Negotiable Instruments Law

Q: What comes instruments? to mind when we talk about negotiable A: *egotiability means passing the instrument from one person to another. A: When we talk about negotiable instrument what usually comes to mind would be your checks, your promissory notes and your bills of exchange.

This law is a ery old law. That!s why you might be wondering why " ha e included old cases. " still included old cases because the principles in those cases would still be applicable today because the law has not changed since it was enacted. The law remains the same and there!s no amendment. #ut you might notice when you read the cases that most of these cases in ol ed checks because that is what is being used today. $o in our transactions it is usually checks. A check is a special kind of bill of exchange. "n the old times when the law was enacted and until the %&'(!s we had the bills of exchange and then came the checks which is actually a special kind of bill of exchange.

Q: 0oes the definition of negotiability stop there? 1an an ordinary instrument which is non2negotiable be passed on from one person to another also? +et!s say for example you ha e 3 and you ha e 4 here. "f 3 and 4 agreed that 3 will buy from 4 %( sacks of class A rice and 3 since he has no money yet at the moment he will issue a promissory note promising to pay 4. $o he promise to pay 5(,(((.

" promise to pay 4 5(,((( on *o ember 56, 5(%%

$gd. 3 Q: Why do we say that it "s a special kind of bill of exchange? A: #ecause there are certain rules that are applicable to checks only. #ut of course the rules on bills of exchange will also be applicable to checks because it is still bills of exchange. This promissory note is not negotiable. #ut this is an instrument. $o we follow the rules of obligations and contracts. And then we will see the difference on the effect if the instrument is non2 negotiable and if the instrument is negotiable. This is a non2 negotiable promissory note. $o 3 .a e that promissory note to 4. #efore the deli ery of the %( sacks of class A rice 4 was also indebted to A for 5(,(((. A already demanded from 4 for the amount of 5(,((( but 4 yet has no money because he relied on the payment of 3.

)our checks, your promissory notes, your bills of exchange these things are what we!re gonna talk about the entire semester, your negotiable instruments. That is co ered by your *"+.

*egotiable instruments this is actually not a ery alien topic to what you learned in your pre ious semesters. )ou ha e already known what instruments are.

Q: 7nder your /blicon can 4 here assign his right in collecting from 3 to A? 1an he assign it to A? 1an 4 gi e this promissory note to A? A: )es, he can. A is now the possessor of the promissory note.

Q: what are instruments under your obligations and contracts? A: "t could be in writing stipulating the agreement of the parties. "t is an instrument. "f we talk about instrument in a legal parlance and that is what we are referring to. #ut an instrument in writing showing agreement between two or more parties. Q:$o what is the effect? A: The effect is A could no longer collect from 4 but will now collect from 3.

,ere we are still talking about these instruments but these instruments being negotiable.

Q: *ow what do mean then by negotiable? "f we now take the word negotiable plus instruments what are then the essential features of your promissory notes, your bills of exchange and your checks? A: The first essential features of course looking at this word alone is *-./T"A#"+"T).

Then there was the deli ery of the %( sacks not of class A rice but class # rice before *o ember 56, 5(%%. $o it was not accepted by 3 because that is not what they agreed upon. #ut who is now the holder of the promissory note? 2222 "t is already A. $o on *o ember 56, 5(%% A collected from 3.

Q: 1an 3 refuse to pay? A: )es, he can because of breach of contract between 3 and 4. And A as you ha e learned in your /bligations and 1ontracts is a mere assignee and he mere steps in to the shoes of 4 meaning if were 4 collecting from 3, 3 will still ha e the defense of breach of contract. And 3 is not compelled to pay. "n fact, he can e en sue for damages. $o A cannot compel 3 to pay because the promissory note is not negotiable. A is a mere assignee, that!s your /bli1on. This is a mere instrument.

Q: What do we mean by *egotiability?

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Negotiable Instruments Law

*ow let!s infuse your negotiability. +et!s go to our sub8ect for this semester, *egotiable "nstruments. Q: in our example which is the primary contract? A: The contract between of course 3 and 4 when 3 issued the negotiable promissory note. Q: ,ow will we make this as negotiable instruments? Q: What is the secondary contract? " promise to pay 4 or bearer 5(,((( on *o ember 56, 5(%%. A: The implied contract between A and 3 because when you look at it there was really no contract between 3 and A but because of the promissory note that was passed on by 4 to A there now exist an implied contract between A and 3 where 3 will ha e to pay the holder of the instrument at the time it is due. $o, if A passed it on to #, to 1, to 0 then more secondary contracts are being created because you will learn later on that if the holder is 0 and 0 will go to 3 and 3 cannot pay, there are secondary contracts that are being created because 0 can claim from 1,#,A or 4 depending on what type of negotiable instrument it is. "f it!s a bearer instrument or an order instrument you will also learn that during the semester. That is what is meant by accumulation of secondary contract.

