Negotiable-Instruments-1st-session.ppt

8/18/2019 Negotiable-Instruments-1st-session.ppt

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NEGOTIABLEINSTRUMENTS(ACT NO. 2031)


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FUNCTION and IMPORTANCE OF

NEGOTIABLE INSTRUMENTS

1. Substitute for money2. The media of exchange for most commercial transactions

- They do away with the need to physically count coins and bills whenpayment is made in financial transactions and obligations. They are a convenient means of doing business that eliminate the risk of dealing

3. Medium of credit transaction


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CHARACTERISTICS OR FEATURES OF

NEGOTIABLE INSTRUMENTS

1. Negotiability2. Accumulation of secondary contracts – as theytransferred from one person to another


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FORMS OF NEGOTIABLE

INSTRUMENTS

1. Promissory notes or those in which the issuer has promispay; and

2. Bills of exchange or those in which the issuer has orderedperson to pay

* Checks are also discussed in the law but they are really a special forof exchange


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Section 1. Form of negotiableinstruments

An instrument to be negotiable must conform to the following requirea. It must be in writing and signed by the maker or drawer;

b. Must contain and unconditional promise or order to pay a sum certmoney;

c. Must be payable on demand or at a fixed or determinable future tim

d. Must be payable to order or bearer; and

e. Where the instrument is addressed to a drawee, he must be namedotherwise indicated therein with reasonable certainty.


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FORMAL REQUIREMENTS OF

NEGOTIABILITY IN GENERAL

In determining the negotiability of an instrument, the followbe considered:

1. The whole of the instrument;

2. Only what appears on the face of the instrument; and

3. The provisions of the Negotiable Instruments Law especiaSection 1thereof which fully define the requirements an instmust meet in order to be negotiable.


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APPLICABILITY OF FORMAL

REQUIREMENTS

Promissory Note

- a to d are necessary in order that a promissory note may be negotiable

- the maker refers to the person issuing a promissory note

- the instrument must contain an unconditional promise

Bill of Exchange

- a to e are necessary in order that a bill of exchange may be negotiable

- the drawer refers to the person issuing a bill of exchange

- the instrument must contain an unconditional order

- subsection e is applicable only to bills of exchange


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FORMAL REQUISITES

1. The instrument must be in writing2. The instrument must be signed by the maker or drawer

3. The instrument must contain an unconditional promise or order to

4. The instrument must be payable in a sum certain in money

5. The instrument must be payable at a fixed determinable future tim

demand

6. The instrument must be payable to order

7. The instrument must be payable to bearer

8. The drawee must be named


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The Drawee must be named

- An order which is not addressed to any person cannot be athe bill would be sufficient if the drawee is indicated thereinreasonable certainty though he is not named. Thus, where aaddressed to the treasurer of a corporation, the drawee issufficiently indicated. (Sections 128, 129, 17e)

- A promissory note has no drawee. Like the drawee, the pabe named with reasonable certainty. (Sec 8 p2)


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Original Parties to a Promissory Note

1. There are originally TWO PARTIES in a promissory note

MAKER – one who makes the promise and signs the instrument

PAYEE –

one whom the promise is made or the instrument is payable

2. The payee may be specifically designated by name, or office or titleTreasurer of X Corporation), or may be unspecified (e.g. bearer)

3. He may seek payment personally or further negotiate the instrume

the maker promises to pay to the payee or to a holder.

4. The maker’s signature must appear on the face of the note for himliable thereon. After an instrument – promissory note or bill of exchanissued and delivered, additional parties can also become involved.


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Bill of Exchange

- A negotiable bill of exchange is an unconditional orderwriting addressed by one person to another, signed by tperson giving it, and requiring the person to whom it isaddressed to pay upon demand or at a fixed or determifuture time a sum certain in money to order or to beare

If drawn on a bank and payable on demand, the order bdefinition called check.


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Original Parties to a Bill of Exchan

1. DRAWER – the person who issues and draws the order bill. He gives the orderto a third party. He does not pay directly.

