NEGOTIABLE

INSTRUMENTS
Accountancy Intensive Review
SUMMER 2015
 FUNCTIONS AND IMPORTANCE

• A Negotiable Instrument:
• A.) Serves as a substitute for money;
• B.) Serves as a medium of exchange for most commercial transactions
• C.) Serves as a medium of credit transactions
• D.) Increases the purchasing power

Features:
1. Negotiability
2. Accummulation of Secondary Contracts
 CONSTRUCTION OF AMBIGUOUS
INSTRUMENTS
• 1.) Words and Figures? - Words
• 2.) Undated?-Time of its Issuance
• 3.) Instrument is payable with interest but no date?-date of the instrument/date of issue
• 4.) Written and Printed?-Written
• 5.) Bill or Note?-Either. At the option of the holder
• 6.) Capacity not clear of person who signed?-indorser
• 7.) Started with "I" but signed by several persons?-the persons are solidarily liable.
 STAGES/INCIDENTS IN THE LIFE OF A
NEGOTIABLE INSTRUMENT
• 1.) Preparation of the Instrument
• 2.) Issue
• 3.) Negotiation
• 4.) Presentment for Acceptance
• 5.) Acceptance
• 6.) Presentment for payment
• 7.) Notice of dishonor
• 8.) Discharge
• Note: Nos. 4 & 5 does not apply to promissory notes
 PREPARATION OF THE INSTRUMENT
CODE: WUDOD
• 1.) It must be in writing and signed by the maker or drawer.
• 2.) It must contain an unconditional promise or order to pay a sum certain in money.
• 3.) It must be payable on demand or at a fixed or determinable future time
• 4.) It must be payable to order or bearer
• 5.) If it is addressed to a drawee, he must be named or otherwise indicated therein with
reasonable certainty.
 A. UNCONDITIONAL PROMISE OR ORDER
(NOT SUBJECT TO A FUTURE OR
UNCERTAINTY)
• 1. I promise to pay P or order 4. I promise to pay P or bearer
P10,000.00 P10,000.00 from the purchase price
(Sgd.) M of my car to be paid by B
(Sgd.) M

• 2. I promise to pay P or bearer 5. Pay P or oder P10,000.00 and

P10,000.00 reimburse yourself out of your
(Sgd.) D collections from my apartment
(Sgd.) D
• 3. I promise to pay P or order P10,000.00 when he To: X
passes the CPA Board examinations.
(Sgd.) M

• Note: Those in red are non-negotiable.

 B. SUM CERTAIN IN MONEY

• 1. I promise to pay P to the order of 2. I promise to pay P to the order of

P10,000.00 or deliver an Iphone 6. P10,000.00 or deliver an Iphone 6 at
(Sgd.) M the option of holder.
(Sgd.) M

• Sum payable is considered certain, although it is to be paid:

• 1.) with interest;
• 2.) by stated installments(due date of the first or each installment must be stated);
• 3.) by stated installments with acceleration clause;
• 4.) with exchange rate, whether fixed or at current rate
• 5.) with costs of collection or attorney's fee in case of non-payment at maturity.
• Examples:
• 1. I promise to pay bearer P10,000.00 in two equal monthly
installments.
(Sgd.) M

• 2.
I promise to pay P10,000.00 to the order of P in two
equal monthly installments beginning on August 1, 2015.
(Sgd.) M

• 3. Pay to P or bearer P10,000.00 as follows: Php 2,000.00

on August 1 two equal monthly installments beginning
on August 1,2015, Php 3,000 on August 15,2015 and Php
5,000.00 on September 1, 2015 .
(Sgd.) D
To: X
 C. DETERMINABLE FUTURE TIME AND
D. PAYABLE ON DEMAND
• Determinable future time
• 1.) At a fixed period after date or sight.
• 2.) On or before a fixed or determinable future time specified therein; and
• 3.) On or at a fixed period after the occurrence of a specified event which is certain to happen.
• Payable on demand:
• 1.) expressed to be payable on demand, or at sight, or on presentation
• 2.) when no time for payment is expressed
• 3.) when an instrument is issued,accepted or indorsed when overdue, it is payable on demand as
regards the persons, so issuing, accepting or indorsing it.
 E. PAYABLE TO BEARER
• 1. When it is expressed to so payable
• 2.When it is payable to the person named therein or bearer
3. When it is payable to the order of a fictitious or non-existing person and such fact is known
to the maker or drawer.
4. When the name of the payee does not purport to be the name of a person
5. When the only or last indorsement is an indorsement in blank.