$gd. 3

This is now a negotiable instrument. $till the same set of facts. 3 issued this promissory note in fa or of 4 or bearer because of the promise of 4 to deli er %( sacks of class A rice. 4 was indebted to A, still he had no money yet so he passed on the promissory note to A. #efore the maturity date on *o ember 56, 5(%% 4 deli ered class # rice. A was unaware of the contract between 3 and 4 so at maturity date A collected from 3.

:eatures of *egotiable "nstruments: %. *egotiability Accumulation of $econdary 1ontracts

Q: 1an 3 now interpose the defense that he will not pay because of the breach of contract between 3 and 4? A: */9 ,e cannot set up that defense anymore because this is now a negotiable instrument and A is not anymore considered a mere assignee but a holder.

5.

;nowing already what the essential features of negotiable instruments are. We ha e to know why these instruments exist. "n the first place why were this instrument created?

That is the difference between a negotiable instrument and a non2 negotiable instrument. The difference is that the holder now of the instrument is more protected unlike in the first example. "n the first example, A being a mere assignee of an instrument, a non2 negotiable instrument was not protected at all with any defect by the pre ious parties. ,e only stepped into the shoes of the pre ious party. #ut in a negotiable instrument the holder of the instrument is protected granting that he has no knowledge at all of any defect of the title of the pre ious parties. $o that is the basic difference. A holder is more protected in a negotiable instrument than in a non2negotiable instrument.

Q: What are instrument?

the

important

functions

of

your

negotiable

A: :irst of course is that your negotiable instrument is a substitute for money. $o if you owe someone %3 pesos you need not bring %3 pesos in cash you 8ust ha e to write a check because it is more con enient and safer. $o that is one of the purposes for ha ing a negotiable instrument.

Q: $o what do we mean then by negotiability? A: *egotiability means the ability of the instrument to be passed from one person to another making the transferee the holder of the instrument not a mere assignee but a holder.

$econd, it is a medium of exchange for commercial transactions. $o in corporations or partnership seldom do you see them use cash. "f they will purchase something in a corporation or a company purchases something they do not use cash they use checks because they can easily trace their expenses when they used checks and again it is safer to use checks than to bring in loads of cash.

$o that is what is meant by negotiability , the first essential feature of your negotiable instrument.

$econd essential feature is accumulation of secondary contacts. "f you talked about secondary contracts then there must be a primary contract.

Third, is that it is a medium for credit transactions . "f you borrow money or you apply for a loan before a bank then you cannot 8ust go inside the bank and get money from the bank. )ou ha e to sign so many papers and these papers include your promissory notes because you will ha e to promise to pay the loan back to the bank. $o your promissory note is also an instrument and depending on the elements of the negotiable instrument we will know whether or not the instrument is negotiable or non2 negotiable.

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Negotiable Instruments Law

and be payable on demand or at a fixed or determinable future time to order. These are the three reasons or functions of your negotiable instrument. The =th re<uisite does not apply to promissory note because your promissory note does not ha e a drawee. The = th re<uisite will apply only to bills of exchange because there are only 5 ma8or types or negotiable instrument.

There are 5 ma8or types of negotiable instrument: a. b. 4romissory notes #ill of exchange

Q: what is a promissory note and what is a bill of exchange? A: you will know what a promissory note or bill of exchange by knowing what the re<uisites are of a negotiable instrument and that!s where we start using your book section %.

A Bill of Exchange is an instrument in writing signed by the 0rawer containing an unconditional order to pay a sum certain in money on demand or at a fixed or determinable future time to order or to bearer and the drawee must be named or otherwise indicated therein with reasonable certainty.

$ection % gi es you the re<uisite of your negotiable instrument. )ou ha e = re<uisites there and as you read re<uisites you will be able to define what a promissory note is and define what a bill of exchange is.

With section % you will also know the parties with these two types of negotiable instrument. *umber = will tell you that since it is not applicable to promissory note then there is an additional party when we talk about a bill of exchange.

