Chapter 1- Forms and Interpretation PDF

MODULE LAW ON NEGOTIABLE INSTRUMENTS CHAPTER 1 FORMS AND INTERPRETATION Learning Objectives: 1. Recognize the forms and interpretation of negotiable instruments. 2. Differentiate the kinds of negotiable instruments. 3. Understand the completion and del...

MODULE LAW ON NEGOTIABLE INSTRUMENTS CHAPTER 1 FORMS AND INTERPRETATION Learning Objectives: 1. Recognize the forms and interpretation of negotiable instruments. 2. Differentiate the kinds of negotiable instruments. 3. Understand the completion and delivery of instruments. 4. Define signature of an agent. 5. Identify the indorsement by minor or corporation. I. FORMS AND INTERPRETATION Elements of a negotiable instrument 1. In writing and signed by the maker or drawer 2. Contains an unconditional promise or order to pay a sum certain in money 3. Payable on demand, or at a fixed or determinable future time 4. Payable to order or to bearer (so called badges of negotiability)  5. If addressed to a drawee, he must be named or otherwise indicated with reasonable certainty. (Sec. 1) Note: A negotiable instrument need not follow the exact language of NIL, as long as the terms are sufficient which clearly indicate an intention to conform to the requirements of the law. (Sec. 10) No. 5 applies only to bills of exchange. A promissory note has no drawee. II. REQUISITES OF NEGOTIABILITY Factors to determine the negotiability of the instrument 1. Words that appear on the face of negotiable instrument 2. Requirements enumerated in Section 1 of NIL 3. Intention of the parties by considering the whole of the instruments III. KINDS OF NEGOTIABLE INTRUMENTS 1. Promissory notes (PN) – An unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a Page 2  fixed or determinable future time, a sum certain in money to order or to bearer. (Sec. 184) 2. Bill of Exchange (BOE) – An unconditional order in writing addressed by one person to another signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. (Sec. 126) Note: Checks are special form of BOE. Distinguish promissory note from a bill of exchange. PROMISSORY NOTE BILL OF EXCHANGE Promise to pay Order to pay As to number of parties 2 original parties 3 parties As to Liability of parties Maker is primarily liable Drawer is secondarily liable As to number of Only 1 presentment (for 2 presentments (for presentments needed payment) is needed acceptance and for payment) are generally needed. Page 3  IV. COMPLETION AND DELIVERY A. INSERTION OF DATE Is the date essential to make an instrument negotiable? The date is not essential (Sec. 6 [a]). If dated, such date is deemed a prima facie proof that it is the true date of the making, drawing, acceptance or indorsement of the instrument. (Sec. 11) When is date important? Date is important to determine maturity, as when: 1. Where the instrument is payable within a specified period after date, or after sight. 2. When the instrument is payable on demand, date is necessary to determine whether the instrument was presented within a reasonable time from issue, or from the last negotiation. 3. When the instrument is an interest‐ bearing one, to determine when the interest starts to run. Page 4 When may date be inserted? 1. Where an instrument expressed to be payable at a fixed period after date is issued undated, or 2. Where the acceptance of an instrument payable at a fixed period after sight is undated Note: Any holder may insert therein the true date of issue or acceptance, and the instrument shall be payable accordingly. (Sec.13) What is the effect of insertion of wrong date? It does not avoid the instrument in the hands of a subsequent holder in due course. In the hands of a holder in due course, the date inserted, even if wrong, is to be regarded as the true date (Sec. 13). Note: With respect to the person who inserted the wrong date, however, the instrument is avoided. (Bank of Houston v. Day, 145 Mo. Appl. 410, 122 SW 756) B. COMPLETION OF BLANKS Who has the authority to fill up the blanks in an incomplete but delivered instrument? The holder has a prima facie authority to complete it. A signature on a 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. (Sec. 14) What is meant by material particular? Page 5  Any particular proper to be inserted in a negotiable instrument to make it complete. What are the various situations involving negotiable instruments? A. Incomplete instrument Delivered a. With forgery and alteration b. Without forgery and alteration Not delivered a. With forgery and alteration b. Without forgery and alteration c. Complete instrument Delivered a. With forgery and alteration b. Without forgery and alteration Not delivered a. With forgery and alteration b. Without forgery and alteration V. INCOMPLETE