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NEGOTIABLE INSTRUMENTS: INTRODUCTION - Coggle Diagram

- - - - BEARER INSTRUMENTS REQUIRE NO INDORSEMENT TO BE NEGOTIATED WHILE ORDER INSTRUMENTS DO
        Under Sec. 30 of the Negotiable Instruments Law, an order instrument requires an indorsement from the payee or holder before it may be validly negotiated. A bearer instrument, on the other hand, does not require an indorsement to be validly negotiated.
        Federal Corporation v. Antonino, GR 199455, June 27, 2018
        
        LEGAL TENDER DEFINED
        In the Philippines, RA 7653 known as the New Central Bank Act defines legal tender as
        notes and coins issued by the Bangko Sentral.
        
        MONEY DEFINED
        Money is defined as what is generally acceptable in exchange for goods. Laws define what can be considered as a general medium of exchange.
      - MANAGER'S & CASHIER'S CHECKS ARE THE SAME
        The legal effects of both checks are the same.
        A manager's check, like a cashier's check, is an order of the bank to pay, drawn upon itself.
        In effect, it commits its total resources, integrity, and honor behind its issuance.
        
        THESE CHECKS ARE AS GOOD AS THE MONEY THEY REPRESENT
        Such checks are regarded substantially to be as good as the money it represents.
        
        JURISPRUDENCE ON MANAGER'S CHECKS APPLY EQUALLY TO CASHIER'S CHECKS & VICE VERSA
        For this reason, jurisprudence on manager’s checks, unless stated otherwise applies equally to cashier’s checks and vice versa.
        (MBTC v. Chiok, GR 172652, Nov. 26, 2014)
        
        JURISPRUDENCE ON:
        MANAGER'S AND CASHIER'S CHECKS
        
        IN THE BUSINESS SECTOR, MANAGER'S AND CASHIER'S CHECKS ARE DEEMED AS CASH
        These are both primary obligations of the issuing bank and are deemed accepted in advance by their mere issuance. It is a well-known and accepted practice in the business sector that these checks are deemed as cash.
        (MBTC v. Chiok)
        
        CLEARING OF CHECK IS NOT ACCEPTANCE
        While it cannot be said that manager's and cashier's checks are pre-cleared, clearing should not be confused with acceptance.
        
        2 more items...
        
        ACCEPTED BANK PRACTICE DEEMS MANAGER'S AND CASHIER'S CHECKS AS CASH
        On the contrary, the accepted banking practice is that such checks are as good as cash. (Metropolitan Bank and Trust Co. v. Chiok, G.R. Nos. 172652, 175302 & 175394, [November 26, 2014], 748 PHIL 392-440)
        
        UNLESS STATED OTHERWISE
      - THE CONCEPT OF NEGOTIABILITY
        
        THE ORIGIN OF NEGOTIABLE INSTRUMENTS
        
        HISTORY OF THE NIL
        
        APPLICABILITY OF NIL
        
        CONCURRENCE OF ELEMENTS REQUIRED
        Provisions of the NIL only apply to negotiable instruments. Sec. 1 of the NIL requires the concurrence of the following elements to be a negotiable instrument:
        (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.
        Rivera v. Chua, GR 184458, Jan. 14, 2015
        
        ESTOPPEL MAY TURN A NON-NI -> NI
        Although an instrument may be non-negotiable, when a party assumes the warranty of an indorser by guaranteeing all prior indorsements, said party is deemed to have treated the instrument as negotiable. As such, it is estopped from claiming the defense of non-negotiability and remains liable as an indorser
        Banco de Oro v. Equitable Bkg. Corp., GR 74917, Jan. 20, 1988
        
        SUPPLETORY TO NIL IS
        EXISTING LEGISLATION
        SUPPLETORY TO EXISTING LEGISLATION ARE RULES OF THE LAW MERCHANT
        Cases not provided for in Act. - Any case not provided for in this Act shall be governed by the provisions of existing legislation or in default thereof, by the rules of the law merchant.
        (Section 196, NIL)
        
        "RULES OF THE LAW MERCHANT"?
        What are rules of the law merchant?
        
