Negotiable Instruments Notes: Introduction

Most common forms of negotiable instruments
  1. Promissory notes (there are also special type i.e. bonds, due bills etc.)
  • Sec. 184. Promissory note, defined. – A negotiable promissory note within the meaning of this Act is
    • an unconditional promise
    • in writing 
    • made by one person to another, 
    • signed by the maker
    • engaging 
    • to pay
      • on demand, or 
      • at a fixed or determinable future time, 
    • a sum certain in money
      • to order or 
      • to bearer. 
    • Where a note is drawn to the maker’s own order, it is not complete until indorsed by him

  • x Figure - more easy to grasp than words 
  • Place executed
  • Date executed
  • To the order of - may be this or to bearer to make it negotiable
  • Payee
  • Signature of maker
  • x Place of payment
  • Amount in words and x figure
  • x Consideration
     2.  Bills of exchange (there are also special types i.e. banker's acceptance, money orders, etc.)
  • Sec. 126. Bill of exchange, defined. – A bill of exchange is an 
    • unconditional order 
    • in writing
    • addressed by one person to another, 
    • signed by the person giving it, (drawer)
    • requiring the person to whom it is addressed (drawee)
    • to pay 
      • on demand or 
      • at a fixed or determinable future time 
    • a sum certain in money 
      • to order or 
      • to bearer.

  • Order or command to pay
  • Signature of Drawer
  • Drawee
  • Payee
      3.  Checks (special form of bill of exchange)


  • Sec. 185. Check, defined. – A check is a 
    • bill of exchange 
    • drawn on a bank 
    • payable on demand. 
    • Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check.
  • Distinctions bet. check v. bill of exchange
    • Check 
      • always drawn upon a bank or banker 
      • always payable on demand
      • NOT necessary to be presented for acceptance 
        • since checks are not to be accepted but presented at once for payment
          • HOWEVER: if the holder requests, and the banker desires, he may accept
      • drawn on deposit OTHERWISE fraud (B.P. 22)
      • death of a drawer of a check w/ knowledge by the banks, revokes the authority of the banker to pay
      • may be presented for payment w/in a reasonable time after its issue
    • Ordinary Bill of Exchange
      • may or may not be drawn against a bank
      • may be payable on demand or at a fixed or determinable future time
      • necessary to be presented for acceptance (drawee turns into acceptor)
      • NOT necessary that a drawer of a bill of exchange should have funds in the hands of the drawee
      • death of a drawer of an ordinary bill of exchange does NOT revoke authority
        • BUT there are some decisions to the contrary
      • may be presented for payment w/in a reasonable time after its last negotiation
To whom instruments may be payable
  1. bearer
    1. when it is expressed to be so payable; or (payable to bearer)
    2. when it is payable to a person named therein or bearer (payable to person named or bearer)
  2. order
    1. to the order of a specified person
    2. to a specified person or his order 
Parties
  • Promissory note
  1. Maker - person who executes the written promise to pay
  2. Payee (if payable to order) or Bearer (if payable to bearer) - in whose favor it is made payable
  • Bill of exchange
  1. Drawer - person who executes the written order to pay
  2. Payee (if payable to order) or Bearer (if payable to bearer) - in whose favor it is made payable
  3. Acceptor - drawee who signifies his assent (usually by signature) to the order of the drawer
    • drawee (NOTE: before assent; NOT a party)
      • addressee
      • person who is commanded or ordered by the drawer to pay a sum certain in money
  • Check  - same as bill of exchange EX
    • certification - instead of acceptance
    • Drawee bank
  • Other parties
    • By indorsement + delivery
  1. indorser - payee who negotiates by indorsement
  2. indorsee (in case payable to order) - to whom the instrument is negotiated by indorsement

    • By delivery (w/o indorsement)
  1. persons negotiating by mere delivery
  2. person to whom the instrument is negotiated by delivery (in case payable to bearer)
  • Holder 
  • Sec. 191 Holder - the payee or indorsee of a bill or note who is in possession of it, or the bearer thereof;
    • payable to order
    1. payee or indorsee
    2. who is in possession
    • bearer
    1. who is in possession
Incidents in the "life" of negotiable instrument
  1. issue - 1st delivery complete in form to a holder

  • delivery - transfer of possession w/ intent to transfer title
    • w/o delivery = incomplete and revocable until delivery
     2.  negotiation - mode of transferring
  • bearer - delivery (here delivery = negotiation)
  • to order - indorsement + delivery
    • indorsement (transfer + implied warranty) - legal transaction, effected by the writing of one's own on the back or upon paper attached (allonged) w/ or w/o addt'l words 
    1. special indorsement - specifies a person to whom it is payable
    2. blank indorsement - does NOT specificy to whom payable
     3.  presentment for acceptance (in certain kinds of bill of exchange) - exhibit the bill to the drawee and demanding that he accept  (signify his assent to the order or command of the drawer)
     4.  
        a.  acceptance -signification by the drawee of his assent to the order of the drawer
  • usually by writing "accepted" followed by signature
  • If check stamped with "certified"
         b.  dishonor by non-acceptance - 
  • when presented and acceptance is refused by the drawee or CANNOT be obtained or 
  • where the presentment for acceptance is excused and the bill is NOT accepted 
     5.  
         a.  presentment for payment (req. for all kinds of negotiable instruments) - consists of exhibiting the instrument to the person primarily liable thereon and demanding payment from him on the date of maturity
         b. dishonor by non-payment 
  • where the instrument is presented for payment and payment is reused or CANNOT be obtained or 
  • where presentment for payment is excused and the instrument is overdue and unpaid
     6.  notice of dishonor 
  • when dishonored by non-acceptance or by non-payment, a notice of dishonor must be given to the drawer and each indorser and any drawer or indorser to whom such notice is NOT given is discharged
  • prupose: notify that NOT paid
     7.  discharge - by payment in due course by or on behalf of the principal debtor

Parties liable:
  • Primarily liable - absolutely required to pay
    • Bills of exchange: acceptor
  • Secondarily liable - others
    • Bills of exchange: drawer, general and qualified indorsers (Secs. 65 & 66), person negotiating by mere delivery (Sec. 65)
Negotiable instruments are distinguish from cash 
  • CANNOT be compelled to accept it in transaction
  • Purpose: supplement currency of gov't
    • check - immediate payment
    • ordinary bill of exchange and promissory note - circulation of credits
  • Delivery is NOT payment, payment only when encashed
  • Principal features

  1. negotiability - 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 personal defense
  2. accumulation of secondary contracts as they are transferred from 1 person to another
Negotiability v. Assignability
  • Assignability
    • more comprehensive since contracts in general
    • subject to defenses among orig. parties
    • necessary to allege and prove consideration
    • assignor in GF  does NOT warrant solvency of the debtor UNLESS 
      • expressly stated
      • insolvency was prior to the assign. and of common knowledge
  • Negotiability
    • special class of contracts: negotiable instruments
    • free from personal defenses avail. among parties
    • consideration is presumed
    • indorser is not liable on his indorsement UNLESS presented for payment and prompt notice of dishonor (in case of dishonor)
      • general indorser is secondarily liable for any cause for w/c the party primarily liable on a negotiable instrument does NOT or CANNOT pay 
      • qualified indorser and the person negotiatin by mere delivery have a limited secondary liability
In non-negotiable:
  • indorsement = assignment
  • indorser = assignor
  • indorsee = assignee