2. DRAWEE – the party upon whom the bill is drawn. He is the person to whoaddressed and who is ordered and expected to pay. He becomes the ACCEPTindicates his willingness to pay the bill. The drawee is a bank in the case of a check .

3. PAYEE – the party in whose favor the bill is originally issued or is payable. Thethe promissory note, may be specifically designated, or may be an office or title, or

NOTE: The parties need not all be distinct persons. The drawer may draw on himshis own order, that is, the parties to the bill can be the same (drawer-drawee or dra


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Section 2. Certainty as to Sum; wconstitutesThe sum payable is a sum certain within the meaning of this Act, althobe paid –

(a) With interest; or

(b) By stated installments; or

(c) By stated installments with a provision that upon default in payme

installment or of interest, the whole shall become due; or(d) With exchange, whether at a fixed rate or at the current rate; or

(e) With costs of collection or an attorney’s fee, in case payment shalmade at maturity


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NOTE: If the instrument calls for an act, other than the paymoney, it is not negotiable because a negotiable instruintended as a substitute for money.

PERMISSIBLE CLAUSES or STIPULATIONSThe sum is not rendered uncertain by a clause in the ins

that it is to be paid with interest, by stated installmenexchange, with costs of collection, or with attorney’s fees.

Neither is the certainty of the sum affected by an acc

provision in an installment note. The basic test is whether thcan determine by calculation or computation the amountwhen the instrument is due. But a promissory note giving ththe right to ascertain the amount rightly thereundernegotiable.


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INTEREST AT INCREASED OR REDUCED RATE

- The provision for increased interest rate if the note is notmaturity (Citizens Savings Bank vs. Lantis, 132 December 1

for a reduced rate if payment is made at or before maturityNat. Bk. Vs. Mayfield, 174 Pac. 1034), or for payment of intinterest, does not destroy negotiability.

SUM TO BE PAID BY INSTALLEMENTS

- The promise or order to pay by stated installments does nnegotiability


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SUM TO BE PAD BY STATED INSTALLMENTS WITH ACCELERATION

1. Acceleration dependent on maker – The sum is still certa

payable by stated installments with an acceleration clause (a pro

any installment or interest is not paid as agreed, the whole shdue). Such a clause requires full payment of an instrument upon

any installment. It does not make an instrument payable upon

(and so non-negotiable) since the time of payment will surely com

2. Acceleration at option of holder – If a note provides for acceler

option of the holder, the instrument is non-negotiable as where(first par.) in the above example instead provides: “or the whole a

interest on 08 January 2016 at the option of the holder.”


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PAYMENT IN FOREIGN CURRENCY

- A provision for payment of a sum in a foreign currencyimpair negotiability because the current rate of exchang

given time may be easily ascertained by an inquiry from tdealing on exchange or foreign currencies and such rate isof common commercial knowledge. An instrument, whetheat a fixed exchange rate or at the current rate is deemedmeet the sum certain requirement.

SUM TO BE PAID WITH COSTS OF COLLECTION OR AN ATTFEE

- A provision to pay all costs, charges and expensesattorney’s fee incurred by the payee in any legal proceedincollection of the debt” renders the instrument non-negotia

Wh i i


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Section 3. When promise isunconditional:An unqualified order or promise to pay is unconditional within the methis Act though coupled with

–

(a) An indication of a particular fund out of which reimbursement is toor a particular account to be debited with the amount; or

(b) A statement of the transaction which gives rise to the instrument.

But an order or promise to pay out of a particular fund is not uncondiIMPLIED PROMISE TO PAY

“ I agree to pay.” “ Good for ”

“ I guaranty to pay.” “ due on demand ”

“ M obliges to pay.”


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BARE ACKNOWLEDGMENT OF INDEBTEDNESS

“IOU”

“due PhP 5,000.00”

“for value received”

* Non-negotiable

IF WORDS OF NEGOTIABILITY ARE ADDED

“due D or order” “IOU PhP 5,000.00 to be pad on January 12016”

“due M or bearer”


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When promise to pay is unconditiona

* An instrument is not negotiable if it contains a promise or order to p

“if H marries”

“if certain property is sold”

“if after a year I am still living”

“out of the rent which may be collected from my apartment”

* Even if the condition or event is very likely to occur, or indeed, evenfact, did occur subsequently, the instrument remains non-negotiable,would, of course, become payable at that time.


