Negotiable Instruments

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Section 1. Form of negotiable instruments.

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An instrument to be negotiable must conform to the following requirements:

(a) It must be in writing and signed by the maker or drawer;

(b) Must contain an unconditional promise or order to pay a sum certain in money;

(c) Must be payable on demand, or at a fixed or determinable future time;

(d) Must be payable to order or to bearer; and

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

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Sec. 52. What constitutes a holder in due course.

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A holder in due course is a holder who has taken the instrument under the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.

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Sec. 29. Liability of accommodation party.

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An accommodation party is

a) one who has signed the instrument as maker, drawer, acceptor, or indorser,

b) without receiving value therefor, and
c) for the purpose of lending his name to some other person.

Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party.

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Who is a holder of an order instrument

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a) He must be a payee or endorsee and
b) in possession of the instrument

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Who is a holder of a bearer instrument

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One who is n possession of the instrument

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Sec. 2. What constitutes certainty as to sum. - The sum payable is a sum certain within the meaning of this Act, although it is to be paid:

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(a) with interest; or

(b) by stated installments; or

(c) by stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; or

(d) with exchange, whether at a fixed rate or at the current rate; or

(e) with costs of collection or an attorney's fee, in case payment shall not be made at maturity.

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Installments must be:

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a) stated and
b) the maturity of each installment must be fixed and determinable

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Sec. 3. When promise is unconditional. - An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with:

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(a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or

(b) A statement of the transaction which gives rise to the instrument.

But an order or promise to pay out of a particular fund is not unconditional.

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Sec. 4. Determinable future time; what constitutes.

An instrument is payable at a determinable future time, within the meaning of this Act, which is expressed to be payable:

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(a) At a fixed period after date or sight; or

(b) On or before a fixed or determinable future time specified therein; or

(c) On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain.

An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect.

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Sec. 6. Omissions; seal; particular money. - The validity and negotiable character of an instrument are not affected by the fact that:

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(a) it is not dated; or

(b) does not specify the value given, or that any value had been given therefor; or

(c) does not specify the place where it is drawn or the place where it is payable; or

(d) bears a seal; or

(e) designates a particular kind of current money in which payment is to be made.

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Remedy if an instrument is not dated

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Sec. 13. When date may be inserted. - Where an instrument expressed to be payable at a fixed period after date is issued undated, or where the acceptance of an instrument payable at a fixed period after sight is undated, [any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly].

The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course; but as to him, the date so inserted is to be regarded as the true date. [PERSONAL DEFENSE]

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Sec. 5. Additional provisions not affecting negotiability. - An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. But the negotiable character of an instrument otherwise negotiable is not affected by a provision which:

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(a) authorizes the sale of collateral securities in case the instrument be not paid at maturity; or

(b) authorizes a confession of judgment if the instrument be not paid at maturity; or

(c) waives the benefit of any law intended for the advantage or protection of the obligor; or

(d) gives the holder an election to require something to be done in lieu of payment of money.

But nothing in this section shall validate any provision or stipulation otherwise illegal.

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Does a mortgage or pledge securing the obligation affect its negotiability?

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Gen Rule: No
Exception: Promise/order to pay is subject to the T&C of the collateral agreement (required the examination of another document)

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Does an additional act affect the instrument's negotiability?

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Gen Rule: Yes
Exception - If the election is given to the holder.

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Two ways to make an instrument payable to order

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1) pay to him or his order (pay to X or order)
2) payable to the order of X (pay to the order of X)

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Sec. 7. When payable on demand. - An instrument is payable on demand:

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(a) When it is so expressed to be payable on demand, or at sight, or on presentation; or

(b) In which no time for payment is expressed.

Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand.

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Sec. 8. When payable to order. - The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of:

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(a) A payee who is not maker, drawer, or 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.

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Sec. 9. When payable to bearer. - The instrument is payable to
bearer:

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(a) When it is expressed to be so payable; or

(b) When it is payable to a person named therein or bearer; or

(c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or

(d) When the name of the payee does not purport to be the name of any
person; or

(e) When the only or last indorsement is an indorsement in blank.

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Requisites if the instrument is payable tot he order of a ficticious or non-existing person.

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1) The payee must be fictitious or non-existent.
2) The one making the instrument or the drawer(?) must know him to be fictitious or non-existent.

Hence, a fictitious person may be a real one.

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How is an order instrument negotiated?

