NEGOTIABLE INSTRUMENTS LAW4 June 2014Atty Danny Uy

I. FORMS AND INTERPRETATION• What makes an instrument a negotiable instrument? there must be a complete

compliance to Sec 1 of NIL to be considered negotiable instrument.

• (Characteristics) Important features of a negotiable instrument1 Negotiability: may pass from hand to hand2 Accumulation of secondary contracts: secondary contracts are picked up

and carried along with them as they are negotiated from one person to another, so far away that the holder does not even know the maker/drawer

• NEGOTIATION: An instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by deliver. If payable to order, it is negotiated by endorsement of the holder and completed by delivery (Sec 30, NIL). ⁃ What is a holder? The payee (bearer instrument) or indorsee (order

instrument) of a bill or note who is in possession of it, or the bearer thereof (Sec 191, NIL).

⁃ NOTE: know the differences between transfer, negotiation and assignment!

⁃ Kinds of Negotiation1 By deliver2 By indorsement of the holder and completed by delivery

• Kinds of negotiable instrumentKnow first “What can be an instrument?”: (1) bill of exchange or (2) promissory note, before you deal with the issue of negotiability under sec. 1.

1 PROMISSORY NOTE: A negotiable promissory note is an unconditional promise in writing made 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 money to order or to bearer (Sec 184, NIL).

⁃ “U Promise” + in writing + to pay + P (pesos) + T (time) + order or bearer

2 BILL OF EXCHANGE: A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer (Sec 126).

⁃ “U Order” + in writing + to pay another + P (pesos) + T (time) + order or bearer

⁃ When is a bill of exchange a promissory note?1 drawer = drawee2 drawee = fictitious3 drawee = no capacity to contract4 in case of doubt or it is ambiguous, the presumption is it is a

promissory note.⁃ the objective of the law is to make sure that the money

goes to the right person.

⁃ Variations in the Bill of Exchange⁃ Trust receipt is a demand draft: “i’m demanding that you pay⁃ Time: Time draft⁃ Location:

⁃ If issued and payable in the Phil: Inland bill⁃ If issued and made payable outside the Phil: Foreign

Bill⁃ If issued in the Phil and made payable outside the Phil

(or other way around): Foreign bill⁃ Answer: does not qualify as an inland bill

⁃ Bonds and debentures - are promissory notesBonds Debentures

Vinculum juris (both based on debt) debtor-creditor debtor-creditor

debtor (issuer/borrower) The governmentThe one who issues the

debenture (San Miguel; Coca-cola)

creditor The public Holder of the debenture

reasonthe government borrows money from the public to bring down inflation

⁃ Kinds of bonds⁃ T-bills: matures in 1 year⁃ T-bonds: matures in 3 years⁃ T-notes: matures in 5 years

⁃ The government does not want to pay the public all at the same time

⁃ there are only two ways to raise funds: (1) sale; (2) loan. In the

first the vinculum juris existing is buyer-seller. In the second, debtor - creditor. Any of these instruments (securities law, negotiable instruments law), will fall under either of the two categories. but they are called by different terms. Hence, the sophistication.

⁃ In case you are not sure of the nature of the instrument because it was you first time to hear such, choose between the two (B/L or PN) and you can only be wrong or correct 50% of the time.

⁃ Money order is an order instrument but not a negotiable instrument. Conditions are based on “postal law”, not NIL.

• Parties

Bill of Exchange Promissory noteMaker drawerpayee drawee

- acceptor holder; referee in case of need

⁃ Is the drawee ever liable? Is the drawee always liable? The drawee is never liable, until and unless he becomes an acceptor by accepting the instrument. If you look at the provisions of liabilities, you will never see a section in the entire NIL a provision which says “liabilities of a drawee”. you will see the liabilities of a drawer, indorser, accommodation party and acceptor. But you will never see any provision which says liabilities of a drawee, because drawee is never liable.

II. NEGOTIABILITY and ACCUMULATION OF SECONDARY CONTRACTS

• Why is there a need to define a “holder”? the law even made a distinction between a holder and a holder in due course. think about it? because of the second feature: accumulation of secondary contracts

⁃ Accumulation of secondary contracts allows for a situation where the maker or the drawer may not eventually know to whom he is liable to. that is the purpose of negotiability. Thus the question: “am i liable to the person holding the instrument?”

⁃ Somewhere between A and G, that instrument may be stolen, may be forged, or materially altered, to the point that the person who made the instrument or drew the bill of exchange will not even know who is the holder. To make sure that he is paying the right person, the law needed to define “holder”. To make sure that he is not able to defend against the person who is now in possession of it, when that person qualifies as the “holder in due course” personal defences will not be available. He has to pay.