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Terms not affecting unconditiona

liability

- Additional terms appearing on an instrument (e.g. statement of the pwhich the instrument is issued, the collateral securing it, the consideratiin exchange for the instrument, e.g. goods purchased).

do not make the promise or order unconditional if the duty to pay isby such terms

Indication of a particular fund out of which reimbursement is to be mad

- An instrument which mentions a particular fund out of which reimbursbe made is negotiable because the order to pay is not rendered conddrawee is not limited to the money in his hands belonging to the drawee

- The fund indicated is not the direct source of payment but only thereimbursement which is an act subsequent to the payment


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Indication of a particular fund out of which payis to be made

- An instrument payable out of a particular or specified fund is n

because the amount to be paid is made to depend upon the adequacof the fund designated. The fund specified is the direct source of paymeasure of liability. It is immaterial whether or not the fund actually eto be created. The instrument remains non-negotiable even if the funbe sufficient at maturity.

Indication of a particular account to be debithe amount

- An instrument which contains a direction to debit a particular accountbecause the promise/order is not also made conditional. The paymdepend upon the existence or adequacy or the particular account to be


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Statement of transaction which gives

to instrument

- Mere recital of consideration for instrument or origin of trdoes not make it conditional. Such kind of reference has nlegal effect on the negotiability of the instrument

Terms and conditions contained in apaper

- The negotiability or non-negotiability of the instrumentdeterminable from what appears on its face aloneelsewhere.

S i 4 i bl f


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Section 4. Determinable future twhat constitutes.An instrument is payable at a determinable future time, within thethis Act, which is expressed to be payable

–

(a) At a fixed period after date or sight; or

(b) On or before a fixed or determinable future time specified therein

(c) On or at a fixed period after the occurrence of a specified evecertain to happen, though the time of happening be uncertain.

An instrument payable upon contingency is not negotiable, and theof the event does not cure the defect.

- A negotiable instrument must be payable at all events.


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1. Payable at a fixed time

“ I promise to pay P or order the sum of PhP 5,000.00 on Janu2016.”

2. Payable at a fixed period after date“ Thirty days after date, I promise to pay P or order the sum o8,000.00.”

3. Payable at a fixed period after sight

“ Thirty days after sight, I promise to pay P or order the sum o8,000.00.”

4. Payable on or before a fixed date

“ On or before February 3, 2016, I promise to pay A or order P3,000.00.”


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5. Payable on or before a determinable future time

“ On or before the start of the next school semester, I promise to payPhP 5,000.00.”

6. Payable on the occurrence of a specified event

“ I promise to pay M or order the sum of PhP 5,000.00 upon the d father.”

7. Payable after the occurrence of a specified event

“ Ten days after the death of his father, I promise to pay M or orderPhP 7,000.00.”

Note: But a bill or note payable several days before the occurrespecified event is not negotiable, since the date of maturity of thecan only be ascertained after it has become overdue and therefore, tpayment is uncertain. Moreover, the law says “on or at a fixed period“not before.”


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8. Payable upon a contingency

“ Pay to the order of P the sum of PhP 9,000.00reaching the age of majority.”

- The bill is non-negotiable because the order is condmay die before reaching the age of majority in whichbill will never mature. It makes no difference that P reaage of maturity because the contingent event does notdefect.

- A contingency is an uncertain future event, or an evemay or may not happen.

Additi l i i


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Section 5. Additional provisions affecting negotiability

An instrument which contains an order or promise to do any act in add

payment of money is not negotiable. But the negotiable character of aotherwise negotiable is not affected by a provision which –

(a) Authorizes the sale of collateral securities in case the instrument bematurity; or

(b) Authorizes a confession of judgment if the instrument be not paid a

(c) Waives the benefit of any law intended for the advantage or protectobligor; or

(d) Gives the holder an election to require something to be done in lieu money.