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a) By indorsement AND
b) delivery

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How is an instrument indorsed in blank

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a) holder merely signs the instrument
b) indorsee is not specified

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When does the holder acquire title to the instrument when said instrument is ante-dated or post-dated?

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Date of delivery

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Sec. 14. Blanks; when may be filled. [INCOMPLETE AND DELIVERED]

2 Situations contemplated in section 14

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1) [Where the instrument is wanting in any material particular], the person in possession thereof has a prima facie authority to complete it by filling up the blanks therein.

2) [And a signature on a blank paper delivered by the person making the signature] in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount.

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Requisites in that any such instrument described in Sec. 14 may be enforced against any person who became a party thereto prior to its completion,

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a) it must be filled up strictly in accordance with the authority given AND
b) within a reasonable time.

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Liability if the instrument described in section 14 is not filled out in accordance with the authority given to him.

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Holder in due course: But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. [ONLY A PERSONAL DEFENSE]

Not a holder in due course: Can't enforce the instrument against a party prior to the completion. However, the person who placed the amount is liable because he is the one at fault and he is an indorser as well.

Subsequent indorsers are liable because of their warranties.

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Sec. 15. Incomplete instrument not delivered.

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Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery. [REAL DEFENSE]

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Who are liable under Section 15?

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The forger and the subsequent parties who indorsed the instrument.

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Presumption in Sec. 16 COMPLETE AND UNDELIVERED

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Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. other than a holder in due course.

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What must be proved in order for delivery to be effectual in accordance with Sec. 16?

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As between immediate parties and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be. [MERELY PRIMA FACIE]

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How may the presumption of delivery in section 16 be rebutted?

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It may be proved that:
a) no delivery was made
b) delivery was not authorized
c) if delivery was authorized, that it was conditional or for a special purpose (for safe keeping or collection).

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What is the presumption of delivery of a holder in due course in Sec. 16?

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Presumption of delivery is CONCLUSIVE until the contrary is proven

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Sec. 17. Construction where instrument is ambiguous. - Where the language of the instrument is ambiguous or there are omissions therein, the following rules of construction apply:

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(a) Where the sum payable is expressed in words and also in figures and there is a discrepancy between the two, the sum denoted by the words is the sum payable; but if the words are ambiguous or uncertain, reference may be had to the figures to fix the amount;

(b) Where the instrument provides for the payment of interest, without specifying the date from which interest is to run, the interest runs from the date of the instrument, and if the instrument is undated, from the issue thereof;

(c) Where the instrument is not dated, it will be considered to be dated as of the time it was issued;

(d) Where there is a conflict between the written and printed provisions of the instrument, the written provisions prevail;

(e) Where the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election;

(f) Where a signature is so placed upon the instrument that it is not clear in what capacity the person making the same intended to sign, he is to be deemed an indorser;

(g) Where an instrument containing the word "I promise to pay" is signed by two or more persons, they are deemed to be jointly and severally liable thereon.

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Sec 17 applies only when

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a) the language is ambiguous
b) there are omissions

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What are the exceptions to sec 18 which stated that a person can't be liable if his signature does not appear in the instrument

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a) duly authorized agent
b) forger
c) signs on a paper separate from the instrument
d) signs under an assumed or trade name
e) negotiated by mere delivery (may still be held liable for breach of warranty)

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Sec 20 [SIGNATURE BY PROCURATION] Requisites in order to bind the principal with regard to the contract signed by the agent

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a) duly authorized
b) acting within his scope and authority
c) principal is disclosed
d) used appropriate words to indicate that he is only acting as a representative

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Can a holder in due course enforce his claim against a minor?

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No. Want of capacity [REAL DEFENSE]

Maker can't raise the incapacity of minor [PERSONAL DEFENSE OF THE MINOR]

The same goes for a corporation

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What are the rights that are not acquired when a signature is forged in accordance with Sec 23.

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a) right to retain the instrument
b) right to give a discharge for the instrument
c) right to enforce payment

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What does section 23 refer to?

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The forged signature and not the instrument

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Despite forgery, who may still be held liable?

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a) those who are barred by estoppel (admit, slient or negligent)
b) warrantors
c) where the signature is not necessary for the acquisition of the 3 rights (e.g. bearer instrument)

The maker may not be held liable even if the holder is a holder in due course because his signature is inoperative. This does not apply to a BEARER instrument since no signature is needed.

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Who bears the loss if the bank did not notice the forged signature?