BUT DELIVERED INSTRUMENTS When is an instrument incomplete? When it is wanting in any material particular. (Sec. 14) When may a prior party be bound by an incomplete but delivered instrument? If it is filled up strictly in accordance with the authority given and within a reasonable time. But if any such instrument, after completion, is negotiated to a holder in due course, it is valid and effectual for all purposes in his hands, and he may enforce Page 6 it as if it had been filled up strictly in accordance with the authority given and within a reasonable time. (Sec. 14) Lorenzo signed several blank checks instructing Nicky, his secretary, to fill them as payment for his obligations. Nicky filled one check with her name as payee, placed P30, 000.00 thereon, endorsed and delivered it to Evelyn as payment for goods the latter delivered to the former. When Lorenzo found out about the transaction, he directed the drawee bank to dishonor the check. When Evelyn encashed the check, it was dishonored. Is Lorenzo liable to Evelyn? Answer: Yes. This covers the delivery of an incomplete instrument, under Section 14 of the Negotiable Instruments Law, which provides that there was prima facie authority on the part of Nicky to fill‐ up any of the material particulars thereof. Having done so, and when it is first completed before it is negotiated to a holder in due course like Evelyn, it is valid for all purposes, and she may enforce it within a reasonable time, as if it had been filled up strictly in accordance with the authority given. D. INCOMPLETE AND UNDELIVERED INSTRUMENTS What is the rule when an instrument is incomplete and undelivered? Not valid against the party whose signature was placed before delivery, whether the holder is a holder in due course or not. With respect, however, to a holder in due course, non‐delivery must be proved because as to him, there is a prima facie presumption of delivery. Reason: Delivery is essential to validity. (Sec. 15) What about the party whose signature was placed after delivery? Page 7  Valid against the party whose signature was placed after delivery like an indorser because the indorser warrants the instrument to be genuine and in all respect what it purports to be. Can a Holder in due course hold a maker for instruments which are incomplete and undelivered supposing that the note was stolen, filled‐up, and was subsequently negotiated? No. the law is specific that the instrument is not a valid contract in the hands of any holder. The phrase “any holder” includes a holder in due course. VI. COMPLETE BUT UNDELIVERED What is the effect if an instrument is undelivered? It is incomplete and revocable until delivery of the instrument for the purpose of giving it effect. (Sec. 16) What is delivery? Delivery refers to the transfer of possession, actual or constructive, from one person to another (Sec. 191), with the intent to transfer title to payee and recognize him as holder thereof. When is an instrument issued? The instrument is deemed issued the first delivery of the instrument, complete in form, to a person who takes it as holder. (Sec. 191) Can a creditor bank who was the payee in a check fraudulently obtained by a third person who subsequently encashed it sue the drawer‐debtor, third person, and drawee bank for the amount of the check? Page 8 Answer: No, the payee of a negotiable instrument acquires no interest with respect thereto until its delivery to him. Without the initial delivery of the instrument from the drawer to the payee, there can be no liability on the instrument. (Development Bank of Rizal v. Sima Wei, G.R. No. 85419, Mar. 9, 1993) What is the effect if the instrument is in the possession of a holder in due course? Valid delivery is conclusively presumed. (Sec. 16) What if the instrument is in the possession of a party other than a holder in due course? Possession of such party constitutes prima facie presumption of delivery but subject to rebuttal. When is delivery made conditional or for a special purpose? Provide examples. It depends upon whom the instrument is delivered. If the instrument lands in the hands of a holder in due course (one who does not know of the conditional delivery or of its special purpose), the instrument will be as if there is no condition. To a holder not in due course, prior parties are not bound by the instrument. Note: The law contemplates that the condition is orally or verbally conveyed to the holder upon delivery, because of the rule that the negotiability is determined only upon the face of the instrument. Who are immediate parties? Persons having knowledge of the conditions or limitations placed upon the delivery of an instrument. It means privity, and not proximity. Page 9 Who are remote parties? Persons without knowledge as to the conditions or limitations placed upon the delivery of an instrument, even if he is the next party physically. F. COMPLETE AND DELIVERED INSTRUMENTS What are the rules when an instrument is complete and delivered? 