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Negotiable Instruments Law Reviewer
Negotiable Instruments Law Reviewer
GENERAL CONCEPTS
CHECK - A bill of exchange drawn on a bank payable on demand. (Sec. 185). It is the
NEGOTIABLE INSTRUMENT (NI) most common form of bill of exchange.
A written contract for the payment of money which complies with the requirements of
Sec. 1 of the NIL, which by its form and on its face, is intended as a substitute for money OTHER FORMS OF NI
and passes from hand to hand as money, so as to give the holder in due course (HDC) the 1. Certificate of deposit issued by banks, payable to the depositor or his order, or to
right to hold the instrument free from defenses available to prior parties. (Reviewer on bearer
Commercial Law, Professors Sundiang and Aquino) 2. Trade acceptance
Functions: (Bar Review Materials in Commercial Law, Jorge Miravite, 2002 ed.) 3. Bonds, which are in the nature of promissory notes
1. To supplement the currency of the government. 4. Drafts, which are bills of exchange drawn by one bank upon another
2. To substitute for money and increase the purchasing medium. 5. Debenture
Legal tender – That kind of money which the law compels a creditor to accept in All of these must comply with Sec. 1, NIL.
payment of his debt when tendered by the debtor in the right amount. Note: Letters of credit are not negotiable because they are issued to a specified person.
Note: A NI although intended to be a substitute for money, is not legal tender. However, a
check that has been cleared and credited to the account of the creditor shall be equivalent Instances when a BE may be treated as a PN
to delivery to the creditor of cash. (Sec. 60, NCBA) a. The drawer and the drawee are the same person; or
Features: (Reviewer on Commercial Law, Professors Sundiang and Aquino) b. Drawee is a fictitious person; or
1. Negotiability – That attribute or property whereby a bill or note or check may pass c. Drawee does not have the capacity to contract. (Sec. 130)
from hand to hand similar to money, so as to give the holder in due course the d. Where the bill is drawn on a person who is legally absent;
right to hold the instrument and to collect the sum payable for himself free from e. Where the bill is ambiguous (Sec. 17[e])
defenses.
The essence of negotiability which characterizes a negotiable paper as a Parties to a NI
credit instrument lies in its freedom to circulate freely as a substitute for 1. Promissory Note
money. (Firestone Tire vs. CA, 353 SCRA 601) a. Maker – one who makes promise and signs the instrument
2. Accumulation of Secondary Contracts – Secondary contracts are picked up and b. Payee – party to whom the promise is made or the instrument is payable.
carried along with NI as they are negotiated from one person to another; or in the 2. Bill of Exchange
course of negotiation of negotiable instruments, a series of juridical ties between a. Drawer – one who gives the order to pay money to a third party
the parties thereto arise either by law or by privity. b. Drawee – person to whom the bill is addressed and who is ordered to pay. He
becomes an acceptor when he indicates his willingness to pay the bill
Applicability: c. Payee – party in whose favor the bill is drawn or is payable.
General Rule: The provisions of the NIL are not applicable if the instrument involved is
not negotiable. DISTINCTIONS
Exception: In the case of Borromeo vs. Amancio Sun, 317 SCRA 176, the SC applied
Section 14 of the NIL by analogy in a case involving a Deed of Assignment of shares which PROMISSORY BILL OF EXCHANGE
was signed in blank to facilitate future assignment of the same shares. The SC observed NOTE
that the situation is similar to Section 14 where the blanks in an instrument may be filled up Unconditional promise Unconditional order
by the holder, the signing in blank being with the assumed authority to do so.
The NIL was enacted for the purpose of facilitating, not hindering or hampering
Involves 2 parties Involves 3 parties
transactions in commercial paper. Thus, the statute should not be tampered with
haphazardly or lightly. Nor should it be brushed aside in order to meet the necessities in a Maker is primarily liable Drawer is only secondarily
single case. (Michael Osmeña vs. Citibank, G.R. No. 141278, March 23, 2004 Callejo J.) liable
Only one presentment: Two presentments: for
Kinds of NI for payment acceptance and for
1. PROMISSORY NOTE (PN) payment
An unconditional promise in writing by one person to another signed by the maker
engaging to pay on demand or at a fixed or determinable future time, a sum certain in NEGOTIABLE NON-NEGOTIABLE
money to order or to bearer. (Sec. 184) INSTRUMENTS INSTRUMENTS
Only NI are governed by Application of the NIL is only by
2. BILL OF EXCHANGE (BE) the NIL. analogy.
An unconditional order in writing addressed by one person to another, signed by the Transferable by Transferable only by
person giving it, requiring the person to whom it is addressed to pay on demand or at a negotiation or by assignment
fixed or determinable future time a sum certain in money to order or to bearer. (Sec. 126) assignment.
