A, INTRODUCTION fegotiable instruments hi the power of These instruments in their inception, transfer and payment, are governed by that code of laws which had evolved from the customs of merchants, commor own cs the COED | pSsoriaraaOey, 2 one ee yuarter of the globe, het, are made through the while ash used to be the common mode of exchanging’ ‘and services for their value. However, the rise of negotiable instruments brought radical change: business practices. The popularity of negoti instruments is due mainly to the advent of modern business practices that contributed to the growth of} ‘ewer ways of facilitating financial transactions. Cash is no longer king. w of the Philippines? governs the use of promissory notes, bills of exchange, —_ SEs 1 Gin Pagan Bs ext 019, asking tees ea ana ol on ‘Act Na. 2031, February 3,191, s 1 vine preries wins Newons- Negotiability ‘oun sr purposes of the present principal references are fo. 2 Commerce, and, by suppletory applicat Civil Code of the Philippines. jon; the New) B, NEGOTIABLE INSTRUMENTS a SggaBle instrament is «written Contract for the payment of money, by its form, intended as a substitute for money and to pass from hand to hand, to give the holder in due course the right to collect the sum due. Thi drawers, 0 negotiable instruments are: , acceptors, and payees; but one can ble instruments in five other lows: indorsers, indorsees, holders, ise, and accommodation parties. There is one curious player though, known as referee,* which is seldom discussed. A is a document that has features of mone! and substitute for money, a medium of excl credit instrument which increase: increases purchasing power in circul as proof of transaction, bility means the papér is (freely and unconditionally transferable from (one person to another by delivery or by indorsement completed by,desvers.° Negotiabilityis the means by which a person transfer to another more than what self possesses: In essence, this ig y toa transferee the right to in turn the 0 C0 convey clear title, not have clear title. A bil of exchange f quite useful as a substitute for ney. It has the advantage that it may be made tothe order of a named person (the payee) and negotiated without his indorsement, It can therefore be sent through the mails or by express or otherwise without the risk \that attaches to the Sending of money. A thief or finder can use money freely, but a bill payable to order and unindorsed ‘cannot ordinarily be passed unless the thief or finder can successfully forge the payee’s signature’ A bill has the further advantage that it can be drawn for any amount and that it enables a creditor to make use of ‘money owed him as though he already had it. GE lan pais 9 be 1. Nemo Dat Quod Non Habet-"so4t PS i ronceie Posresces One of the most important principles relating to property transfer is “nemo dat quad non habet” which. means/nobody can pass a better title than he himself possesses. In other words, one cannot give what one does not have, nor transfer anything that one does not ‘own, The effect of this rule is that any transfer without the transferor’s title is null and void, Negotiable instruments are a common i this rule. A person may validly acqui cello es A acquire negotiable instruments from a seller who does not. PEReastitle ® Section 30, NL ‘when the original transferor does over'them, The only requirement for this exception to apply is that the purchase must be for bona’ fide reasons; Hence, defects of title of sellers) of these instruments do not affect the title of persons who purchase them in good faith and for value. If the transferor had obtained a negotiable instrument through fraud) or) duress, but the subsequent transferee is a purchaser in good faith and for value, that transferee would have a perfectly good title over: the negotiable paper.° Thus, the title of the transferee fas regard the negotiable instrument is independent of the title of his transferor. Consequently, the transferee can sue upon a negotiable instrument in his own name in case of|dishonor without giving notice of transfer to the original debtor, that is, without informing the original debtor of the fact that the transferee has become the holder of the negotiable instrument.’ The principal ‘@ifference, ' therefore, between a negotiable instrament and other documents (or chatiel) is thet, in the case of a negotiable instrument, the transferee, in good faith and for consideration, attains good title even though the title of the transferor may be defective. In the case of other documents, however, the transferee acquires no better title than, that of the transferor.® 6 Setion 52, NL. 7 Section 70, Nik * Geel, Shivam B, The Negotiable Instruments Act, 1881: A Crea Analisis. ‘Penguin-Partidge, Bloomingdale, 2015.Fr See-30 'A negotiable instrument is a cartier without framed in the fewest words poset icing certainty and precision. It ig which’ can materially impede certain. a oo ies, certificates of deposit, trade acceptances, bonds, letters of a tte. but this handbook will deal only with the negotiable instruments under the Negotiable Instruments pad namely: promissory notes, bills of ‘exchange, and checks, which is a special type of bil Eanes S, which is a special type of bill of 2. Features|Of Negotiable Instruments A negotiable instrument has the following features: ue aaa Negotiable instruments are freely! iransferabl mone baa to another any number ce staan , in return of something of valle The right of ownership passes from person to Persenacither by mere delivery (if the instrument is Payable te beare) or by endorsement/competed by Seey (il it is. payable to order)" The essence of ‘egotiablity which characterizes a negotiable paper freely oe eutrrument lies in its freedom to circulate pectsbe instrament i entba ne eae bial kenga att mt en fo money fe, the pri - Ina E ict is between the udattemrtyce; and ine er Gnd the’payee; and in a bill of exchange, Ch, aR +G1R No 9755, Ruler Co. he 1992; Section 20, Nt No, 119236, March 5, 2001 ———E—=————— jndorse munky ne drawerlland!'thellpayee. When these Patraments are negotiated, or when the pill of additional contracts are exchange is accepted, cxated.'' As the instrument is negotiated/further, lore partiesjware™added / unto them (indorsers, saorsees, acceptor). Bvery negotiation brings in a new iOntract, and the more secondary contracts are coenmulated, the better it is for the holder because in aece of dishonor by the party primarily liable, there be held secondarily liable on ‘ill be parties who can instrument (indorsers, drawer), subject to service ‘otice of dishonor upon them. '? tion u of ne fable document from a negotiab 3. Presumptions Certain facts pertaining to a negotiable instrument are considered. to be jtrue| and cannot be refuted (conclusive), and some others are considered “true unless proven otherwise (prima facie). These are called presumptions. The Negotiable Instruments Law holds the following presumptions: (1)-@onsideration - Every negotiable instrument is ‘deemed prima facie to have been issued for a valuable’ consideration; and every person whose signature D. Negotiable Insruments. American tnstcute of 6years thereon to have become a party thereto for app value (Section 24); Date twas _ Every negotiable instrument O) jejdrawm, transferred, indorsed, or accepted on Trasdate stated on the face of the instrument (Section 1; i nt {@) When payable on demand = Where an instrume (°) gsuied, accepted, or indorsed when overdue, itis, as regards the person so issuing, accepting, Or indorsing, it, payable on demand (Section 7); livery to holder in due course (HDC) - Where the (Parent is in the hands of a holder. in due course, a valid delivery thereof by all parties prior to him so as ‘to make them liable to him is ee we ‘And where the instrument is no) longer in possession of a party whose “signature appears thereon, a valid and intentional delivery’ by him is presumed until the contrary is proved (Section 16); (8) Signer as indorser-Where a signature is so placed Uupon the instrument that it is not clear in what ‘capacity the nerson making the sari intended to sign, he is to be deemed an indorser (Section 17(), - Where an instrument containing the word CLpromise to pay’ is signed by two ‘or more persons, they are deemed to be jointly and Seyerally liable thereon (Section 17(g)); (7) Holder for value= Where value has at any: given for the instrument, the holder is ae holder for value in respect to all parties who beco such prior to that time (Section 26); 0 Presumphon Preramphon PRavrapon he is deemed a holder for value to the extent of his (Section 27); an 9 drawn or indorsed to a person ~ Where an instrument is oat or indorsed to a person as "cashier" or other fiscal officer! ofa bank or corporation, it is deemed prima facie to be payable to the bank or corporation of which he is such, caer coal aa es Bepotied by either the seme: ank or corpoi e indorsement ofthe office: (Section 42), 5 (10) ~ BReepE where an indorsement bears date after the maturity of the instrument, every negotiation is deemed prima facie to have been effected before the instrument was overdue (Sect 5) eas gipicaa- yeas anos =a ae (11) Place of indorsement - EXCept where the contrary appears, every indorsement is to have been made is dated (Section 46); Presumed prima facie the instrument (12) When person not deemed holder in due course. - Where an instrument payable on demand is negotiated on an unreasonable length of time after its ‘issue, the holder is not deemed a holder in due course (Section 53); = Where the transferee receives notice of. ‘any infitmity-in the instrument or defect in the title of the person negotiating the same before he has paid the 8t agreed to be paid therefor, he will be {ull amoupolder in due course only to the extent of the amount therefore paid by him (Section 54); (14) Holder in due course - It is presumed that every holder of a negotiable instrument is deemed prima facie to be a holder in due course, ie., he took the instrument in good faith and for value before it was overdue (Section 59); When @ person deemed indorser. - A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to be indorser unless he clearly indicates by appropriate ‘words his intention ‘to be bound in some other) capacity (Section 63); (16) Order of indorsements - It is presumed that, the indorsements appearing on the negotiable instrument ‘were made in the order or sequence in which they appear thereon (Section 68); (17) Order in which indorsers are liable - As respect one another, indorsers are liable prima facie in the order in which they indorse; but evidence is admissible to show that, as betwee or among themselves; they have’ agreed otherwise (Section 68) 9) Sender deemed to have given due notice - Where notice of dishonor is duly addressed and deposited in the post office, conclusive presumption arises that the 9 sender have given due notice, notwithstanding any miscarriage in the mails (Section 105); (20) Deposit of notice of dishonor in post office~ When notice of dishonor has been deposited in any branch post office or in any letter box under the control of the post office, conclusive presumption arises that notice has been deposited in the post office (Section 106); (21) Waiver of protest. - A waiver of protest, whether in the case of a foreign bill of exchange or other negotiable instrument, is deemed to be a waiver not of a formal protest but also of presentment and notice of dishonor (Section 111}; (22 ept presumed as actual \n unconditional promise in writing to accept a bill before it is drawn is deemed an actual acceptance in favor of every person who, upon the faith thereof, receives the bill for value (Section 135); (23) Presumption that drawee accepted the bill The drawee is presumed to have accepted a exchange if, on presentment for acceptance, destroys it, or refuses within twenty-four hours after such presentment or within such other period as the holder may allow, to return the bill accepted or non- accepted to the holder (Section 13 (24) Failure to object is deemed acceptance - When the drawer or an indorser receives notice of a qualified acceptance, he must, within a reasonable time, express his dissent to the holder or he will be deemed to have assented thereto (Section 142); and 10duhnition maker payee (Sea 184. Promissory note, Sec. 184. Prominin the meaning of this Act is ay (25) When drawer. - Where an acceptance f whose honor expres Si aceeplance for the honor of the i drawer (Section 163). 4. Promissory Note defined. - A negoti within the mise in writing made by one person to ‘the maker, engaging to pay on or determinable future time, a arer. Where a it is not complete promissory note ‘unconditional pror another, signed by demand, or at a fixed sum certain in money to order orto be is drawn to the maker's own order, until indorsed by him. =| to pay ‘A promissory note is an unconditional promise to pay AiPieting made by one person to another, signed by the maker, engaging to pay on demand or a fixed determinable future time a sum certain in money to order or bearer.!? ‘The original parties to a promissory note are the maker (promisor or debtor) and the payee (promisee or creditor), The maker writes the note and promises to pay a specified amount, and the payee is the party entitled to the promised payment. There is no third party involved on the note because the issuance and the payment of a note are made by one person only - the maker. He issues the note and promises to honor it at its date of maturity or on due presentment. It is n presumed, however, that the payee or holder had given value for the paper.1* The purposes of promissory notes are to borrow money and settle debts. Hence, they are often created between a borrower and a lender in which the amount of money by the specified date or on due presentment. They need not necessarily represent a business transaction, but may be made by virtue of goods bought and sold. aoe eagles A Se tet ny i {P10,000.00 — Fauyaele Philippines June 1, 2020 eS" For value received, I promise to pay to the order | lof Juan dela Cruz the sum of Ten Thousand Pesos | (P10,000.00), Philippine currency, on December 30, 12020 at ABC Bank, Makati sichcai | capa atdaie. namyand gna [pbtitmag, be dipensed vith _(SedPPEBtOTSEos justration above is the standard form of ‘ory note. The amount on the upper left-hand comer represents the amount payable; the place and date on the upper right-hand corner are the place and date of execution; on the body of the instrument the amount payable is stated in words and in figures, as well as the date of maturity and the place of payment. If the note is payable to order the payee is named, but not necessarily if it is payable to bearer; and if payable on demand the date and place may be dispensed with. At the lower right-hand corner are the name and signature of the maker. 