Negotiable Instruments Notes: Form and Interpretation (Sec. 1 - 8)

THE NEGOTIABLE INSTRUMENTS LAW

I. FORM AND INTERPRETATION
  
*Section 1. Form of negotiable instruments. - An instrument to be negotiable must conform to the following requirements: (Always step 1 because it determines what law is applicable) (WUPPA)
(a) It must be in writing and signed by the maker or drawer; 
  • at least the surname should appear and generally the signature (It may consist of mere initials or even numbers)

  • where the name is NOT signed, the HOLDER must prove that what is written is intended as a signature of the person sought to be charged

  • how signature may be written: (must be shown to have been adopted & used by the party as his signature)

    • printed

    • typewritten

    • stamped

    • engraved

    • photographed

    • lithographed

  • Location of signature: NOT material; usually written at the bottom right hand corner

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

    • Order (NOT mere authority to pay nor request)

      • may be equivalent

        • mere words of civility (i.e. will oblige, by paying) - negotiable

  • Note

    • Promise

      • may be 

        • equivalent (i.e. agree,shall pay,will pay); or 

        • implied (i.e. good to, payable on demand)

          • BUT may not be implied from the mere existence of a debt

  • sum certain - ascertainable by mere mathematical computation

  • money - NOT bonds, corp. stock, state paper, scrip, checks, foreign bills, treasury certs. 

    • Legal Tender in the Philippines (compels creditor to accept)

      • However: certified checks such as managers check may be similarly situated

      • Redemption by manager's check were accepted or NOT accepted to on that ground = VALID

    • may be in foreign money BUT must specify denomination (NOT an invariable rule)

      • rate prevailing at the time of payment (RA 529)

      • only agreement and NOT the claim can be void

(c) Must be payable on demand, or at a fixed or determinable future time;   
 (d) Must be payable to order or to bearer; and
  • order - equivalent 

    • assigns

    • assignees

    • holder

    • on return of this certificate properly indorsed (implies indorsement)

  • bearer 

    • equivalent: possesor

    • bearer + specified person - NOT negotiable because modifier only

(e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. - additional req. for bill 
  • may be filled under iimplied authority 

Importance of formalities: to distinguish from non-negotiable insturments
  • Negotiable - apply negotiable instruments law

Determination o negotiability:
  1. apply provisions especially Sec. 1 above

  2. consider instrument as a whole

  3. what appear on the face and NOT elsewhere

*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:
(a) with interest; or 
  • silent: legal rate from time of judicial or extrajudicial demand

  • Escalation clause is valid if there is deescalation clause

    • Escalation clause - stipulate that the rate of interest agreed upon may be increased in the event that the applicable maximum rate of interest is increase by law or by the Monetary Board

    • Deescalation clause - stipulate that the rate of interest agreed upon may be reduced in the event that the applicable maximum rate of interest is decreased by law or by the Monetary Board

(b) by stated installments; or
  • each installment maturity should be known


(c) by stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; or  (w/ acceleration clause)   (d) with exchange, whether at a fixed rate or at the current rate; or 
  • exchange - difference in value of the same amount of money in diff. countries (only for foreign bills)

    • may be at

2.           current rate 
3.           fixed rate
(e) with costs of collection or an attorney's fee, in case payment shall not be made at maturity.
  • Attorney's fee 

    • need NOT be a sum certain

    • must be reasonable

    • if silent: NOT recoverable

Overdue instrument - NOT fully negotiable - holder NOT holder in due course

*Sec. 3. When promise is unconditional. - An unqualified order or promise to pay is unconditional within the meaning of this Act though coupled with:
(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 
  • Fund for reimbursement (absolutely payable and should NOT be from a restricted fund)

    • drawee pays the payee from his own funds

    • afterwards, drawee pays himself from the particular fund indicated

  • Payment -direct source

    • drawee pays directly from the particular fund indicated - NOT negotiable - conditional upon the sufficiency of the funds

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

    • as per contract notes

    • chattel notes

    • conditional sales agreement

    • reference to mortgages

      • EX: in the note itself or part of the note - non-negotiable bec. uncertainty of amount

  • Subject to terms and conditions of the transaction stated = non- negotiable

But an order or promise to pay out of a particular fund is not unconditional.
  • as long as absolutely requires to pay

*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:
(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.