A transferee can be a A transferee remains to be an
HDC if all the assignee and can never be a HDC
requirements are
complied with
A holder in due course All defenses available to prior
takes the NI free from parties may be raised against the
personal defenses last transferee
The dates of each installment must be fixed or at least determinable and the amount to
REQUISITES OF NEGOTIABILITY be paid for each installment.
a. It must be writing and signed by the maker or drawer A sum is certain if the amount to be unconditionally paid by the maker or drawee can be
Any kind of material that substitutes paper is sufficient. determined on the face of the instrument and is not affected by the fact that the exact
amount is arrived at only after a mathematical computation. (Notes and Cases on Banks,
With respect to the signature, it is enough that what the maker or drawer affixed
Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino)
shows his intent to authenticate the writing. (Notes and Cases on Banks,
Negotiable Instruments and other Commercial Documents, Timoteo B. Aquino)
b. Unconditional Promise or Order to pay a sum certain in money ACCELERATION INSECURITY EXTENSION
Unconditional promise or order CLAUSE CLAUSE CLAUSE
A clause that Provisions in the Clauses in the face payment is stated; therein; or
renders whole debt contract which of the instrument c. Where issued, accepted, c. On or at a fixed period after the
due and allows the holder that extend the or indorsed after maturity occurrence of a specified event,
demandable upon to accelerate maturity dates; (only as between which is certain to happen, though
failure of obligor to payment if he a. At the option of immediate parties). (Sec. the time of happening is uncertain.
comply with certain deems himself the holder; 7) (Sec. 4)
conditions. insecure. b. Extension to a
further definite time If the day and the month, but not the year of payment is given, it is not negotiable due to
at the option of the its uncertainty. (Pandect of Commercial Law and Jurisprudence, Justice Jose Vitug, 1997
maker or acceptor ed.)
c. Automa –tically
upon or after a d. Payable to Order or to Bearer
specified act or Payable to Order
event. The instrument is payable to order where it is drawn payable to the order of a specified
Instrument is still Instrument is Instrument is still person, or to him or his order. (Sec. 8)
negotiable rendered non- negotiable (Notes The payee must be named or otherwise indicated therein with reasonable certainty.
negotiable and Cases on The instrument may be made payable to the order of:
because the Banks, Negotiable a. A payee who is not the maker, drawer or drawee
holder’s whim and Instruments and b. The drawer or maker
caprice prevail other Commercial c. The drawee
without the fault Documents, d. 2 or more payees jointly
and control of the Timoteo B. Aquino) e. One or some of several payees
maker f. The holder of an office for a time being
b. Subsequent Negotiation
1. If payable to bearer, a negotiable instrument may be negotiated by mere
III. INTERPRETATION OF NEGOTIABLE INSTRUMENTS (Sec. 17) delivery.
2. If payable to order, a NI may be negotiated by indorsement completed by
a. Discrepancy between the amount in figures and that in words – the words prevail, but if delivery
the words are ambiguous, reference will be made to the figures to fix the amount. Note: In both cases, delivery must be intended to give effect to the transfer of instrument.
b. Payment for interest is provided for – interest runs from the date of the instrument, if (Development Bank vs. Sima Wei, 219 SCRA 736)
undated, from issue thereof. c. Incomplete negotiation of order instrument
c. Instrument undated – consider date of issue. Where the holder of an instrument payable to his order transfers it for value without
d. Conflict between written and printed provisions – written provisions prevail. indorsing it, the transfer vests in the transferee such title as the transferor had therein and
e. When the instrument is so ambiguous that there is doubt whether it is a bill or note, the he also acquires the right to have the indorsement of the transferor. But for the purpose of
holder may treat it as either at his election; determining whether the transferee is a holder in due course, the negotiation takes effect as
f. If one signs without indicating in what capacity he has affixed his signature, he is of the time when the indorsement is made. (Sec. 49)
considered an indorser. d. Indorsement
g. If two or more persons sign “We promise to pay,” their liability is joint (each liable for his Legal transaction effected by the affixing one's signature at the:
part) but if they sign “I promise to pay,” the liability is solidary (each can be a. Back of the instrument or
compelled to comply with the entire obligation). (Sec. 17) b. Upon a paper (allonge) attached thereto with or without additional words specifying the
person to whom or to whose order the instrument is to be payable whereby one not only
IV. TRANSFER AND NEGOTIATION transfers legal title to the paper transferred but likewise enters into an implied guaranty
that the instrument will be duly paid (Sec. 31)
INCIDENTS IN THE LIFE OF A NI (1 Agbayani, 1992 ed.) GENERAL RULE: Indorsement must be of the entire instrument.
