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Negotiable Instruments: Characteristics, Differences, and Rights of Holders, Lecture notes of Negotiation

Ateneo de Naga University (ADNU)Negotiation

The characteristics and differences between negotiable and non-negotiable instruments, including the rules on delivery and discharge of secondary parties. It also covers the rights of holders in due course and the nature of indorsed instruments.

Typology: Lecture notes

2019/2020

Uploaded on 10/06/2020

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Category Archives: Negotiable
Instruments Law
Commercial Law – Negotiable Instruments Law
1. Negotiable Instruments – written contracts for the payment of money; by its form,
intended as a substitute for money and intended to pass from hand to hand, to give the holder in
due course the right to hold the same and collect the sum due.
2. Characteristics of Negotiable Instruments:
a. negotiability – right of transferee to hold the instrument and collect the sum due
b. accumulation of secondary contracts – instrument is negotiated from person to person
3. Difference between Negotiable Instruments from Non-Negotiable Instruments:
Negotiable Instruments
Non-negotiable Instruments
Contains all the requisites of Sec. 1 of the
NIL
does not contain all the requisites of Sec.
1 of the NIL
Transferred by negotiation
transferred by assignment
Holder in due course may have better
rights than transferor
transferee acquires rights only of his
transferor
Prior parties warrant payment
prior parties merely warrant legality of
title
Transferee has right of recourse against
intermediate parties
transferee has no right of recourse
4. Difference between Negotiable Instruments and Negotiable Documents of Title
Negotiable Instruments
Negotiable Documents of Title
Have requisites of Sec. 1 of the NIL
does not contain requisites of Sec. 1 of NIL
Have right of recourse against intermediate
parties who are secondarily liable
no secondary liability of intermediate parties
Holder in due course may have rights better
than transferor
transferee merely steps into the shoes of the
transferor
Subject is money
subject is goods
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Category Archives: Negotiable

Instruments Law

Commercial Law – Negotiable Instruments Law

  1. Negotiable Instruments – written contracts for the payment of money; by its form, intended as a substitute for money and intended to pass from hand to hand, to give the holder in due course the right to hold the same and collect the sum due.
  2. Characteristics of Negotiable Instruments: a. negotiability – right of transferee to hold the instrument and collect the sum due b. accumulation of secondary contracts – instrument is negotiated from person to person
  3. Difference between Negotiable Instruments from Non-Negotiable Instruments:

Negotiable Instruments Non-negotiable^ Instruments

Contains all the requisites of Sec. 1 of the

NIL

does not contain all the requisites of Sec.

1 of the NIL

Transferred by negotiation transferred by assignment

Holder in due course may have better

rights than transferor

transferee acquires rights only of his

transferor

Prior parties warrant payment

prior parties merely warrant legality of

title

Transferee has right of recourse against

intermediate parties transferee has no right of recourse

  1. Difference between Negotiable Instruments and Negotiable Documents of Title

Negotiable Instruments Negotiable Documents of Title

Have requisites of Sec. 1 of the NIL does not contain requisites of Sec. 1 of NIL

Have right of recourse against intermediate

parties who are secondarily liable no secondary liability of intermediate parties

Holder in due course may have rights better

than transferor

transferee merely steps into the shoes of the

transferor

Subject is money subject is goods

Instrument itself is property of value

instrument is merely evidence of title; thing

of value are the goods mentioned in the

document

  1. Promissory Note – unconditional promise to pay in writing made by one person to anther, signed by the maker, engaging to pay on demand or a fixed determinable future time a sum certain in money to order or bearer. When the note is drawn to maker’s own order, it is not complete until indorse by him. (Sec. 184 NIL) Parties:
    1. maker
    2. payee
  2. Bill of Exchange – 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 NIL) Parties:
    1. drawer
    2. payee
    3. drawee/ acceptor
  3. Check – bill of exchange drawn on a bank and payable on demand. (Sec. 185 NIL)
  4. Difference between Promissory Note and Bill of Exchange

