Negotiable instruments – characteristics

a. Negotiability –usually promissory note, bill of exchange

b. Accumulation of secondary contracts

Requisites

1. It must be in writing and signed by the maker or drawer

2. It must contain an unconditional promise or order to pay a sum certain in money
3. It must be payable on demand or at a fixed or determinable future time
4. It must be payable to order or bearer
5. Where the instrument is addressed to drawee, he must be named or otherwise indicated
therein with reasonable certainty

Role of negotiable instruments

a. As a substitute for money

b. As a medium for exchange or commercial transactions
c. As a medium for credit transactions

It can be made on leather or on whatever surface so long as it is movable

Its negotiability can be understood from the face of the instrument

The signature can be placed at any place of the instrument

The burden of proving the legitimacy of a signature belongs to the one alleging its falsity

Legal tender is that sort of money in which a debt, or other obligation calling for money, may be lawfully
paid, if the contract does hot specify the medium of payment. (18 R.C.L. 1276-1278; Ballentine's Law
Dictionary, p. 738.) Thus, gold and silver and bank notes are not money.

The place and the date are not essential to the negotiability of the instrument except in certain cases
when the date is necessary to determine when the note is due

A negotiable bill of exchange is 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.)
From the foregoing, it will be seen that a bill of exchange is essentially an order made by one person to
another to pay money to a third person. For brevity, a bill of exchange is usually called a "bill." If drawn
on a bank and payable on demand, the order bill is, by definition, called check. (Sec. 185.) The check is
the most common form of order paper
There a three parties involved in a bill of exchange

1. The drawer – the one who makes the instrument

2. The drawee – the one order to pay- in a check, it is the bank. Can become the acceptor
3. The payee – the one the instrument is in favor of

A drawee-bank is not liable for its refusal to pay a check on account of insufficient funds
notwithstanding the fact that a deposit may be made later in the day. Where the
deposit is sufficient, the failure of a bank to pay the check of the drawer entitles the
drawer to substantial damages without any proof of actual damages.

Sec. 2. Certainty as to sum; what constitutes. — The sum payable is a sum certain within the meaning
of this Act, although it is to be paid —
(a) With interest; or
(b) By stated installments; or
(c) By stated installments, with a provision that upon default in payment of any installment or of
interest the whole shall become due; or
(d) With exchange, whether at a fixed rate or at the current rate; or
(e) With costs of collection or an attorney's fee, in case payment shall not be made at maturity.

When promise is unconditional. — An unqualified order or promise to pay is unconditional within the
meaning of this Act, though coupled with —
(a) An indication of a particular fund out of which reimbursement is to be made, or a particular
account to be debited With the amount; or
(b) A statement of the transaction which gives rise to the instrument.
But an order or promise to pay out of a particular fund is not unconditional.

The drawee is not limited to the money in his hands belonging to the drawer. In other words, the fund
indicated is not the direct source of payment but only the source of reimbursement which is an act
subsequent to the payment.
EXAMPLE:
"Pay to the order of P PI,000.00 and reimburse yourself from the rentals of my house."
The drawee may pay the amount out of any fund. It is only the reimbursement that is to come from the
rentals.

But an instrument which is simply chargeable to a particular account (infra.) is negotiable. In this case,
payment is not confined to that fund, but is to be made whether it should fail or otherwise, and it is
mentioned only for the purpose of informing the drawee, as to his means of reimbursement.

The test of negotiability in every case is said to be whether or not the instrument carries the general
personal credit of the maker or drawer. If it does, the instrument is negotiable; if it carries only the
credit of a particular fund, the instrument is non-negotiable.
(1) "I promise to pay P or order the sum of P10,000.00 out of my salary in the government," or "out of
the proceeds of the sale of my shares of stocks."
(2) "Pay to bearer the sum of P10,000.00 out of the dividends which I may receive from X corporation."
(3) "Pay to bearer the sum of PI0,000.00 out of my money in your hands" or "out of my share of the
profits."

In each of the above cases, the maker or drawee is limited to the fund indicated and is not supposed to
pay if that fund should prove insufficient. The note, however, is not made uncollectible. The right or
contract must be resolved under ordinary contract law.

The intention to limit payment to a particular fund must be made plain. If the language used is
ambiguous or obscure, courts usually decide in favor of negotiability

EXAMPLES:
(1) "I promise to pay P or order the sum of PI,000.00 to be debited with his current account with me/'
(2) "Pay P or order the sum of PI,000.00 and charge the same to my account" or "to my share of the
profits."
(3) "Pay P or order PI,000.00 on account of my contract with you."

In the above cases, the instrument is payable absolutely and not out of a particular fund. It merely
indicates a particular account out of which the holder or drawee is to reimburse himself. The instrument
is to be paid first after which the particular account indicated will be debited.

"I promise to pay to the order of P P300,000.00 being the price of a car this day sold and delivered to
me."
The statement merely identifies the transaction which gives rise to the instrument. It does not qualify
the order or promise to pay making it conditional. The instrument is to be paid whether or not the cont
Terms and conditions contained in another paper. — If the promise or order is "subject to or governed
by the terms and
conditions of our contract executed by us on ___________________ ," the
instrument is not negotiable because the obligation to pay is burdened with the terms and conditions of
another contract, subjecting recovery on the Instrument to defenses available under the contract.
Furthermore, this will require an examination of said contract to determine the rights and obligations under
the instrument. Such instrument is non-negotiable regardless of what the terms of the contract actually are.
As already stated, the negotiability of the instrument must be determinable from what appears on its face
alone and not elsewhere, (see Sec. 1.)
In short, to destroy negotiability, the reference to a collateral contract must show that the obligation to
pay is burdened with the conditions of that contract. (Powell & Powell v. Greenleaf & Currier, 104 Vt.
480,162 Atl. 377.)
The rule in Section 3 may be stated thus: "The negotiability of a bill or note is not affected by a reference
which is simply: (a) a recital of the consideration for which the paper was given; or (b) a statement of
the origin of the transaction; or (c) a statement that it is given in accordance with the terms of a contract
between the same parties." (ibid.)
Sec. 4. Determinable future time; what constitutes. — An instrument is payable at a determinable
future time, within the meaning of this Act, which is expressed to be payable —
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future time specified therein;
ract is performed.