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BOBADILLA [LAW 3 PRELIMINARY REVIEWER]

LAW 3 PRELIMS - A sum certain in money payable to order, or


bearer
ACT 2031 Negotiable Instruments Law, the law
governing negotiable instruments under Philippine a. Certificate of Deposit a written
jurisdiction enacted on FEBRUARY 3, 1911 took effect acknowledgement of a bank of its receipt of a certain
on JUNE 2, 1911 sum with a promise to repay the same.

APPLICABILITY OF THE NIL b. Bonds a certificate or evidence of a debt on


which the issuing company or governmental body
1. Limited Application only applicable to those
promises to pay the bondholders a specified amount of
which meet requirements on Sec 1 of NIL
interest for a specified length of time, and to repay the
2. Supplementary application of other laws
loan on the expiration date.
NEGOTIABLE INSTRUMENT A written contract for the
c. Bank Note a promissory note of an issuing bank
payment of money, which is intended as a substitute for
payable to bearer on demand and intended to circulate
money and passes from one person to another as
as money
money, in such a manner as to give a holder in due
course the right to hold the instrument free from d. Due Bill note whereby a person acknowledges
defenses available to prior parties. his debt to another and he promises to pay bearer or to
order a sum owed which is certain in money
FUNCTIONS AND IMPORTANCE OF NI
e. Debenture a promissory note or bond backed by
1. Substitute for Money
2. A medium of Credit Transaction the general credit of a corporation and usually not
3. A medium of exchange secured by a mortgage or lien on any specific property

FEATURES/CHARACTERISTICS OF NI 2. Bill of Exchange (Check, Draft, Trade and


Bankers Acceptance, Inland and Foreign Bill,
1. Negotiability it may be transferred from one Clean and Documentary Bill of Exchange, and
person to another so as to constitute the Bills in Set )
transferee to be a holder in due course that is - An unconditional order in writing
free from personal defenses. - Addressed by one person to another
3 ways where an instrument may lose its - Signed by the person giving it
negotiability: - Requiring the person to whom it is addressed
- By restrictive indorsement to pay on demand or at a fixed or determinable
- By arrival of maturity future time
- By discharge of the instrument - A sum certain in money to order or to bearer
2. Accumulation of Secondary Contracts - (known as Order paper/Three-Party Paper)
additional parties can become involved and
more persons are made liable to the holder a. Check is a bill of exchange drawn on a
3. Presumed Consideration Law presumes that bank payable on demand
the instrument was issued for a valuable - Cashiers Check and Managers Check
consideration / issued or received for value drawn by a bank upon itself, and is accepted
already by the act of its issuance. The bank
KINDS OR FORMS OF NI is he drawer and the Drawee
(COMMON FORMS) - Ordinary Checks drawn on a bank by
virtue of checking account opened by
1. Promissory Note depositors with the bank
- An unconditional promise in writing - Memorandum Checks an evidence of
- Made by one person to another debt against the drawer, and although it may
- Signed by the maker not be intended to be presented, has the
- Engaging to pay on demand, or at a fixed or
same effect as an ordinary check, and if
determinable future time
passed to a third person, will be valid in his
hands like any other check.
BOBADILLA [LAW 3 PRELIMINARY REVIEWER]

- Travelers Check an instrument purchased 1. Documents against Acceptance Bill


from a bank, express companies, or the like, documents must be attached when
in various denominations, which can be presented for acceptance
used like cash upon second signature by the 2. Documents against Payment Bill -
purchases documents must be attached when
- Bank Draf a check drawn by one bank presented for payment
upon another bank, payable to a third f. Bills in Set is actually one bill that is drawn
person in demand. in a set