a. Issue EXCEPTION: Where instrument has been paid in part, it may be indorsed as to the
b. Negotiation residue. (Sec. 32)
c. Presentment for acceptance, in certain kinds of Bills of Exchange
d. Acceptance Kinds of Indorsement:
h. Dishonor by non-acceptance A. SPECIAL – Specifies the person to whom or to whose order, the instrument is to be
i. Presentment for payment payable (Sec. 34)
j. Dishonor by non-payment B. BLANK – Specifies no indorsee:
1. Instrument becomes payable to bearer and may be negotiated by delivery (Sec. CONSIDERATION FOR THE ISSUANCE AND SUBSEQUENT TRANSFER
34) Every NI is deemed prima facie to have been issued for a valuable consideration. Every
2. May be converted to special indorsement by writing over the signature of indorser person whose signature appears thereon is presumed to have become a party thereto for
in blank any contract consistent with character of indorsement (Sec. 35) value. (Sec. 24)
C. ABSOLUTE – One by which indorser binds himself to pay:
1. Upon no other condition than failure of prior parties to do so; What constitutes value:
2. Upon due notice to him of such failure. a. An antecedent or pre-existing debt
D. CONDITIONAL – Right of the indorsee is made to depend on the happening of a
contingent event. Party required to pay may disregard the conditions. (Sec. 39) b. Value previously given
E. RESTRICTIVE – An indorsement is restrictive, when it either: c. Lien arising from contract or by operation of law. (Sec. 27)
a. Prohibits further negotiation of the instrument; or
b. Constitutes the indorsee the agent of the indorser; or V. HOLDERS
c. Vests the title in the indorsee in trust for or to the use of some other persons. But
mere absence of words implying power to negotiate does not make an HOLDER
indorsement restrictive. (Sec. 36) A payee or endorsee of a bill or note who is in possession of it or the bearer thereof.
(Sec. 191)
F. QUALIFIED – Constitutes the indorser a mere assignor of the title to the instrument.
(Sec. 38) RIGHTS OF HOLDERS IN GENERAL
It is made by adding to the indoser's signature words like "sans recourse,” “without
recourse", "indorser not holder", "at the indorser's own risk", etc. (Sec. 51)
G. JOINT – Indorsement payable to 2 or more persons (Sec. 41) a . May sue thereon in his own name
H. IRREGULAR – A person who, not otherwise a party to an instrument, places thereon b. Payment to him in due course discharges the instrument
his signature in blank before delivery (Sec. 64) The only disadvantage of a holder who is not a holder in due course is that the
Other rules on indorsement; negotiable instrument is subject to defenses as if it were non-negotiable. (Chan Wan vs.
1. Negotiation is deemed prima facie to have been effected before the instrument is
overdue except if the indorsement bears a date after the maturity of the instrument. (Sec. Tan Kim, 109 Phil. 706)
45)
2. Presumed to have been made at the place where the instrument is dated except when
the place is specified. (Sec. 46)
Holder In Due Course (HDC)
3. Where an instrument is payable to the order of 2 or more payees who are not partners,
all must indorse unless authority is given to one. (Sec. 41) A holder who has taken the instrument under the following conditions: KEY: C O V I
4. Where a person is under obligation to indorse in a representative capacity, he may 1. Instrument is complete and regular upon its face;
indorse in such terms as to negative personal liability. (Sec. 44) 2. Became a holder before it was overdue and without notice that it had been previously
dishonored;
3. For value and in good faith; and
4. At the time he took it, he had no notice of any infirmity in the instrument or defect in the
RENEGOTIATION TO PRIOR PARTIES (Sec. 50)
title of the person negotiating it. (Sec. 52)
Where an instrument is negotiated back to a prior party, such party may reissue and
further negotiate the same. But he is not entitled to enforce payment thereof against any
intervening party to whom he was personally liable. Reason: To avoid circuitousness of Rights of a HDC:
suits.
