Negotiable Instrument Law 1

Question 1

Requisites for a negotiable instrument

Answer 1

SECTION 1. Form of Negotiable Instruments. — An instrument to be negotiable must conform to the following requirements:
(a)It must be in writing and signed by the maker or drawer;
(b)Must contain an unconditional promise or order to pay a sum certain in money;
(c)Must be payable on demand, or at a fixed or determinable future time;
(d)Must be payable to order or to bearer; and
(e)Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.

Question 2

What is a negotiable instrument?

Answer 2

a written contract for the payment of money which complies with the requirements of Sec. 1 of the Negotiable Instruments Law (NIL), which by its form and on its face, is intended as a substitute for money and passes from hand to hand as money, so as to give the holder in due course (HDC) the right to hold the instrument free from defenses available to prior parties

Question 3

What are the functions of a negotiable instrument?

Answer 3

1. Substitute for money
2. Medium of exchange
3. Credit instrument which increases credit circulation
4. Increase purchasing medium in circulation
5. Evidence of transaction

Question 4

Two Distinctive Features/ Characteristics of Negotiable Instruments:

Answer 4

Negotiability - it is that attribute or property whereby a bill or note or check 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 to collect the sum payable for himself free from defenses.

Accumulation of Secondary Contracts - secondary contracts are picked up and carried along with Negotiable Instruments as they are negotiated from one person to another; or in the course of negotiation of negotiable instruments, a series of juridical ties between the parties thereto arise either by law or by privity. The indorsers become secondarily liable to the holder.

Question 5

What are the kinds of negotiable instruments?

Answer 5

Promissory Note (PN) – 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 (Sec. 184)

Bill of Exchange (BE) - 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)

Check - a bill of exchange drawn on a bank payable on demand (Sec. 185

Question 6

What is the difference between a promissory note and bills of exchange?

Answer 6

A promissory note is an unconditional promise, a bill of exchange is an unconditional order.

A promissory note involves two parties, a bills of exchange involves three parties

In a promissory note, a person who issues such is called a maker while in bills of exchange a person who issues is called the drawer.

in a PN, the maker pays the payee in a bill of exchange, the drawee pays the payee

Question 7

What is a sum certain?

Answer 7

The sum payable sum 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.

Question 8

When is an instrument payable to order?

Answer 8

The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable to the order of—

(a) A payee who is not maker, drawer, or drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.

Where the instrument is payable to order the payee must be named or otherwise indicated therein with reasonable certainty.

Question 9

When is a NI payable to bearer?

Answer 9

Section 9. The instrument is payable to bearer—
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named therein or bearer; or
(c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or
(d) When the name of the payee does not purport to be the name of any person; or
(e) When the only or last indorsement is an indorsement in blank, sufficient terms.

Question 10

Difference between bearer instruments and documents payable to order.

Answer 10

If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder and completed by delivery.

Question 11

Steps in the issuance of a negotiable instrument

Answer 11

The mechanical act of writing the instrument completely and in accordance with Sec. 1 of NIL.

Delivery - The transfer of possession, actual or constructive, from one person to another (NIL, Sec. 191), with the intent to transfer title to payee and recognize him as holder thereof.

Question 12

What is the effect of an incomplete and not delivered instrument?

Answer 12

Section 15. Where an incomplete instrument has not been delivered it will not, if completed and negotiated, without authority, be a valid contract in the hands of any holder, as against any person whose signature was placed thereon before delivery.

Question 13

SEC. 16. Delivery; when effectual: when presumed.—

Answer 13

Every contract on a negotiable instrument is incomplete and revocable until delivery of the instrument for the purpose of giving effect thereto. As between immediate parties, and as regards a remote party other than a holder in due course, the delivery, in order to be effectual, must be made either by or under the authority of the party making, drawing, accepting, or indorsing, as the case may be; and in such case the delivery may be shown to have been conditional, or for a special purpose only, and not for the purpose of transferring the property in the instrument. But where the instrument is in the hands of a holder in due course, a valid delivery thereof by all parties prior to him so as to make them liable to him is conclusively presumed. And where the instrument is no longer in the possession of a party whose signature appears thereon, a valid and intentional delivery by him is presumed until the contrary is proved.

Question 14

INTERPRETATION OF NEGOTIABLE INSTRUMENTS (Sec. 17)

Discrepancy between the amount in figures and that in words

Answer 14

the words prevail, but if the words are ambiguous, reference will be made to the figures to fix the amount.

Question 15

What is the effect of indorsement by infant or corporation?

Answer 15

Section 22. The corporation, indorsement or assignment of the instrument by a corporation or by an infant passes the property therein, notwithstanding that from want, of capacity the corporation or infant may incur no liability thereon.

Infant = minors

Question 16

What are the effect of a forged signature?

Answer 16

Section 23. When a signature is forged or made without the authority of the person whose signature it purports to be, it is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority.

Question 17

SEC. 24. Presumption of consideration.—

Answer 17

Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value.

Question 18

What constitutes value?

Answer 18

Section 25. Value is any consideration sufficient to support a simple contract. An antecedent or preexisting debt constitutes value; and is deemed such whether the instrument is payable on demand or at a future time.

Question 19

What constitutes holder for value?

Answer 19

Section 26. Where value has at any time been given for the instrument, the holder is deemed a holder for value in respect to all parties who became such prior to that time.

Question 20

What is the effect of want of consideration?

Answer 20

Section 28. Absence or failure of consideration is matter of defense as against any person not a holder in due course; and partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise.

Question 21

What is an accommodation party?

Answer 21

An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person.

An accommodation party is considered a surety of the credit.

Question 22

What is the liability of an accommodation party?

Answer 22

Such a person is liable on the instrument to a holder for value, notwithstanding such holder at the time of taking the instrument knew him to be only an accommodation party.

Question 23

What are the incidents in the life of a negotiable instrument?

Answer 23

1. Issuance
2. Negotiation
3. Presentment for acceptance (for bills of exchange)
4. Acceptance (for bills of exchange)
5. Dishonor by non-acceptance (for bills of exchange)
6. Presentment for payment
7. Dishonor by non-payment
8. Notice of dishonor
9. Discharge

Question 24

What constitutes negotiation?

Answer 24

Section 30. An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder completed by delivery.

Question 25

How is an indorsement made?

Answer 25

The indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement.

Question 26

What are the kinds of indorsement?

Answer 26

1. Special indorsement
2. Blank indorsement

Question 27

What is a special indorsement?

Answer 27

A special indorsement specifies the person to whom, or to whose order, the instrument is to be payable; and the indorsement of such indorsee is necessary to the further negotiation of the instrument.

Question 28

What is an Indorsement in Blank

Answer 28

An indorsement in blank specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery.

Question 29

What is the effect of striking out an indorsement?

Answer 29

Section 48. The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument.

Question 30

Sec17. How to interpret when:

Payment for interest is provided for

Answer 30

interest runs from the date of the instrument, if undated, from issue thereof.

Question 31

When the instrument is undated:

Answer 31

consider date of issue.

Answer 32

4. Conflict between written and printed provisions – written provisions prevail.
   5.

Answer 33

When the instrument is so ambiguous that there is doubt whether it is a bill or note, the holder may treat it as either at his election;
6.

Answer 34

If one signs without indicating in what capacity he has affixed his signature, he is considered an indorser.
7.

Answer 35

If two or more persons sign “We promise to pay,” their liability is joint (each liable for his part) but if they sign “I promise to pay,” the liability is solidary (each can be compelled to comply with the entire obligation). (Sec. 17)