2‘The maker (M) promises to pay P (payee) o} amount of P10,000 on December 30, doacriee the Bank in Makati, On due date P presents the note on for payment. If M pays in due cour: , discharged. ae Mustration: M-> P-> M (discharged) However P, while waiting for the due dat yi eto 2 hegotiate it to a third person, A; and A may want to hnegotiate it further to B; B to C; C to D; and D to (holdes), On due date, E presents the note to M fo payment. If M pays in d . Besment If M pay jue course, the note is Mlustration: M-> P-> A> B-> C-> D > E-> M (discharged) The prininry’ contract Is between Mf tn between, Mand, Contracts biveen Pand A, Aan B, B and, © and Dyand D and B are secondary contracts. P, A, By C tid 'D are indorsers and ther transferees are indorsees 5. Stages In The Life Of A Promissory Note W-!-N~ (=) (1), Writing - M undertakes the mechanical act of writing and signing the instrument; (3 suance ~M delivers te note to jegotiation - P transfers the note to third-party Ato B: BoC; CtoD: and DoE (holder a ‘resentment ~ On due date, E presents the no! for payment; ee Payment ~ M pays in due course; and a >= (6) Discharge ~ Instrument is discharged. pon presentment for payment (n°- 4 above), two possibilities may ensue: (1) _M pays in due course, resulting in the discharge of the instrument;!5 or ) M dishonors the note by non-payment, which Qi Mp may proceed against the indorsers including AS original payee (D, C, B, A and P) after service of notice of dishonor.'® irthe note is dishonored by non-payment, E (hoxder) If the petve notice of dishonor to all indorsers (D. © Brand P), Unless excused or dispensed with, 9 Party Bae nat_served with—notice of dishonor is discharged. 7 Indorsers are liable in the order that they indorse; ieening, prior parties are liable to subsequent Parties, 16 but that rule does not apply to the holder. Provided notice of dishonor has been given, the holder has immediate right of recourse against the indorsers in any order he wants, regardless of whatever rangement the indorsers might have as between or mong themselves. There is no need for the holder to first aue the maker before going after the indorsers.!° The holder can demand payment from any prior indorser, like C in the given example, provided notice of dishonor has been given to him. C, and any other ' gection 88 in elation to Seetion 119 ' Section 89, ML 18 Section 68, NIL Fyindorset for that matter, cannot invoke the nile rior prijer Section 68 as against the holder. However, tayment made by an indorser does not discharge the prvrament because the party primarily liable is the maker.2 Presentment for payment is not necessary to charge the maker.?" 6, Bill Of Exchange | ‘See. 126. Bill of exchange, defined. - A of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, “requiring the person to whom it is addressed to pay on | demand or at a fixed or determinable future time a sum | certain in money to order or to bearer. A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to onder orto bearer. The fundamental purpose of a bill of exchange is to settle il eset debts without the actual ‘The original parties toa bill of exchange are the drawer (Gebtor) and the payee (creditor. The drawer orders the drawee to pay the payee a certain amount on demand or ata fixed or determinable future time. The awee is not under obligation to accept the order to pay, but if he does accept on presentment of the instrument to him by the payee or holder he becomes 2 section 60, NL 15 liable thereon as an acceptor. Only then does he become a party to and liable on the instrument, ‘The payee of a negotiable instrument acquires no interest with respect thereto until its delivery to him. Delivery of an instrument means transfer of possession, actual or constructive, from one person to ppother. Without the initial delivery of the instrument from the drawer to the payee, there can be no liability on the instrument. Moreover, such delivery must be {ntended to give effect to the instrument.?* In an ordinary written contract, the parties write out fully the terms of their agreement, but in promissory notes and bills of exchange, the terms of the contract are not fully expressed. The contract between the maker and the payee of a promissory note may be Stated with some fullness, but the contract between the drawer of a bill of exchange or of a check and the payee is not stated.2 So is the contract, if any, between the drawer and the drawee. ‘Although the relationship between the drawer and the ‘payee is not indicated in the instrument, the law Allows that a statement of the transaction which gives fise to the instrument be indicated on the face of the instrument itself as a matter of discretion on the part of the drawer.2° On the other hand, the relationship between the drawer and the drawee is a bit mysterious in the sense that by mere inspection of the instrument 23 Sections 62 and 127, NIL 28 Development Bank ofthe Phils. vs. Sima We 1993, 25 wiliston, Samuel LLD. Negotiable In 6 R. No. 85419, March 9 ts American Inatiute of 16one fins no indication as to the basis for the drawer, Gant or authority to draw the instrument on te igh didrawee. However, for one person to draw a bil vramehange on another, he must be in credit as to the oe exctthe basis of the credit could be a contract of “lc orloan, whereby the intended drawee is, indebted to the supposed drawer; or the drawer keeps a ‘deposit’ in the bank or in the drawee’s hands, which debt or “deposit” is equal to or more than the amount indicated in the instrument drawn. If there was no credit available in the hands of the intended drawee, there would be no basis, in the absence of a special arrangement, to expect the said drawee to honor the supposed drawer’s payment order.2” Hence, although the drawee is not under obligation to accept the bil he may be liable to the drawer in case of dishonor. It is possible, however, for one to draw a bil another although they have no funds or credit arrangement whatsoever. In such a case, presentment fo sceeptance or payment would not be necessary to charge the drawer, as he has no reason to expect that the instrument would be paid if presented. In that eas ites dina labial event fytie bli taz net On an ordinary draft or check, the signature of the drawee docs not appear. Hence, he incurs no lability to the holder ithe refuses to pay the instrument. This 's consistent with the general rule laid down under ction 18 which states, "No person is liable on th whose signature does not appear > "29 However, if the drawee does put his thereon. Signature on the draft - this act is known Ae eraptance’ - the drawee thus becomes liable on the of a check by the drawee bank draft. The acceptance js known as “certification".