(OTHER CLASSIFICATIONS OF CHECK) INSTRUMENTS WITH LIMITED NEGOTIABILITY

- Certified Checks one drawn by a 1. Treasury Warrant issued by the government


depositor upon funds to his credit in a bank for its official expenditure, non negotiable since
- Crossed Check one that bears two it comes from a gov. fund
parallel lines across its face indicating that 2. Trust Receipts is an instrument used in
the check is for deposit business transactions by which a bank advances
- Stale Check one which has not been money to enable a customer to buy goods and
presented for payment within a reasonable takes the bill of lading for such goods in its own
time afer its issue. (valueless) name
3. Postal Money Order is an order for the
b. Draft bill of exchange used in payment of money to the payee named therein
documentary exchanges drawn by one post office upon another under
- Time Draf or Usance Bills draf payable authority of law.
at a fixed future date or a determinable 4. Certificate of Stock a written instrument
future time signed by a proper officer of a corporation
- Sight Draf draf payable when the holder stating that the person named therein is the
presents it for payment or at sight or on owner of a designated number of shares of
demand stock
- Sola Bill a bill of exchange issued only in 5. Letter of Credit a letter requesting one person
one single instrument as distinguished from to make advances to a third person on the credit
bills in set of the writer.
6. Bill of Lading document issued by the carrier
c. C1. Trade Acceptance a bill of exchange whereby receipt of goods is acknowledged and
usually a draf used in contracts of sale the carrier promises to deliver the goods to
whereby the seller as a drawer orders the whoever is validly holding it
third person (as drawee) to pay a sum 7. Warehouse Receipt a written
certain to the same seller (payee). acknowledgement by a warehouseman that he
C2. Bankers Acceptance a time draf has received and holds certain goods
across the face of which the drawee is a 8. Withdrawal Slip document used to withdraw
bank and has written the word accepted. from a savings account, does not contain any
The accepting party is the bank itself. promise or order to pay
9. Negotiable Orders of Withdrawals (NOW
d. D1. Inland Bill both drawn and payable Accounts) savings account from which funds
within the Philippines may be withdrawn by means of negotiable
D2. Foreign Bill does not purport to be
orders of withdrawal
both drawn and payable within the PH
Bill of Exchange treated as Promissory Note
e. E1. Clean Bill of Exchange a bill to which
no document is attached when presentment 1. When the drawer and the drawee of the bill are
for payment or acceptance is made the same person
E2. Documentary Bill of Exchange a bill to 2. When the drawee is fictitious person
which a document(s) is attached 3. When the drawee has no capacity to contract
BOBADILLA [LAW 3 PRELIMINARY REVIEWER]

4. When the instrument is so ambiguous that *where the presentment for acceptance is
there is a doubt whether it is a bill or a note excused and the bill is NOT accepted
6. PRESENTMENT FOR PAYMENT when the
PARTIES TO A NEGOTIABLE INSTRUMENT instrument is placed or exhibited before a
1. PROMISSORY NOTE person required or who may be required to pay
A. MAKER person who promises to pay the it coupled with the request that he honor the
amount stated in the instrument obligation represented by the instrument
B. PAYEE/THE BEARER person who is 7. DISHONOR BY NON PAYMENT non acceptance
supposed to be paid by the maker of a bill or nonpayment of the bill or note
2. BILL OF EXCHANGE 8. NOTICE OF DISHONOR one given orally or in
A. DRAWER person who draws or takes out writing, personally, by mail or otherwise, to all
and signs the instrument; orders the drawee parties secondarily liable identifying the
to pay instrument and advising that it has been
B. DRAWEE person who is being ordered to dishonored
pay 9. PROTEST (in certain cases) make a solemn
C. PAYEE/THE BEARER the one to whom written declaration, in due form, on behalf of
payment should be made by the drawee or the holder, against all parties liable for any loass
the acceptor or damage to be sustained by the non
D. ACCEPTOR drawee who already accepted acceptance or nonpayment of a bill or note
the order of the drawer to pay in the bill of 10. DISCHARGE when instrument loses its force
exchange and effect as a legal obligation
3. OTHER PARTIES
A. INDORSER persons who transfer or MODULE 2 NEGOTIABLE INSTRUMENTS IN GENERAL
negotiate an instrument by indorsement
COMMERCIAL PAPER - refers to written promises or
completed by delivery obligations that arise out of commercial transactions from
B. HOLDER payee or indorsee of a bill or note the use of such instruments as promissory notes and bills of
who is in possession of a bill or note, exchange.
payable to order, or person in possession of NEGOTIABLE INSTRUMENT are instruments that conform
to the requirements of ACT 2031 Section 1 and said
a bill or note payable to bearer
conformity should all appear on the face of the instrument
C. BEARER person in possession of a bill or NON-NEGOTIABLE INSTRUMENT instrument that does not
note which is payable to bearer meet the requirements laid down to qualify an instrument as
a negotiable one
INCIDENTS IN THE LIFE OF NEG. INSTRUMENT LEGAL TENDER kind of money which the law compels a
creditor to accept in payment of his debt
1. ISSUE 1st delivery of the instrument, complete *P1, P5, P10 maximum of P1,000
in form, to the holder *1,5,10 and 25 cents maximum of P100
2. NEGOTIATION transfer from one person to INTEREST indemnity for damages when debtors incurs in
another so as to constitute the transferee the delay (6% per annum in case no stipulation)
ACCELERATION CLAUSE when there is a clause or a
holder
provision in the instrument that states that payment can be
*payable to bearer = delivery (delivery = demanded earlier than the original fixed date
negotiation) COST AND ATTORNEYS FEES judicial costs recoverable by
*to order - indorsement + delivery winning party
3. PRESENTMENT FOR ACCEPTANCE (in certain CONDITION future and contingent event, or past event
kinds of bill of exchange) instrument shall be unknown to the parties, happening or non-happening of
which will either give rise or extinguish an obligation
presented to the drawee so that the drawee will
*Suspensive happening or non happening will give rise to
signify his agreement to the order of the drawer an obligation
to pay *Resolutory if happening or non happening will extinguish
4. ACCEPTANCE signification by the drawee of his obligation
assent to the order of the drawer MATERIAL PARTICULAR a particular the omission of which
will render the instrument non negotiable
5. DISHONOR BY NON ACCEPTANCE
ANTEDATING instrument contains a date earlier than true
*when presented and acceptance is refused by
date of issuance
the drawee or CANNOT be obtained or
BOBADILLA [LAW 3 PRELIMINARY REVIEWER]

