Negotiable Instruments - General Principles
PURPOSE OF CODIFICATION
Chief purpose was to produce uniformity in the laws of the different states upon this important subject, so that the citizens of each state might know the rules which would be applied to their notes, checks, and other negotiable paper in every other state in which the law was
enacted, since it is an absolute impossibility for the commercial purchaser
Second purpose was to preserve the law as nearly as possible as it then existed
COMMON FORMS OF NEGOTIABLE INSTRUMENTS
1. Promissory notes
2. Bills of exchange
3. Checks, which are also bills of exchange, but of a special kind
PROMISSORY NOTE, SECTION 184
“A negotiable promissory note, within the meaning of this act, is an unconditional promise in writing by one person to another, signed by the maker
(1), engaging to pay on demand or at a fixed or determinable future time
(2), a sum certain in money
(3) to order or to bearer
(4). Where a note is drawn to the maker’s own order, it is not complete until indorsed by them.”
Essentially a promise in writing to pay a sum certain in money
The promise is to pay on demand or on a fixed or determinable future time
General characteristics: amount; place where contract to pay is executed; due date; absolute promise to pay something; payable to order/bearer; payee; maker of the note
BILL OF EXCHANGE, SECTION 126
• “A bill of exchange is an unconditional order in writing addressed by one person to another signed by the person giving it
(1), requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time
(2) a sum certain in money
(3) to order or to bearer”
• General characteristics: the order or command to pay; drawer/maker; drawee
CHECK
A bill of exchange drawn on a bank payable on demand
TO WHOM INSTRUMENTS MAY BE PAYABLE
1. Bearer
2. Order
3. To a specified person
WHEN IS IT PAYABLE TO BEARER?
1. When it is expressed to be so payable
2. When it is payable to a person named therein or bearer
WHEN IS IT PAYABLE TO ORDER?
1. When it is expressed to be payable to the order of a specified person
2. To a specified person or his order
WHEN IS IT PAYABLE TO A SPECIFIED PERSON?
When the instrument is payable to a specified person named in the
instrument and no other
PARTIES TO A PROMISSORY NOTE
1. Maker—the person who executes the written promise to pay
2. Payee, if the instrument is payable to order—the person in whose favor the promissory note is made payable
3. Bearer, if the instrument is payable to bearer
PARTIES TO A BILL OF EXCHANGE
1. Drawer—the person who executes the written order to pay
2. Payee, if the instrument is payable to order—the person in whose favor a bill of exchange is drawn payable
3. Bearer, if the instrument is payable to bearer
4. Acceptor—the drawee who signifies his assent to the order of the drawer. It is only when he accepts the bill that he becomes a party thereto and liable thereon.
OTHER PARTIES TO NEGOTIATED INSTRUMENTS
1. Indorser and
2. Indorsee, in the case of instruments payable to order
3. Persons negotiating by mere delivery
4. Persons to whom the instrument is negotiated by delivery
INDORSER AND INDORSEE
When the negotiation is by indorsement completed by delivery, the parties added are the indorser and indorsee
Indorser—the one who negotiates the instrument
Indorsee—the one to whom the instrument is negotiated by indorsement
WHERE INSTRUMENT IS PAYABLE TO BEARER
• Where the instrument is payable to bearer, it can be negotiated by mere delivery without necessity of indorsement
HOLDER
The payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof
If the instrument is payable to order, he who is the payee or indorsee and who is in possession thereof
If the instrument is payable to bearer, he who is in possession thereof
ISSUE
First delivery of the instrument, complete in form to a person who takes it as a holder
DELIVERY
Consists principally of placing the transferee in possession of the instrument, but it must be accompanied by the intent to transfer title
“every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto”
NEGOTIATION
• Transfer of an instrument from one person to another as to constitute the transferee the holder of the instrument
• Mode of transferring an instrument
• Effect is to make the transferee the holder of the instrument
HOW INSTRUMENT PAYABLE TO BEARER IS NEGOTIATED
May be negotiated by mere delivery
HOW INSTRUMENT PAYABLE TO ORDER IS NEGOTIATED
Must be negotiated by indorsement completed by delivery
Indorsement is necessary to make the transferee the indorsee and delivery is necessary to place the transferee in possession of the instrument
INDORSEMENT
Legal transaction, effected by the writing of one’s own name on the back of the instrument or upon a paper attached thereto, with or without additional words specifying the person to whom or to whose order the instrument is to be payable whereby one not only transfers
one’s full legal title to the paper transferred but likewise enters into an implied guaranty that the instrument will be duly paid
SPECIAL INDORSEMENT
Specifies the person to whom or to whose order the instrument is to be payable
BLANK INDORSEMENT
One that doesn’t specify the person to whom or to whose order the instrument is to be payable
NEGOTIATION, INDORSEMENT, DELIVERY, COMPARED.