1. Without forgery and alteration, all parties are bound. 2. With forged indorsement and/or alteration Order instruments a. Order promissory note b. Prior parties not bound. Forged signature is wholly inoperative (Sec. 23); unless estoppel sets in with regard prior parties (cut‐off rule). c. Subsequent parties bound. Order bill of exchange a. Drawer’s account cannot be charged by the Drawee; b. Drawer has no cause of action against collecting bank, since the duty of the latter is only to payee; c. Drawee can recover from collecting bank; d. Drawer not liable to the collecting bank. Collecting bank bears loss (can recover from person it paid) e. Payee can recover from: Drawer and Collecting bank, but not from Drawee unless with acceptance of the bill; Page 10 Bearer instruments Bearer promissory note  Prior parties liable;  Forged signatory not liable to party not holder in due course. Bearer bill of exchange  Drawee bank liable. VII. RULES ON INTERPRETATION What are the rules of construction in case of ambiguities in a negotiable instrument? 1. Words prevail over figures 2. Interest runs from the date of the instrument, if date from which interest is to run is unspecified; if undated, from the issue 3. If undated, deemed dated on the date of issue 4. Written provisions prevail over printed 5. If there is doubt whether it is a bill or note, the holder may treat it as either at his election 6. When not clear in what capacity it was signed, deemed signed as an indorser 7. If "I promise to pay" but signed by two or more persons, jointly and severally liable. Page 11 SIGNATURE Who are the persons liable on an instrument? GR: Only persons whose signatures appear on an instrument are liable thereon. (Sec. 18) XPN:  Person signs in trade or assumed name (Sec. 18 ) – Party who signed must have intended to be bound by his signature.  Principal is liable if a duly authorized agent signs in his own behalf disclosing the name of the principal and adding words to show he is merely signing in a representative capacity. (Sec. 19) – Authority may be given orally or in writing (SPA, only an evidence of authority of an agent to third parties)  In case of forgery (Sec. 23)  Acceptor makes his acceptance of a bill on a separate paper (Sec. 134) A. SIGNING IN TRADE NAME Is a person signing in trade name liable? Page 12  Yes. As a general rule, only persons whose signatures appear on an instrument are liable thereon. But one who signs in a trade or assumed name is liable as if he signed his own name (Sec. 18 ). It is necessary, however, that the party who signed intended to be bound by his signature. VIII. SIGNATURE OF AN AGENT What are the legal effects of an agent’s signature in a negotiable instrument? 1. Provided that the requisites are complied with, the legal effects of an agent’s signature in a negotiable instrument are: 2. His signature will bind his principal 3. He will be exempt from personal liability What are the requisites to exempt an agent from liability? 1. He is duly authorized 2. He adds words to his signature indicating that he signs as agent/representative 3. He discloses the name of his principal.(Sec. 20) What is meant by procuration? Procuration is the act by which a principal gives power to another to act in his place as he could himself (Fink v. Scott, 143 S.E. 305) What is the effect of a signature by procuration? It operates as 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) Page 13 IX. INDORSEMENT BY MINOR OR CORPORATION What are the effects of an infant or corporation’s indorsement? Not void. The incapacity of the infant is not a defense which can be availed of by prior parties. However, it does not destroy the right of such an infant indorser to disaffirm under the rules of infancy Passes property therein Voidable. Therefore, parties prior to the minor or corporation cannot escape liability by setting up as defense the incapacity of the indorsers. A minor, however, may be held bound by his signature in an instrument where he is guilty of actual fraud committed by specifically stating that he is of age. (PNB v. CA, G.R. No. L‐34404, June 25, 1980) To know more information about CHAPTER 1- FORM AND INTERPRETATION PLEASE CLICK THE LINK: https://www.youtube.com/watch?v=NjBNdeduvK4&t=16s To know more information about Chapter 1-Kinds of Negotiable Instruments PLEASE CLICK THE LINK: https://www.youtube.com/watch?v=aceV4fCVv-g REFERENCE: Law on Negotiable Instruments Author: Hector S. De Leon Hector S. De Leon, Jr. Page 14