GAPUZ NOTES

NEGOTIABLE INSTRUMENTS LAW

NEGOTIABLE INSTRUMENTS LAW

1. Elements of a Negotiable Instrument (NI) (Section 1, NIL) KEY:WUPOA

a. in Writing and signed by the Maker or Drawer;
b. contains an Unconditional promise or order to pay a sum certain in money;
c. payable on Demand or at a fixed or determinable future time;
d. payable to Order or Bearer;
e. if Addressed to a drawee, he/she must be named or otherwise indicated therein with reasonable
certainty.

2. General Classification of NI
There are two general kinds of NI; a Bill of Exchange, or a Promissory Note.
a. Bill of Exchange = 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. (Section
126, NIL) [involves three parties]
b. Promissory Note = 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. Where a note is drawn to the maker's own order, it
is not complete until indorsed by him. (Section 184, NIL) [involves only two persons]

A Bill of Exchange may be treated either as a Promissory Note or a Bill of Exchange (at the option of the
payee/indorsee) in any of the following instances: (Section 17(e), and 130, NIL)
a. The drawer and drawee are one and the same person; (e.g. I, Juan, order Juan to pay A)
b. The drawee is a fictitious person; (e.g. I order Batman to pay A)
c. The drawee has no capacity to contract; (e.g. I order Scarlet Snow to pay A) (Scarlet Snow is a
minor, thus has no capacity to contract)
d. The instrument is so ambiguous that there is doubt whether it is a bill or a note. (e.g. God
ordered me to pay A or order, signed by me)

3. Brief Liabilities of Parties (for Drawer, Drawee/Acceptor; Maker, Payee/Indorsers)

The liabilities are as follows:
a. Drawer = secondarily liable for the payment of the NI if the drawee does not accept the NI for
whatever reason. He engages to:
i. Admit the existence and capacity to indorse of the payee.
ii. That the instrument shall be accepted and paid by the Drawee (the party who is primarily
liable).
iii. Engages that if the instrument is dishonored and proper proceedings are brought, that
he will pay to the party entitled to be paid. (Section 61, NIL)
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b. Drawee/Acceptor = primarily liable for the bill of exchange only if he accepts. He engages to:
i. Pay according to the tenor of his acceptance.
ii. Admits the existence and signature, and capacity to draw the instrument of the Drawer.
iii. Admits the existence and capacity to indorse of the Payee. (Section 62, NIL)

c. Maker = primarily liable on the Note. He engages to:

i. Pay according to the tenor of the instrument.
ii. Admits the existence of the payee and his capacity to indorse. (Section 60, NIL)

d. Payee/Indorsers = secondarily liable to indorsees (subsequent holders who fails to get paid
by the Maker/Drawee, by virtue of their General Warranties. (Section 65, 66, NIL)
 Only if the instrument is presented for payment within the required period of
time. (Section 70, NIL); and
 Only if the said payee/indorser properly receives a notice of dishonor, (Section
89, NIL) and the notice is properly given by the party required to give such notice.
(Section 90, NIL).

4. New Civil Code provides that obligations shall be paid in Philippine Currency and no person can be
compelled to accept a check (NI) as payment of obligations because Negotiable Instruments do not have
legal tender power. However, the SC held that a tender of a check (even a personal check) to exercise a
right to redeem is valid.
In other words, a check is NOT legal tender. But in a specific instance, mere tender of a check (while not
considered payment until encashed, deposited, or credited to the creditor’s account) is considered a valid
overt act of exercising a right to redeem (perhaps in relation to redemption in foreclosure proceedings of
mortgages), even if not yet encashed so as to consider the redemption as timely made.

5. When payable to bearer (Section 9, NIL)

NI is payable to bearer when:
a. It is written expressly as payable to bearer. [e.g. Pay to Bearer]
b. It is written as payable to a person named therein or bearer. [e.g. Pay to Juan or Bearer]
c. It is made payable to a fictitious person, and such fact was known to the Maker/Drawer. [e.g.
Pay to Batman; Pay to Juan Dela Cruz (as long as the maker intended it to be fictitious even if a
man named Juan dela Cruz truly existed]
d. It is made payable to a payee which does not purport to be the name of any person. [e.g. Pay to
CASH]
e. When the only or last indorsement is an indorsement in BLANK. [e.g. Pay to John or Order, and
the last indorsement is a blank indorsement only]
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6. …When the NI is payable out of a particular fund? Or when it is reimbursable out of a particular fund?
A NI is deemed unconditional EVEN IF it is provided to be reimbursable from a particular fund. The
moment a particular fund is indicated from where the funds are to be sourced, the instrument is impliedly
subject to the condition that the particular fund is sufficient. (Section 3, NIL)

7. ..NI to be issued for a valuable consideration =Discuss.