°° check is presented by a holder the day it @ the drawer’s account has adequate suppose the rhout a request from the is drawn ant funds, but the drawee, wit faneer, dishonors it. In such a case the banlk is ot drove fo the holder because it has not accepted (oF tetified) the instrament; its signature does no Sppear on it. It is immaterial that the drawee may be liable to the drawer.°! ‘the drawer, drawee, and payee need not be different people; the same person may have different capacities peoP'Single transaction. For example, a drawer may ico be the payee, or the drawer and the drawee may alse pe and the same person, in which case itis in legal pe ota promissory note and the holder may treat the fAsuument at his option either as a bill of exchange or as a promissory note.!? fhe bill becomes an acceptor. To .d only sign his name on the bill rertically on the face, but {ll do. Words such as “accepted,” or sary. In one case A drawee who signs # accept, the drawee nect of exchange, usually v anywhere else wi “good,” or “Ok,” or “seen” are unneces' Payable through Drafts and 1. Acceptance and Dishonor leat r'$ Us atk. Lite Rock L Rev toon averepostory wale /lawreview W015 /iss4/3 3 2 Section 130, NIL 18te drawee who signed his name and wrote, however, "Jcemed not to have accepted.*° iss my foot iS two or more may be addressed to The order 10 Pa ees; There may also be in a bill persons as jpW fury drawee, called a referee in case of a kind of subsitiyee does not pay, the holder of a bill ae en this referee. It is in the option of the nay a Mmort or not tothe referee in case of need as holder rote it. The usual form is: “In case of need, epi to (name of referee) at (address) P10 Manila, Philippines laeeaea June 1, 2020 days after sight, pay to the order of Juan dela Ge the sum of Ten Thousand Pesos {710,000.00}, Philippine currency, at ABC Bank, Makati, ‘To: Carlos Reyes (Sgd.) Pedro Santos JP {25 M. Clara Street | Pasay City =| ‘The illustration above is the standard form of bill of exchange. The amount payable is shown on the upper left-hand comer, and the place and date of execution on the upper right-hand corner. On the body of the instrument are the time and the place of payment, the amount in words and in figures, and the name of the 33 oro v- Knapp, 19, 867 (A 1884) 2 Secon 128, NL 2 Seton 131, IL 28 Craxfré, John J. The Negotiable struments Law. Baker, Voorhis and Company Hew Yirk, 1946. 19 payee. On the lower left-hand corner is the name and address of the drawee, and on the lower right-hand corner, the name and signature of the drawer. Pedro Santos is the drawer (D), Carlos Reyes the drawee (X) and Juan dela Cruz, the payee (P). D orders X to pay P the amount of P10,000. D draws, signs, and delivers the bill to P. P presents the bill to X for acceptance. If X accepts, he becomes an acceptor. Thirty days from acceptance P presents the bill back to X for payment. If X pays in due course, the instrument is discharged. Mlustration: D-> P-> X (discharged) However, P may want to negotiate the bill to A; A to B; B to C; C to D; and D to E (holder). E presents the bill to X for acceptance and, thirty days thereafter, for payment. If X pays in due course, the instrument is discharged. Mustration: D->P->A->B->C->D->B-> X (discharged) The primary contract is between D and P. The contracts between P and A, A and B, B and C, C and D, and D and E are secondary contracts. P, A, B, C and D are indorsers and their transferees are indorsees. Before acceptance X was a drawee; after acceptance X becomes an acceptor. 7. Stages In The Life Of A Bill Of Exchange (1) Writing - D writes and signs the bill ordering X to pay P; 20rs the bill to P; ies D delivrofers the bill to A; A to B; B to Negotiaty D to E (holder); vod; and D to (hee ynce ~ B presents the bil ment [OF tne bil s among those require prance Wjceeptance under Section 143, ) Issuance G (4), Present to X for accel to be present NIU tment for payment “On due dat into X for payments te nent —X pays in due course; and (0 Bavnge the nsrument is cscharged e, E presents for acc Upon presentment Upet a5 above), two possi 3 accept the bill, in which case oy cence Xa ace aS a he ee acceptance, X makes a promise that on due By is Aeill pay the holder according to the tenor of fate Meeptance. If he pays in due course, such Rayment shall result in the discharge of the instrument;*” oF - X may dishonor the bill by non- oanerer non-payment If the bill is dishonored, E (holder) should give notice of dishonor to all indorsers (P, A, B, C, D) and the drawer D. Unless excused or dispensed with, any drawer or indorser to whom such notice is not given is discharged.% However, there are instances when notice of dishonor need not be given to the drawer®? and the indorsers.* 2 ection 88 in el to Secon a There is no provision in the law dealing with the liability of a drawee. Until and unless he accepts, a drawee is not a party to nor liable on the instrument*! although he may be under obligation to the drawer to accept and pay as ordered. A bill of itself does not operate as an assignment of funds in the hands of the drawee.*? He must accept to be liable on the bill, in which case he becomes an acceptor.*3 This. is consistent with the general rule that no person is liable on the instrument whose signature does not appear thereon." If the drawee does not accept the drawer's order, the holder can enforce an unaccepted bill only against parties secondarily liable (i.e., drawer and the indorsers, if any) provided they are properly served with notice of dishonor.* 8, Distinctions Between Promissory Note And Bill Of Exchange [Promissory Note Bill of Exchange (1) Unconditional promise | Unconditional order to to pay a (2) Involves 2 parties Involves 3 parties (maker and payee] (drawer, drawee, (3) Maker is primarily | Drawer is secondarily and absolutely liable and conditionally liable (4) Acceptance not T required | (5) Only 1 presentment ~ | Generally 2 presentments _for payment Poe carta tanaka Acceptance required "0 sectons 127 and 189, NL 2 Section 127, Nl, 4# section 26 Contract between (hater and pavee may be [stated drawer and drawee are | stated 7 9. Cheek ‘See. 185. Check, defined. - A check is a bill of exchange \drawn on a bank payable on demand. Except as here ‘e provided, the provisions of this Act applica ‘of exchange payable on demand apply to a ‘Acheck is a bill of exchange drawn on a bank payable ‘on demand.