the check with the bank and the bank teller accepted the same and in accordance with
customary bank practice, stamped in the check the words “non-negotiable”. The
amount was withdrawn after the deposit. This prompted Nell to file a case against the
bank, Casals and Casville. While the instant case was being tried, Casals and Casville
assigned the garrett skidder to plaintiff which credited in favor of defendants the
amount of P450,000 as partial satisfaction of its claim against them. Who shall bear the
loss?

Nell Company should bear the loss because the letter of credit was ambiguous for in this
case the payee was not clearly indicated.

5. RTC Quezon City awarded the petitioner Fortunado damages in a civil case against Angel
Bautista. Pursuant to the said judgment, Bautista levied upon two parcels of land
registered in her name. But the second lot had already been purchased by National
Steel Corporation although not yet registered under its name. After due notice, these
lots were sold at public auction to the petitioner and subsequently registered in his
name. NSC filed with the trial court an urgent motion to redeem both lots, which was
 opposed by the petitioner. As the motion remained unresolved and the period of
redemption would expire, NSC issued to the sheriff a PNB Check as the redemption
price for the lot. The sheriff acknowledged receipt of the check as redemption money
for the two parcels of land and issued a certificate of redemption in favor of NSC and
Bautista. The petitioner rejected the redemption by check because it was not legal
tender and was not intended for payment but merely for deposit. Was there a valid
payment? Explain.

Yes, there was a valid legal tender. Art. 1249 of the Civil code deals with the extinction
of an obligation through payments of legal tender but in this case the subject is to
redeem a property which is not an obligation that can be extinguished that is
contemplated under this provision. Furthermore, jurisprudence provides that the
redemption of property that was the subject of an execution is not invalidated if the
payment made to the sheriff is through a check for the amount that was due and that
was duly accepted by the sheriff or officer.
           

6. Bachrach sold a truck to Golingco, which was secured by a promissory note and a
chattel mortgage on the truck. The promissory note provided that there would be
payment of 25% attorney’s fees. Is the stipulation valid? Explain.

Yes, the stipulation is valid because as provided under sec. 2 of Act. No. 2031 a sum
certain payable in money is still valid even if there is a stipulation that there will be
attorney’s fees to be added up in the sum to be paid by the debtor.

7. The general rule is that an instrument must not contain an order or promise to do any
act in addition to the payment of money. Otherwise, the instrument wouldn’t be
negotiable. Explain the exceptions.

The exceptions are provided under sec. 5 of the NIL wherein the instrument contains:
a. Authorizes the sale of collateral securities when the instrument is not paid at
maturity.
b. Authorizes the confession of judgment when the instrument is not paid at maturity
c. Wherein it waves the benefits provided by law that is for the advantage given to the
obligor
d. The holder can elect that will allow him to acquire something that is needed to be
done in connection with the payment of money.

8. What is Cognovit actionem? Explain.

A cognitive actionem is a type of Confession of Judgment provided under Act. No. 2031
wherein it is explained as a written confession made by the defendant conforming to
the merits of the case presented and in effect grants the execution of the sum of money
being litigated. This lessen the expenses to be made like paying for attorneys fees.
9. What is the effect of the omission of a date and amount in a bill of exchange? Explain.

The effect of the omission of a date will not affect the negotiability of the instrument as
provided under sec. 6 of Act No. 2031 because such omission of a date in a bill of
exchange will allow the current holder of the instrument to insert the true date when it
was issued or accepted which is provided under sec. 13 of Act. No 2031. Moreover, if
there is an omission of the amount in a bill of exchange, if such instrument has a
signature and is in the possession of the person who made the said signature, that
person is deemed to have a prima facie authority to fill up the amount to be paid
needed in the said instrument.

10. Knowing he had insufficient funds, Ang Tek Lian issued a check for P4000, payable to
cash. This was given to Lee Hua Hong in exchange for cash. Upon presentment of the
check, it was dishonored for having insufficient funds. It is argued that the check, being
payable to cash, wasn’t indorsed by the defendant, and thus, isn’t guilty of the crime
charged. Rule on the contention.

The contention is not correct because jurisprudence provides that if a check has been
drawn and that is payable to cash the bank can pay the amount of the said check to the
person who presented without any indorsement from the drawer. Unless the bank is in
doubt as to the true character of the drawee, or there might be issues of forgery
because before a bank releases the amount indicated they also verify if the signature in
the check is genuine, then the bank can demand for any identification in order to
protect itself.

End