Note: Order instrument may become a bearer instrument, but a bearer instrument remains a bearer
even if it is specially indorsed.
 F. PAYABLE TO ORDER

• 1. Payee - Pay to P or order

• 2. Maker - Pay to the order of myself
• 3. Drawer - I promise to pay myself or order
• 4. Drawee - Pay to the order of yourself
• 5. Two or more persons jointly - I promise to pay to the order of X and Y
• 6. One or more several payees - Pay to the order of X or Y
• 7. Holder of an office for the time being - I promise to pay to the FSUU Cashier or his order
 COMMON TYPES OF NEGOTIABLE
INSTRUMENTS
• 1. Promissory Note - an unconditional promise in writing made by one person to another, signed
by the maker, engaging to pay on demand or at a fixed determinable future time, a sum certain in
money to order or to bearer.
• 2. 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 fixed or determinable future time a sum certain in money to order or to bearer. It may be
inland bill of exchange or foreign bill of exchange.A bill in set is one composed of several parts
being outnumbererd and containing a reference to the other parts, the whole of the parts
constituting but one bill.
• 3. Check is a bill of exchange drawn on a bank payable on demand.
 TYPES OF CHECKS
• 1. Memorandum Check
• 2. Manager's Check
• 3. Cashier's Check
• 4. Bank Draft
• 5. Traveller's Check
• 6. Certified Check
• 7. Crossed Check
• 8. Post-dated Check
• 9. Ante-dated Check
 WHEN THE BANK MAY REFUSE PAYMENT
OF CHECKS
• 1. The bank is insolvent
• 2. The drawer's deposit is insufficient or he has no account with the bank or his account had been
closed
• 3. The drawer dies and proper notice is received by the bank
• 4. The drawer is insolvent and proper notice is received by the bank
• 5. The drawer has countermanded payment
• 6. The check is post-dated
• 7. The banks has reason to believe that the check is a forgery
• 8. The holder refuses to identify himself.
 B.P. BLG.22 - BOUNCING CHECKS LAW

• Issuance of a check with insufficient fund constitutes a violation of this law.

• 1. The drawer is aware that at the time of issue, he does not have sufficient funds in the drawee
bank.
• 2. The drawer is aware that at the time of the issue, he does not have sufficient credit with the
drawee bank.
• 3. The drawer, without any valid reason, ordered the drawee bank to stop payment.
• 4. The drawer, who having sufficient funds in or credit with the drawee bank when he draws and
issues a check, shall fail to keep sufficient funds or maintain a credit to cover the full amount of
the check if presented within a period of 90 days from the date appearing thereon.
PROMISSORY NOTE VS. BILL OF EXCHANGE
Promissory Note
1. It is an unconditional promise to pay.
2. It is signed by the maker
3. It has two original parties
4. The maker is primarily liable
5. There is no need to present it for acceptance
6. If payable on demand it must be presented for
payment within a reasonable time from issue
7. If payable to the maker's own order, it its not
complete without the maker's indorsement
Bill of Exchange
1. It is an unconditional order to pay.
2. It is signed by the drawer
3. It has three original parties
4. The drawer is secondarily liable
5. It must be presented for acceptance in some
cases
6. If payable on demand it must be presented for
payment within a reasonable time from its last
negotiation
7. If payable to the drawer's own order, it is
complete without the drawer's indorsement
 CHECKS AND ORDINARY BILL OF EXCHANGE
Check EXCHANGE
Ordinary Bill of Exchange
1. Always drawn on a bank
2. Always payable on demand
3. Always drawn against a deposit
4. No need for presentment for acceptance
5. Ordinarily intended for immediate payment
6. Death of the drawer with knowledge of the bank
revokes the authority to pay
7. It must be presented for payment within a
reasonable time from issue
8. If not presented within a reasonable time from
issue, the drawer is discharged from liability to the
extent of the loss caused by the delay
9. If it is accepted or certified, the drawer and
indorsers are discharged from liability thereon
1. May not be drawn on a bank
2. May not be payable on demand
3. Need not be drawn against a deposit
4. Must be presented for acceptance in some cases
5. Intended for circulation as an instrument of credit
6. Death of the drawer does not revoke the authority to pay
7. If payable on demand, it must be presented for payment within a
reasonable time from its last negotiation
8. If not presented within a reasonable time from its last negotiation, the
drawer is totally discharged from liability.
9. If it is accepted, the drawer and indorsers remain liable.
 ISSUE