        ELEMENTS OF A NEGOTIABLE INSTRUMENT
        SECTION 1.Form of Negotiable Instruments. —
        An instrument to be negotiable must conform to the following requirements:
        
        WRITTEN & SIGNED BY MAKER/DRAWER
        It must be in writing and signed by the maker or drawer;
        
        UNCONDITIONAL PROMISE/ORDER TO PAY SUM CERTAIN IN MONEY
        Must contain an unconditional promise or order to pay a sum certain in money;
        
        PAYABLE ON DEMAND or ON FIXED/DETERMINABLE FUTURE TIME
        Must be payable on demand, or at a fixed or determinable future time;
        
        PAYABLE TO ORDER/BEARER
        Must be payable to order or to bearer; and
        
        IF ADDRESSED TO DRAWEE, THEY MUST BE NAMED; or
        INDICATED WITH REASONABLE CERTAINTY
        Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.
        
        ||| (Negotiable Instruments Law, Act No. 2031, [February 3, 1911])
        
        ELEMENTS MATTER.
        IF ONE ELEMENT FROM SEC. 1 IS LACKING, THE NIL DOES NOT APPLY BUT THE GENERAL LAW ON CONTRACTS WILL
        The NIL only applies to NIs (i.e. To those instruments which conform with the requisites laid down by section one of the law). If a requisite is absent, then the instrument is not considered as an NI, and is governed by another legislation/s.
        
        1 more item...
        
        E or 5TH REQUIREMENT IS ONLY APPLICABLE TO BOE, NOT TO PN
        (Akawnting)
        
        OUR NEGOTIABLE INSTRUMENTS LAW IS A VERBATIM REPRODUCTION OF THE UNIFORM NEGOTIABLE INSTRUMENTS LAW OF THE US
        The Negotiable Instruments Law (NIL) is a verbatim reproduction of the Uniform Negotiable Instruments Law of the US, approved by the National Conference of Commissioners on Uniform States Law in 1896.
        
        THE PH HAS ADOPTED ONLY THE ORIGINAL NIL, DISREGARDING SUBSEQUENT AMENDMENTS
        Since its enactment in 1911, not a single amendment to it has been made.
        In the US in 1958, the Uniform Commercial Code (UCC) containing a chapter on commercial papers replaced the UNIL in some states. However, there are currently no signs that the PH plans to adopt the amendments introduced in the UCC.
        
        AMJUR ON NIL AMENDMENTS MAY POSE QUESTIONABILITY IN APPLICATION BUT ARE INDICATIVE OF LEX FERENDA
        This means that foreign jurisprudence based on the amendments of the NIL may have questionable relevant to PH jurisprudence
        
        AMJUR ON NIL MAY BE RELEVANT
        This means that foreign jurisprudence on the matter of the NILaw is relevant to PH Jurisprudence
        
        ORIGINATED FROM MERCHANTS AND TRADERS OF FLORENTINE AND VENETIAN MERCHANTS ALONG THE ADRIATIC SEA,
        IN THE MIDDLE AGES
        The use of NIs originated from the merchants and traders of the Middle Ages, more specifically among the Florentine and Venetian merchants along the Adriatic Sea.
        
        DEVISED TO AVOID THE RISKS OF TRANSPORTING MONEY AND TO FACILITATE THE CONTRACT OF CAMBIUM
        The BoE was devised to facilitate the contract of cambium and to avoid the risks of transporting money.
        A practice then evolved among the merchants and traders under which certain holders of instruments in a specified form were permitted to enforce the contract in their own names, free from all claims against the original obligees. These came to be known as NIs.
        
        NEGOTIABILITY vs PROFITABILITY
        Negotiability facilitates commercial transactions where profitability depends largely on the briskness with which they are consummated.
        