Promissory Note Bill of Exchange

Unconditional promise unconditional order

Involves 2 parties involves 3 parties

Maker primarily liable drawer only secondarily liable

only 1 presentment – for payment

generally 2 presentments – for acceptance

and for payment

  1. Distinctions between a Check and Bill of Exchange

CHECK BOE

  • always drawn upon a bank or banker
    • may or may not be drawn against a

bank

  • always payable on demand
    • may be payable on demand or at a fixed

or determinable future time

c. be payable on d emand or at a fixed determinable future time d. be payable to o rder or to bearer (Sec. 1 NIL)

  1. Requisites of a Negotiable Bill (BOE): (SUDOC) It must:
    1. be in writing s igned by the drawer
    2. contains an u nconditional promise or order to pay a sum certain in money
    3. be payable on d emand or at a fixed determinable future time
    4. be payable to o rder or to bearer
    5. the drawee must be named or otherwise indicated with reasonable c ertainty (Sec. 1 NIL) Notes on Section 1:
  • In order to be negotiable, there must be a writing of some kind, else there would be nothing to be negotiated or passed from hand to hand. The writing may be in ink, print or pencil. It may be upon parchment, cloth, leather or any other substitute of paper.
  • It must be signed by the maker or drawer. It may consist of mere initials or even numbers, but the holder must prove that what is written is intended as a signature of the person sought to be charged.
  • The Bill must contain an order, something more than the mere asking of a favor.
  • Sum payable must be in money only. It cannot be made payable in goods, wares, or merchandise or in property.
  • A drawee’s name may be filled in under Section 14 of the NIL
  1. Determination of negotiability
    1. by the provisions of the Negotiable Instrument Law, particularly Section 1 thereof
    2. by considering the whole instrument
    3. by what appears on the face of the instrument and not elsewhere *In determining is the instrument is negotiable, only the instrument itself and no other, must be examined and compared with the requirements stated in Sec. 1. If it appears on the instrument that it lacks one of the requirements, it is not negotiable and the provisions of the NIL do not govern the instrument. The requirement lacking cannot be supplied by using a separate instrument in which that requirement which is lacking appears.
  2. Sum is certain even if it is to be paid with: a. interest b. in installments

c. in installments with acceleration clause d. with exchange e. costs of collection or attorney’s fees (Sec. 2 NIL)