Q: +ook at the promissory note, who are the original parties of this instrument? A: you ha e the 3aker and 4ayee. The 3aker makes the promissory note and the 3aker himself is promising to pay a certain 4ayee or #earer or a certain 4ayee or /rder a sum certain in money. $o, there are only 5 parties in a promissory note.

>e<uisites of negotiable instrument: %. 5. ?. '. =. 3ust be in writing and signed by the maker or drawer 3ust contain an unconditional promise or order to pay a sum certain in money 3ust be payable on demand or at a fixed or determinable future time. 3ust be payable to order or bearer "f the instrument is addressed to a drawee: 0rawee must be named or otherwise indicated therein with reasonable certainty.

This is an example of a bill of exchange and as we said a check is a special kind of bill of exchange.

This is an ordinary bill of exchange.

" promise to pay 4 or bearer 5(,((( on *o ember 56, 5(%%. *ame of the #ank: #4" $gd. 3 4ay to the order of @@@@@@@@@@@@@@Amount in 4eso@@@@@@@@@@@ +ook at this instrument here. " said that this is a negotiable promissory note. This is in writing. This is signed by the 3aker. The promise here is unconditional because there was no condition attached to it. There is a fixed date of maturity. This is payable to bearer. The =th re<uisite does not apply to promissory note. Amount in words @@@@@@@@@@@@@@@@@@@@@ 0ate:

0epositorA0rawer

A Promissory Note is an instrument in writing that is signed by the 3aker unconditionally promising to pay a sum certain in money

Q: This is also a bill of exchange. "f you look at this ordinary bill of exchange how may parties do you see?

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Negotiable Instruments Law

A: ? parties. )ou ha e the 0rawer, the 4ayee and the 0rawee. Q: 0uring collection can B refuse to pay? A: *o9 because he signed and he cannot 8ust say that he is signing in behalf of his principal 3. $ince you signed there you are liable. Q: what is the difference between a promissory note and a bill of exchange? A: "n a promissory note the one making the instrument is the one promising to pay. "n a bill of exchange or in a check the one making the instrument is not the one who is going to pay but he is ordering somebody else to pay. 0 addressing it to the 0rawee B is ordering B, B you pay to the order of 0. The 0rawer is not actually paying he is ordering somebody else to pay. That!s why there are ? parties. Q: ,ow then can B escape liability? A: of course he would ha e to sign for his principal but he must indicate that he is merely signing as an agent.

Q: What determines the negotiability of the instrument? ,ow do you know if the instrument is negotiable? "s it the agreement between the parties? /r is it the face of the instrument? A: "t is the face of the instrument precisely why you ha e your re<uisites. )our re<uisite if you look at the face of the instrument if it has complied with the re<uisites. "f it has complied with all the re<uisites then it is negotiable. "f it does not comply with one of the re<uisite e en 8ust one it is no longer negotiable but that does not mean that it is not alid. "t is 8ust not negotiable. *ot alid and not negotiable are two different things. "f you say not alid then you ha e to go to /bli1on meaning that instrument is not effecti e. ,ere if it is not negotiable it is still effecti e only that you remember our first example only the effects will be different if you pass it on because we!re talking about negotiability the passing on the instrument from one person to another. "f you say not negotiable then it is 8uat not negotiable not that it is not alid only that the effects if it were negotiable would be different from when it is not negotiable.

CThe last ? minutes of recording kay naputol because naay exchoserang frog nga nanawag namaligya ug lifetime insurance. ,ehehe9 D

We said that this is negotiable. And we said that an instrument be negotiable that means its susceptibility being passed on from one person to another making the transferee thereof a holder under the definition of your *"+.

Q: This particular promissory note written on the board can you consider this a negotiable instrument? 1an you pass this board from one person to another? A: definitely not although it is in writing but that does not mean to say that you will write it anywhere because we!re talking about negotiability. The susceptibility of being passed on from one person to another. :or as long as it can be passed on there could be no problem. $o we!re talking about from passing it on from one person to another.

This 3aker here the one signing it says there it must be in writing and signed by the 3aker we!re talking about promissory notes. That means that if you sign an instrument then you are bound already by that instrument. $upposing you ha e B and B is a mere agent of 3 and 3 is out of town but 3 has a transaction between 4 and 4 wants to ha e this promissory note A$A4 because if he could not get the promissory note the transaction would not be pushed through. $o 3 the principal is now asking B to make a promissory note. And so B made one for his principal and B signed his name.

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