⁃ a “holder in due course” holds the instrument free from any defeat of title of prior parties, and free from defences available to prior parties among themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon (Sec 57, NIL).

⁃ Holder in due course is free from: (1) defects of title and (2) defences of prior parties.

⁃ Because of the feature called accumulation of secondary contract the danger that he will be paying the wrong person is there. And so the definition of the “holder” and “holder in due course” are provided. this is important in relation to chapter in discharge.

• Accumulation of secondary contract can take 2 forms: Transfer can take 2 forms.

1 Negotiation2 Assignment

Transfer Negotiation Assignment

If you want to transfer, you can either negotiate or assign.

If i negotiate, the person in possession becomes the holder or holder in due course

If i assign, the person who receives it becomes the assignee.

*** assignee can never be a holder in due course because only a holder can be HDC

HOW to Transfer:(1) by negotiation(2) by assignment

HOW to negotiate:(1) by delivery - if payable to bearer(2) by endorsement completed with delivery - if payable to order

***Outside negotiation, there is no such thing as endorsement and delivery.

The only context i know that there can be endorsement and delivery in an assignment (outside negotiation) is in warehouse receipts law.

AS TO TRANSFEROR:Will the principle “stepping into the shoes” apply when the negotiable instrument is transferred?

It depends, because there are two kinds of transfer. if the transfer were by negotiation, the answer is no. If the transfer were by assignment, the answer is yes.

“stepping into the shoes” will not apply if negotiable instrument is negotiated.

Rights transferred:

Rights transferred: “steps into the shoes” subrogation

(1) all the title that the transferor had over the instrument and (2) the right to compel the transferor to give the endorsement. *** cannot be holder or a HDC*** can assignee endorse the instrument?

AS TO TRANSFEREE (receiver):The transferee becomes:

(1) Assignee - if the transfer was by assignment.(2) Holder - if the transfer was by negotiation

Assignee Holder

Whether instrument is payable to order or to

bearer, same rule applies. do not get confused.

Whether instrument is payable to order or to

bearer, same rule applies.

Whether instrument is payable to order or to

bearer, same rule applies.

Transfer Negotiation Assignment

If you want to transfer, you can either negotiate or assign.

If i negotiate, the person in possession becomes the holder or holder in due course

If i assign, the person who receives it becomes the assignee.

*** assignee can never be a holder in due course because only a holder can be HDC

HOW to Transfer:(1) by negotiation(2) by assignment

HOW to negotiate:(1) by delivery - if payable to bearer(2) by endorsement completed with delivery - if payable to order

***Outside negotiation, there is no such thing as endorsement and delivery.

The only context i know that there can be endorsement and delivery in an assignment (outside negotiation) is in warehouse receipts law.

AS TO TRANSFEROR:Will the principle “stepping into the shoes” apply when the negotiable instrument is transferred?

It depends, because there are two kinds of transfer. if the transfer were by negotiation, the answer is no. If the transfer were by assignment, the answer is yes.

“stepping into the shoes” will not apply if negotiable instrument is negotiated.

Rights transferred:

Rights transferred: “steps into the shoes” subrogation

(1) all the title that the transferor had over the instrument and (2) the right to compel the transferor to give the endorsement. *** cannot be holder or a HDC*** can assignee endorse the instrument?

AS TO TRANSFEREE (receiver):The transferee becomes:

(1) Assignee - if the transfer was by assignment.(2) Holder - if the transfer was by negotiation

Assignee Holder

Whether instrument is payable to order or to

bearer, same rule applies. do not get confused.

Whether instrument is payable to order or to

bearer, same rule applies.

Whether instrument is payable to order or to

bearer, same rule applies.

III. SECTION 1• always asked in the bar.

• unconditional order or to pay a sum certain in money

⁃ If the maker or drawer is entitled to pay in money or in some other service or thing other than money, is this allowed?

⁃ Basis: Under civil code, when the obligation is dependent upon the will of the obligor, it is void.

⁃ the option should not be upon the person who has the duty to perform.

“ikaw na any may utang, ikaw pa pipili ng bayad mo. ang yabang mo.”

⁃ But if you were the holder “ako ang pipili ng bayed mo, pwede”. if you were the creditor you would agree to the agreement.

• payable on demand or at a fixed determinable future time⁃ “20 days after my dog dies” : determinable⁃ “when my dog dies before my cat” : not determinable ⁃ “at sight” - for Bill of exchange, at sight of the drawee; to be able to fix the date,

specially when instrument is undated.

• Payable to order or to bearer1 when payable to order?

⁃ where 2 when payable to bearer?