• Is the first delivery of the instrument, complete in form, to a person who takes it as a holder.
• Holder for value - one who gives a valuable consideration for the instrument issued or negotiated
to him.
• However, a person may issue, accept or negotiate and instrument without receiving value
therefor and only for the purpose of lending his name to some other person. Such person is called
accommodation party and he is liable on the instrument even if the holder knows that he is only
an accommodation party. His remedy, after he has paid the instrument, is to demand
reimubursement from the accommodated party.
 NEGOTIATION

• Is the transfer of an instrument from one person to another made in such a manner as to
constitute the transferee the holder thereof.
• A holder is the payee or indorsee of a bill or note, who is in possession of it or the bearer thereof.
• How to negotiate?
• 1. For bearer instruments - mere delivery only
• 2. For order instruments - indorsement plus delivery
 INDORSEMENT

• Is the writing of the name of the indorser on the instrument with the intent either to transfer the
title to the same or to strengthen the security of the holder by assuming a contingent liability for
its future payment or both.
• How to indorse?
• 1. Written on the back of the instrument but may be written anywhere.
• 2.Written on a piece of paper, attached to the instrument to become part of it,which paper is
called allonge.
• 3. Partial indorsement is not allowed,except part of the amount has already been paid.
• .
 KINDS OF INDORSEMENTS

• 1. Special - a person is named as payee

• 2. Blank - no name of a person
• 3. Restrictive - indorsed and payable to that specific person only
• 4. Qualified - does not gurantee the solvency of the maker or drawer
• 5. Conditional-indorsed with a condition
• 6. Irregular or anomalous - not a party to the instrument
• 7. Facultative-notice of dishonor or protest is waived
 OTHER IMPORTANT PRINCIPLES
REGARDING NEGOTIATION
• 1. A bearer instrument,even if specially indorsed,may still be negotiated further by mere delivery.
• 2. An instrument indorsed to two or more indorsees,all must indorsed,unless, one is authorized to
indorse for all of them.
• 3. If drawn or indorsed to the cashier or other fiscal officers of the bank or corporation,it is
presumed that it is payable to the bank or corporation.Therefore, it may be negotiated by any
authorized officers of the bank or corporation.
• 4. Indorsement of an agent/representative will not make him personally liable,provided he
disclosed his principal and the fact that he is only acting as an agent.
• 5. A signatute by "procuration" operates as notice that the agent has but limited authority to sign and the
principal is bound only in the case the agent acted within the actual limits of his authority.
• 6. An indorsement is presumed to have been made at the place where it is drawn and before it is overdue, unless
the contrary appears.
• 7. A person placing his signature on the instrument,otherwise than as maker, drawer or acceptor is deemed to be
an indorser, unless he indicates by appropriate words his intention to be bound in some other capacity.
• 8. The warranty of a party negotiating by mere delivery extends only to the immediate transferee.
• 9. As respect one another, indorsers are presumed liable in the order in which they indorsed, but evidence is
admissible to show that as between or among themselves, they have agreed otherwise.
• 10. Joint payees or joint indorsees who indorse are deemed to indorse jointly and severally.
• 11.When a person places his indorsement on an instrument negotiable by delivery, he incurs all the liabilities of
an indorser.
 RIGHTS OF THE HOLDER

