Commercial Law Review
Glenn Tuazon, 4-A
Atty. Jack Jimenez
SY 2010-11
4 Quizzes (50 each) + MT (100) + Finals (100) divided by 4 = Final Grade
Part 1: Negotiable Instruments Law
· HISTORY: contrast a negotiable instrument with a non-negotiable PN:
o First objection: a person stepping into the shoes of the seller is exposed otherwise to the defenses that the buyer may launch against the seller
§ Law’s solution – exempt from personal defenses
o Second objection: “I don’t know the maker, I just know the one negotiating it to me. How will I know he’s solvent?”
§ Law’s solution – will make the indorser liable regardless (Accumulation of secondary contracts)
§ The more indorsers, the more you can sue
· Two general parts in the law:
o 1 – what makes an instrument negotiable
o 2 – rights and obligations of parties
· Two basic forms:
o Promise to pay (PN)
o Order to pay (bill of exchange)
· If it does not comply with the requisites of negotiability, it is still a contract, but not covered by the NIL.
· Either:
o Payable to order – negotiated by indorsement, and delivery
o Payable to bearer – delivery is sufficient
o N.B. If payable to a specific person, it is not negotiable
· Four basic contracts involved:
o 1. Making
o 2. Drawing
o 3. Negotiating
o 4. Accepting
§ To show consent
o N.B. But for all, there must be delivery
· Basic principles: NIL is for justice.
o 1. Bad faith: So if a person is in BF, he cannot invoke defenses. (Ex. Issued a negotiable instrument to pay for a car that is defective. The indorsee knows that the car is defective, he is in bad faith.)
o 2. Estoppel – ex. A father allowing a son to steal a check and forge his signature is estopped from denying it
o 3. Comparative fault
§ If a bank honors a check with a forged signature, the bank is considered negligent too
§ But if the negligence of the drawer outweighs the negligence of the bank, the law shifts the fault to the drawer
o 4. The law will only protect you from personal defenses if you are a holder in due course (Sec. 52)
§ Good faith
§ With value
§ Before overdue (see below)
§ With no notice of defenses
o 5. General rule: there must be demand , before an instrument becomes overdue. Exception: If time is of the essence.
§ Ex. Reserve requirements of banks must be kept afloat, so overnight, banks sometimes transact with each other
§ “An overdue instrument is shouting to the high heavens – I have been dishonored!”
· Requirements – found in Sec 1. 2-9 are elaborations of such.
o 1a. It must be in writing
o 1b. It must be signed – symbol of consent
§ If one signed another name or a symbol, it will bind him if he intended for it to bind him
§ Location is immaterial
o 2a. Must contain a promise or order to pay
§ Need not use exact words, even equivalent words are fine
§ Creates a NEW obligation to pay, not a mere acknowledgement of an old debt
· Exception 1: date of payment is mentioned, or at least, a date of maturity
· Exception 2: insertion of “or order” (words of negotiability) in the old terms
§ Authorization to pay or a mere request does not create a binding obligation to pay.
o 2b. The promise to pay or order must be unconditional
§ Do not look into evidence aliunde. You must confine yourself within the four corners of the instrument to deem whether it is absolute.
§ Fall back on obligations and contracts – distinguish between uncertain events and certain events, although indeterminate (ex. Moment of death of mother-in-law)
o 2c. Sum certain, and payable in money
§ Because it is meant to be a substitute for money
§ Also, specify the denomination. Cannot just be a number.
o 3. Payable on demand or on a determinable future time
o 4. Payable to order or bearer
§ Need not use exact words
§ But there must be reasonable certainty so people know from whom they could demand payment
§ Ex. instead of “order” à pay to X or his indorsees; pay to X or his assigns
§ Ex. instead of “bearer” à pay to X or holder; pay to X or possessor
o 5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated with reasonable certainty
§ If name of the drawee is left blank, it is an incomplete instrument which can be filled up as a remedy
· Most cases involve fraud, by taking advantage of the features of the law.
· Sec 2: when a sum is certain
o Even when there is a stipulation of interest. It must be in writing.
o The stipulated rate controls – there is no more ceiling on interest rate. But it is unconscionable, it is void, and the rate is reduced to 12% (in circular 416).
o If there is stipulated interest, without a rate, 12% as well.
o If payment is by installment, for the instrument to be valid, the amount of installments must be indicated and the date of maturity of each installment is specified.
§ “Promise to pay Jose Cruz or order P100,000 in 10 installments.” à not negotiable
§ You have to specify both AMOUNT and WHEN EACH is due. You cannot just give the starting point (ex. Nov 2005)
o If there is an acceleration clause – failure to pay an installment will make the entire balance due and demandable.
o It is now valid to stipulate payment in foreign currency.
o If you talk about an exchange rate, you have to talk about at least 2 currencies. It cannot be just one.
o Under Civil Code, general rule is attorney’s fees are not recoverable, except when there is written stipulation. Stipulating such makes the NI more attractive.
§ Ex. “I will pay reasonable attorney’s fees in case there is failure to pay” – is this a sum certain? Yes. Because you know how much is due at the date of maturity (it doesn’t matter what you pay after maturity). This is the reckoning point – at the date of maturity, is the sum certain? ALSO, stipulations on attorney’s fees is always subject to court control anyway.
