NEGOTIABLE INSTRUMENTS LAW (ACT NO. III.

Requisites of Negotiability (Section 1)

2031) Reviewer
A negotiable instrument must:
1.​ Be in writing and signed by the maker or
I. Definition of a Negotiable Instrument drawer.
A negotiable instrument is a written contract for the 2.​ Contain an unconditional promise or order
payment of money intended as a substitute for to pay.
money and passes from one person to another in 3.​ Be for a sum certain in money.
such manner as to give a holder in due course the 4.​ Be payable on demand or at a fixed or
right to hold the instrument free from defenses determinable future time.
available to prior parties. 5.​ Be payable to order or to bearer.
6.​ If addressed to a drawee, the drawee must
Governing Laws be named or otherwise indicated with
●​ Negotiable Instruments Law (Act No. 2031) reasonable certainty.
●​ Civil Code
●​ Code of Commerce Important
All requisites must appear on the face of the
Important Principles instrument.
●​ A negotiable instrument is not legal tender.
●​ It is merely a substitute for money.
●​ Delivery of a negotiable instrument does not IV. Unconditional Promise or Order
by itself constitute payment.
●​ Payment occurs when: The promise or order to pay must be unconditional.
○​ The instrument is cashed; If payment depends on a contingency, the
○​ Through the fault of the creditor, the instrument is non-negotiable.
instrument is impaired; or
○​ In the case of a check, when the
amount is cleared and credited to V. Sum Certain in Money
the creditor's account.
The amount remains certain even if:
1.​ Interest is included.
II. Rules of Construction 2.​ Payment is by installments.
3.​ There is an acceleration clause.
In case of ambiguity: 4.​ Payment is in legal tender or foreign
1.​ Words prevail over figures. currency.
2.​ Written provisions prevail over printed 5.​ Attorney's fees and costs of collection are
provisions. provided.
3.​ Interest runs from the date of the
instrument.
4.​ If the instrument is undated, interest runs VI. Time of Payment
from the date of issue.
5.​ If there is doubt whether the instrument is a Payable on Demand
bill or a note, the holder may treat it as An instrument is payable on demand when:
either. 1.​ It expressly states that it is payable on
6.​ Persons signing an instrument containing demand, at sight, or upon presentation.
the words "I promise to pay" are jointly and 2.​ No time for payment is expressed.
severally liable. 3.​ It is issued, accepted, or indorsed after
maturity.
Payable at a Determinable Future Time to pay on demand or at a fixed or determinable
An instrument is payable at a determinable future future time a sum certain in money to order or
time when it is payable: bearer.
●​ At a fixed period after date; or
●​ At a fixed period after sight or presentment. Parties
●​ Maker
●​ Payee
VII. Order Instruments and Bearer Instruments
Liability
Order Instrument The maker is primarily liable.
An instrument is payable to order when it is payable
to the order of a specified person. B. Bill of Exchange
Examples: An unconditional order in writing addressed by one
●​ Pay to the order of Juan Dela Cruz. person to another, signed by the drawer, requiring
●​ Pay to the order of the payee. the drawee to pay on demand or at a fixed or
●​ Pay to the order of the drawer or maker. determinable future time a sum certain in money to
●​ Pay to the order of two or more payees order or bearer.
jointly. Parties
●​ Drawer
Negotiation of an Order Instrument ●​ Drawee
Requires: ●​ Payee
1.​ Indorsement; and ●​ Acceptor (usually the drawee after
2.​ Delivery. acceptance)

Bearer Instrument Liability

An instrument is payable to bearer when: ●​ Acceptor is primarily liable.
1.​ It expressly states that it is payable to ●​ Drawer is secondarily liable.
bearer.
2.​ It is payable to a named person or bearer. C. Check
3.​ It is payable to a fictitious or non-existing A bill of exchange drawn on a bank and payable on
person known by the maker to be fictitious demand.
or non-existing.
4.​ The name of the payee does not purport to
be the name of any person. IX. Completion and Delivery
For a negotiable instrument to create liability:
Fictitious Payee Rule 1.​ It must be complete.
If the payee is fictitious or was never intended to 2.​ It must be delivered.
receive the proceeds, the instrument is treated as a
bearer instrument. Date
A date is not an essential requisite of negotiability.
Negotiation of a Bearer Instrument However, it is important to determine:
Requires only delivery. ●​ Commencement of interest;
●​ Maturity;
●​ Reasonable period for presentment.
VIII. Kinds of Negotiable Instruments

A. Promissory Note X. Signature

An unconditional promise in writing made by one As a general rule:
person to another, signed by the maker, engaging
Only persons whose signatures appear on the 2.​ Holds the instrument free from defects of
instrument are liable. title of prior parties.
3.​ May enforce payment for the full amount.
Exceptions 4.​ May sue on the instrument.
1.​ Signing in a trade name or assumed name.
2.​ Principal bound through a duly authorized
agent. XIII. Presentment for Payment
3.​ Forger.
4.​ Acceptor signing a separate acceptance. Presentment is the exhibition of the instrument to
the person primarily liable for payment.

XI. Forgery Requirements

1.​ Made by the holder or authorized agent.
Definition 2.​ At a reasonable hour.
Forgery is the counterfeit making or fraudulent 3.​ On a business day.
alteration of a writing, usually a signature. 4.​ At the proper place.
5.​ To the person primarily liable.
General Rule
A forged signature is wholly inoperative.
XIV. Dishonor
Exception An instrument is dishonored when payment or
When the party against whom enforcement is acceptance is refused.
sought is precluded from setting up forgery or want
of authority. Effect
Notice of dishonor must be given to parties
Forged Drawer's Signature secondarily liable, such as:
The drawee bank is liable because it is bound to ●​ Drawer
know the signature of its depositors. ●​ Indorsers

Forged Payee's Signature

The drawee bank is likewise liable because it has XV. Discharge of a Negotiable Instrument
the duty to pay only the proper payee. Discharge releases all parties from liability and
renders the instrument no longer negotiable.

XII. Holder in Due Course (HDC) Modes of Discharge

1.​ Payment by the principal debtor.
Requisites 2.​ Payment by the accommodated party.
The holder must: 3.​ Intentional cancellation.
1.​ Take the instrument complete and regular 4.​ Any act that discharges an ordinary money
on its face. obligation (e.g., remission, novation,
2.​ Become holder before it is overdue. merger, payment).
3.​ Take it in good faith and for value.
4.​ Have no notice of any defect or infirmity.

Rights
An HDC:
1.​ Holds the instrument free from personal
defenses.