Negotiable Instruments Law (NIL)

These flashcards cover key vocabulary and concepts related to negotiable instruments, including definitions, functions, and legal principles.

Negotiable Instruments and how transferred

A written document that promises payment of a specific amount of money to a specified person or bearer.

TWO MODES OF TRANSFER
Negotiation - Transfer of the instrument from one person to another so as to constitute the transferee the holder thereof. (Governed by NIL & refers only to negotiable instruments)

» holder in due course: a holder who is free from personal defenses of prior parties.

Assignment - Transferee does not become a holder and he merely steps into the shoes of the transferor. (Governed by NCC & refers to contracts generally).

» others: intestate succession.

Functions of NI

[text]

• A substitute for money

• It is a medium of exchange

• It is a credit instrument which increases credit circulation

• It increases purchasing power in circulation

• It serves as proof of transactions

• It is an investment instrument (can be security under the Securities Regulation Code)

• It is a personal property that can be used as a collateral under the Personal Property Security Act

• It is used to secure obligations

Legal Tender

Money that must be accepted if offered in payment of a debt.

Kinds of Negotiable Instruments & Features

1. Promissory Note (Sec. 184) - An unconditional promise in writing made by one person to pay another a sum of money either on demand or at a specified future time.
   » Certificate of deposit: a written acknowledgment of a bank of its receipt of a certain sum with a promise to repay the same.
   » Bonds: evidence of a debt on which the issuing company or governmental body promises to pay the bondholders a specified amount of interest for a specified length of time, and to repay the loan on the expiration date.
   » Debenture: A promissory note or bond backed by the general credit of a corporation and usually not secured by a mortgage or lien on any specific property.

2. Bill of Exchange (Sec. 126) - An unconditional order in writing addressed by one person to another, requiring the latter to pay a specified sum of money.
   » Bill of exchange treated as a promissory note

Features

• Negotiability = Allows negotiable instruments to be transferred from one person to another so as to constitute the transferee a holder.

• Accumulation of secondary contracts = When transferred through negotiation, secondary contracts are accumulated because the indorsers become secondarily liable not only to their immediate transferees but also to any holder.
  » Xpn: unless they have a valid defense against the holder or any party, these indorsers are liable to said holder or whoever may be compelled to pay the instruments

As to NI, when is there deemed to be payment?

GR: Delivery of negotiable instruments does NOT produce the effect of payment.

• Check is NOT a legal tender thus cannot constitute a valid tender of payment.

• Delivery is acceptable if what is being done is NOT payment but exercise of a right

Xpns - (When delivery produces the effect of payment)

• When the paper or document is encashed

• When the paper or document is impaired due to the fault of the creditor. [Note: Obligation of the DR remains even if the check becomes stale and can no longer be honored by the drawee bank]

Manager's Check vs. Crossed Check

M: A check issued by a bank guaranteeing payment; the bank is both the drawer and the drawee.

C: A check that is marked with two parallel lines which indicates that it must be deposited directly into a bank account and cannot be cashed

Bearer Instrument

An instrument that is payable to the person in possession of it, allowing for transfer by delivery.

Indorsement

The act of signing the back of an instrument to transfer ownership or rights in it.

Electronic Fund Transfer

A method of paying or transferring money electronically, often subject to the same provisions as checks.

Documentary Bill of Exchange

A bill of exchange accompanied by documents of title, used in international trade.

Requisites of Negotiability (Sec. 1)

An instrument to be negotiable must comply with the ff reqs:

[WS-PS-DTA]

1. must be in writing and signed by the maker or drawer;

2. must contain an unconditional promise or order to pay a sum certain in money;

3. Must be payable on demand, or at a fixed or determinable future time;

4. Must be payable to order or to bearer; and
   » Sec. 9 (when payable to bearer) - expressed, person named therein or bearer, fictitious person

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

Fictitious Payee Rule

A principle stating that if a check is made out to a fictitious or non-existent person, it is treated as a bearer instrument.

Holder in Due Course (Sec. 52)

A holder who has taken the instrument under the following conditions that:

[CRO_GV_ID]

• it is complete and regular upon its face;

• he became the holder of it before it was overdue, and without notice that it had been previously dishonored;

• he took it in good faith and for value;

• 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.