POST-DATING - instrument contains a date later than true


date of issuance ISSUE/DELIVERY the transfer of the possession of the
DELIVERY transfer of possession, actual or constructive instrument by the maker or drawer with intent to transfer
ISSUE 1st delivery of instrument to holder title to the payee and recognize him as the holder thereof
PROCURATION act by which a principal gives power to IMMEDIATE PARTIES parties who are proximate to the
another to act in his place as he could himself maker or the drawer and are privy to the conditions or
FORGERY counterfeit-making or fraudulent alteration of limitations placed upon the delivery of the instrument.
any writing REMOTE PARTIES parties who are not in direct contractual
relation to each other
FORMAL REQUIREMENTS OF NEGOTIABILITY IN GENERAL
the following must be considered: JOINT LIABILITY two or more debtors are bound to pay
(1) the whole of the instrument; their proportionate share in the obligation
(2) only what appears on the face of the instrument; JOINT AND SEVERAL OR SOLIDARY LIABILITY two or more
(3) the provisions of the Negotiable Instruments Law persons are bound to and can be made to comply with the
especially Section 1 thereof which gives the requirements of entire obligation
negotiability.
*FORGERY = REFERS TO SIGNATURE
EXCHANGE charge for the expense of providing funds at *MATERIAL ALTERATION DATE, SUM PAYABLE, TIME
the place where the instrument is payable to meet the OR PLACE OF PAYMENT
instrument which is issued at another place
CONTINGENCY an event which is possible but which may FRAUD ON NEGOTIABLE INSTRUMENTS:
or may not occur
1. FRAUD IN FACTUM (FRAUD IN ESSE
TIME INSTRUMENTS instruments that are not payable on
CONTRACTUS) type of fraud in which bills and
demand
notes are given through trick or device causing
ADDITIONAL PROVISIONS NOT AFFECTING NEGOTIABILITY: the parties giving the same to believe that the
1. SALE OF COLLATERAL SECURITY is a separate instrument they are giving is f a different
obligation attached to another contract or character
instrument to guarantee its performance 2. FRAUD IN INDUCEMENT type of fraud by
2. CONFESSION OF JUDGEMENT signifies an which deception and misinterpretation of facts
acknowledgement of indebtedness, upon which it is induced the desirability of signing the contract
contemplated that a judgement may and will be
rendered and therefore any provision that MODULE 3 CONSIDERATION AND NEGOTIATION
authorizes such do not affect negotiability
3. WAIVER OF BENEFIT GRANTED BY LAW
CONSIDERATION inducement to a contract; the
4. ELECTION OF HOLDER TO REQUIRE SOME OTHER
ACT cause, motive, price or impelling influence which
induces a contracting party to enter into a contract
HOLDER FOR VALUE one who has acquired title to a
negotiable instrument in the usual course of business,
for valuable consideration, in good faith
LIEN a charge against or interest on property to
secure payment of a debt or performance of an
obligation
ITEMS THAT MAY BE OMITTED IN AN INSTRUMENT ACCOMMODATION BILL OR NOTE one to which the
WITHOUT AFFECTING NEGOTIABILITY accommodation party has put his name, without
- Date
consideration, for the purpose of accommodating some
- Value
- Place
other party who is to use it, and is expected to pay it
- It bears a Seal ACCOMMODATION PARTY one who lends his name,
- It designates a particular kind of current money payable without consideration, for the purpose of enabling the
accommodated party to obtain credit or to raise money
MATERIAL PARTICULAR are generally items or requisites as ACCOMMODATED PARTY one in whose favor a
provided for under Section 1 of NIL. It may also include any person without receiving value thereof, signs an
important detail that affects the tenor of the instrument instrument for the purpose of lending his credit and
enabling said party to raise money upon it
*INCOMPLETE and DELIVERED instrument = person holding NEGOTIATION transfer of negotiable instrument from
it has prima facie authority to complete it within the given one person to another
authority / personal defense
INDORSEMENT writing of the name of the name of
*INCOMPLETE and UNDELIVERED instrument = inoperative
the payee on the instrument with intent either to
(delivery is essential), revocable / real defense
BOBADILLA [LAW 3 PRELIMINARY REVIEWER]

