NEGOTIABLE INSTRUMENTS LAW(NIL)

bsa22a1

BY PROF. CESAR V. RAMIREZ, CPA. MBA, CESO IV,

FRIACC, BSA PROGRAM CHAIR
 DEFINITION OF A NEGOTIABLE INSTRUMENT
• It comprises mainly of bills of exchange and
promissory notes used as a substitute for money in an
exchange of goods and services in business
transactions.
• Negotiable instruments must comply with the
requisites under Section 1 of the Negotiable
Instruments Law to be negotiable from one person to
another.
 FUNCTIONS OF NEGOTIABLE INSTRUMENTS
• As substitute for money-facilitate trade

• As media of exchange for most commercial transactions-

increase purchasing power with less currencies

• As a medium of credit transactions- creditworthiness of a

person or entity without available cash or property at present.
 CHARACTERISTICS OF NEGOTIABLE
INSTRUMENTS
1. NEGOTIABILITY- transferability from one person to another
like money
2. ACCUMULATION OF CONTRACTS- every transfer,
indorsement and/ or delivery creates a separate and distinct
contract and parties.
Note: In case of doubt as to negotiability, the instrument is
negotiable. The reason is to facilitate the circulation of the
instruments and business transactions.
 INSTRUMENTS WITH LIMITED NEGOTIABILITY
• LETTER OF CREDIT
• TRUST RECEIPT
• TREASURY WARRANT
• POSTAL MONEY ORDER
• BILL OF LADING
• CERTIFICATE OF STOCK
• WAREHOUSE RECEIPT
• PAWN TICKET
Note: These instruments do not meet the requisites of a negotiable
instrument under Section 1; hence non-negotiable; but they are
commonly used in business transactions.
 TYPES OR KINDS OF NEGOTIABLE
INSTRUMENTS
• COMMON TYPES
– PROMISSORY NOTE
– BILL OF EXCHANGE
• SPECIAL TYPES
– CERTIFICATES OF DEPOSITS
– DUE BILLS
– BANK NOTES
– BONDS
– DRAFTS
– TRADE ACCEPTANCES
– BANKER’S ACCEPTANCES
 REQUISITES OF NEGOTIABLE INSTRUMENTS
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.
Source: Section 1, Negotiable Instruments Law
 FORMAL REQUISITES EXPLAINED
• It must be in writing- handwritten in pen or pencil, typewritten,
printed in durable paper. The signature is normally indicated on
the lower right portion of the document, but it can be place
anywhere. The signature is an evidence that the one who signs
the instrument is bound and committed to pay it.
• Contain an unconditional promise or order to pay. It is only
either a promise to pay or order to pay without any condition.
• Sum certain in money- cash of legal tender generally accepted
as medium of exchange including foreign currencies. Gold and
silver are not sum certain in money.
 FORMAL REQUISITES EXPLAINED
• Payable on demand or at a fixed or determinable future time.
Sight instrument payable upon presentation of the holder.
• Payable at fixed or determinable future time, e.g., 30 days
after date or 20 days after delivery.
• Payable to order- payee who is not the maker, drawer, or
drawee; the drawer or maker; the drawee; two or more
payees jointly; one or more of several payees; or the holder of
an office for the time being. The payee must be named with
reasonable certainty if the instrument is payable to order. (Sec.
8, NIL)
 FORMAL REQUISITES EXPLAINED
• Payable to bearer- when expressed to be so payable;
when it is payable to a person named therein or
bearer; when it is payable to the order of a fictitious
or non-existing person, and such fact is known to the
person making it so payable; when the name of the
payee does not purport to be the name of any
person; when the only or last indorsement is an
indorsement in blank. (Sec. 9, NIL)
 CERTAINTY OF THE SUM; WHAT CONSTITUTES
• The sum payable is a sum certain within the meaning of this
Act, although it is to be paid-
– With interest; or
– By stated installments; or
– By stated installments with a provision that, upon default in payment
of any installment or of interest, the whole shall become due; or
– With exchange, whether at a fixed rate or at the current rate; or
– With costs of collection or an attorney’s fee, in case payment shall
not be made at maturity. (Sec. 2, NIL)
 WHEN PROMISE IS UNCONDITIONAL
• An unqualified order or promise to pay is unconditional
within the meaning of this Act though coupled with-
– 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
– A statement of the transaction which gives rise to
the instrument; or
• But an order or promise to pay out of a particular fund
is not unconditional. ( Sec 3, NIL)
 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-
– At a fixed period after date, or sight; or
– On or before a fixed or determinable future time specified therein;
or
– 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.
 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-
– Authorizes the sale of collateral securities in case the instrument be not paid at
maturity; or
– Authorizes a confession of judgment if the instrument be not paid at maturity; or
– Waives the benefit of any law intended for the advantage or protection of the
obligor; or
– 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. (Sec. 5, NIL)
 OMISSION, SEAL, PARTICULAR MONEY
• The validity and negotiable character of an instrument are not