        INDORSEES NOT REQUIRED TO LOOK INTO PAST EVENTS
        This provides protection to the indorsees of NIs because they are not required to look into past events which gave rise to the creation of the NIs. They can rely on its face. If there is a defect in the contract that gave rise to the NI, the indorsee shall not be burdened.
        
        USUALLY 2 CONTRACTS INVOLVED WHENEVER A NI IS ISSUED
        There are usually 2 contracts involved whenever a negotiable instrument is issued:
        
        Contract of sale, an
        
        Promise to pay (like a promissory note)
        
        THOSE 2 CONTRACTS ARE INDEPENDENT OF ONE ANOTHER
        As to the original parties (Buyer and Seller), the promise to pay is dependent on the validity of the contract of sale.
        Once the instrument is negotiated to a 3rd person, the promise to pay is completely independent of the sale; as far as he is concerned, there is only 1 contract: the promise to pay
        
        WHAT IS THE CONSEQUENCE OF THESE TWO CONTRACTS BEING INDEPENDENT OF ONE ANOTHER?
        Phrased as it is, "independent" of one another means that they do not depend on each other i.e. the fulfillment of the obligation of the bank to release the funds from a check does not depend on the fulfillment of the obligations of the buyer and seller (the original parties).
        
        ALLOWS THE TRANSFEREE TO HAVE A BETTER TITLE THAN THE TRANSFEROR
        It is possible for a person to whom a negotiable instrument is negotiated to acquire a better title than his transferor if he fulfills the requirements of a holder in due course.
      - FUNCTIONS OF NEGOTIABLE INSTRUMENTS
        Negotiable Instruments (NIs) may serve any of the following functions:
        
        SUBSTITUTE FOR MONEY -
        As a substitute for money in payment for property or services.
        
        CREATE/TRANSFER CREDIT -
        As a means of creating and transferring credit
        
        FACILITATE SALE -
        To facilitate the sale of goods :
        
        NOT LEGAL TENDER
        Although NIs do not constitute legal tender, they often take the place of money as a means of payment.
        
        NIs ONLY PRODUCE THE EFFECT OF PAYMENT WHEN
        
        ENCASHED
        
        IMPAIRED THROUGH THE FAULT OF THE CREDITOR
        Delivery of promissory notes payable to order or bills of exchange and other mercantile documents shall produce the effect of payment only when they have been cashed or when through the fault of the · creditor they have been impaired.
        (Art. 1249)
        
        CHECKS ARE NOT EQUIVALENT TO CASH
        Checks are not negotiable instruments equivalent to cash. they are only substitutes for money and not legal tender, more so when there is a named payee and is not payable to bearer.
        (Federal Corporation v. Antonino)
        
        MANAGER'S AND CASHIER'S CHECKS
        
        But contradicting this is the case of MBTC v. Chiok which says that Checks are deemed as cash.
        What gives?
        
        ACTION FROM THE ORIGINAL OBLIGATION IS HELD IN ABEYANCE, UNTIL THEN
        In the meantime, the action derived from the original obligation shall be held in abeyance.
        (Art. 1249)
        
        LEGAL TENDER DEFINED
        In the Philippines, RA 7653 known as the New Central Bank Act defines legal tender as
        notes and coins issued by the Bangko Sentral.
        
        LEGAL TENDER DEFINED
        Paras, in commenting on Art. 1249 of the NCC, defines legal tender as 'that which a debtor may compel a creditor to accept in payment of the debt.
        
        MONEY DEFINED
        Money is defined as what is generally acceptable in exchange for goods. Laws define what can be considered as a general medium of exchange.
        
        MONEY DEFINED (BY AMJUR)
        MONEY HAS VALUE ONLY BY LAW AND
        NOT BY NATURE
        Money is purely a legal institution; it is impossible without law.
        Money is what the law or custom makes receivable for payments of taxes and debts. "Money by itself is but a mere device.
        It has value only by law and not by nature.
        So that a change of convention between those that use it is sufficient to deprive it of its value and of its power to purchase our requirements
        
        VALIDITY AS MEANS OF PAYMENT CONDITIONED ON BEING HONORED
        Under Article 1249, NCC, although a NI may be used as a substitute for money, its validity as a means of payment is conditioned on its being honored by the person bound by its terms to pay it.
        
