Regulatory Framework (module 2)

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LECTURE NOTES ON REGULATORY FRAMEWORK AND LEGAL ISSUES IN BUSINESS BSA 2104; Sections BFC and BEC; College of Business Administration University of the East – Manila

MODULE 2. Negotiable Instruments Law Form and Interpretation Consideration and Negotiation HOW IS NEGOTIABILITY DETERMINED Negotiability of a instrument is determined by ascertaining if all the requirements of Section 1 appear on the face of the instrument. The factors that affect the determination of negotiability of instruments are: 1) The whole of the instrument shall be considered; 2) Only what appears on the face of the instrument shall be considered; and 3) The provisions of the Negotiable Instruments Law, especially Section 1 thereof shall be applied. The negotiability is therefore not determined by looking at a separate document. Example: Mr. X issued a check in payment of the price of a land which he purchased from Mr. Y. The purchase of the land is covered by a document entitled Deed of Conditional Sale. The negotiability of the check will be determined based only on what is stated in the check itself and not based on the Deed of Conditional Sale. The sale may be conditional but the check may be considered negotiable if all the requirements of Section 1 appear on the check itself. IT MUST BE IN WRITING SIGNED BY THE MAKER OR DRAWER. MODULE 2.

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a. Writings The writings on the instrument may be made in any manner because Section 1 of the Negotiable Instruments Law does not specify the materials that should be used in writing the instrument nor the material on which the writing should be made. Therefore, the writings may be printed, in ink or in pencil and it may be written in any material that substitutes paper like cloth, leather or parchment. Section 191 of the NIL provides that the word “written” includes printed, and “writing” includes print. b. Signature. The maker must sign the promissory note and the drawer must sign the bill of exchange. The signature of the maker or the drawer may be in their handwriting, printed, engraved, lithographed or photographed so long as they are adopted as the signature of the signer. What is important is that the maker or the drawer used what he affixed as his own signature for authentication. For example, the maker Mr. Xavier placed the letter “X” as his signature in a promissory note. This can qualify as the signature of Mr. Xavier so long as he adopted it as his signature. This is true even if he does not usually sign using the letter “X” provided that he deliberately used it to authenticate. IT MUST CONTAIN AN UNCONDITIONAL PROMISE OR ORDER TO PAY A SUM CERTAIN IN MONEY. a. IT MUST CONTAIN A PROMISE OR AN ORDER TO PAY 1). A negotiable promissory note contains a promise to pay -- there is an undertaking made by the maker to pay the payee or any holder of the promissory note. 2) A bill of exchange contains an order to pay – the drawer is commanding the drawee to pay the payee or the holder. b. Promise to pay and its equivalent. 1)The word “promise” need not be used in the instrument as long as words that are equivalent are used. A “promise” may be implied from the language

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used in the instrument. For example, the following contains a promise although the word “promise” is not used. August 8, 2020 “Due X or order P8,000.00 payable on July 6, 2022. Sgd. “Y” 2) There is no “promise” if there is a mere acknowledgement of debt. For example, the following is not negotiable and a mere acknowledgement of debt. Order to pay and its equivalent. Normally the word “order” does not appear on a bill of lading. What is important is that a command is given to the drawee to pay. b. THE PROMISE OR ORDER MUST BE UNCONDITIONAL. The promise or order is not unconditional if the promise or order is made to depend on a contingent event. Even if the contingent event will occur, the instrument is not converted into a negotiable instrument. Meaning of condition. A condition under the Civil Code is a future and contingent event, or a past event unknown to the parties, the happening or non-happening of which will either give rise to an obligation or extinguish existing obligations. An event is contingent event if it is not sure to happen. If a condition is stated in the promissory note or a bill of exchange, the instrument is not negotiable. For example, this promissory note is conditional because the happening of a contingent event gives rise to the obligation to pay. July 20, 2019 I promise to pay Mr. X or order P20,000.00 on July 19, 2020 if he will be elected as Student Council President of the University of the East in the year 2020. “Sgd. Mr. A”

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Stipulations that make promise or order conditional. 1) An indication of an account or fund out of which payment shall be made. 2) When payment is made to depend upon a contingency

Stipulations that do not make the promise or order conditional 1)An indication of a particular fund out of which reimbursement is to be made. 2) An indication of a particular account to be debited with the amount. 3) A statement of the transaction which gives rise to the instrument.

PAYABLE ON DEMAND OR AT A FIXED OR DETERMINABLE FUTURE TIME. a) An instrument may be payable on a fixed date. instrument may be payable on August 5, 2020.

For example, an

b) An instrument may also be payable on demand. For example, an instrument may state: “I promise to pay Mr.X or order P5,000.00 on demand.” c) An instrument may also be payable at a determinable future time. For example, an instrument may be payable “on or before September 8, 2020.” PAYABLE TO ORDER OR BEARER An instrument that is payable to a specified person or entity is not negotiable because the NIL requires that the instrument must be payable to order or to bearer. For example, this instrument is not negotiable because it is payable to a specified person, Mr. X. July 1, 2008 MODULE 2.

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“I promise to pay Mr. X P10,000.00 on or before January 8, 2009” Sgd. Mr. Y If the instrument reproduced above contains a promise to pay “Mr. X or order” or a promise to pay “to the order of Mr.X” then the requirement that it is payable to bearer or to order is complied with.

IDENTIFICATION OF THE DRAWEE Section 1 of the NIL provides that “where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.” The requirement applies only to a bill of exchange and not to a promissory note. The requirement is imposed because it is indispensable that any person who will take the bill of exchange must know the person who will be primarily responsible under the instrument. The purpose of negotiable instrument as a tool in commercial dealings will be greatly hampered if the holder will still have to guess who is and look for the identity of the drawee. For example, it is not acceptable to indicate the drawee as “the person who always drives a red car going to his office in the City Hall of Iloilo City.