affected by the fact that –
– It is not dated;
– Does not specify the value given, or that any value has been given
therefor;or
– Does not specify the place where it was drawn or the place where it is
payable;or
– Beats a seal; or
– Designates a particular kind of current money in which it is to be paid.
• But nothing in this section shall alter or repeal any statute requiring
in certain cases the nature of consideration to be stated in the
instrument.(Sec. 6, NIL)
 WHEN PAYABLE IN DEMAND
• An instrument is payable on demand
– Where it is expressed to be payable on demand, or
at sight, or on presentation; or
– In which no time for payment is expressed.
• Where an instrument is issued, accepted, or indorsed
when overdue, it is a regards the person so issuing,
accepting or indorsing it, payable on demand.
 TERMS, WHEN SUFFICIENT
• Where the instrument or an acceptance or any indorsement
thereon is dated, such date is deemed prima facie to be the
true date of the making, drawing , acceptance, or
indorsement, as the case may be. (Sec. 11, NIL)
• Ante-dated or post-dated instrument-. The instrument is not
invalid for the reason that it is ante-dated or post-dated,
provided that it is not done for illegal or fraudulent purpose.
The person to whom an instrument so dated is delivered
acquires the title there at the time it is delivered. (Sec. 12, NIL)
 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. Sec. 13, NIL.
 BLANKS, WHEN MAY BE FILLED
• When 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. And the signature on 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. In order ,however, that any such instrument,
when completed, may be enforced any person who become a party
thereto prior to its completion, it must be filled up strictly in accordance
with the authority given and within a reasonable time. But if any such
instrument, after completion is negotiated for 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. Sec 14, NIL
 INCOMPLETE INSTRUMENT NOT DELIVERED
• 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.
Sec 15, NIL
 DELIVERY WHEN EFFECTUAL, WHEN
PRESUMED
• Every contract on a negotiable instrument is incomplete and revocable
until delivery of the instrument for the purpose of giving effect thereto. 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; and in such case, the delivery may be
shown to have been conditional, or for a special purpose only, and not for
the purpose of transferring the property in the instrument. But where the
instrument in the hands of a holder in due course, a valid delivery thereof
by all parties prior to him so as to make them liable to him is conclusively
presumed. And where the instrument is no longer in the possession of a
party whose signature appears thereon, a valid and intentional delivery by
him is presumed until the contrary is proved. Sec 16, NIL
 CONSTRUCTION WHERE INSTRUMENT IS
AMBIGUOUS
• Where the language of the instrument is ambiguous or there
are omissions therein, the following rules of construction apply:
– Where the sum payable is expressed in words and also in figures and
there is a discrepancy between the two, the sum denoted in words is
the sum payable; but if the words are ambiguous or uncertain,
reference may be had to the figures to fix the amount.
– Where the instrument provides for the payment of interest, without
specifying the date from which the interest is to run, the interest runs
from the date of the instrument, and if the instrument is undated,
from the issue thereof.
– Where the instrument is not dated, it will be considered to be dated as
of the time it was issued.
 CONSTRUCTION WHERE INSTRUMENT IS
AMBIGUOUS(CONTINUED)
• Where there is a conflict between the written and printed
provisions of the instrument, the written provision prevails.
• Where the instrument is so ambiguous that there is doubt
whether it is a bill or a note, the holder may treat it as either at
his election.
• 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.
• Where an instrument containing the words “ I promise to pay” is
signed by two or more persons, they are deemed to be jointly
and severally liable thereon. Sec 17, NIL
 LIABILITY OF A PERSON SIGNING IN TRADE OR
ASSUMED NAME
• No person is liable on the instrument
whose signature does not appear thereon,
except as herein otherwise expressly
provided. But one who signs in a trade or
assumed name will be liable to the same
extent as if he had signed in his own name.
Sec 18, NIL
 SIGNATURE BY AGENT; AUTHORITY; HOW
SHOWN
• The signature of any party may be made by a duly authorized
agent. No particular form of appointment is necessary for the
purpose and the authority of the agent may be established as
in other cases of agency. Sec 19, NIL
• Liability of person signing as agent, etc. Where the instrument
contains or a person adds to his signature words indicating that
he signs for or on behalf of a principal, or in a representative
capacity, he is not liable on the instrument is he was duly
authorized; but the mere addition of words describing him as a