Payable to order payable to bearer

If you indorse an order instrument, is there negotiation? None, there must be endorsement and delivery.

If you endorse a bearer instrument, is there negotiation? None, once a bearer, always a bearer. Thus, there must be delivery. endorsement is not enough.

If you deliver an order instrument, is there negotiation? None, to perfect negotiation, there must be endorsement coupled with delivery.

If you are the indorser, would you indorse it? No, why are you requiring an endorement? Any person in possession of the instrument to whom it was delivered has the right to compel the person who delivered the instrument to endorse it.

If you deliver a bearer instrument, is there negotiation? Yes, no need for endorsement

If you indorse and delivered an order instrument, is there negotiation? Yes.

If you indorse a bearer instrument and deliver it, is there negotiation? Yes, the person who indorsed will be liable as an indorser in addition to his liability as the person who delivered it.

***If you endorse a bearer instrument, tatanga-tanga ka. bakit? kung dineliver mo, wala kang problem. ngayon may mga warranties ka pa as an indorser under sec 65. Kung wala kang indorsement, wala kang warranties as an indorser. Qualified indorser lang.

• When addressed to a drawee, must be named or otherwise indicated with reasonable certainty⁃ can an instrument be indorsed certainly? yes⁃ can indorsement be made to several persons? No, only one endorsement for the

entire check

payee drawee

Can an instrument be may payable to two or more persons?Yes (Sec 8)

Can it be addressed to two or more drawees? No, there must be only one drawee (Sec )

payee drawee

Can an instrument be may payable to two or more persons?Yes (Sec 8)

Can it be addressed to two or more drawees? No, there must be only one drawee (Sec )

IV. LIABILITIES OF PARTIES• If A makes a promissory note and endorses it to B. A was not able to pay, can

B run after A? ⁃ Yes, under the provisions of Sec 60: Liabilities of maker, the maker warrants that

he shall make good the liability, that he shall pay xxx. Maker’s liability is direct and primary.

• Would you answer change if this were a bill of exchange and not a promissory note? Yes. Is A liable to B?⁃ No ⁃ Under the provisions of Sec 60 and 61, liabilities of the drawer and maker are the

same. They warrant, in the case of the drawer, that upon presentment, that it shall be paid according to the tenor of the instrument.

• B endorses to C a promissory note/bill of exchange. B does not pay C, can C run after A?⁃ The maker or the drawer warrants that he shall pay according to the tenor of his

issuance of the instrument. it does not matter.

• It turned out that B is not the same person to whom it was paid. somehow C acquired it, as based on instrument, from B. Can A be made liable to C?

⁃ A is liable to C and cannot defend the fact that B is not the same B. because A, when he issued the check, under the same provision, warrants the existence of the payee. Also in the same provisions, he warrants that he shall pay it according to its tenor.

⁃ Never answer in your own words. Memorize Sec 60 to 66

• Assuming that B is the real payee, is B liable to C?

⁃ Yes, He warrants that he shall pay it according to the tenor of the instrument. — Wrong!

⁃ He warrants that he shall pay it according to the tenor of his endorsement.

• If B indorsed the instrument and it is for P100, when it reached C, somebody made it appear that it was made for P150, is B liable to C?

⁃ Yes, to the extend of P100, because B warrants that he shall pay according to the tenor of his endorsement.

• Is the instrument valid in that situation?

⁃ It depends, it falls under material alteration under sec 124 in relation to 125. under 124, if an instrument is materially altered, the instrument is avoided. But if that were not raised as a defense and the question therefore is, B liable to C, answer sec 66: Yes, because B warrants to pay according to the tenor of his endorsement.

• If B requires that he will only accept the payment in check of A, if a person would co-sign with him. What do you call mr X? Not an accommodation party. X is deemed an indorser.

⁃ He is not an accommodation maker. When X co-signed with A, the check show A and X. If X will be an accommodation maker/party, (Sec 29: Accommodation party is one who has signed as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person.). In this situation it appears that X, when he issued a check, he did not receive a consideration for that. But because A is a party to it, he is not an accommodation party, he is a co-maker, under civil law. Kung si X lang, an accommodation party can sign as the drawer. Only then the provisions of the accommodation party apply.

• C transferred to D, is C liable to D? Can D run after B?⁃ Yes, C is liable to D. ⁃ Yes, B is liable according to the tenor of his endorsement.

• A bearer instrument, A delivered to B. B delivered to C. C indorsed to D. Is C liable to D? ⁃ Yes, under Sec 65. He acquires the liability of an indorser, despite the fact that it

is a bearer instrument.