        NEGLIGENCE OF PLAINTIFF =
        PAYMENT EFFECTED
        If the non-payment is caused by the plaintiff's negligence, then payment will be deemed to have been effected.
        
        IN REDEMPTION, TENDER OF CHECK SUFFICES
        Tender of check is sufficient to compel redemption of foreclosed property since such redemption is not an obligation but a right.
        
        EXTINGUISHMENT OF OBLIGATION IS CONDITIONED ON PAYMENT
        And even if the creditor accepts the check, such acceptance will not extinguish the obligation until payment of the check is realized.
        (Article 1249, NCC)
    - - PARTIES TO A PROMISSORY NOTE
        
        MAKER/PROMISSOR
        The maker/promissor, the person [who] makes the promise to pay.
        
        PAYEE
        The payee, the person to whom the promise to pay is made.
        
        PARTIES TO A BILL OF EXCHANGE
        
        DRAWER
        The drawer, the person who gives the order to pay in a bill of exchange
        
        DRAWEE
        The drawee, the addressee of the order (e.g. issuing bank of the check)
        
        PAYEE
        The payee, the person to whom the payment is to be made
        
        NEGOTIATION/INDORSEMENT
        
        INDORSER - When the payee of an instrument transfers it to another by signing it at the back, he is said to have negotiated or indorsed the same.
        
        INDORSEE = HOLDER - The person to whom he negotiates the instrument, thus the indorsee becomes the holder of the instrument as well.
      - NATURE OF LIABILITY
        The parties to a negotiable instrument are either
        
        PRIMARILY or
        
        SECONDARILY liable
        
        PRIMARY PARTY:
        The one who is absolutely and unconditionally required to pay the instrument when it falls due.
        
        IN PN,
        MAKER IS PRIMARILY LIABLE
        The maker is primarily liable on a PN
        
        IN BOE,
        NO PERSON IS PRIMARILY LIABLE UNTIL DRAWEE ACCEPTS
        ORDER TO PAY
        b. In a BOE, there is no person primarily liable to pay until and unless the drawee accepts the order of the drawer to pay
        
        SECONDARY PARTY -
        The parties that can be held responsible should the primary parties fail to pay.
        
        DRAWER & INDORSERS ARE SECONDARY PARTIES
        Specifically speaking, the drawer of a BOE and the indorsers of either a bill or note are the [secondary] parties.
        
        THE LIABILITY OF SECONDARY PARTIES ARE CONDITIONED ON 2 FACTORS
        
        DEMAND FROM PRIMARY PARTY -
        That a demand or presentment be duly made on the primary party
        
        NOTICE OF DISHONOR -
        Should the said party dishonor (i.e. Fail to pay OR accept) such instrument, that a notice of such dishonor be given to the secondary party.
        
        INDORSES ENTER INTO 2 CONTRACTS
        WHEN INDORSING
        By indorsing the bill/note, the indorser implies that
        
        SALE/TRANSFER
        He is selling/transferring the instrument to his indorsee, thus assuming liabilities similar to that of a seller or transferor of personal property.
        
        WARRANTY
        He warrants that he will pay the instrument when the two conditions above have been fulfilled. The holder can therefore hold any indorser liable should the maker or acceptor fail to pay.
        
        ANY INDORSER MAY BE HELD LIABLE?
        By "any" indorser, does that mean the holder may hold any of the several previous indorsers liable?
        