 NI, like all other contracts, is presumed by law to be issued for consideration. Hence, every party who
signed therein is presumed to have been a party for value. [i.e. they got something out of the
instrument]. The presumption is not conclusive, however. [Section 24, NIL]

 Value can be anything, such as a prior or pre-existing debt, regardless if payable on demand or at a
fixed or determinable future time. [Section 25, NIL]

 Once a holder acquires the instrument for value, meaning he paid someone to get the instrument, he is
regarded as a Holder for Value for all the predecessors-in-interest (prior holders) of the person he paid.
[e.g. A issued a PN to B. B negotiated it to C. C negotiated it to Denver. Denver negotiated it to Eric. Eric
is considered a holder for value since he paid Denver for the PN. He is considered by law to be a holder
for value from the perspective of A, B, C, even if Eric never actually paid A, B, or C for the PN.] [Section
26, NIL]
 If instead Eric was given the PN only for half of the amount as security for the personal loan
of Denver, Eric is deemed as a holder for value only to the extent of the lien which is one-half
of the amount)

 An accommodation party is made by law expressly liable, even if he himself did not acquire anything of
value for his accommodation. This peculiar instance, where a person apparently lends his
name/signature to his friend to accommodate the friend, is made by law expressly liable. Therefore, an
accommodation party cannot raise the defense of want of consideration by reason that he only
accommodated the friend. [Section 29, NIL]

 IN ALL INSTANCES, TAKE NOTE THAT LACK OF CONSIDERATION IS ONLY A PERSONAL DEFENSE.
[Section 28, NIL]
 The practical import of this, is that this defense is useless if the holder is a Holder in Due
Course.

8. ..Date of NI is not essential except..?

 The instrument need not be dated to be negotiable, since it is not one of the requisites of a negotiable
instrument. [Section 6(a), NIL]

 However, if the NI is made payable on a determinable future time, and the said time may be determined
ONLY in relation to the date the instrument was made, then the date is essential for it to be
negotiable. Otherwise, there would be no way to know when the instrument will mature. (e.g. Pay to
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NEGOTIABLE INSTRUMENTS LAW

Bearer only after six months after execution of this instrument; OR Pay to Bearer only if the instrument
is presented six months after sight)
 In particular, the date of the NI is essential only if the maturity date of the said NI
depends on the same. [page 24, Sundiang-Aquino]
 In this case, if the date is stated as “July 5”, without stating the year, then the
instrument becomes non-negotiable as it will not meet the requirement of being
payable at a determinable future time.

9. Forgery: When a signature is FORGED or even if genuine if made without consent, that signature is
WHOLLY INOPERATIVE, and the holder has no right to retain, discharge, enforce; UNLESS the forged
signatory is precluded from setting up the defense of forgery/want of authority. What are the exceptions?
Distinguish the Liabilities and Rules in Forgery vs. Alteration.
 FORGERY is the most well-known REAL/ABSOLUTE DEFENSE in NIL.

 There are certain examples of Forgeries, such as:

1. When the signature is totally forged, and untrue.
2. It is a Genuine Signature, but made without consent. (e.g. signed by a person who is not so
authorized by the entity such as an officer/agent of a corporation or juridical entity, or a
secretary of a person) [Section 23, NIL]

 The exceptions are: [page 38, Sundiang-Aquino]

 Those who warrant the instrument such as the acceptor-drawee, or the indorsers
 Those who ratified the forged instrument, expressly or impliedly
 Those who were negligent.
 The SC has held that a person who negligently placed complete trust in his secretary the
blank checks, and failed to check on the status of these checks, and allowed the payees to
encash them, then the consequences of the unauthorized acts of the secretary is
attributable to him and he is made responsible therefore. (Ilusorio v. CA, 2002)
 The SC has held that the acceptor-drawee who fails to detect the forged signature of the
drawer is made responsible for negligence (especially if it’s a bank) and it cannot pass the
blame to the drawer’s negligence in leaving the checks exposed to thieves, since by
accepting the instrument the bank warrants all prior signatures as genuine. (Traders
Royal Bank v. RPN, 2002)

 DISTINGUISH FORGEY AND ALTERATION.