  1. General Rule: The promise or order should not depend on a contingent event. If it is conditional, it is non-negotiable. Exceptions: a. indication of particular fund from which the acceptor disburses himself after payment b. statement of the transaction which gives rise to the instrument. (Sec. 3 NIL) But an order or promise to pay out of a particular fund is not unconditional Notes on Section 3
  • The particular fund indicated should not be the direct source of payment, else it becomes unconditional and therefore non-negotiable. The fund should only be the source of reimbursement.
  • A statement of the transaction does not destroy the negotiability of the instrument. Exception: Where the promise to pay or order is made subject to the terms and conditions of the transaction stated.
  1. Instrument is payable upon a determinable future time if: a. there is a fixed period after sight/date b. on or before a specified date/fixed determinable future time c. on or at a fixed date after the occurrence of an event certain to happen though the exact date is not certain (Sec. 4 NIL) Notes on Section 4
  • If the instrument is payable upon a contingency, the happening of the event does not cure the defect (still non-negotiable)
  1. General Rule: If some other act is required other than the payment of money, it is non- negotiable. Exceptions:
  • to a specified person or his order It may be drawn payable to the order of:
    1. a payee who is not a maker, drawer, or drawee
    2. the drawer or maker
    3. the drawee
    4. two or more payees jointly
    5. one or some of several payees
    6. the holder of an office for the time being (Sec. 8 NIL) Notes on Section 8
  • The payee must be named or otherwise indicated therein with reasonable certainty.
  • If there is no payee, there would be no one to indorse the instrument payable to order. Therefore useless to be considered negotiable.
  • Joint payees in indicated by the conjunction “and”. To negotiate, all must indorse.
  • Being several payees is indicated by the conjunction “or”.
  1. Instrument is payable to bearer : a. when it is expressed to be so payable b. when payable to the person named or bearer c. payable to order of fictitious or non-existent person and this fact was known to drawer d. name of payee not name of any person e. only and last indorsement is an indorsement in blank (Sec. 9 NIL) Notes on Section 9
  • “fictitious person” is not limited to persons having no legal existence. An existing person may be considered fictitious depending on the intention of the maker or the drawer.
  • “fictitious person” means a person who has no right to the instrument because the maker or drawer of it so intended. He was not intended to be the payee.
  • where the instrument is drawn, made or prepared by an agent, the knowledge or intent of the signer of the instrument is controlling.
  • Where the agent has no authority to execute the instrument, the intent of the principal is controlling
  1. The date may be inserted in an instrument when:
    1. an instrument expressed to be payable at a fixed period after date is issued undated
    2. where acceptance of an instrument payable at a fixed period after sight is undated (Sec. 13 NIL) Effects:
  • any holder may insert the true date of issuance or acceptance
  • the insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course
  • as to the holder in due course, the date inserted (even if it be the wrong date) is regarded as the true date.
  1. Subsequent Holder in Due Course not affected by the following deficiencies: a. incomplete but delivered instrument (Sec. 14 NIL) b. complete but undelivered (Sec. 16 NIL) c. complete and delivered issued without consideration or a consideration consisting of a promise which was not fulfilled (Sec 28 NIL) 26. Holder in Due Course Affected by Abnormality/Deficiency: a. incomplete and undelivered instrument (Sec. 15 NIL) b. maker/drawer’s signature forged (Sec. 23 NIL) 27. Incomplete but Delivered Instrument:
  2. Where an instrument is wanting in any material particular: a. Holder has prima facie authority to fill up the blanks therein. b. It must be filled up strictly in accordance with the authority given and within a reasonable time. c. If negotiated to a holder in due course, it is valid and effectual for all purpose as though it was filled up strictly in accordance with the authority given and within reasonable time. (Sec. 14 NIL)
  1. delivery is essential to the validity of any negotiable instrument
  2. as between immediate parties or those is like cases, delivery must be with intention of passing title
  3. an instrument signed but not completed by the drawer or maker and retained by him is invalid as to him for want of delivery even in the hands of a holder in due course
  4. but there is prima facie presumption of delivery of an instrument signed but not completed by the drawer or maker and retained by him if it is in the hands of a holder in due course. This may be rebutted by proof of non-delivery.
  5. an instrument entrusted to another who wrongfully completes it and negotiates it to a holder in due course, delivery to the agent or custodian is sufficient delivery to bind the maker or drawer.
  6. If an instrument is completed and is found in the possession of another, there is prima facie evidence of delivery and if it be a holder in due course, there is conclusive presumption of delivery.
  7. delivery may be conditional or for a special purpose but such do not affect the rights of a holder in due course.

30. General rule: a person whose signature does not appear on the instrument in not liable. Exception: 1. one who signs in a trade or assumed name (Sec. 18) 2. a duly authorized agent (Sec. 19) 3. a forger (Sec. 23)

  1. General rule: an agent is not liable on the instrument if he were duly authorized to sign for or on behalf of a principal. Requisites:
    1. he must be duly authorized
    2. he must add words to his signature indicating that he signs as an agent
    3. he must disclose his principal (Sec. 20 NIL) Notes on Section 20
  • if an agent does not disclose his principal, the agent is personally liable on the instrument.