But nothing in this section shall validate any provision or stipulation oth

GENERAL RULE Th i t t i ti bl if it t i i


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GENERAL RULE: The instrument is non-negotiable if it contains a promisdo any act in addition to the payment of money. The prohibition is basethat while one could be indorsed, the other would have to be assigned.

Examples:

“ I promise to pay M or order phP 5,000.00 and (or) to deliver 20 boxes o

NON-NEGOTIABLE

(a) “and to pay for taxes assessed upon the note or its mortgage securitRobert Wallace Co., 201 1a. 1143, 208 N.W. 730)

(b) “and to keep free from encumbrance property on which the value o

pledged for security of the instrument depends.”

(Streckload vs. national Sa828)

(c) “and a promise to insure the property pledged as security.” (First Statevs. Russel, 224 Mich. 298, 221 N.W.142)


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EXCEPTIONS:

(a) Sale of collateral securities

“I promise to pay M or order the sum of PhP 7,000.00 on February 10, 2016 secudelivered to her by way of pledge and which she could sell should I fail to pay her

* The additional act is to be performed after the date of maturity when the instrunegotiable in the full commercial sense. Until the date of maturity, the promiseonly.

(b) Confession of judgment

* Warrants of attorney to confess judgment, however, are not authorized not co

law because under these instruments, the promissor bargains away his right to asecond paragraph of Section 5 contains a proviso or stipulation otherwise illegal.”of the provision as to the confession of judgment does not render the instrumentconfession of judgment given after the action is brought to save expenses is valid.

(c) Waiver of benefit granted by law

‘Pay bearer PhP 20,000.00. Notice of dishonor waived.”


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* Neither does waiver of protest, presentment for paymentdemand, destroy the negotiability of an instrument.

(d) Election of holder to require some other act.“I promise to pay F or order PhP 50,000.00 or a laptop at thof the holder.”

* The holder has a choice. The instrument is negotiable becholder cannot compel him to make payment in money. If th

is with the promissor, the instrument is non-negotiable becholder cannot compel him to make payment in money. Thu

“I promise to pay F or order PhP 50,000.00 or a laptop.”= NNEGOTIABLE

Omissions; seal; particular money.


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Section 6. Omissions; seal; particular money.

validity and negotiable character of an instruare not affected by the fact that -

(a) It is not dated; or(b) Does not specify the value given, or that any value has been given or

(c) Does not specify the place where it is drawn or the place where it the place where it is payable; or

(d) Bears a seal; or(e) Designates a particular kind of current money in which payment is

made.

But nothing in this section shall alter or repeal any statute requiring incases the nature of the consideration to be stated in the instrument.


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GENERAL RULE: Date is not necessary.

EXCEPTIONS: Date is necessary when it is to determine the maturity.

(a) where said date is tied to the date of issue – “payable thafter date of issue.”

(b) where interest is stipulated for the purpose of determin

the interest is to run.(c) in the case of promissory mote, the date of issue, and inof the bill of exchange, the date of the last negotiation therthe purpose of determining whether a party acted within areasonable time in making presentment for payment.


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Section 7. When payable on demand. – Ainstrument is payable on demand(a) Where it is expressed to be payable on demand, or at sight, or on presentation;

(b) In which no time for payment is expressed.

Where an instrument is issued, accepted, or indorsed when overdue, it is, as regardso issuing, accepting, or indorsing it, payable on demand.

* Instruments that are not payable on demand, called “time instruments,” are payadefinite time.

* Instead of”

on demand,”

the words“

at sight”

or“

on presentation”

or“

on call”

otime called for” may be used.

* The words “on demand” are ordinarily used in promissory notes while the wordsbills of exchange.

* “At sight” means that the instrument is payable as soon as it is seen by the party liable.

Th i t t i


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Section 8. When payable to order. – The instrument is pto order where it is drawn payable to the order of a speperson or to him or his order. It may be drawn payable order of:

(a) A payee who is not maker, drawer, or drawee; or

(b) The drawer or maker; or

(c) The drawee; or

(d) Two or more payees jointly; or

(e) One or more of several payees; or

(f) The holder of an office for the time being.