*® The drawer orders the bank to pay the payee or order a specific amount, and the check must be presented to the bank for payment within a reasonable time from issue. In determining what is “reasonable time,” regard is to be had to the nature of the instrument, the usage of trade or business with respect to such instruments, and the facts of the particular case. The test is whether the payee employed such diligence as a prudent man exercises in his own affairs. This is because the nature and theory behind the use of a check points to its immediate use and payability.47 ‘A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. ** Delay to make presentment yment will discharge the indorser from ‘The bank cannot be compelled to accept or certify a check, regardless of whether the drawer has sufficient money in the bank to cover the amount of the check. Certification is equivalent to acceptance.*° There are instances when a bank may issue cashier's check, manager's check, certified check, but that is always discretionary on the part of the bank. 10. Distinctions Between Check And Bill Of Exchange (cheek {i} The drawee is Siways a bank (2) Drawn on a bank deposit May be payable on (9) Always payable on | demand or at a fixed or | demand | determinable future time | {ay Gan be crossed to snd negusbiiy Cannot be cmseed '5) Presentment for ___| Presentment for feceptance not required |& “The drawee may or may not be a bank Not necessarily drawn on a bank deposit (6) Death of drawer of check, with knowledge _ | exchange, with of the bank, revokes the | knowledge of the authority of the bank to | drawee, does not revoke pay the authority of the | drawee to pay | 4 PNB vs. Seeto, G.R. No, 14988, August 13, Pyray Mast May be presented for) (7) Must ‘i payment within a forpament thin grits | reasonable time after its | eas ont fast negotiation. | sue | a s ¢ three distinctions between the the drawer of a bill of exchange, 185, 186, 187 and 188. pe presented \dditionally, there ar drawer of a check and Giecussed under Sections 11, Negotiable Instruments Are Not Legal Tender .gotiable instrument discharge an igh considered as medium for obligations, negotiable instruments are payment of eret settied 1s the rule that payment fot tne made in legal tender. Legal tender is that kind rit ney which the law compels a creditor to accept fr Dayment of his debt when tendered by the debtor in tae aght amount. Section 60 of The New Central Bank Jat (RA.7659) provides: “(A}Il notes and coins issued iy the Bangko Sentral shall be fully guaranteed by the pines and shall be legal tender Republic of the Philip 1 inthe Philippines for all debts, both public and an delivery of ne obligation? Althou private, Under BSP Circular No. 537 s. 2006, the maximum ‘amount of coins to be considered as legal tender is as follows: One thousand pesos (P1,000.00) for denominations of 1-Piso, 5-Piso, and 10-Piso coins; and, One hundred pesos (P100.00) for denominations of L-sentimo, 5-sentimo, 10-sentimo, and 25-sentimo coins. Paper bills have no such limitations. 51 ew Cental Bank Act RA, 765) 25 Negotiable instruments are not legal tender but often take the place of money as a means of payment Since a negotiable instrument is only a substitute for money and not money, the delivery of such an instrument does not, by itself, operate as payment Mere delivery of a check does not discharge the obligation under a judgment. The obligation is not extinguished and ‘remains suspended until the payment by commercial document is actually realized.? Negotiable instruments shall produce the effect of payment under the following circumstances: (1) When they have been cashed or when through the fault of the creditor they have been impaired. (2) When the check has lost its value due to the fault of the creditor as when he has unreasonably delayed in presenting the check for payment,®° or when, in the case of a foreign bill of exchange, the creditor neglected to make a protest;%* and (3) A check which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor in the amount equal to the amount credited to his account.,? Acceptance of a check implies an undertaking of due diligence in presenting it for payment. If no such presentment was made, the drawer cannot be held liable irrespective of loss or injury sustained by the payee. Payment will be deemed effected and the 52 Yang vs. CA, G.R. No. 138074, August 15, 2003, 53 BPI ys, Royeea, G.R 176664, July 21, 2008 5 PNB va, Seeto, £4988, August 19, 1952. © Quiros vs. Guin, § 5 Section 60, New Cen!= which the check was given as Ht will be discharged.°* ation obligation | ayment conditional 76, The payment of debts in money shall be 249. Te tey stipulated, and ifit is not possible cemency, then in the currency which is ‘in the Philippines. ea ender nt promissory notes payable to order, or =< ea ae or other mercantile documents shall | fof payment only when they have ‘he fault of the creditor {Anicle 1 made in to deliver Su | legal tender pills of excl produce the effect pr cashed, or when through | they have been impaired. * they Memeantime, the action derived from the original | obtigation shall be held in the abeyance. ri that the delivery of a check produces the effect of payment only when it is cashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the debtor is prejudiced by the creditor's unreasonable delay in presentment. The acceptance of a check implies an undertaking of due diligence in presenting it for payment, and if he from whom it is received sustains loss by want of such diligence, it will be held to operate as actual payment of the debt or obligation made at all, the drawer cannot be held liable irrespective of loss or injury unless presentment is otherwise excused. This is in harmony with Article 1249 of the Civil Code under which payment by way of check or other negotiable instrument is conditioned on its being cashed, except when through the fault of the creditor, the instrument is impaired. The payee of a check would be a creditor under this provision and if its non-payment is caused by his negligence, payment will be deemed effected and the obligation for While it is true © Po Barretto Realty Corp. v.CA, G.R. No, 132362, June 28, 2001. ay 0 ey Conditional payment will be discharge 000 » C. THE NEGOTIABLE INSTRUMENTS Law 1. FORM AND INTERPRETATION ‘An instrument is negotiable if i requirements prescribed und ler Negotiable Instruments Law.60 it conforms +: S to the Section 1 of the ‘Section 1. Form of negotiable instrumeate-~ aS instrument to be negotiable master ane following requirement: eee (a) It must be in writing and a unwed 6 and signed by the maker | (b) Must contain an unconditi to pay sum certain in moneys te reer |(c)Must be payable on demand, or at determinable future time; See (a) Must be payable to order or to b: % earery {e) Where the instrument is addressed te « draw he must be named or otherwise indicated therein with reasonable certainty, = 12. Requisites Of Negotiability To be negotiable, an instrums 1 : ent mus following requirements: — lencia & Co, Ine, G.R. No, 105188 January 23,1998 vs. C.A,, GR. No, 97753, August 10, 1992, 28en and Signed by the Maker or Drawer ‘ iting. The ent must be in W1 A negotiabl see pencil,°! or even spray paint; werting may Be Hy vricing, done