transfer the title to the same, or to strengthen the 1. SPECIAL INDORSEMENT indorsement where
security of the holder by assuming a contingent liability name of payee is specified
for the future payment or both (Latin word INDORSA 2. BLANK INDORSEMENT specifies no indorsee
meaning written on the back) and it generally consists only of the signature of
*Indorsement normally appears at the back of the the indorser
instrument or the DORSAL PORTION 3. RESTRICTIVE INDORSEMENT restricts or
*It may also be written on a separate paper or as prohibits entirely the further negotiation of an
ALLONGE instrument, or modifies the rights of the holder
SPECIAL INDORSEMENT one where the name of the or the liabilities of then indorser
payee is specified 4. QUALIFIED INDORSEMENT constitutes the
RESTRICTINVE INDORSEMENT one so worded that indorser a mere assignor of the title to the
either restricts or prohibits entirely the further instrument
negotiation, or modifies the rights of the holder or *RECOURSE means resort to a person who is
assignor of the title to the instrument secondarily liable under the default of the
QUAIFIED INDORSEMENT one which constitutes the person who is primarily liable
indorser a mere assignor of the title to the instrument 5. CONDITIONAL INSDORSEMENT indorse
CONDITIONAL INSTRUMENT one by which the imposes some other condition to his liability, or
indorser imposes some other condition to his liability on the indorsers right to collect the proceeds of
REACQUIRER refers to a holder who negotiates an the instrument
instrument and then subsequently reacquires STRIKING OUT INDORSEMENT is when the
indorsement/s are removed and the persons who made
MODE OF TRANSFERRING TITLE TO A NEGOTIABLE the instrument are no longer indorsers. Liabilities are
INSTRUMENT relieved
1. BY ASSIGNMENT the transferee merely steps
into the shoes of the assignor and is generally MODULE 4 RIGHTS AND LIABILITIES OF PARTIES
done by transferring it without indorsement
2. BY OPERATION OF LAW by death of holder, by CLASSES OF HOLDERS
the bankruptcy or insolvency of holder, upon 1. Holder
death of a joint payee or indorsee 2. Holder for Value
3. BY INDORSEMENT 3. Holder in Due Course
4. BY DELIVERY mere delivery of the instrument RIGHTS OF HOLDER
payable to bearer 1. To sue in his own name
KINDS OF TRANSFER OF NI 2. To receive payment
1. ISSUE first delivery of instrument complete in 3. To transfer his right through negotiable or
form by maker or drawer to payee assignment
2. NEGOTIATION transfer of instrument DEFECTS OF TITLE covers all those situations, which
3. ASSIGNMENT transfer of title to the are known as personal or equitable defenses, and to
instrument over those equities or ownership where there is breach
METHODS OF NEGOTIATION of faith in negotiation
1. For instrument payable to BEARER mere
delivery is sufficient CIRCUMSTANCES THAT MAKES THE TITLE DEFECTIVE
2. For instrument payable to ORDER (where the party obtained instrument or signature by:
Indorsement (by payee or present holder) and 1. Fraud
delivery (to the next holder or indorsee) 2. By Duress, force or fear
3. Any other lawful means
INDORSEMENT TO MULTIPLE PAYEES OR INDORSEES 4. Illegal consideration
1. JOINT PAYEES an instrument purporting to 5. Negotiation in breach of faith
transfer the instrument to two or more persons 6. Circumstances amounting in fraud
severally does not operate as a negotiation of INFIRMITIES include things that are wrong with the
the instrument for the cause of action is split or instrument itself as distinguished from things that are
divided lacking in the contracts on the instruments
2. ALTERNATIVE PAYEES instruments are KINDS OF DEFENSES
sometimes payable to two or more alternative 1. REAL OR ABSOLUTE DEFENSES available
payees against all parties, both immediate and remote,
including holder in due course
CLASSIFICATION OF INDORSEMENT
BOBADILLA [LAW 3 PRELIMINARY REVIEWER]

2. PERSONAL OR EQUITABLE DEFENSES those


that grow out of the agreement or conduct of a
particular person concerning the instrument,
which renders it inequitable for him, though,
holding the legal title, to enforce it against a
holder in due course
CLASSIFICATION OF PARTIES
1. PRIMARY LIABLE
- Maker (Prom.Note)
- Acceptor (Bill of ex)
- Certifier of check
PRIMARY LIABILITY liability of a person who
has absolute obligation to pay the instrument
2. SECONDARILY LIABLE
- Drawer (Bill)
- Indorser (Note or bill)
SECONDARY LIABILITY liability of a person
who becomes liable only if the person primarily
liable fails or refuses to pay
3. NOT LIABLE
- Drawee, until he accepts instrument