32. Per Procuration – operates as notice that the agent has a limited authority to sign. Effects:

  • the principal in only bound if the agent acted within the limits of the authority given
  • the person who takes the instrument is bound to inquire into the extent and nature of the authority given. (Sec. 21 NIL)
  1. General rule: Infants and corporations incur no liability by their indorsement or assignment of an instrument. (Sec. 22 NIL) Effects:
  • no liability attached to the infant or the corporation
  • the instrument is still valid and the indorsee acquires title
  1. General rule: a signature which is forged or made without authority is wholly inoperative. Effects:
    1. no right to retain
    2. no right to give a discharge
    3. no right to enforce payment can be acquired. (Sec. 23 NIL) Exception:
  • the party against whom it is sought to be enforced is precluded from setting up the forgery or want of authority. Notes on Section 23
  • Section 23 applies only to forged signatures or signatures made without authority
  • Alterations such as to amounts or like fall under section 124
  • Forms of forgery are a) fraud in factum b) duress amounting to fraud c) fraudulent impersonation
  • the drawee bank can recover from the collecting bank
  • the payee can recover from the drawer
  • the payee can recover from the recipient of the payment, such as the collecting bank
  • the payee cannot collect from the drawee bank
  • the collecting bank bears the loss but can recover from the person to whom it paid
  • if payable to bearer, the rules are the same as in PN.
  • if the drawee has accepted the bill, the drawee bears the loss and his remedy is to go after the forger
  • if the drawee has not accepted the bill but has paid it, the drawee cannot recover from the drawer or the recipient of the proceeds, absence any act of negligence on their part.
  1. Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration. (Sec. 24 NIL) Effects:
  • every person whose signature appears thereon is a party for value
  • presumption is disputable
  1. Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who become such prior to that time. (Sec. 26 NIL)
  2. Effect of want of consideration:
    1. Absence or failure of consideration may be set up against a holder not a holder in due course (personal defense)
    2. Partial failure of consideration is a defense pro tanto (Sec 28 NIL) Notes on Section 28
  • absence of consideration is where no consideration was intended to pass.
  • failure of consideration implies that consideration was intended by that it failed to pass
  • the defense of want of consideration is ineffective against a holder in due course
  • a drawee who accepts the bill cannot allege want of consideration against the drawer
  1. An accommodation party is one who signs the instrument as maker, drawer, acceptor, or indorser without receiving value therefor and for the purpose of lending his name to some other person. Effects:
  • an accommodation party is liable to the holder for value notwithstanding that such holder knew that of the accommodation. (Sec. 28 NIL) Notes on Section 28
  • the accommodated party cannot recover from the accommodation party
  • want of consideration cannot be interposed by the accommodation party
  • an accommodation maker may seek reimbursement from a co-maker even in the absence of any provision in the NIL; the deficiency is supplied by the New Civil Code.
  • he may do this even without first proceeding against the debtor provided: a. he paid by virtue of judicial demand b. principal debtor is insolvent
  1. An instrument is negotiated when:
    1. it is transferred from one person to another
    2. that the transfer must be in a manner as to constitute the transferee a holder For a bearer instrument – by delivery
  • the transferee acquires such title as the transferor had
  • the transferee acquires the right to have the indorsement of the transferor
  • negotiation takes effect as of the time the indorsement is actually made (Sec. 49 NIL) 45. Rights of a holder:
  • a holder may sue in his own name
  • a holder may receive payment. Effects:
  • if in due course it discharges the instrument (Sec. 51 NIL) 46. Requisites for a Holder in Due Course (HDC): a. receives the instrument complete and regular on its face b. became a holder before it was overdue and had no notice that it had been previously dishonored if such was the fact c. takes the instrument for value and in good faith d. at time he took the instrument, no notice of infirmity in instrument or defect in the title of the person negotiating it (Sec. 52 NIL) Notes on Section 52
  • every holder is presumed to be a HDC (Sec. 59)
  • the person who questions such has the burden of proof to prove otherwise
  • if one of the requisites are lacking, the holder is not HDC
  • an instrument is considered complete and regular on its face if a) the omission is immaterial b) the alteration on the instrument was not apparent on its face
  • an instrument is overdue after the date of maturity.
  • on the date of maturity, the instrument is not overdue and the holder is a HDC
  • acquisition of the transferee or indorsee must be in good faith
  • good faith means lack of knowledge or notice of defect or infirmity
  1. A holder is not a HDC where an instrument payable on demand is negotiated at an unreasonable length of time after its issue (Sec. 53 NIL) 48. Rights of a HDC:
  • holds the instrument free from any defect of title of prior parties
  • free from defenses available to prior parties among themselves (personal/ equitable defenses)
  • may enforce payment of the instrument for the full amount against all parties liable(Sec. 57 NIL) Notes on Section 57
  • Personal or equitable defenses are those which grow out of the agreement or conduct of a particular person in regard to the instrument which renders it inequitable for him through legal title to enforce it. Can be set up against holders not HDC
  • Legal or real defenses are those which attach to the instrument itself and can be set up against the whole world, including a HDC.