manually or by means inone's wn Mae, in print oF typed. The material of a device oe ritten makes no difference. It may upon which i leather or any other ent, cloth, a However, there is danger in using nei Lo hhandat can be erased in view of the risk of pencil alteration." niform requirement of all negotiable instruments is that they must be signed by the issuer. Issuance is the transfer of negotiable instrument from the maker or drawer of the instrument to the payee, the issuer is the maker, in a bill Ina promissory note, the of exchange, the issuer is the drawer. A promissory fote must be signed by the maker, and a bill of exchange, by the drawer. Without such signature the instrument would not be complete and negotiable. ‘The primary wl Signature is not limited to the personal handwriting of one’s name; it need not be the full name of the issuer. That means the maker or drawer may make an impression of his signature with a rubber stamp or even an X if he intends that by so doing he has signed. It can be typed or by thumbprint. Signature by initials es L,(L917) The Law of Bill, Notes and Checks, National Rochester, RY. © Sections 124 & 125, NIL 29 or by mark are sufficient, provided it substitute and he intends be used as to be bound = by it. These signatures do not instead need only be some sort of sent, S0% but identifier of the issuer. It may be cave ae official may consist of mere initials or even nu; nimbmaric or be printed, engraved, lithographed or photos to long as the holder must prove that what (opens 3S intended or adapted as the signature of terete 8 made with his authority.6 Moreover. the weet may even be in a trade name or assumed nee by any word, marl, or symbol executed or adopted 9p on wi a person with the present intention to authenticate (2) Must Contain an Unconditional i fePay a. Sum Certain in Money mae of Onder A promissory note contains a bill contains an order oo Te a “unconditional promise” refers to promisso: ate and the phrase “unconditional order” to bile ef exchange and checks. The only permissible eorilss 7 order in a negotiable instrument is to pay a sum certain in money; any other promise or order negates negotiability. The reason for this rule is to prevent an instrument from having an indeterminate value. It cannot be made payable in goods, property, or services, or a combination thereof, with the lone exception under Section 5(d) where the option “to whitey, James L (1917). The Law of Bl, Notes and Checks Book Company, Rochester, N.Y. ” cio 65 Andrews Fletcher R. Negotia 66 Section 18, NIL iments. 9. Res. L. Rev. 3491958), 30jie something to be done in lieu of payment of faa d to the holder.*7 money” is grante« ent where a creditor assigns his claim AMainst a debtor and orders him (debtor) to pay the claim so assigned to a certain payee or assignee, is not ‘a bill of exchange although the words “pearer” are used therein. In this case, the order to pay is conditioned on the existence and validity of the claim; hence, the order to pay is conditional. On the other hand, if the order is unconditional, it is immaterial, as far as the negotiability of the instrument is concerned, that the drawer has no valid claim against the drawee and has no right to draw on him. ‘A check drawn on a bank where the drawer has no funds is as much a negotiable instrument as if he had funds, because the drawer does make an unconditional demand or order upon the bank. The promise in a note must be as unconditional as the order in a bill. Another requirement of negotiability is that the instrument must be for “a sum certain in money’. “Money” is not limited to “legal tender” as defined by law but includes any particular kind of current money. ‘This paragraph is supported by Section 132 which states that in a bill of exchange, an acceptance by the drawee “must not express that the drawee will perform © PNB vs, Zulueta, GR, No, 7271, August 90,1967. 31 his promise by any other means than the payment of money.” 3) Must be Payable on Demand, or Qheerminable Future Time Pc uniloe Payable on demand means payable immediately demand by the payee or holder. An instrumecy payable on demand when it is so expressed to he cs payable, or at sight, or on presentation; or in which no fime for payment is expressed. Where an instrnenn is issued, accepted, or indorsed when overdue, itis oe regards the person so issuing, accepting, of indorsing it, payable on demand." Determinable future time may be stated in several ways; itis not necessary to set out a specific date. For example, a note might say that it is payable on or before a stated date; or at a fixed period after date or sight; or at a definite time subject to acceleration; or at a definite time subject to extension at the option of the holder or automatically. However, an instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect Sometimes bills of exchange are payable a fixed number of days after sight or after date. When such a bill will become due is not fixed when the instrument is issued, but it can be fixed by presenting the instrument and starting the days to run from the day of presentment, By looking at the instrument one cannot tell how soon it will be due, but the holder can make it become due within the given number of days © Section 192, NUL 7 Section 7, 7 Section 4, NIL 2after sight by formally presenting the instrument to the drawee. This is the rationale behind Section 143(a) which requires presentment for acceptance where the bill is payable after sight “to fix the maturity of the (4) Must be Payable to Order or Bearer Every negotiable instrument must be payable to ‘order’ or ‘bearer’. These are the words of negotiability. An instrument payable to order is one that will be paid to the order of a particular person or organization identifiable in advance. To be payable to order, the instrument must state by placing the words “payable to the order of” before the name of the payee. It does not matter whether the instrument reads “to the order of A” or “to A or order’; they mean the same thing. An instrument may be payable to the order of the maker, drawer, drawee, or someone else. It may also be payable to the order of two or more payees {together or in the alternative), to an estate, a trust, or a fund (in which case it is payable to the representative, to an office or officer, or to a partnership or unincorporated association). A negotiable instrument not payable to a particular person must be payable to bearer, meaning to any person who presents it. To be payable to bearer, the instrument may say “payable to bearer” or “payable to Juan dela Cruz or bearer”; or it may be made payable to “cash” or “to the order of cash”.” 7 ection 143, Nile 79 Section 9, NIL 33 ‘A check drawn payable to the order of “cash” is a bneck payable to bearer and the bank may pay it to the person presenting it for payment without the grawer’s indorsement.’