1. May sue on the instrument in his own name;
STRIKING OUT INDORSEMENT 2. May receive payment and if payment is in due course, the instrument is discharged;
The holder may at any time strike out any indorsement which is not necessary to his title. 3. Holds the instrument free from any defect of title of prior parties and free from defenses
The indorser whose indorsement is struck out, and all indorsers subsequent to him, are available to parties among themselves; and
thereby relieved from liability on the instrument. (Sec. 48) 4. May enforce payment of the instrument for the full amount thereof against all parties
liable thereon. (Secs. 51 and 57)
Every holder of a negotiable instrument is deemed prima facie a holder in due course. that no consideration passed between the accommodation and accommodated parties.
However, this presumption arises only in favor of a person who is a holder as defined in (Sec. 29)
Section 191 of the NIL. The weight of authority sustains the view that a payee may be a
holder in due course. Hence, the presumption that he is a prima facie holder in due course Rights & Legal Position:
applies in his favor. (Cely Yang vs. Court of Appeals, G.R. No. 138074, August 15, 2003) 1. AP is generally regarded as a surety for the party accommodated;
2. When AP makes payment to holder of the note, he has the right to sue the
Holder Not In Due Course accommodated party for reimbursement. (Agro Conglomerates, Inc. vs. CA, 348 SCRA
One who became a holder of an instrument without any, some or all of the requisites 450)
under Sec. 52 of the NIL.
Liability: Liable on the instrument to a holder for value notwithstanding such holder at the
With respect to demand instruments, if it is negotiated an unreasonable length of time time of the taking of the instrument knew him to be only an accommodation party. Hence,
after its issue, the holder is deemed not a holder in due course. (Sec.53) As regards, an AP, the 4th condition, i.e., lack of notice of infirmity in the instrument or defect
GENERAL RULE: Failure to make inquiry is not evidence of bad faith. in the title of the persons negotiating it, has no application. (Stelco Marketing Corp. vs.
EXCEPTIONS: Court of Appeals, 210 SCRA 51)
1. Where a holder’s title is defective or suspicious that would compel a reasonable man to
investigate, it cannot be stated that the payee acquired the check without the knowledge of Rights of APs as against each other: May demand contribution from his co-
said defect in the holder’s title and for this reason the presumption that it is a holder in due accommodation party without first directing his action against the principal debtor provided:
course or that it acquired the instrument in good faith does not exist. (De Ocampo vs. a. He made the payment by virtue of judicial demand; or
Gatchalian, 3 SCRA 596) b. The principal debtor is insolvent.
2. Holder to whom cashier’s check is not indorsed in due course and negotiated for value is The relation between an accommodation party is, in effect, one of principal and surety –
not a holder in due course. (Mesina v. IAC) the accommodation party being the surety. It is a settled rule that a surety is bound equally
and absolutely with the principal and is deemed an original promissory and debtor from the
Rights of a holder not in due course:
beginning. The liability is immediate and direct. (Romeo Garcia vs. Dionisio Llamas, G.R.
1. It can enforce the instrument and sue under it in his own name.
No. 154127, December 8, 2003)
2. Prior parties can avail against him any defense among these prior parties and prevent the
said holder from collecting in whole or in part the amount stated in the instrument
Well-entrenched is the rule that the consideration necessary to support a surety
Note: If there are no defenses, the distinction between a HDC and one who is not a HDC is
obligation need not pass directly to the surety, a consideration need not pass directly to the
immaterial. (Notes and Cases on Banks, Negotiable Instruments and other Commercial
surety, a consideration moving to the principal alone being sufficient. (Spouses Eduardo
Documents, Timoteo B. Aquino)
Evangelista vs. Mercator Finance Corp, G.R. No. 148864, August 21, 2003)
SHELTER RULE
VII. PARTIES WHO ARE LIABLE
A holder who derives his title through a holder in due course, and who is not himself a
party to any fraud or illegality affecting the instrument, has all the rights of such former
holder in respect of all prior parties to the latter. (Sec. 58) PRIMARY AND
SECONDARY WARRANTIES OF PARTIES
LIABILITY OF PARTIES
ACCOMMODATION Impose no direct obligation to
Makes the parties liable pay in the absence of breach
A legal arrangement under which a person called the accommodation party, lends his
to pay the sum certain in thereof. In case of breach, the
name and credit to another called the accommodated party, without any consideration.
money stated in the person who breached the
Accommodation Party (AP) instrument. same may either be liable or
barred from asserting a
Requisites: particular defense.