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Drawee bank provided that the Drawer did not act NEGLIGENTLY. There is a contractual duty of the bank to know the signature of it client

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Sec. 125. What constitutes a material alteration

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Any alteration which changes:

(a) The date;

(b) The sum payable, either for principal or interest;

(c) The time or place of payment:

(d) The number or the relations of the parties;

(e) The medium or currency in which payment is to be made;

(f) Or which adds a place of payment where no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect, is a material alteration.

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In case of material alteration, may it be enforced? (Sec. 124.)

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Holder in due course:
a) It may be endorsed against any party prior to the alteration according to its original tenor.

b) It may be enforced according to its altered tenor against the one who made the alteration and the subsequent parties (warranty)

Not a holder in due course:
a) payment can't be enforced against any party prior to its alteration (REAL DEFENSE)

b) It may be enforced according to its altered tenor against the one who made, authorized or assented to the alteration and the subsequent indorsers

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Sec. 32. Indorsement must be of entire instrument. - The indorsement must be an indorsement of the entire instrument.

What are the indorsements that Sec. 32. preclude?

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1) An indorsement which purports to transfer to the indorsee a part only of the amount payable, or

2) which purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the instrument.

Exception: But where the instrument has been paid in part, it may be indorsed as to the residue.

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Distinguish lack or absence of consideration from failure of consideration.

To whom can these defenses be set up?

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Absence of consideration - Total lack of any valid consideration

Failure of consideration - Neglect or failure of one of the parties to perform the consideration agreed upon

Both are PERSONAL defenses can be raised against immediate parties but NOT against HOLDERS IN DUE COURSE

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M issued a note to P w/o giving any consideration. P paid 500 for accommodating him. Is M w/o consideration?

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Yes. The 500 is consideration for lending his name and not by reason of the instrument

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Can a company be an accommodation party?

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No. Indorsements without approval are ultra vires acts.

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Is an accommodation party primarily or secondarily liable?

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a) If he signs as acceptor drawee, he is primarily liable

b) If he signs as maker/drawer, he is secondarily liable

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What do general indorsers warrant?

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The solvency of prior parties

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Sec. 36. When indorsement restrictive. - An indorsement is restrictive which either:

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(a) Prohibits the further negotiation of the instrument; or (No title is passed. Merely becomes an agent)

(b) Constitutes the indorsee the agent of the indorser; (No title is passed. Merely becomes an agent) or

(c) Vests the title in the indorsee in trust for or to the use of some other persons.
But the mere absence of words implying power to negotiate does not make an indorsement restrictive.
(title is passed)

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Sec. 47. Continuation of negotiable character. - An instrument negotiable in its origin continues to be negotiable until it has been:

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a) restrictively indorsed or

b) discharged by payment or otherwise.

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Sec. 37. Effect of restrictive indorsement; rights of indorsee. - A restrictive indorsement confers upon the indorsee the right:

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(a) to receive payment of the instrument;

(b) to bring any action thereon that the indorser could bring;

(c) to transfer his rights as such indorsee, where the form of the indorsement authorizes him to do so.

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When is a qualified indorser (Sec. 38) liable?

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Instrument is dishonored by non-acceptance or non-payment due to

a) forgery

b) lack of good title

c) lack of capacity

d) at the time of indorsement, the instrument was valueless or not valid and he knew of such fact

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Rights of a transferee for value

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a) acquire the rights of his transferor (if a defense is available against the transferor, the defense is available against the transferee as well)

b) right to require the transferor to indorse the instrument

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Sec. 50. When prior party may negotiate instrument.

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Where an instrument is negotiated back to a prior party, such party may, subject to the provisions of this Act, reissue and further negotiable the same. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable.

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Sec. 41. Indorsement where payable to two or more persons.

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General Rule: Where an instrument is payable to the order of two or more payees or indorsees, all must indorse

exception:
a) partners
b) the one indorsing has authority to indorse for the others.

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Sec. 51. Rights of holder

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The holder of a negotiable instrument may
a) sue thereon in his own name; AND
b) receive payment, and if payment is in due course, the instrument is discharged

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Payment in due course

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Payment is made:
a) on or after maturity
b) to the holder
c) in good faith and without notice that his title is defective

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Defenses available to a party not a holder in due course

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a) mistake
b) absence or failure of consideration
c) incapacity or minority
d) lack of authority of the agent

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Rights of a holder in due course

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a) To receive payment and if the payment is in due course, the instrument is discharged

b) To sue in his own name

c) Freedom from any defect of title of prior parties

d) Freedom from defenses available to prior parties among themselves

d) To enforce payment on the instrument for the full amount thereof against all parties liable thereto