* (6) Where the Instrument is Addressed to a Drawee, (P) Must be Named or Otherwise Indicated Therein with Reasonable Certainty ‘The last paragraph applies only to a bill of exchange because it speaks of a drawee. There is no drawee in a promissory note. The drawee need not be specifically named, it is enough that he is identifiable (e.g., current mayor of Manila). But it may be addressed to two or more persons as joint drawees.”5 If the drawer ‘and drawee of a bill are one and the same person, or where the drawee is a fictitious person or a person not having the capacity to contract, the instrument is in egal effect a promissory note and the holder may treat it either as a bill or a note.7© 13. Determination Of Negotiability In determining the negotiability of an instrument, only the instrument itself in its entirety and what appears on its face must be considered. The law requires that the value of a negotiable instrument be ascertainable on its face, without reference to other documents. It must comply with the requirements of Section 1 of the Negotiable Instruments Law,’” otherwise it will not be acceptable as payment in commercial transactions. 7¥ Ang Tek Lian ve. CA, G.R, No, -2516, September 25, 1950, 78 Section 128, NIL. 77 Caltex Phils. vs. CA, G.R. No, 97753, August 10, 1992. 34if it appears on the instrument that it lacks one or Some of the requirements under Section 1, it is not Segotiable and the provisions of Act No. 2031 do not govern the instrument. The lacking requirement/s Bemnot be supplied by using a separate instrument in Which said lacking requirement/s appear. The deceptance of a bill of exchange is not important in the determination of is negotiability. The nature of Seceptance is important only in the determination of the kind of liabilities of the parties involved.” On the issue of whether postal money orders are negotiable instruments, the 1971 case of Philippine Education Co. vs. Soriano has put the matter to rest. in that case, the Supreme Court held: “The weight of authority in the United States is that postal money orders are not negotiable instruments, the reason being that in establishing and operating a postal money order system, the government is not engaged in commercial transactions but merely exercises a government power for the public benefit. Moreover, some of the restrictions imposed upon money orders by postal laws and regulations are inconsistent with the character of negotiable instruments. For instance, such laws and regulations usually provide for not more than one endorsement; payment of money orders may be withheld under a variety of circumstances.”’9 What about withdrawal slips, are they negotiable instruments? Withdrawal slips are non-negotiable instruments. The essence of negotiability which characterizes a negotiable paper as a credit 789 vs: Aruego, G.R. Nos. 1-28836-37, January 31, 1981. 7 philippine Education Co, vs, Soriano; G.R, No. L-22408, June $0, 1971. 35 instrument lies in its freedom to ¢ Mubstitute for money. The witha te freely dre Yasa character.® aval lips lack this on the matter of electronic me: Court held in one case that eleert'® Supreme cannot be considered negotiable instren one SS28eS jack the feature of negotiability, whieh wig’ 29 they be transferred”. The instruc s the ability tg electronic messages are not ne; tions given through otis igh they do not comply with the req iable instruments ae tinder Section 1, NIL. The electronic mc nceotabilty signed by the investor-clients as supposed in are not a bill of exchange, they do not cq! unconditional order to pay a sum certain in mney the payment is supposed to come from aspen S or account of the investor-clients; and. they sean payable to order or bearer but to a sreciment designated third party.8t Pecifically: ‘A promissory note is an unconditional pr iechanigedasantnconditihalonee tie eae parties to a promissory note are the maker ant ike payee, the original parties to a bill of exchange are the drawer and the payce. As they pass from hand to hand through negotiation, endorsers are added as parties to the instruments. Every endorsement is a separate contract, and the further the instrument is endorsed, the more secondary contracts are accumulated, In a promissory note the maker is primarily liable, but in a bill of exchange the drawer is only secondarily liable. In a bill of exchange the party primarilis the acceptor.®? The drawe wee Who when presented to him becomes. a BSePES the bi, and until he accepts, the drawee is mart Pt? Unless liable on the instrument. @ Party to nor The maker and the acceptor ; unconditionally liable; while the ety and indorsers are secondarily and conditionaty sa, the hold the drawer and the indorsers liable sei 30®: To concioastnuatveee the folowing dishonored by the maker or "gtéye Presentment; and, (2) The drawer and igq!P™ receive notices of dishonor as soon as the in sore is dishonored, otherwise they are dischasgerement In the case of a check where t1 eros i gene gMes 2 ae bak implies that the check is drawn upon sufficient fence in the hand of the drawee, that they have been say apart for its satisfaction and that they shall be co applied whenever the check is presented for payment, Where a check is certified by the bank on whieh it is drawn, the certification is equivalent to acceptance 85 Bar Questions What are the requisites of a negotiable instrument? 2 Section 62, NIL 9 Section 127, NIL. © Secti 155 New Pacific Timber vs. Seneris, G.R. No. L-4176A, Dec. 1980. as follows: “I promise t9 pay Gabriela is 08 Jper the undonditional thdrawal of eetscn in the Philippines.” Discuss te ‘egotiability of the note above. n-negotiability of the note above. _ ‘or not? a jeep from Reliable Motors Company for a “of P50,000. He paid P25,000 in cash and 'd the following promissory note on the balance: September 1, 1989 the sum of 25,000 to Reliable Motors | we December 31, 1989, | Sod. X | wrote in his oun handwriting @ “ep until [shall have paid it in full” [promise to pay Company on or befor Bar Exam. Discuss the negotiability or non-negotiability of the following yy 500,00 Mani, September 1, 1993 F500 Ons pay Pedro San Juan or oder the sum of P2,500. (Sgd.) Noet Castro Manila, June 3,1993 @f 10,000.00 in five/5) instaliments, with the first installment payable on October 5, 1993 and the other installments on oF before the ffth day of the succeeding month or thereafter. (Sgd.) Lito Villa ‘Bar Exam 2000 4) MP bought a used cell phone from JR. JR preferred cash but MP is a friend so JR accepted MP's promissory note for P10,000. JR thought of converting the note into cash by endorsing it to his brother KR. The promissory note is a piece of paper with the following hand-printed notation 38,{SAND PESOS IN PAYMENT FOR Hig CELLPHONE 1 WEEK FROM TODAY. took the are aske b)_ TH is an indorsee of a promissory note that simply states: “PAY TO JUAN TAN OR ORDER 400 PESO: date, no place of payment and no considerat ‘signed by MK and written under his letterhead spec address, which happens to be his residence. TH accepted the (promissory note as payment for services rendered to SH, who in fur received the note from Juan Tan as payment for a prepaid Cell phone card worth 450 pesos. The payee acknowledged having received the