· Sec 3: promise is unconditional
o Instructions on how payment will be entered into the books of account does not affect unconditional nature
§ Neither does “reimburse yourself” affect
§ TEST: it must indicate the source of reimbursement, not source of payment. The latter is not negotiable.
o Statement of how the original obligation came about does not affect conditionality
§ But it will become non-negotiable if mention of the prior contract (ex. deed of sale) makes the NI subject to the terms and conditions of the contract. This makes it conditional.
o Elizalde: Person bought cars. He issued a PN, secured with a CM over vehicles. The PN said that the payment is secured by the CM. It was negotiated to Elizalde by the car selling company. Elizalde sought to collect. Issue is whether the statement of security (CM) made it non-negotiable. HELD: Negotiable, because the promise to pay is still conditional, and is not dependent to the CM. Test: does the promise to pay rely on the terms and conditions of the security? If so, it is not negotiable. Else, it is negotiable.
o Abubakar: A Treasury Warrant is not negotiable. It is payable out of a particular fund, so you do not apply Sec. 66. “No money should be paid out of the Treasury without an appropriation for that purpose” (Constitution).
§ FACTS here: X deposited treasury warrants with a rural bank. The rural bank deposited with Metrobank. Even before the treasury warrants were cleared by the clearing house, Metrobank allowed withdrawal. The warrants were spurious. Metrobank is suing the rural bank to recover, since the rural bank warranted the treasury warrants by negotiating it to Metrobank. HELD: Metrobank is wrong, because the treasury warrants are not negotiable instruments.
o BUT a reference from which fund the obligation would be paid does not destroy negotiability if payment is not limited to come from such fund.
· Sec 4; payable at determinable future time
o 1st situation: “Pay Jose Cruz or order… if the holder feels insecure, he may demand that I post reasonable securities, and if I fail to do so, he can declare the entire balance due and demandable.”
§ One view: non-negotiable – because date of maturity becomes uncertain because holder can accelerate payment, and there is an additional undertaking other than payment of money.
§ Other view: negotiable – because the undertaking to put up a security is merely an accessory obligation. The date of maturity is not uncertain because acceleration is within control of the maker; he can prevent it by complying with the additional security. (better view)
o 2nd situation: “same… if the holder feels unsecure, he can declare the entire balance due and demandable.”
§ It is not negotiable, because here, the holder has the absolute option to make the obligation due and demandable.
o Differentiate:
§ When the maker may choose to pay before a certain date, it is still negotiable (ex. “on or before June 15” à maker can pay before June 15 at his option)
· Effect: all other secondary contracts are discharged. It benefits everybody.
§ When the holder may absolutely choose to have the obligation due, it is not
· Effect: everybody becomes secondarily liable by ripening their obligation. Thus, this is not valid.
o If hinged upon a contingency, non-negotiable even if the event or condition happens.
o Philippine Education v. Soriano: A money order is not negotiable, because although it says “pay to the order of,” under Postal Regulations, obligation to pay is conditional, depending on different grounds where the post office can refuse to pay. Also, it can only be indorsed once.
· Sec 5: additional provisions that do not affect negotiability
o GENERAL RULE: Other obligation or undertaking aside from payment of money makes it non-negotiable (“secured by CM over my car, which I will keep in good condition”)
o EXCEPTIONS:
o Authority for holder to foreclose pledge/CM or collateral securities
o Authorizes confession of judgment if instrument not paid upon maturity
§ N.B. the SC said, however, this is a void stipulation
o Waiver of benefit of law
§ Waiver of notice of dishonor
§ Waiver of venue
§ Waiver of exemption from execution
o Holder can require something other than payment of money
§ If option is upon holder to demand either cash or rice, it is still negotiable because the holder can ALWAYS demand money
· Sec 6: omissions which do not affect
o 1. Not dated
o 2. Failure to mention consideration
§ It is presumed in this contract
o 3. Does not specify place where it is drawn or payable
o 4. Bears a seal
o 5. Designates currency in which payment will be made
· Sec 7: When it is payable on demand
o Upon sight or presentation
o Instrument is silent on when payment is made
o When it is overdue
§ As to the maker, he is discharged
§ BUT as to the indorser, it is upon demand
· Sec 8: When it is payable to order
o [It may be upon order of]
o 1. Order of payee who is not maker, drawer, or drawee
o 2. Drawer
§ Ex. Jose Cruz writing a check saying “Pay to the order of Jose Cruz” – this is better than making a check paid to cash, which anyone can encash if lost and found
§ In this example, it is not complete until Jose indorses it, because there has to be delivery (at least two parties to a contract)
o 3. Drawee
o 4. Two or more payees jointly
§ Ex. Pay to the order of Jose Cruz AND Manuel Santos
o 5. One or some of several payees
§ Ex. Pay to the order of Jose Cruz OR Manuel Santos
o 6. Holder of an office for the time being (ex. Treasurer of the city of Makati)
o If the drawee is not indicated with reasonable certainty, then it is not negotiable.
· Sec 9: When it is payable to bearer
o 1. Expressed as such
§ Caltex: [unclear facts] Caltex required collateral for a credit line. Requestor had as security a time deposit (Security Bank). Caltex accepted it. [yada yada yada] Bottomline, requestor maxed his credit line and disappeared. Caltex and Security bank are in dispute. HELD: It says that the deposit is payable to the depositor, and the depositor is bearer. It is a bearer instrument.
§ [As explained by Phil. Law Library]: The Certificates of Time Deposit are negotiable instruments. The documents provide that the amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is the "bearer." The documents do not say that the depositor is Angel de la Cruz and that the amounts deposited are repayable specifically to him. Rather, the amounts are to be repayable to the bearer of the documents or, for that matter, whosoever may be the bearer at the time of presentment. (Caltex)