agent, or is filling a representative character, without disclosing
his principal, does not exempt him from personal liability. Sec
20, NIL
 SIGNATURE BY PROCREATION; EFFECT OF
• A signature by “procreation” operates notice that the
agent has but a limited authority to sign, and the principal
is bound only in case the agent in so signing acted within
the actual limits of his authority. Sec. 21, NIL
• Example:
• Crissalyn Quilapio
• Per, Procuration: Pamela Arquines
• It may be expressed as “per proc.”, “P.P.” or “pp.”
 EFFECT OF INDORSEMENT BY INFANT OR
CORPORATION
• The indorsement or assignment of the instrument by a
corporation or by an infant passes the property therein,
notwithstanding that from want of capacity, the corporation or
infant may incur no liability thereon. Sec. 22, NIL
• Contract entered into by minor is voidable (Art. 1327,1329,1390,
New Civil Code of the Philippines), on his or his guardian’s
preference.
• Ex. Ms Quilapio issues a note payable to the order of Ms. Pamela,
a minor. Pamela indorses the note to Ms. Sison. Ms. Quilapio is
liable to Ms. Sison as the indorsement passes title to Ms. Sison.
• This section applies to a corporation for its ultra vires acts.
 FORGED SIGNATURE; EFFECT
• When a signature is forged or made without the authority of the person
whose signature purports it to be, it is wholly inoperative, or no right
to retain the instrument, or to give a discharge therefor, or to enforce
payment thereof against any party thereto, can be acquired through or
under such signature unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of
authority. Sec 23, NIL
• Forgery is a real defense even against a holder in due course. It cannot
be presumed but must be proven with sufficient and convincing proofs.
• Example: Pamela issued note to his own order and forged Crissa’s
signature. That signature is inoperative and cannot be enforced against
Crissa, even to a holder in due course.
 CONSIDERATION
• Every negotiable instrument is deemed prima facie to have
been issued for a valuable consideration, and every person
whose signature appears thereon to have become a party
thereto for value. Sec 24 NIL
• Value; what constitutes.- Value is any consideration sufficient to
support a simple contract. An antecedent or pre-existing debt
constitutes value; and is deemed such whether the instrument
is payable on demand or at a future time. Sec. 25, NIL
• Example: Crissa sells and delivers a computer to Pamela with
an total amount of P 30,000 and the latter issues a note for P
28,000. In this case there is a valuable consideration.
 WHAT CONSTITUTES HOLDER FOR VALUE
• Where value has at any time been given for the
instrument, the holder is deemed a holder in respect to
all parties who become such prior to that time. Sec. 26,
NIL
• Example: Pamela issues a note to Crissa without
consideration. Crissa indorses it to Angelica also without
consideration. Angelica indorses it to Christien for value.
Under Sec. 26, Christien is a holder for value not only to
Angelica, but also to Crissa and Pamela.
 WHEN LIEN IN AN ISTRUMENT CONSTITUTES
FOR VALUE
• Where the holder has a lien on the instrument arising either
from contract or by implication of law, he is deemed a holder
for value to the extent of his lien. Sec. 27, NIL
• A lien is a security or collateral on debts.
• Example: Crissa makes a note for P 50,000 payable to
Pamela or her order. Pamela pledges the note to Angie to
secure the payment of Pamela’s debt of P 40,000. The note
is indorsed and delivered to Angie by Pamela.
• Angie is a holder for value for P 40,000 which is the amount
of her lien. On maturity, Angie may collect the P 50,000 and
give the P 10,000 to Pamela
 EFFECT OF WANT OF CONSIDERATION
• Absence or failure of consideration is a matter of defense as
against any person not a holder in due course; and partial
failure of consideration is a defense pro tanto whether the
failure is an ascertained and liquidated amount or otherwise.
• Example: Pam makes a note to Crissa to pay for a piece of
non-existing land.
– In this case, there is a absence of consideration between
Pam and Crissa and there will be no recovery can be made
by Crissa from Pam.
 LIABILITY OF ACCOMODATION PARTY
• An accommodation party is one who has signed
the instrument as maker, drawer, acceptor or
indorser, without receiving value therefor, and 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.
 ACCOMODATION PARTY; EXAMPLES
Pam is in bad need of cash for P 50,000 but nobody wants
to lend her. She asks Crissa, a bff, to accommodate her by
issuing a note payable to Pam, without consideration. Pam
indorses the note to BPI which discounts the note because
of Crissa’s credit.
In this case the note is an accommodation note and Crissa
is an accommodation party and Pam the accommodated
party. Pam cannot enforce the note against Crissa should
Pam pay BPI because Pam gave no valuable consideration
to Crissa and she was merely accommodated by Crissa.
END OF PRESENTATION
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