note on August 1, 2000. A Bar reviewwee had THis not a holderin ‘connection wit ing @ place of payment and any consideration. What would your advice bbe? Exam 2005 What is a negotiable instrument? Give the characteristics of a negotiabl Sec. 2. What constitutes certainty as to sum. - The | sum payable is a sum certain within the meaning of this Act, although it is to be paid: (a) with interest; or ated installments; or ated installments, with a provision that, {e) by | upon default in payment of any installment or of interest, the whole shall become due; or ) with exchange, whether at a fixed rate or at the current rate; or 39 torney’ ‘ase payment shall not be made at mama 2 14, What Constitutes Certainty As To Sum The sum payable must be certain or at le ascertainable in money. The certainty is not affecca by the following provisions: 1) Interest - The sum payable is a sum cey 1 eet paar tum eran is fixed by the instrument itself, the exact sum which will be due at maturity can be calculated by any one at any time. If interest is due but the specific rate is not stated in the instrument, the current legal rats applies. (2) Instatiments - If payment is to be made by installments, the number of installments and the maturity date of each installment must be stated otherwise the bill would be non-negotiable because the sum payable would not be certain or ascertainable in violation of Section (3) Acceleration Clause - The third subsection refers to an acceleration clause whereby, under certain conditions, the date of maturity may acceleration may be in terms automati at the option of the authorized to a referred to as himself insecure, or “on demand (often or when he “deems or on maker's default in the 40if the maker fail il or interest, OF if ! rails yment of PFINCIPS. 1 op security “good."** povenende secu oF acceleration clause is one An _ cept han Gault by the maker, the wherein, UPR ve declared due at the option of the instramer a clause was contained on the note a S ational City Bank v. Brskme & Sons, Inc.&? imoted a MGrovided that if the, chattel mortgage The clause ote was “breached,” the ote should securing atthe holder's option. The court in that becotfeld that the clause did not destroy negotiability. common type of acceleration clause is where the gpton mao Uferate maturity is on the holder who may opeyse the option only upon the happening of a Specified event beyond his control, like non-payment SPenstallments, the death of the maker, insolvency or bankruptey of the maker, or any other objectively pecertainable event. It has also been ruled that a holder could accelerate the date of maturity "if he deems himself insecure” or if there be such a change in the condition or affairs (financial or otherwise) of any of the parties as in the opinion of the holder thereof will increase its risk.®* The power to accelerate, however worded, can only be exercised in the good faith belief that the prospect of payment or performance is impaired; but the burden of establishing lack of good faith is on the party against whom the power is to be exercised, i.e., the maker. The lam F. Stare, Arce 3: Commercial Paper, 2 rr hp: scarp aw unt em et RAndsews, Regotable instruments, 5 W Ins scholarigeoranon law case ed caselrey 015/324 ‘cle. Avaable a pa achaarip law sts edu /lnwreview 0126s a establishment of the requires prevent a holder from Ment of f good fai it Popress a debtor. ith is to acceleratin Payment soils © ‘take note, however, of the spreach” of the terms of de moe despite the was denied. A promissory note pay, ee acceleration the plaintiff 120 months after date oth "er of simultaneously with a mortgage to sent’ ®xecuted ‘The mortgage contained a default claccans (ME note. tha failure to pay taxes upon the {0 the effect within thirty days after they became te eget lands holder of the mortgage the option of dawome’ the gntire amount secured by the more iaing the payable. The mortgage referred to the sotts, 25d Secured, but the note was devoid of any mene tat it mortgage. Subsequently, upon the arene 8 othe the plaintiff notified the defendants of hee accelerate the debt. Held: The morterg to"? promissory note were two distinet instneven ten en the absence of any reference in the nat tit mortgage, the breach of a condition in the meget” has no efect upon the note. To hold that ther se instrument and one contract for pu interpretation would allow the terms of the psy varied by extraneous instruments cont serie theory of negotiable instruments." In eflect the coe in this case, was of the opinion that incorporation of the mortgage provisions into the note densovel the negotiability of the instrument. ae (4) Exchange Rate - The fourth subsection 3s ert the rate of exchange where payment len frig Rev. 772 (1963), http /lawdigtalcommons bee bl /el/s93/25 2currency. The sum is certain the statute though the it exchange either at a fixed {5) Cost of Collection or Attorney subsection states that the sum ’s Fee - The fi inal 5 certain though with costs of paleo, ® likewise collection or with attorney's fee if payment is not made at maturity, Bar Exam 1964 Explain whether or not the following instrument is negotiable. ‘P1,000.00 Manila, October 5, 1970) 1 acknowledge to have received from lose Crs ne Sitar pesos (P1,000.00 which T promise to pay on Hem ease months from date with one percent eee pee nae hie ted ey So pnd eth Pe tuhen due, the both prinpel aed nlereat sat bees ae? option of the holder. ae palms 3 (Sad) Pedro Garcia Bar Exam 1992 Perla bought a motor car pay Company for P250,001 executed a promissory in installments from Automotive With @ P50,000.00 downpayment. She fe for the balance which reads For value received, I promise to pay Automotive Company or order] is office in Legaspi City, the sum of P200,000.00 with interest at 12% per anrum, payable in equal installments of P20,000.00 fen (10) months starting 21 October 2002. (Sod. la Manila, 21 September 2002 483 3. When promise is unconditional. - An dlified order or promise to pay is avaditional within the meaning of this Act tough coupled with: though *{ndication of a particular fund out of ) ci reimbursement is to be made or a ‘account to be debited with the which particular it; oF to a statement of the transaction which gives | Gise to the instrument. But an order or promise to pay out of a particul fund is not unconditional. 15, Unconditional Promise An unqualified order or promise to pay is unconditional though coupled with: (1) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount. - A promise or order to pay which is dependent on the existence or sufficiency of a fund or credit is non-negotiable, but a statement of the fund or account to which the payment is to be charged is not objectionable, for the sum is to be paid regardless of whether the fund or credit is sufficient to meet the charge. A promise or order to pay is conditional if reference to a particular fund clearly indicates an intention that such fund should be the direct source of payment.?° 9° Metropolitan Bank vs, CA, G.R, No. 88866, February 18, 1991 44