Where the instrument is payable to order, the payee must bor otherwise indicated therein with reasonable certainty.


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An instrument is payable to order where it is drawn payab

the order of a specified person; (2) to him or his order. Consan instrument payable to a specified person is notinstrument and, therefore, is non-negotiable as the promiseis limited to paying one person.

“Pay to the order of PhP 10,000.00.”

“Pay to M or order PhP 10,000.00.”


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Section 9. When payable to bearer. – Theinstrument is payable to bearer-

(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein or bearer;

(c) When it is payable to the order of a fictitious or non-exisperson, and such fact was known to the person making it soor

(d) When the name of the payee does not purport to be theany person; or

(e) when the only last indorsement is an indorsement in bla

EXAMPLES


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1. Expressed to be payable to bearer

“I promise to pay to bearer PhP 8,000.00.”

“I promise to pay to the bearer, B, PhP 8,000.00.” non-negotia

payable to a definite person only.

2. Payable to person named therein or bearer.

“Pay to B or bearer PhP 8,000.00.”

“Pay to B or holder PhP 8,000.00.”

3. Payable to order of a fictitious person.

“Pay to Alice in Wonderland or order PhP 5,000.00.”

4. Payable to order of a non-existing person.

“Pay to the order of the Queen of the Milky Way.”

5. Name of payee not name of a person


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5. Name of payee not name of a person

“Pay to cash.” “Pay to money.”

“Pay to cash or order.” “Pay to sundries.”

6. Only indorsement in blank

Pay to P or order PhP 8,000.00.

(Sgd.) R

To W

Manila

(Sgd.) P


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7. Last indorsement in blank

Pay to A

(Sgd

Pay to B

(Sgd

(Sgd

– The instrument n


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Section 10. Terms when sufficient. The instrument nfollow the language of this Act, but any terms are swhich clearly indicate an intention to conformrequirements hereof.

* Clear intention of the parties

“promise” - “bind myself ”

“on demand” – “on call”

“bearer

” – “holder

”

* Mere defect in language or grammatical error – This does render an instrument non-negotiable. Thus, the words “himorder” may be construed as “himself or order”

Section 11. Date presumption as to

–Where the instrument or an ac

i d t th i d t d h d t i d d i f


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or any indorsement thereon is dated, such date is deemed prima fathe true date of the making, drawing, acceptance or indorsement, amay be.

* He who claims that some other date is the true date has the burden t

claim.

Section 12. Ante-dated and post-dated. – The instrument is not invalid forthat it is ante-dated or post-dated, provided this is not done for an illegpurpose. The person to whom an instrument so dated is delivered acquiresas of the date of delivery.

Section 13. When date may be inserted. –

Where an instrument expresseda fixed period after date is issued undated, or where the acceptance opayable at a fixed period after sight is undated, any holder may insert thereof issue or acceptance, and the instrument shall be payable accordingly. Thwrong date does not avoid the instrument in the hands of a subsequencourse; but as to him the date so inserted is to be regarded as the true date.

When date may be inserted


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y

(a) Where an instrument is payable at a fixed period after date but is issued undate

(b) Where an instrument is payable at a fixed period after sight but the acceptance

* Date of issue or acceptance to be specified – Any holder may insert therein the tr

issue or acceptance and the instrument shall be payable accordingly. It is necessaryof issue or acceptance, as the case may be, be specified so as to determine the dateThe reason is that unless the true date is inserted, one will not know when the instbe due.

Insertion of a wrong date

1. As to holder with knowledge. – The insertion of a wrong date in an undated instone having knowledge of the true date of issue or acceptance will avoid the instrumhim but not as to a subsequent holder in due course who may enforce the samenotwithstanding the improper date.

2. As to subsequent holder in due course – The insertion of a wrong date constitutalteration. Nevertheless, in the hands of a holder in due course, the date inserted, ewrong, is to be regarded as the true date.

