NEGOTIABLE INSTRUMENTS LAW (NIL) REVIEWER Classications of NI FORM AND INTERPRETATION 4c 5, 6 7, 8
4, 7 8, 9
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10. Promissory note — an unconditional promise in writing made Form/definition of negotiable instruments (NI) by one person to another, signed by the maker, engaging to pay a. It must be in writing and signed by the maker or drawer. on demand, or at a ixed or determinable future time, a sum b. Must contain an unconditional promise or order to pay a certain in money to order or to bearer. sum certain in money. a. i CLASSIFICATION OF NOTE: (1) demand instrument or (2) c. Must be payable on demand or at a fixed or determinable time instrument. ii The note is normally a time instrument. future time. b. It is also called as a promise a promise paper , or two- party party paper . d. Must be payable to order or bearer. 11. Original parties to a note e. Where the instrument is addressed to a drawee, he must be a. Maker is the one who makes the promise and signs the named or otherwise indicated therein with reasonable instrument; while the payee is the one to whom the promise certainty. is made or the instrument is payable. 2. i Commercial paper – a written promises or obligations that b. i PAYEE’S DESCRIPTION AND OBLIGATION: It may arise out of commercial transactions from the use of such speciically designated by name, or ofice or title ii instruments instruments as promissory notes or bills of exchange. (Treasurer,) or may be unspeciied (bearer.) ii It may seek NOTE: All commercial paper or instrument is either negotiable or payment personally or further negotiate the instrument. non-negotiable. c. OBLIGATION OF THE MAKER: It promises to pay to the 3. i Every NI is presumed to be a contract but not every contract is payee or holder and signs on the face of the note for him to a NI. ii An NI may or may not be a commercial paper. be liable thereon. 4. Considerations to be followed on negotiable instruments d. Additional parties can also become involved after an a. The whole of the instrument. instrument is issued and delivered. b. Only what appears on the face of the instrument. 12. General outline and principal features of a negotiable c. The provisions of Sec. 1 of NIL in order for an instrument to promissory note be negotiable. Payable to order
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184 1c +
191[7]
Selected formal requirements explained
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14 8[2,] 17e, 128, 129
5. The instrument must be in writing — The instrument must be reduced to tangible form; otherwise, nothing could be negotiated or passed from hand to hand. a. Writing the instrument includes that which has been written on durable paper and with a pen or pencil and that which is in print or has been typed. b. An oral promise can make it difficult to determine liability and create the danger of fraud. 6. The instrument must be signed by the maker or drawer — GENERAL RULE: The signature may appear in any part of the instrument whether at the top, middle or bottom or at the margin, although al though the signature of the maker or drawer is placed at the lower right hand corner thereof; and it will be valid and binding as long as it appears that a person intended to make the instrument his own. a. i His signature is prima is prima facie evidence of his intention to be bound as either maker or drawer. ii However, if the signature is so placed upon the instrument that if it is not clear in what capacity the person intended to sign, he is deemed an indorser. b. i The written signature of the maker or drawer is preferable that the full name or at least the surname should appear. ii But, initials or any mark will be sufficient, provided that such signature be used as a substitute and the maker or drawer intends to be bound by it. c. The party against whom it operates the refusal of authenticity of signature of the maker or drawer, must provide some evidence of its falsity because the PRESUMPTION that the signature is valid. d. Maker refers to the person issuing a promissory note, while the drawer , to the person issuing a bill of exchange. 7. The instrument must contain an unconditional promise or order to pay — CLASSIFICATION OF NI: (1) promises to pay or promissory notes, and (2) orders to pay or bills of exchange. 8. The instrument must be payable in a sum certain in money a. i REASON: Money is the one standard of value in actual business. ii The promise or order may designate a particular kind of current money in which payment is to be made. b. i Money — the medium of exchange authorized and adopted by a domestic or foreign government as part of its currency; and it includes all legal tender. ii Legal tender — a currency which a debtor can legally compel a creditor to accept in payment of a debt in money when tendered by the debtor in the right amount. 9. The drawee must be named — the provision applies only to bills of exchange and checks. a. i An order obviously, which is not addressed to any person cannot be a bill. ii However, the bill would be suficient if the drawee is indicated therein with reasonable certainty though he is not named. b. REASON: The payee or holder is enable to know upon whom he is call for acceptance or payment.
Payable to bearer
a.