• General rights:
• 1. To sue on the instrument in his own name
• 2. To receive payment and if payment in due course, the instrument is discharged.
• Holder - the payee or indorsee of a bill or note,who is in possession of it or the bearer thereof.
• Holder for value - one who has given a valuable consideration for the instrument negotiated or
indorsed to him
• Holder in due course - is one who takes the instrument under the following conditions:
• 1. that it is complete and regular upon its face
• 2. that he became the holder of it before it was overdue and without notice that it had been
previously dishonored if such was the fact;
• 3. that he took it in good faith and for value;
• 4. that at the time it was negotiated to him, he had no notice of any infirmity or defect in the title
of the person negotiating him.

A holder in due course holds the instrument free from any defect of title prior parties among
themselves and he can enforce payment of the instrument for the full amount thereof against all
parties liable thereon.
• Personal defenses cannot be set up against a holder in due course, but real defenses are available against
all persons, including a holder in due course.
Personal defenses Real defenses
1. Filling of wrong date 1. Incomplete undelivered instrument
2. Filling of blanks not in accordance with the authority given and not within a 2. Illegality of contract
reasonable time
3. Complete undelivered instrument 3. Want of authority
4. Incomplete delivered instrument 4. Fraud in factum or fraud in esse contractus
5. Simple fraud or fraud in inducement 5. Fraudulent alteration by holder
6. Absence or failure of consideration 6. Prescription
7. Acquisition of instrument by unlawful means 7. Infirmities appearing on the face of the instrument
8. Acquisition of instrument by duress, force or fear 8. Incapacity as far as the incapacitated is concerned

9. Negotiation in breach of faith 9. Discharge at or after maturity

10. Acquisition of instrument for an illegal consideration 10. Forgery

11. Negotiation under circumstances that amount to fraud Forgery is the counterfeit-making or fraudulent alteration of any writing and
may consist in the signing of another's name or the alteration of the instrument
in the name,amount,description of the person and the like,with intent thereby
12. Innocent alteration or spoliation to defraud.
13. Payment or release before maturity
14. Set-off between immediate parties
 LIABILITIES OF THE PARTIES
-The parties primarily liable are the maker, drawee-acceptor and the certifier of a check. The
parties secondarily liable are the drawer and indorsers. The drawee is not liable on the instrument
until after he has accepted the bill.
1. Maker's liability:
a.) he engages that he will pay the note according to its tenor
b.) he admits the existence of the payee and his then capacity to indorse.
2. Acceptor's liability:
a.) he engages that he will pay the bill according to the tenor of his acceptance
b.) he admits the existence of drawer, the genuineness of his signature and his capacity and
authority to draw the bill
c.) he admits the existence of the payee and his then capacity to indorse.
• 3. Drawer's liability:
• A.) he engages that on due presentment, the bill will be accepted and paid according to its tenor
• B.) he engages that he will pay the bill to the holder or to any indorser who paid it, if the bill is dishonored
and notice of dishonor or protest will be sent to him
• C.) he admits the existence of the payee and his then capacity to indorse.

4.) General indorsers warrant:

a. ) that the instrument is genuine and in all respects what it purports to be
b.) that he has a good title to it
c.) that all prior parties had capacity to contract
d.) that the instrument is valid and subsisting at the time of his indorsement
e.) that on due presentment, it shall be accepted or paid, or both according to its tenor
f.) that he will pay it to the holder or to any subsequent indorser who paid it, if the instrument is
dishonored and the necessary proceedings on dishonor be duly taken.
• 5. The qualified indorser or the person negotiating be delivery warrants:
• A.) that the instrument is genuine and in all respects what it purports to be
• B.) that he has a good title to it
• C.) that all prior parties had the capacity to contract
• D.) that he has no knowledge of any fact which would impair its validity or render it valueless

• 6.) An irregular or anomalous indorser is liable:

• A.) to the payee and all subsequent parties, if the instrument is payable to the order of a third person
• B.) to all parties subsequent to the maker or drawer, if the instrument is payable to the order of the maker or drawer
• C.) to all parties subsequent to the accommodated party, if he signed the instrument as an accommodation party.
 PRESENTMENT FOR ACCEPTANCE