Personal Defenses Real Defenses

1. absence or failure of consideration Alteration

2. want of delivery of complete

instrument

Want of delivery of incomplete

instrument

3. insertion of wrong date where payable

at a fixed period after date and issued

undated; or at a fixed period after sight

and acceptance is undated Duress amounting to forgery

4. filling up the blanks contrary to

authority given or not within reasonable

time Fraud in factum or in esse contractus

5. fraud in inducement Minority

6. acquisition of the instrument by force,

duress or fear Marriage in case of a wife

7. acquisition of the instrument by

unlawful means

Insanity where the insane person has a

guardian appointed by the court

  1. General rule: every holder is deemed prima facie to be a holder in due course. Exception:
  • where it is shown that the title of any person who has negotiated the instrument is defective, the burden is on the holder to prove that he is a HDC or that a person under whom he claims is a HDC (Sec. 59 NIL)
  1. A maker is primarily liable: Effects of making the instrument, the maker: a. engages to pay according to tenor of instrument b. admits existence of payee and his capacity to indorse (Sec. 60 NIL) Notes on Section 60
  • a maker’s liability is primarily and unconditional
  • one who has signed as such is presumed to have acted with care and to have signed with full knowledge of its contents, unless fraud is proved
  • the payee’s interest is only to see to it that the note is paid according to its terms
  • when two or more makers sign jointly, each is individually liable for the full amount even if one did not receive the value given
  • the maker is precluded from setting up the defense of a) the payee is fictional, b) that the payee was insane, a minor or a corporation acting ultra vires
  1. A drawer is secondarily liable Effects of drawing the instrument, the drawer:
    1. admits the existence of the payee,
    2. the capacity of such payee to indorse
    3. engages that on due presentment, the instrument will be accepted or paid or both according to its tenor. If the instrument is dishonored, and the necessary proceedings on dishonor duly taken
  1. the drawer will pay the amount thereof to the holder
  2. will pay to any subsequent indorser who may be compelled to pay it. (Sec. 61 NIL) Notes on Section 61
  • a drawer may insert an express stipulation to negative or limit his liability
  1. An acceptor is primarily liable By accepting the instrument, an acceptor:
  • engages that he will pay according to the tenor of his acceptance
  • admits the existence of the drawer, the genuineness of his signature and his capacity and authority to draw the instrument
  • the existence of the payee and his then capacity indorse 54. Irregular Indorser – a person not otherwise a party to an instrument places his signature in blank before delivery is liable as an indorser in the following manner:
  1. if payable to order of a third person – liable to the payee and to all subsequent parties
  2. if payable to order of the maker or drawer – liable to all parties subsequent to the maker or drawer
  3. if payable to bearer – liable to all parties subsequent to the maker or drawer
  4. if signs for an accommodation party – liable to all parties subsequent to the payee (Sec. 64 NIL) 55. Warranties where negotiating by delivery or qualified endorsement:
  5. the instrument is genuine and in all respect what it purports to be
  6. the indorser has good title to it
  7. all prior parties had the capacity to contract
  8. indorser has no knowledge of any fact that would impair the validity or the value of the instrument. Limitations of warranties:
  • if by delivery – extends only to immediate transferee
  • warranty of capacity to contract does not apply to persons negotiating public or corporate securities (Sec. 65 NIL) Notes on Section 65
  • a qualified indorser is one who indorses without recourse or sans recourse
  • recourse – resort to a person secondarily liable after default of person primarily liable
  • a qualified indorser cannot raise the defense of a) forgery b) defect of his title or that it is void c) the incapacity of the maker, drawer or previous indorsers.