*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:

GR: Order or promise to any act in addition to the payment of money = non-negotiable
EX: (CCWH)
(a) authorizes the sale of collateral securities in case the instrument be not paid at maturity; or  (merely accelerable = negotiable)
GR: promise of the maker to furnish additional security (additional act to the promise to pay in money) = non-negotiable 
(b) authorizes a confession of judgment if the instrument be not paid at maturity; or   
2 kinds of confession: 
  1. Cognovit actionem (NOTE: differs from warrant of attorney)

  • written confession of an action by a defendant, subscribed, but not sealed, and irrevocably authorizing any attorney of any court of record to confess judgment and issue execution usually for a sum named

  • given in order to save expense 

      2.  Confesion relicta verificatione
  • confession of judgment made after plea is pleaded, such as cognovit actionem, accompanied by a withdrawal of a plea

      *Warrant of attorney 
  • instrument in writting addressed to 1 or more attorneys named therein, authorizing them, generally, to appear in any court, or in some specified court on behalf of the person giving it, and to confess judgment in favor of some particular person therein named in an action of debt

  • Effect of confession of judgment in the Phils. = VOID as against public policy - because:

    1. they enlarged the field for fraud

    2. under this instrument, the promissor bargains away his right to a day in court

    3. the effect of the instrument is to strike down the right of appeal accorded by statute

(c) waives the benefit of any law intended for the advantage or protection of the obligor; or   
  • benefits or protection of the obligor that may be waived:

  1. presentment of payment

  2. notice of dishonor

  3. protest

(d) gives the holder an election to require something to be done in lieu of payment of money.
  • it has to be the holder's option and not the drawee

  • Example: pay to A or order money or property at the option of the holder (negotiable) vs. I promise to pay A or order money or property (non-negotiable)

But nothing in this section shall validate any provision or stipulation otherwise illegal.
NOTE: (b) is still void bec. of this

  • Test of negotiability: If the promise would give rise to a cause of action for breach of contract if the additional act is NOT done = non-negotiable


*Sec. 6. Omissions; seal; particular money. - The validity and negotiable character of an instrument are not affected by the fact that: (DVPSC)
  • If payment on demand, statute of limitations begin immediately 

(a) it is not dated; or   
  • However, there are cases where the date is necessary to fix the maturity date

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

(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.
  • contract that foreign currency has fixed value in relation to the money of the country in w/c the instrument is payable but no such contract exists in the Phils.

But nothing in this section shall alter or repeal any statute requiring in certain cases the nature of the consideration to be stated in the instrument.

*Sec. 7. When payable on demand. - An instrument is payable on demand:
(a) When it is so expressed to be payable on demand, or at sight, or on presentation; or   
  • at sight - not ordinarily used in promissory note since for presentment

(b) In which no time for payment is expressed. (payable in demand)
  • when blank for time for payment unfilled- may be filled under incomplete intruments Sec 14,15 or 16

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.

  • only as to immediate parties



*Sec. 8. When payable to order. - The instrument is payable to order where it is drawn payable 

  1. to the order of a specified person or (order - designated by him)

  2. to him or his order. 

It may be drawn payable to the order of: (PJS-D2MH)
(a) A payee who is not maker, drawer, or drawee; or  
(b) The drawer or maker; or   (acceptor in favor of drawer)
(c) The drawee; or   
(d) Two or more payees jointly; or (and)
(e) One or some of several payees; or (or)
(f)  The holder of an office for the time being. (Example: cashier of co.)
Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty. 
GR: name of payee unfilled = non-nego
EX: incomplete under Sec. 13-15 depending on how it was delivered