1. The accommodation party must sign as maker, drawer, acceptor, or indorser; Conditioned on Does not require presentment
2. He must not receive value therefor; and presentment and notice and notice of dishonor.
3. The purpose is to lend his name or credit. (Sec. 29) of dishonor (Campos and (Campos and Lopez-Campos,
4. Lopez-Campos, Negotiable Instruments Law,
Note: “without receiving value therefor,” means without receiving value by virtue of the Negotiable Instruments 1994 ed.)
instrument. (Clark vs. Sellner, 42 Phil. 384) Law, 1994 ed.)
Effects: The person to whom the instrument thus executed is subsequently negotiated
has a right of recourse against the accommodation party in spite of the former’s knowledge 1. Primarily Liable (Sec. 60 and 62, NIL)
MAKER ACCEPTOR OR DRAWEE instrument is contract maker or drawer or to
A. Engages to pay A. Engages to pay according dishonored and bearer, he is liable to
proper d. The all parties subsequent
according to the tenor of to the tenor of his acceptance;
instrument is, at
the instrument; and B. Admits the existence of the proceedings are to the maker or
brought, he will the time of drawer.
B. Admits the existence drawer, the genuineness of his
endorse-ment,
of the payee and his signature and his capacity and pay to the party
entitled to be valid and C. If he signs for
capacity to indorse. authority to draw the
subsisting. accommo-dation of
instrument; and paid.
C. Admits the existence of the the payee, he is liable
B. Engages that to all parties
payee and his capacity to the instrument
indorse. subsequent to the
will be accepted payee.
or paid, or both,
A bill of itself does not as the case may
operate as an assignment of be, according to
funds in the hands of the its tenor; and
drawee available for the
payment thereof and the C. If the
drawee is not liable unless and instrument is
until he accepts the same dishonored and
(Sec.127) necessary
proceedings on
dishonor be duly
taken, he will
pay to the party
entitled to be
paid.
B. ULTRA VIRES ACTS Note: Since no distinction is made, it does not matter whether it is favorable or unfavorable
A real defense but the negotiation passes title to the instrument. (Sec. 22) to the party making the alteration. The intent of the law is to preserve the integrity of the
Note: A corporation cannot act as an accommodation party. The issuance or negotiable instruments.
indorsement of negotiable instrument by a corporation without consideration and for the
accommodation of another is ultra vires. (Crisologo-Jose v. CA, 117 SCRA 594) 2. Alteration by a stranger (spoliation)- the effect is the same as where the alteration is
made by a party which a HDC can recover on the original tenor of the instrument. (Sec.
C. INCOMPLETE AND UNDELIVERED NI (Sec. 15) 124)
If completed and negotiated without authority, not a valid contract against a person who
has signed before delivery of the contract even in the hands of HDC but subsequent Changes in the following constitute material alterations:
indorsers are liable. This is a real defense. a. Date;
b. Sum payable, either for principal or interest;
D. INCOMPLETE BUT DELIVERED NI (Sec. 14) c. Time or place of payment;
1. Holder has prima facie authority to fill up the instrument. d. Number or relations of the parties;
2. The instrument must be filled up strictly in accordance with the authority given and within e. Medium or currency in which payment is to be made;
reasonable time f. That which adds a place of payment where no place of payment is specified; and
3. HDC may enforce the instrument as if filled up according to no. 2. g. Any other change or addition which alters the effect of the instrument in any
respect. (Sec. 125) A serial number is an item which is not an essential requisite
for negotiability under Sec. 1, NIL, and which does not affect the rights of the
E. COMPLETE BUT UNDELIVERED NI (Sec. 16) parties, hence its alteration is not material. (PNB vs. CA, 256 SCRA 491)
1. Between immediate parties and those who are similarly situated, delivery must be
coupled with the intention of transferring title to the instrument.
2. As to HDC, it is conclusively presumed that there was valid delivery; and
3. As against an immediate party and remote party who is not a HDC, presumption of a
valid and intentional delivery is rebuttable.
F. FRAUD
FRAUD IN FACTUM OR FRAUD IN ESSES
FRAUD IN CONTRACTUS OR FRAUD IN
INDUCEMENT EXECUTION
The person who signs The person is induced to sign an
the instrument intends to instrument not knowing its
sign the same as a NI character as a bill or note
but was induced by fraud
H. PRESCRIPTION