Sec. 17. Construction where instrument is ambiguous. - Where the language of the instrumambiguous or there are omissions therein, the following rules of construction apply


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g , g pp y

(a) Where the sum payable is expressed in words and also in figures and there is a discrepathe two, the sum denoted by the words is the sum payable; but if the words are ambiguoureference may be had to the figures to fix the amount;

(b) Where the instrument provides for the payment of interest, without specifying the date

interest is to run, the interest runs from the date of the instrument, and if the instrument ifrom the issue thereof;

(c) Where the instrument is not dated, it will be considered to be dated as of the time it wa

(d) Where there is a conflict between the written and printed provisions of the instrumentprovisions prevail;

(e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, th

treat it as either at his election;

(f) Where a signature is so placed upon the instrument that it is not clear in what capacity tmaking the same intended to sign, he is to be deemed an indorser;

(g) Where an instrument containing the word "I promise to pay" is signed by two or more pare deemed to be jointly and severally liable thereon.


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Rules on construction in case of amb

or omission

1. Sums expressed in words and in figures different – When there is a discrepancy

sum expressed in words and the sum expressed in figures, the former controls.2. Words ambiguous or uncertain – Words outweigh figures. However, when the wambiguous or uncertain, reference may be had to the figures to determine the true

3. Date when stipulated interest to run not specified – If the date when the stipulais to run is not specified, the interest runs from the date of the instrument or if undadate of its issue.

4. Instrument undated –

An undated instrument is considered dated as of the date

Issue means the first delivery of the instrument complete in form, to a person was holder. The date appearing in the instrument is deemed prima facie the true datacceptance, or indorsement.

5. Written and printed words in conflict – In case of conflict between the written ai i h f il


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provisions, the former prevail.

* The reason for the rule is that the written words are deemed to express the true the maker or drawer because they are placed there by himself. On the other hand, are prepared without any particular contract in view.

6. Whether instrument bill or note in doubt –

In case of doubt as to whether an insbill or note, the holder may treat either at his election.

The instrument is ambiguous. The promise to pay indicates that it is a promissoryHowever, it is addressed to W which indicates that it is a bill of exchange. In this castreat the instrument either as a bill or note at his discretion.

I promise to pay P or order PhP 8,000.00

(Sgd) R

To W

7. Capacity in which person signed in doubt – In case of


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p y p gwhat capacity the person making the instrument intended tis to be deemed an indorser .

* The signature of the maker of a note or the drawer o

usually affixed at the lower right-hand corner of the instrumdrawer’s name is usually placed on the lower left-hand coholder negotiates the instrument by signing on the back the

* Section 17(f) applies only when there is doubt duambiguous location of the signature. In such case, the p

signs is considered as an indorser who assumes the least lianot as maker or drawer.

Sec 18 Liability of person signing in trad


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Sec. 18. Liability of person signing in tradassumed name. -

No person is liable on the instrument whose signature

appear thereon, except as herein otherwise expresslyBut one who signs in a trade or assumed name will be liasame extent as if he had signed in his own name.

Sec. 19. Signature by agent; authority; how shown - Theof any party may be made by a duly authorized aparticular form of appointment is necessary for this purpthe authority of the agent may be established as in otheagency.


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Sec. 20. Liability of person signing as

agent and so forth.

Where the instrument contains or a person add

signature words indicating that he signs for or on ba principal or in a representative capacity, he is non the instrument if he was duly authorized; but taddition of words describing him as an agent, or asrepresentative character, without disclosing his pdoes not exempt him from personal liability.


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When agent may escape personal lia

In order that an agent who signs a negotiable instrument may escape personal

following are the requisites:(1) He is duly authorized;

(2) He adds words to his signature indicating that he signs as an agent, that is, for oa principal, or in a representative capacity; and

(3) He discloses his principal.

Use of descriptive words without disclosure of principalThe mere addition of descriptive words without disclosing the principal will no

signer from personal liability. Therefore, one who signs an instrument in a represencapacity but without disclosing his principal will still be personally liable although hsignature the word “agent” or “trustee” or ‘administrator” or “guardian” or ‘dire

Negotiable-Instruments-1st-session.ppt

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