The igures “P 1,000,000.00” at the upper left corner of the instrument indicate the amount of the note. ii The igure is convenient, not essential, because the amount in igures is more quickly grasped than the written words. b. i “Bacolod City” at the upper right corner denotes the place where the contract is executed, while the date “December 31, 2015,” the date of execution. ii The place and the date are not essential except in certain cases: (1) iii When the date is necessary to determine when the note is due; (2) iv To run the interest when the payment of interest has been stipulated; or (3) v Whether the holder is barred by the statute of limitations from enforcing the note. c. i “For value received” suggests the consideration given for the note which may be speciied. ii The words thereof may be omitted as consideration is presumed. d. i “I promised to pay,” neither “he might” nor “will probably,” signiies an absolute and unconditional promise to pay the i
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payee or to a holder and the words thereof are essential. ii The substituted words for “promise” are: “I agree to pay,” “I bind myself to pay,” “I will pay,” “good to Ricci L. Siason or order,” “I acknowledge to be indebted to Ricci L. Siason or order,” etc. iii Words that would not satisfy the negotiability of the note are: “Due to Ricci L. Siason P 1,000,000,” or “will agree to pay.” e. “To the order of” and “or order,” implies a promise to pay as ordered or commanded by the payee; but the instrument may be payable to bearer. f. i “On or before January 31, 2016” indicates the date of maturity or the time when the promise to pay is to be fulilled. ii Where no time for payment is expressed, an instrument is payable on demand. g. The name “Ricci L. Siason” indicates the payee, the person to whom the promise is made or the instrument is payable; if the promise is made to “bearer,” the payee need not be speciied. h. The amount “One Million Pesos,” which precedes the unnecessary igures “P 1,000,000.00,” indicates the amount which the maker binds himself to pay. i. “At his house at Kabankalan City, Negros Occidental” indicates the place of payment of the note, not essential. j. i The signature “Arniel Jake M. Jordan” is the maker of the note, the one who promises to pay. ii A note may be signed by several persons either jointly or jointly and severally. 13. i Bill of exchange — an unconditional order in writing addressed by one person to another, signed by the person giving it, and requiring the person to whom it is addressed to pay upon demand or at a ixed or determinable future time a sum certain in money to order or to bearer. ii Check — the common type of order paper or bill drawn on a bank and payable on demand. iii It is a three-party paper, requiring the drawer, drawee, and the payee to ill the legal roles involved. PURPOSE a. iv Fundamental idea and purpose: The drawer has funds in hands of the drawee which the former desires to be paid to the payee; thus, he draws the bill ordering the drawee to pay the amount in the bill to the payee. b. v Liability of drawee for nonpayment: If the drawee refuses to accept when he has funds for the purpose, he becomes liable to the drawer (not the payee) for the resulting damages and the harm done to his credit. vi If the drawer has no funds in the hands of the drawee while the PRESUMPTION is the former must have the arrangements with the latter so that he will honor the bill; thus, the drawee must look for reimbursement to the drawer and not to a bona ide holder. 14. Original parties to a bill of exchange a. Drawer — the person who issues and draws the order bill; drawee — the party upon whom the bill is drawn or the person to whom the bill is addressed and who is ordered and expected to pay; and payee — the party in whose favor the bill is originally issued or is payable. b. OBLIGATIONS: Drawer gives order to pay money to a third party— meaning he does not pay directly; and drawee accepts the bill when he indicates his willingness to pay the bill. c. DESCRIPTION OF PAYEE: He may be speciically designated, or may be an ofice or title, or unspeciied. d. The parties need not all be distinct persons; thus, the drawer may draw on himself payable to his own order, i. e., the two parties to the bill can be the same person (drawer drawee or drawer -payee.) 15. General outline and principal features of a negotiable bill of exchange
a. “Pay to” indicates an unconditional order to pay. b. The name “Arniel Jake M. Jordan” indicates the drawer, the one who signs the bill of exchange. c. i The name “Carlos Hilado Memorial State College” indicates
the drawee, not a real party to the bill, who assumes liability only when he accepts the bill usually by writing the word “accepted” and signing his name on the face thereof in which case he ceases to be a drawee and becomes known as an acceptor . ii By accepting, the acceptor becomes primarily liable like the maker of the note, the drawer becoming only a surety. d. The word (may be omitted) “charge the same to the account of,” means the amount to be paid by the drawee is to be charged against the funds of the drawer. 16. i Non-negotiable instrument — an instrument lost the quality of negotiability or doe not meet the requirements laid down for negotiable instruments. ii EXAMPLE is a check payable only to a speciied person. a. A negotiable instrument ceases to be negotiable if the indorsement prohibits the further negotiation of the instrument. b. A non-negotiable instrument may not be negotiated but may be assigned or transferred, absent an express prohibition against assignment or transfer written on the instrument. c. Scope of law : The Civil Code within the assignment of contract rights governed the rules of transfers of non negotiable instruments and within the principles of contract law a NI is improperly negotiated to a third person (transferee.) d. Legal consequences of transfer or assignment: Persons who transfer or assign contractual or non -negotiable rights pass only the rights that they had.