1.Acceptable Drawees --- Where the instrument is addressed to two or more drawees jointly. For example, this is a valid indication of drawees: “To Mr. X and Mr. Y.” 2. Not Acceptable Drawees: Where the instrument is addressed to two or more drawees in the alternative: For example, this indication of drawees is not valid: “To Mr X or Mr. Y.” 3. Not Acceptable Drawees: Where the instrument is addressed to two or more drawees in succession, For example, this indication of drawees is not acceptable: “To Mr. X or in his absence or failure to pay Mr. Y.”

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Sec. 2. What constitutes certainty as to sum. --- 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 (a) By stated installments, with a provision that, upon default in payment of any interest the whole shall become due; or (b) With exchange, whether at a fixed rate or at the current rate; or (c) With costs of collection or an attorney’s fee, in case payment shall not be made at maturity. a. Payable in Money. 1) The instrument is still negotiable even if the amount to be paid is expressed in currency that is not legal tender so long as it is expressed in money. For example, an instrument is still negotiable if the amount to be paid is “US$200.00, United States currency.” Although United States dollars are not legal tender in the Philippines, they are still money. 2) The promise or order to pay in goods is not negotiable. For example, this is not negotiable: “Pay Mr. X or order ten (10) kilos of aluminum.” 3) An instrument is not negotiable if what is to be paid is money and/or another thing at the option of the maker or acceptor or anybody who is supposed to pay. For example, an instrument is not negotiable if it states: “I promise to pay to Mr X or bearer P10,000 or to deliver three sacks of corn. Sgd. Mr. Y” 4) However, the instrument is still negotiable if the option belongs to the holder. The holder will choose if he will demand payment of money or delivery of goods. For example, an instrument is negotiable if it states: “I promise to pay Mr. X or bearer P10,000.00 or to deliver ten sacks of corn at the option of the holder. Sgd. Mr. Y.”

b. Sum Certain MODULE 2.

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The requirement is that the money to be paid must be a “sum certain.” A sumis certain within the contemplation of Section l (b) of the NIL If the amount that is to be unconditionally paid by the maker or drawee can be determined on the face of the instrument. For example, the amount to be paid is not certain if what is payable is “the balance of the loan that maker must still pay with the East West Bank.” It is also not negotiable if what is supposed to be paid is a sum certain plus another undetermined amount. For example, an instrument is not negotiable if the promise is “to pay P10,000.00 and the equivalent of the monthly allowance that I receive as employee of Apex Corporation” or if the promise is “to pay P10,000.00 plus all the profits that the maker’s store will earn in the month of December 2010.” c. Interest. Under Section 2, stipulations like payment of interest and payment in installment do not affect the certainty of the sum to be paid. In cases mentioned in Section 2, there is an unconditional obligation to pay the principal amount. For example, an instrument that states “Pay to the order of Mr. X P20,000.00 with interest at 20% per anum” is payable in sum certain because there is an absolute obligation to pay a fixed amount, P20,000.00. The interest is just an addition to the sum certain that is payable.

d. Installment Payments. “Stated installments” mentioned in Section 2 paragraph C means that two (2) things must be present: 1) the dates of each installment must be fixed or at least determinable; and 2) the amount to be paid for each installment must also be stated or at least determinable. MODULE 2.

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Examples: 1.This instrument is payable in stated installments because the amount of each installment is fixed (P2,000.00) and the dates of each installments are also fixed (December 5, 2020, January 5, 2021, February 5, 2021 and March 5, 2021), 2. The instrument is not payable in stated installment. Both the amount of each installment and the dates of each installments are not fixed and the instrument is not negotiable. For example: “I promise to pay Mr. X or order P8,000.00 in installment every month starting September. Sgd. Y”

e. Acceleration Clauses. Section 2 of the NIL provides that the certainty of the amount to be paid is not affected if it is to be paid “by stated installments, with a provision that upon default in payment of any installment or of interest, the whole shall become due.” When there is an accelerationclause, payment can be demanded earlier than the original date fixed. What is contemplated in this provision is a typical acceleration clause where the cause of the acceleration is an act attributable to the person who is supposed to pay that is, his nonpayment.

f. Payable with Exchange. As already pointed out earlier that the negotiable instrument can be payable in foreign currency. In such type of negotiable instrument, the maker or the drawer may provide for the exchange rate. For instance, although the amount stated may be in United States currency, actual payment may be in Philippine currency. Hence, it is necessary to place the exchange rate in order to know the exact amount to be paid in Pesos. In such a case the negotiability of the instrument is not affected because the principal sum is still certain. MODULE 2.

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g. With cost of collection and attorney’s fees The sum is still certain because the principal amount is still certain in case the payeeor any holder will be forced to file a collection casein courtif there is non-payment.

Sec. 3. 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.

a. Promise or Order to Pay Must be Unconditional. 1. Condition under the New Civil Code. Under Articles 1173 and 1181 of the New Civil Code, a condition is a future and uncertain event, or a past event unknown to the parties, the happening (positive) or non-happening (negative) of which may either give rise to an obligation or may extinguish existing ones. The condition is suspensive if the happening or non-happening of the event will give rise to an obligation; the condition is resolutory if the happening or nonhappening of the event will extinguish existing obligations. The negotiability of the instrument is destroyed if the same, on its face, contains either a resolutory or suspensive condition. 2. Reference to Transaction. Section 3 makes it clear that the statement of the transaction that gave rise to the obligation covered by the note or the bill does not destroy MODULE 2.

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the negotiability of the instrument. However, if the transaction restricts the instrument or subjects the instrument to its terms and condition, the instrument is rendered non-negotiable.

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