        NOTICE OF DISHONOR MAY BE WAIVED
        The right of the secondary parties to be given notice of dishonor, to presentment, and to protest may be waived. This does not affect the negotiability of the instruments.
  - - - IF DRAWN TO MAKER'S OWN ORDER, INDORSEMENT REQUIRED
        Where a note is drawn to the maker's own order, it is not complete until indorsed by him.
        (Section 184, NIL)
        
        May the maker write a check to himself?
        YES, and when he does, he has to endorse it before it becomes encashed.
      - "Sign" or "Endorse"
        Sign is just writing a signature
        Indorse is signing on the back of the check to signify that the check is to bearer
        
        What is "to order" or "to bearer"?
        According to Google, "to order" is written when a check is to be encashed to the order of a SPECIFIC PERSON while "to bearer" is to
        WHOEVER PHYSICALLY BEARS THE CHECK
      - "PRINTED" IS CONSIDERED WRITTEN
        What is considered "In writing": This includes
        print; written or typed. The word “’written’ includes
        printed, and ‘writing’ includes print” [Sec. 191, NIL].
        
        ELECTRONIC MESSAGES ARE NOT NEGOTIABLE INSTRUMENTS
        Electronic messages cannot be negotiable
        instruments
        [HSBC v. CIR, G.R. No. 166018 (2014)].
      - CERTIFICATE OF DEPOSIT IS A TYPE OF PN
        A certificate of deposit is an instrument issued by a bank reciting a deposit of a certain sum of money, payable either at a fixed time or on demand, to the depositor therein.
      - BOND IS A TYPE OF PN
        A bond is an evidence of indebtedness issued by a corporation, public or private, payable at a definite date in the future, usually for a long term.
        
        BOND = CORPORATION'S WRITTEN PROMISE
        It is in effect a written promise of the corporation to pay a definite sum of money on the day named.
  - - - ORDER REQUIRED
        Order – command made by the drawer addressed to the drawee ordering the latter to pay the payee or the holder a sum certain in money; the instrument is, by its nature, demanding a right.
        
        MERE REQUEST or AUTHORITY TO PAY IS NOT AN ORDER
        A mere request or authority to pay does not constitute an order. Although the mere use of polite words like "please" does not of itself deprive the instrument of its characteristics as an order, its language must clearly indicate a demand upon the drawee to pay
        
        Why are authorizations not enough?
        Authorizations not being enough can get tricky, but it is understood that while authorizations empower the drawee to release funds, empowerment is not an order.
      - A CHECK IS A TYPE OF BOE
        The check is the most commonly used form of bill of exchange.
        
        CHECKS ARE ALWAYS PAYABLE ON DEMAND
        A check is always payable on demand.
      - DRAFT DEFINED
        A draft is an order made by one person, like a buyer of goods, addressed to a person having in his possession funds of such buyer, ordering the addressee to pay the purchase price to the seller of the goods.
        
        FOR PERSONS PHYSICALLY REMOTE FROM EACH OTHER
        A draft is a form of bill of exchange used mainly in transactions between persons physically remote from each other.
        
        BANK DRAFT
        Where the order is made by one bank to another bank, it is referred to as a bank draft.
- - - - IF MAKER HAS OPTION TO REQUIRE SOMETHING TO BE DONE IN LIEU OF PAYMENT OF MONEY, THEN THIS IS NOT A
        NEGOTIABLE INSTRUMENT
        An instrument where the maker or the person primarily liable has the option to require something to be done in lieu of payment of money is not negotiable.
        
        BUT IF HOLDER HAS OPTION TO DO SO, THEN THIS INSTRUMENT IS NEGOTIABLE
        But it is negotiable if the option to require something to be done in lieu of payment of money is with the holder [CAMPOS].
        
        MUST NOT DEPEND ON AN EVENT NOT CERTAIN TO HAPPEN
        Must not be dependent upon an event that is not certain to happen [ABAD].
        
        EVEN IF CONDITION IS FULFILLED, THE INSTRUMENT IS STILL NOT NEGOTIABLE
        The fact that the condition appearing on the instrument has been fulfilled will not convert it into a negotiable one.
        An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect [Sec. 4, NIL].
        
        So what if it is certain to happen then?