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16241635, CC
The sum payable is a sum certain within the meaning of this
2 Act, although it is to be paid: It does not affect its negotiability
a. With interest; b. By stated installments; c. By stated installments with a provision that, upon default in payment of any installment or of interest, the whole shall become due; d. With exchange, whether at a ixed rate or at the current rate; or e. With cost of collection or an attorney’s fee in case payment shall not be made at maturity. 2. i “The NI must contain an unconditional promise or order to pay a sum certain in money” is a requisite for the negotiability to assure the clarity and certainty in determining the instrument’s value. ii The sum certain may be: a. A fixed amount to be paid wholly in money stated plainly on the face of the instrument. iii NOTE: If the instrument calls for an act, other than payment of money, it is not negotiable because a NI is intended as a substitute for money. b. iv Permissible clauses or stipulation laid down in Sec. 2. v Neither is the certainty of the sum affected by an acceleration clause in an installment note. vi BASIC TEST THE SUM CERTAIN IN INSTALLMENT NOTE: Whether the holder can determine by calculation or computation the amount payable when the instrument is due. vii But, A note giving the maker the right to ascertain the amount rightly payable is non -negotiable.
The Composition of Sum To Be Paid is One of the Following 3. With interest at ixed rate; or at increased or reduced rate. 4. By stated installments — stated installment means (a) the interest of each installment and (b) the due date of each installment must be ixed in the instrument. 5. i By stated installments with acceleration clause — Two cases for acceleration feat: a. ii Dependent on maker — Acceleration clause means a promise that if any installment or interest is not paid as agreed, the whole shall become due. iii Such clause does not make an instrument payable upon contingency and so non negotiable since the time of payment will come. iv NOTE: The maker can avoid the acceleration by paying the installments on due date; while the payee or holder cannot accelerate the note unless the maker fails to pay an installment. b. At the option of holder — If the note provides for acceleration at the option of holder, the instrument is non negotiable. 6. With exchange — Means the instrument is payable in foreign currency. a. i Exchange — The charge, may be at ixed or current rate, for the expense of providing funds at the place where the instrument is payable to meet the instrument which is
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issued at another place. ii Two provisions of payment with indication of the particular fund out of which reimbursement is to be made, or an indication of particular account to be exchange: debited with the amount or a statement of transaction which b. Payment in foreign currency — this does not impair the negotiability, REASON: the current exchange rate at any gives rise to the instrument does not render the promise or order conditional, REASON: This has reference to bills only given time may be inquired from banks dealing on since reimbursement and debiting can only take place exchange or foreign currencies and such rate is a matter of where payment by another is made. vii Additional terms common commercial knowledge. appearing on an instrument (e.g., a statement of the purpose c. Payment with exchange rate — applies to instrument drawn in one country and payable in another; in other for which the instrument is issued, the collateral securing it, ) do not make the promise or order conditional if the duty to words, exchange is applicable only to foreign bills. pay is unaffected by such terms. 7. With costs of collection or an attorney’s fee — Its provisions: a. Increase in amount due effective after maturity does not Unconditional Terms Coupled for the NI affect the certainty of amount payable at maturity, REASON: The increase in the amount due even if uncertain takes place after maturity when the instrument ceases to be 5. Indication of a particular fund out of which reimbursement negotiable in the full commercial sense or to perform the is to be made is negotiable because the fund indicated is not ofice of money; until the instrument matures, the amount the direct source of payment but only the source of payable is certain. reimbursement which is an act subsequent to the payment; b. Liability of attorney’s fee may be reduced by courts if moreover the drawee is not limited to the money in his hands found unconscionable or unreasonable; if such fee is belonging to the drawer. unspeciied, then it shall be in a reasonable sum. 6. Indication of a particular account to be debited with the c. Acquisition of instrument after matu rity — A transferee amount is negotiable because the payment does not depend acquiring the instrument when it is overdue would not be a upon the existence or adequacy or the particular account to be holder in due course and consequently would not hold the debited and such account must be indicated. instrument subject to defenses, as if it were non -negotiable. 