Incomplete/undelivered instrument

• A decided to write a check. he signed it without filling all the entries in the check. He gave it to B, who filled up the remaining details. Although A instructed B to place the amount P10,000, B filled it up for P100,000. Instead of giving it to A’s creditor, B paid it to C. Is A liable to C?⁃

• C indorsed to D, can D run after B? can B defend by saying that the obligation is only up to P10,000?

⁃ B is liable to D because he warrants that he shall pay according to the tenor of his endorsement of P100,000.

• A signed a check and placed it in his drawer, with the intention of telling B to pay it to the creditor. B instead of placing P10,000, wrote P100,000 and indorsed it to C. Is A liable to C?

⁃ No, the instrument is incomplete and is not delivered. it is not a valid contract in the hands of any holder, as against any person whose signature was place thereon before delivery.

⁃ applicable doctrine is incomplete and undelivered doctrine under Sec 15.

• C indorsed to D. D indorsed to E, who is a holder in due course. Can E hold A liable?

⁃ An incomplete and undelivered instrument is not valid in the hands of any holder, including a holder in due course.

• Can E claim that he is free from any defect of title or defences of prior parties in this situation?

⁃ No, because an instrument that is incomplete and undelivered is not valid in the hands of any holder, including a holder in due course.

Forgery

• A issued to B, for some reason E is in possession of the instrument indorsed by C to D. Can E claim from A? Can E run after B?

• If signature of A is forged? is B liable to E?⁃ Sec 23, What is wholly inoperative?⁃ Is B liable to E? No, because signature is inoperative. No right to retain the

instrument or to give discharge therefor, or to enforce payment thereof against any party, can be acquired.

⁃ The effect of forgery is provided for in Sec 23.

• rules on 13, 14, 15, 16 - remember!⁃ related with 124, 23

Alteration• If the amount is forged, is the instrument inoperative?

⁃ you cannot forge the amount. under 23, you can only forge the signature. if there is “forgery of the amount”, The effect is in sec 124. The instrument is avoided.

⁃ If you are the creditor, yung 100 ginawing 150, sasabihin mo bang avoided yan o hindi? Hindi, any sasabihin mo 100. pag sinabi mong avoided at sinunod mo ang Sec 124, parang binaril mo yung sarili mo. in other words, the law says you have that option. But the law does not say that. Unfair nga naman if avoided. i-forge lang, eh di lalong di ka naka-collecta. I-alter lang, di ka na maka-collecta forever. All you have to do is alter it and the creditor cannot collect anymore because instrument is avoided. di naman tama yun.

• If the date is forged, effect is Sec 124.⁃ If the name of the payee is forged, 124

⁃ If you look at 125, the only forgery can only happen in the signature. any attempt to change the other details is alteration, except that the SC ruled that altering the serial number is not enough to change the negotiable instrument.

Other side of the coin

• A recipient is only either a holder or a holder in due course or assignee⁃ HDC: 52⁃ effect of HDC: free from any defect of title of prior parties, and free from defences

available to prior parties amount themselves, and may enforce payment of the instrument for the full amount thereof against all parties liable thereon. 57

⁃ Not free in incomplete and undelivered, forgery

• But there is one defense that he is not free of that is not upon the face of the instrument itself? Only ONE.⁃ FRAUD.

• complete and regular: will affect notice of infirmity or defect from the instrument itself. Iba yung notice of infirmity or defect on the title itself. kasi kailangan makabalita ka na may niloko muna - that is defect in title. pero yung mga cross check, that is the perfect example, that is upon the instrument itself, therefore the notice of any infirmity is not on title but on the instrument itself.

• once you see a crossed check, is the instrument negotiable? The instrument is negotiable. but the fact that it is negotiable only once places you on inquiry, Bakit? when there is failure to inquire, it will be considered as badge of bad faith, sufficient to take you out from the provision of sec 52. From there you can now derive the defences, real or person, you can put up against the holder.

• The whole purpose of issuing this check, other than negotiability, is for the continuing accumulation of secondary contracts to the point that there is an end to the negotiability. the end of the negotiability is called discharge.

V. DISCHARGEMemorize the discharge.

• In the civil code, the provisions for the extinguishment of obligation will discharge a negotiable instrument. But there are peuliarilites in discharge under NIL that are not in the extinguishment of obligation under civil code. if an instrument is dated jan 1, 2014 and is deposited in jan 1 2019, what is the effect? discharge.

• Is the issuer liable in his obligation? Yes. when the instrument is discharged, he is no longer liable in the negotiable instrument. but it does not mean that he can avoid his obligation to pay. there is a difference between the liability under NIL and under Contracts law. You cannot file a suit under NIL, you rendered yourself impaired by your own inaction. can he sue you for collection of sum of money? Yes, check is just an evidence.