1. Indorsement is merely the first step in the process of negotiating an instrument which is payable to order
2. Where the instrument is payable to order, neither is delivery equivalent to negotiation
3. But where the instrument is payable to bearer, delivery is equivalent to negotiation
PRESENTMENT FOR ACCEPTANCE
Exhibiting the bill to the drawee and demanding that he accept it, that is, signify his assent to the order or command of the drawer
ACCEPTANCE
Signification of the drawee of his assent to the order of the drawer
DISHONOR BY ACCEPTANCE
Where the bill is presented for acceptance, and acceptance is refused by the drawee, or cannot be obtained, or where presentment for acceptance is excused, and the bill is not accepted
PRESENTMENT FOR PAYMENT
Consists of exhibiting the instrument to the person primarily liable thereon and demanding payment form him on the date of maturity
DISHONOR BY NON-PAYMENT
Where the instrument is presented for payment and payment is refused or cannot be obtained, or where presentment for payment is excused and the instrument is overdue and unpaid
NOTICE OF DISHONOR
When an instrument has been dishonored by non-payment or non-acceptance
DISCHARGE
• An instrument is discharged by payment in due course by or on behalf of the principal debtor
PARTIES PRIMARILY AND SECONDARILY LIABLE
• Under the Negotiable Instruments Law, the person primarily liable on an instrument is the person who by the terms of the instrument is absolutely required to pay the same
• All other parties are secondarily liable
IN BILLS OF EXCHANGE
• The acceptor is the one primarily liable
• He is absolutely required to pay the instrument as he engages that he will pay it according to the tenor of his acceptance
SECONDARY LIABILITY OF DRAWER
• By the mere drawing of the instrument, the drawer assumes the liability stated in Section 61
• The general tenor of the liability of the drawer is that he will pay the bill if the drawee doesn’t accept or pay the bill.
• In other words, he is not absolutely required to pay the bill—if the drawee pays, then he is not required to pay. It is only when the drawee doesn’t pay that he will be required to pay.
SECONDARY LIABILITY OF INDORSER
He will pay the instrument if the person primarily liable will not pay.
SECONDARY LIABILITY OF ONE NEGOTIATING BY DELIVERY
By merely delivering an instrument payable to bearer, without saying anything more, the person negotiating by mere delivery assumes the liability mentioned in Section 65.
Under said section, the general tenor of liability is similar to that of an indorser
IN PROMISSORY NOTES
The maker is primarily liable
Agreement of the maker is that he will pay the instrument according to the tenor
FUNCTION OF NEGOTIABLE INSTRUMENTS
1. Substitute for money
2. Increase the purchasing medium in circulation
PAYMENT BY NEGOTIABLE INSTRUMENTS
W/N the giving and taking of a promissory note or bill of exchange is prima facie absolute payment as in the case of money or merely a prima facie conditional payment?
The delivery of the promissory notes payable to order, or bills of exchange or 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
PRINCIPAL FEATURES OF NEGOTIABLE INSTRUMENTS
1. Negotiability
2. Accumulation of secondary contracts as they are transferred from one person to another
NEGOTIABILITY
Attribute or property 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 sums payable for himself free from defense.
PRIMARY PURPOSE OF NEGOTIABILITY
To allow bills and notes the effect which money, in the form of government bills or notes, supplies in the commercial world
ACCUMULATION OF SECONDARY CONTRACTS
Most important characteristic of negotiable instruments is the accumulation of secondary contracts which they pick up and carry with them as they are negotiated from one person to another
Advantage: they improve as they pass from hand to hand, as more debtors are added