 These two are both REAL/ABSOLUTE DEFENSES, which cannot be defeated by being a Holder
in Due Course.
 In FORGERY, only the signature is inoperative, whereas in MATERIAL ALTERATION, the
instrument itself is rendered void. (Section 23, 124, NIL)
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 In FORGERY, the signature of one of the parties is totally false, whereas in MATERIAL
ALTERATION, the instrument is changed as to the Date, Sum payable, Time or place of payment,
Number of parties, Currency of payment, or Adds a place of payment where none is specified,
or any Other change or addition which changes the instrument in any respect. SHORTCUT: See
if the change affects any of the requisites of negotiability. (Section 125, NIL; PNB v. CA) KEY:
DSTNCAO

 As regards a Holder in Due Course (HDC), the party whose signature was forged or anyone prior
to him, as well as the ones who did not take part in the alteration is totally relieved of liability
on the NI, but it differs as to the extent they can assert liability on the NI. In FORGERY, they can
enforce the instrument against the forger and the subsequent indorsers in the whole amount of
the instrument, whereas in a material alteration, the HDC can enforce the instrument IN ITS
ORIGINAL TENOR ONLY against the parties who altered and those subsequent indorsers.

10. When is a NI payable to ORDER? Discuss the liabilities of parties, also the cut-off rule?
An NI is payable to ORDER only in the following instances: (Section 8, NIL)
a. If the note or bill is made expressly so payable to the order of a specified person. (e.g. Pay to the
order of A)
b. If the note or bill is made payable to a specific person, or his order. (e.g. Pay to A or order)
The payees, who must be named or otherwise indicated therein with reasonable certainty (similar to
requirements for a drawee), also must be:
a. A payee who is not a maker, drawer, drawee; or
b. The drawer or maker; or
c. The drawee; or
d. Two or more payees jointly; or
e. One or some of several payees; or
f. The holder of an office for the time being.
The liabilities are highlighted above already.
 The cut-off rule pertains to the rule where the liability of parties are changed when a forgery or material
alteration is made, such that the party whose signature is forged, as well as all the prior parties from
him becomes absolved of liability on the instrument. The same applies to the parties prior to the party
who made a material alteration of the instrument. In such instances, the only ones who can be made
liable on the note are all subsequent parties/indorsers from the point of forgery or material alteration.

11. General Rule: When is Holder of NI is presumed as Holder in Due Course? Exceptions.
Discuss NEGOTIATION (transfer from 1 person to another=order vs. bearer; Presentment for payment (to
charge persons secondarily liable); Liabilities of parties (Maker; Drawer; Acceptor / Drawee; Indorser)
Discharge of NI:
a. Payment by Principal
b. Payment by Accommodation Party
c. Intentional Cancellation
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d. Other modes
i. Novation
ii. Prescription
iii. Set-off (legal compensation)
iv. Renunciation (same as condonation)

A Holder is always presumed prima facie to be a HOLDER IN DUE COURSE (HDC). The rights of a holder
in due course is given to a real holder in due course, OR to a holder who traces his title thereto from a
Holder in Due Course himself, as long as he is not a party to the fraud or illegality of the instrument.
(Section 58, NIL)

The party assailing the status of a holder must prove that the Holder being assailed traced his title thereto
from a party who has a defect in acquisition. (Section 59, NIL) (e.g. A issued a PN to B. B to C. C to D. D to
E. If A refuses to honor the PN in the hands of E, he must prove that there was a defect in the title of either
C, or D. After this, the burden of evidence now shifts to E to prove he is a Holder in Due Course.)

The requisites of a HDC are: (Section 52, NIL) KEY: COVN

(a) The instrument is Complete and regular on its face.
(b) The holder acquired the NI before it was Overdue, or without notice that it had been previously
dishonored, if such was the case.
(c) The holder is in good faith and for Value;
(d) At the time it was negotiated to him, he had no Notice of any infirmity or defect in the title
of the person negotiating it to him.

EXCEPTIONS: A Holder will not be deemed a HDC if:

(a) The instrument payable on demand was negotiated an unreasonable length of time after its
issuance. (Section 53, NIL)
(b) If after paying a certain amount of value of the note but prior to paying the full amount for
the note, the holder becomes aware of an infirmity or defect in the title of the person
negotiating it to him, he is deemed a HDC only as to the value of the note he paid prior to
having knowledge of the same. (Section 54, NIL)

NEGOTIATION is the act of transferring a NI in such a way as to constitute the recipient as a holder thereof,
with the view of extinguishing or fulfilling an obligation. [i.e. merely handing it over to someone, such as
an agent, is not negotiation and the presumption of existence of consideration will not apply] (page 27,
Sundiang-Aquino)
 Negotiation of a Bearer instrument is completed by mere delivery.
 Indorsing a Bearer instrument is superfluous. It will not affect the negotiation thereof,
but will expose the indorser to the warranties of a general indorser to a subsequent
holder. (Sec. 65, 66, NIL; page 50, Sundiang-Aquino)
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 Negotiation of an Order instrument requires both delivery AND indorsement.

 Indorsement must be a signature in writing, on the instrument itself. Otherwise, it will
be a mere assignment if made on a separate document.
 The difference between an indorsement and assignment, is that a proper indorsement
will result in the negotiation of the NI, whereas an assignment will only transfer the right
of the predecessor to the transferee.
 Proper negotiation will give the transferee all the rights available under the NIL, first and
foremost being that he can be deemed a HDC and be immune to personal defenses.