Defenses vs. Equities of Ownership

D: These are invoked to resist a claim for payment.

EO: This is invoked for the purpose of claiming the instrument.

Note: Although these two things are similar, they are invoked for different purposes. But nevertheless, they may be invoked by the same person.

Defenses under NIL

Legal justifications of the persons who are sought to be held liable. May be grounds to refuse to pay.

» Real or Personal.
» When a defense is invoked, it is possible that there is a person who was unlawfully deprived of the instrument and has a better right over it.

Q: Who invokes these?

A: Those who are primarily or secondarily liable.

What are Real Defenses?

these are defenses raised against ALL holders, even a holder in due course.
» absence of one of the essential elements of a contract or where the contract is void.

» Attaches to the instrument itself.

List of Real Defenses

[MF NMUF IV PD]

1. Minority (available only to minor) - Sec. 22
   » Minor himself is not liable and can only be invoked by him. Capacitated part cannot invoke (personal only to the minor).

2. Forgery - Sec. 23
   » The forged signature is inoperative. No valid contract.
   » Note Cut-off rule & Mistaken Identity.
   » Forgery is never presumed. Needs clear and convincing evidence.
   » NOTE: Indorsers after the forgery are liable because they warrant that they have good title to the [order] instrument.
   

3. Non-delivery of incomplete instrument - Sec. 15
   » It follows that those persons whose signature was placed before the delivery can also disclaim liability from payment.
   

4. Material alteration - any alterations which changes Sec. 125 [DSTNM]
   » Material = If it alters the effect of the instrument | Still only a PARTIAL REAL DEFENSE when it comes to HDC who can enforce it in the original tenor of the instrument.
   » the date;
   » the sum payable (either principle/interest);
   » time or place of payment;
   » number or the relations of the parties;
   » the medium or currency OR adds a place of payment when there is none stipulated.
   

5. Ultra Vires act of corporation
   » actions that are committed outside of the object for which the corporation was created as defined in its AOI (may be subject to ratification since it is VOIDABLE and not an illegal act).
   

6. Fraud in factum or esse contractus - fraud in execution.
   » a person is induced to sign an instrument without knowing its character as a note or a bill. (di niya alam nego instrument).
   

7. Illegality (if declared void for any purpose)

8. Vicious force or violence - ex. gunpoint.

9. Prescription - extinctive prescription (10 yrs)

10. Discharge in insolvency

Cut-off Rule under Forgery defense

GR:

Parties prior to the forged signature are cut off from the parties after the forgery = Prior parties CANNOT be held liable and CAN raise the defense of forgery

Xpn - when defense can be PRECLUDED:

(1) Parties who warrant or admit the genuineness of the signature in question;

(2) Those who, by their acts, silence, or negligence, are estopped from setting up the defense of forgery [there is ratification]

What are Personal Defenses?

these are defenses raised ONLY against holders who are NOT holders in due course (HDC).

» There is a true contract but for some reason (e.g. fraud) the defendant is excused from the obligation to perform.

» Attached to the holder/person.

List of Personal Defenses

[FIN CFF FTD MIA]

1. Failure or absence of consideration

2. Illegal consideration
   » ex. if check issued for payment of marijuana

3. Non-delivery of complete instrument - Sec. 16

4. Conditional delivery of complete instrument - Sec. 16

5. Fraud in inducement

6. Filling up blank not within authority

7. Filling up blank beyond reasonable time

8. Transfer in breach of faith

9. Duress or intimidation - ex. blackmail.

10. Mistake

11. Insertion of wrong date

12. Ante-dating or Post-dating for illegal or fraudulent purpose.

Who is an Indorser? (Sec. 63)

Persons who who negotiates the instrument through indorsement completed by delivery AKA signs the back + delivers the instrument.

Notes:

• General Indorser vs. Special Indorser vs. Qualified Indorser ?

• Liabilities or Warranties (Sec. 67)

  • (i) The instrument is genuine + and in all respects what it purports to be;

  • (ii) that he has good title to it;

  • (iii) that all prior parties had the capacity to indorse it.
    

• Indorser of a Bearer Instrument versus Order Instrument

  • B:

  • O:

• brb