BUSINESS LAW 2

NEGOTIABLE INSTRUMENTS LAW

FINAL ACTIVITY

I. Discussion
1. What is a negotiable instrument?
A negotiable instrument is one that conforms to the following
requirements:
a) It must be in writing and signed by the maker or drawer;
b) It must contain an unconditional promise or order to pay a sum
certain in money;
c) It must be payable on demand, or at a fixed or determinable
future time;
d) It 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.
What are the requirements of negotiability?
Section 1 of the Negotiable Instruments Law provides that an
instrument, to be negotiable, “must be in writing and signed by the maker
or drawer.”
2. What are the reasons why negotiable instruments play an important note
in trade and commerce?
The importance of negotiable instruments in trade and commerce
are, as follows:

a) Although they do not constitute legal tender, they are used as a

substitute for money.
b) Negotiable papers, particularly checks, constitute, at present,
the media of exchange for most commercial transactions.
c) Negotiable instruments also serve as a medium of credit
transactions.
d) Negotiable instruments shall produce the effect of payment only
when they have been encashed or when through the fault of
the creditor they have been impaired. [Article 1249, Civil Code]
Characteristics of negotiable instruments
e) Negotiability: That quality or attribute whereby a bill, note or
check passes or may pass from hand to hand, similar to money,
so as to give the holder in due course the right to hold the
 instrument and collect the sum payable for himself free from
defenses.
f) The most important feature of negotiable instruments is the
accumulation of secondary contracts as they are transferred
from one person to another.
3. Why is a Negotiable Bill of Lading not a negotiable instrument?
A bill of lading is not a negotiable instrument,
t h o u g h i t i s transferable by endorsement and delivery. Therefore, a
bonafide holder for value of such a bill of lading does not get title to
the goods better than that of the transferor of the documents.
He can sue in his own name and can give valid discharge.
4. Is ante-dating or post-dating an instrument illegal? Explain.
As provided in Section 12 of NIL, generally ante-dating and post-dating is
valid as long as it is not negotiated after its maturity except when it is
done for an illegal or fraudulent purpose. The title is acquired as of the
date the instrument is delivered.
Like for instance, post-dated instruments contain a date later than
the date of the issuance and used illegally if intended to cover insufficient
funds without informing the payee while Ante-dated instruments contain a
date earlier than the date of the issuance and used illegally to cover the
charging of unreasonable high rate of interest.

5. In case of forged instruments, who are not allowed by law to set up the
defense of forgery, and are, therefore, made liable to the holder?
Those who are estopped by their acts, silence and negligence from
setting up the defense of forgery, and indorsers, acceptors and persons
negotiating by delivery who warrants or admit to the genuineness of the
signatures in question.

6. Who are the original parties to a

(a) Promissory Note - There are two parties to a promissory note:

a) Maker or Drawer is the person who makes or draws the promissory

note to pay a certain amount as specified in the promissory note. He is
also called the promisor.
b) Drawee or Payee is the person in whose favour the promissory note is
drawn. He is called the promisee.

(b) Bill of Exchange? A bill of exchange has the following parties, namely:
a) Drawer - the person who makes the bill, or who gives the order to
pay a certain sum of money, is the drawer of the instrument.
b) Drawee - the person who accepts the bill of exchange, or who is
directed to pay a certain sum, is called drawee.
c) Payee - the person receiving payment is called the payee, who can
be a designated person or the drawer himself.

7. Who is a holder in due course?

 Section 52 of NIL states that 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 dishonoured, 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 title of the person
negotiating it.
What are his rights?
Pursuant to Section 57 of the NIL, a Holder in Due Course holds the
instrument free from any defect of title of prior parties, and free from
defences available to prior parties among themselves, and may enforce
payment of the instrument for the full amount thereof against all parties
liable thereon.

8. What is a Check?
Under Section 185 of the same law, a check is a special type of bill
of exchange drawn on a bank payable on demand. A check does not
have to state that it is payable on demand, and presentment for its
acceptance is not necessary.

Stale Check?
A check is said to be “stale” when it has not been presented for
payment within a reasonable time after its issuance. It has no value and is
not to be paid. As to what constituents an unreasonable length of time is
dependent upon the existing circumstances. However, banking practice
dictates a check is already stale if it is not presented for payment within a
period of six (6) months from the date of issuance. This does not mean,
however, that the obligation of the debtor is extinguished simply because
the check he issued to his creditor became stale

Give the purpose of crossing a check.

The act of crossing a check serves as a warning to the holder that
the check has been issued for a definite purpose so that the holder
thereof must inquire if he has received the check pursuant to that
purpose; otherwise, he is not a holder in due course.

II. Problems
Negotiability

1. A promissory note signed by Drew with the amount and payee in blank,
was stolen by Henry who put the amount of P100,000.00 and his name as
payee, and indorsed the note to Joseph, then Joseph to Josephine. Has
Josephine the right to enforce the note against Drew? Henry? Joseph?

Josephine has no right to enforce it against Drew because according

to Section 15 of the NIL, an incomplete and undelivered instrument if
completed and negotiated without authority will not be a valid contract in
the hands of any holder as against any person whose signature was
placed thereon before delivery. While she has a right to enforce it against
Henry and Joseph since they are parties whose signatures appear after
the delivery and are general indorsers that warrant the genuineness of the
instrument.

Rights of a Holder in Due Course

2. W, maker of a promissory note; X, payee, increased the amount and

indorsed the note to Y, a holder in due course, and from Y to Z who had
notice of the fraud by X, and from Z to A who had also notice of the
defect.

Decide the rights of Z with respect to W, X, and Y and the rights of A with
respect to all prior parties.

Z has all the rights of such holder in respect of W, X and Y having

derived his title from Y who was a holder in due course therefore he is a
holder through a holder in due course and he was not a party to the fraud.
A cannot recover from W because he did not acquire his title from
a holder in due course and is not free from personal defenses.

Notice of Dishonor

3. W, maker, X, payee, Y first indorsee, and Z, second indorsee and present

holder. A demand by Z for payment of the promissory note presented to
W was refused by W. May Z immediately sue X and Y to recover the
amount of the note? Decide.
 Yes. Under the law it states that an indorser of an instrument makes
warranties to the maker or drawer of an instrument and to subsequent
holders of the instrument. However, if an indorser who pays the
instrument has the right to seek reimbursement from a prior indorser or
maker or drawer of an instrument.

Checks

4. W, drawer of a check, X, drawee bank, Y, payee, and Z, indorsee and

present holder. Z failed to present check for payment within a reasonable
time after issue. X became bankrupt. State the liability of W and Y to Z.
W is liable. The law provides that in case a check is not presented
for payment within a reasonable time after its issue, the drawer is not
discharged by the simple reason that presentment for payment is delayed
because a drawer of a check is treated as a principal debtor.
Z is not liable, under the law, an indorser, unlike a drawer, is totally
discharged from liability when the check is not presented for payment
within a reasonable time after its issue, regardless of whether or not he
suffered any loss thereby.
NOTES:

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