7. Statement of transaction which gives rise to instrument a. Instruments are issued by reason of the transaction upon i When promise is unconditional — An unqualiied order or which they are based; hence, the mere recital of the promise to pay is uncon ditional within the meaning of this Act consideration for which the instrument was issued or though coupled with: mere references to a separate agreement out of which a. ii An indication of a particular fund out of which the instrument has arisen does make it conditional. reimbursement is to be made or a particular account to be b. If the promise or order is “subject to the terms and debited with the amount; or conditions of our contract executed by us on December b. iii A statement of the transaction which gives rise to the 31, 2015 ,” the instrument is non -negotiable, REASON , The instrument. obligation to pay is burdened with the terms and conditions iv But an order or promise to pay out of a particular fund is not of another contract, subjecting recovery on the instrument unconditional. to defenses available under the contract; furthermore, this 2. When promissory note contains a promise to pay — A will require an examination of said contract to determine prospective holder would not eager to accept an instrument the rights and obligations under the instrument. unless its payment can be reasonably expected under every 8. Indication of a particular fund out of which payment is to be circumstance. made is non-negotiable because the amount to be paid is made a. Implied promise to pay — A negotiable promissory note to depend upon the adequacy or existence of the fund must contain an unconditional promise to pay, that is, any designated; moreover, the fund speciied is the direct source of words equivalent to a promise or assumption of payment and the measure of liability. Even if the fund is found responsibility for the payment of the note on the face of an to be suficient at maturity, the instrument remains non instrument are suficient to constitute a “promise to pay.” negotiable. TEST OF NEGOTIABILITY: Whether the b. A bare acknowledgement of indebtedness alone neither instrument carries the general personal credit of the constitutes a promise to pay nor a NI; however, if words of maker or drawer. negotiability are added, the instrument is negotiable i although it lacks express promissory words since the What constitutes determinable future time — An written promise to pay may be fairly inferred therefrom. instrument is payable at such time, within the meaning of this 3. i When bill of exchange contains an order to pay Act, which is express to be payable: a. ii Words equivalent to an order to pay — An a. ii At a ixed period after date or sight; unconditional order to pay by one party to another b. iii On or before a ixed or determinable future time speciied encompasses the bill of exchange; otherwise, it is not therein; or negotiable. iii Any words which are equivalent to an order c. iv On or at a ixed period after the occurrence of a speciied or which show the drawer’s will that money should be paid event which is certain to happen though the time of are suficient. happening be uncertain. v b. iv Mere request to pay — The language used in law is not a An instrument payable upon a contingency is not negotiable, request, that is, the drawer demands the drawee to make and the happening of the event does not cure the defect. payment. v Order is a command or imperative direction and 2. Certainty of time of payment thus a mere request, supplication or authority does not a. Instrument payable at all events is an essential constitute an order; moreover, the mere use of courteous requirement for negotiability of an instrument that its words like “please” does not convert an order into a payment will certainly become due and demandable one request. time or other, though it may be uncertain when that time c. vi Liability of drawer — Whether the drawer obedient to will come. the order to pay or not is not immaterial. vii The b. i When time of payment certain — The instrument must negotiability of a bill depends upon the terms of the order. be payable on demand, or at a ixed or determinable future viii The drawer has his liability under the law. in order to be negotiable. ii In case of demand or sight 4. i When promise or order to pay unconditional instrument, the holder may call for payment at any time; on a. ii Instrument payable absolutely — A promise or order the other hand, a term or time instrument is payable only only on NI is not enough. iii The NI must be unconditional or upon the arrival of the time for payment. iii Checks must be absolute, that is, it must not be subject to any condition or payable on demand. contingency, except implied conditions of presentment, c. i REASONS: TIME MUST BE CERTAIN so that: the holder protests and notice of dishonor as provided in the law. will know when he may enforce the instrument. ii The b. iv REASON OF REQUISITE — The liability is unconditional person liable (maker, drawee, or acceptor) knows when he greatly enhances the ability of the instrument to circulate may be required to pay. iii The secondary parties (drawer, freely from one person to another. v If the promise or order indorser, or accommodation party) know when his to pay is clearly conditional in nature, the instrument obligation will arise. constitutes a simple contract; even if the condition or event 2. When instrument payable at determinable future time is very likely to occur, or occur subsequently, it remains a. non-negotiable although becomes payable at due time. c. vi Terms not affecting unconditional liability — The mere
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4, CC 1179 70, 143 152, 165, 167, 170, 89
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