• Is the production or exhibition of a bill of exchange to the drawee for his acceptance.Generally, it
includes presentment for payment and the holder of the bill may present it to drawee for his
acceptance and payment at the same time.Generally, it includes presentment for payment and the
holder of the bill may present it to the drawee for his acceptance and payment at the same time.
There are instance, however, when a bill must be presented for acceptance first, before it is
presented for payment in order to charge the drawer and indorsers.These are:
• 1. when the bill is payable after sight or when presentment for acceptance is necessary in order to fix
its maturity
• 2. when the bill expressly stipulates that it shall be presented for acceptance
• 3. when the bill is drawn payable elsewhere than at the residence or place of business of the drawee.
In the foregoing cases, the holder of the bill must present it for acceptance or negotiate it within a
reasonable tie; otherwise, the drawer and indorsers shall be discharged from liability thereon.
A. Who should present the bill for acceptance? - holder or any person representing him.

B. When should it be presented for acceptance? - reasonable hour on business day and before overdue.
• C. To whom should it be presented for acceptance?-to the drawee, to all drawee(unless one can represent
others like a partner),personal representative of the drawee if already dead(optional),to the drawee or his
trustee/assignee, if the drawee has been adjudged bankrupt or insolvent.

• D. When is presentment excused?

• 1. when the drawee is dead, or has absconded;
• 2. when the drawee is fictitious or incapacitated person
• 3. when presentment cannot be made despite the exercise of reasonable diligence
• 4. when acceptance has been refused on some other ground, although presentment has been irregular
• In the foregoing cases, the holder may treat the bill as dishonored by non-acceptance.
 ACCEPTANCE

• - is the signification by the drawee of his assent to order of the drawer.

• Kinds of acceptance
• 1. General - absolute acceptance
• 2. Qualified-varies the effect of the bill as drawn
• Kinds of qualified acceptance
• 1. Conditional Note: holder cannot be compelled
• 2. Partial to agree to this acceptance
• 3. Local
• 4. Qualified as to time
• 5. Acceptance of one or some but not all of the drawees.
 PRESENTMENT FOR PAYMENT

• -is meant the presentation of an instrument to the person primarily liable for the purpose of
demanding and receiving payment.

• Not necessary:
• 1. Liability absolute on date for payment
• 2. Where instrument payable at a special place
• 3. Where presentment required by terms of instrument
 NOTICE OF DISHONOR

• Bringing either verbally or by writing, to the knowledge of the drawer or indorser of an

instrument, the fact that a specified negotiable instrument,upon proceedings taken,has not been
accepted or paid and that the party notified is expected to pay it.

• Protest - a formal instrument executed by a notary public or other competent person certifying
that the facts necessary to the dishonor of the instrument by non-acceptance or non-payment
have taken place. This is necessary only in case of foreign bills of exchange.
 DISCHARGE

– Means the release of all parties from liabilities arising from the instrument. It signifies the end in
the life of the negotiable instrument. If the instrument is discharged, all parties, whether primarily
or secondarily are relieved of the liabilities thereon.

A. How a negotiable instrument is discharged?

1. By payment in due course by or on behalf of the principal debtor
2. By payment in due course by the accommodated party
3. By the intentional cancellation of the instrument
4. By any other act which will discharge a simple contract for the payment of money
5. When the principal debtor becomes the holder of the instrument at or after maturity.
WHEN PERSONS SECONDARILY LIABLE ARE
DISCHARGED

• 1. By any act which discharges the instrument

• 2. By the intentional cancellation of his signature by the holder (striking-out)
• 3. By the discharge of prior parties
• 4. By valid tender of payment made by a prior party.
• 5. By a release of the principal debtor, unless the holder's right of recourse against the party
secondarily liable is expressly reserved
• 6. By any agreement binding upon the holder to extend the time of payment or postpone the holder's
right to enforce the instrument.
• In the foregoing cases, only the specified persons secondarily liable are discharged, but the instrument is
not yet discharged except in case nos. 1-5.
end