 For a Promissory Note, Presentment for Payment is the first step which must be done within the
required period to the Maker (primarily liable), followed by a notice of dishonor to the proper
parties (the indorsers), in order to charge the latter (indorsers are secondarily liable). (Section
70, 89, NIL; pages 52-53, Sundiang-Aquino)

 For a Bill of Exchange, the instrument must be Presented for Acceptance. (Section 143, 89, NIL;
page 53, Sundiang-Aquino)
 In case of dishonor by the drawee (primarily liable), the notice of dishonor must be sent
to the indorsers and the drawer (who are secondarily liable).

 Presentment for Payment/Acceptance is not required in the following instances:

(1) As to the drawer, where he has no right to expect that the drawee will pay the
instrument. (Section 79, NIL)
(2) As to the indorser, where the instrument was made or accepted for his accommodation
and he has no reason to expect that the instrument will be paid when presented.
(Section 80, NIL) (e.g. If A signed a PN to accommodate his friend, B, and B appears on
the PN as an indorser, then even though the law considers the accommodation party as
primarily liable, B who is technically the true maker cannot hide behind the veil that the
instrument must be presented first to the accommodation party. In this instance, he is
also primarily liable even without prior presentment for payment/acceptance)
(3) Where dispensed with as where, after exercise of due diligence, presentment cannot be
made; or where the drawee is a fictitious person; and by waiver of presentment,
whether express or implied. (Section 82, NIL)
(4) When the instrument has been dishonored by non-acceptance. [note: this particular
instance only applies to a Bill of Exchange)

12. BP 22 (Bouncing Checks Law) = are checks considered NI?

Yes, checks are Negotiable Instruments, being an example of a bill of exchange where the drawee is a bank,
and the check must be drawn on a deposit, and must be presented for payment/acceptance within a
reasonable time after its issue. (Section 186, NIL)
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13. BP 22 elements =
The elements are:
(1) A check has been drawn to be applied on account or for value;
(2) The drawer knows at the time of issuance that he does not have sufficient funds in credit with
the drawee bank for payment of the check in full upon presentment;
(3) The check is subsequently dishonored by the bank for insufficiency of funds; or would have been
dishonored for the same reason had not the drawer, without any valid reason, ordered the bank
to stop payment.

14. ..Requirements of BP 22.

BP 22 prosecution must prove:
(1) A person makes, draws or issues a check as payment for account or for value;
(2) That the check was dishonored by the bank due to a lack of funds, insufficiency of funds or
account already closed;
(3) The payee or holder of such check gives written notice of dishonor and demand for payment;
and
(4) That the maker, drawer or issuer, after receiving such notice and demand, refuses or fails to pay
the value of the check within FIVE BANKING DAYS.

15. Estafa/Swindling in Bouncing Checks, in relation to RPC 315, 2(D) = Elements

Estafa in bouncing checks are separate crimes/offenses.
 Estafa can be committed when a person defrauds another through the false pretense of issuing a
worthless check prior to or simultaneously with the commission of the fraud.

 The offense under BP 22 is penalized for the mere issuance of a worthless check, regardless of the
underlying obligation.

 The only similar element is the fact that a worthless check was issued. The difference is in Estafa, an
obligation was contracted simultaneously with or prior to the issuance of the check, and damage was
caused to the party with him either parting with his money or property in consideration of the check.
Being an offense mala in se, malice or deceit is required to be proved. Good faith can be a defense.

 In contrast, BP 22 punishes the mere issuance of a worthless check. It being a malum prohibitum,
performing the prohibited act is enough for conviction, and good faith is not a defense.

 Both of these are continuing offenses, by virtue of the “knowledge” requisite that the checks are
worthless (common to both).
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16. Crime of Estafa under RPC 315, 2(D) is committed by the Drawer/Issuer who deceives the offended
party/Payee into parting with his property/cash? Explain.
Yes. Estafa by the false pretense of issuing a worthless check requires in addition to the element of a
worthless check, that the same be issued in payment for an obligation contracted simulatenously with the
commission of the fraud, so as to induce the party to part with his property/cash. This latter part, whereby
the victim was induced to part with his property or cash, is the essential element/requisite of damage.

17. Venue = shall be instituted in the city/municipality where the offense was in part committed = Research
Being a continuing offense, the venue and consequently the jurisdiction over the offense is the MTC. Venue
in BP 22 cases is determined by the place where the elements of making, issuing, or drawing of the check,
delivery thereof, deposited (or presented for encashment) or dishonored occurred. (Morillo v. People,
GR 198270, December 09, 2015)

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