NOTES IN NEGOTIABLE INSTRUMENTS LAW
Class of Atty. Zarah Villanueva-Castro (FEU / San Beda)
I. PRELIMINARY CONSIDERATIONS
Negotiable Instrument - a written contract for the payment
of money which complies with the requirements of Sec. 1 of
the 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.
(Reviewer on Commercial Law, Sundiang and Aquino)
Functions of
1.
2.
3.
Negotiable Instrument:
Substitute for money
Medium of exchange
Tool used in commercial transaction.
Two Distinctive Features of NI:
1. 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.
¾ Requisites of Negotiability:
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.
2. 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.
Distinctions: Negotiable and Non-Negotiable Instruments
NEGOTIABLE
Must contain all requisites
of sec.1
Transferable by
negotiation and
assignment
HDC can have rights
better than his transferor
Prior parties warrant
payment (secondary
liability)
Governed by NIL
Transferee is a holder in
due course
Defenses generally not
available
NON-NEGOTIABLE
Does not contain all
requisites of sec.1
Transferable by
assignment only
A transferee acquires no
better right than his
transferor
Prior parties do not
warrant payment but
merely the legality of
title
NIL only by analogy
Transferee is assignee
only
All defenses available
against last transferee
Classes of Negotiable Instruments:
1. Promissory Note (PN) - unconditional promise in writing
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.
2. 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.
Bills in Set: one composed of several parts, each part
numbered and containing a reference to the other parts, the
whole of the parts constituting but one bill.
•
Rights of holders where parts are negotiated
separately:
1. If both are HDC, the holder whose title first
accrues is considered the true owner of the
bill.
2. But the person who accepts or pays in due
course shall not be prejudiced.
•
Obligations of holder who indorses 2 or more parts
of the Bill in Set:
1. The person shall be liable on every such part.
2. Every indorser subsequent to him is liable on
the part he has himself indorsed, as if such
parts were separate bills.
Distinctions between a Negotiable Instrument and a
Negotiable Document of Title
NEGOTIABLE INSTRUMENT
The subject is money
Has all the requisites of
Sec 1 of NIL
A holder of NI may run
after the secondary parties
for payment if dishonored
by the party primarily
liable
A holder, if HDC, may
acquire rights over the
instrument better than his
predecessors
PROMISSORY
NOTE
Unconditional promise
Involves 2 parties
Maker is primarily liable
Only one presentment: for
payment
NEGOTIABLE DOCUMENT
OF TITLE
The subject is goods
Does not have these
requisites
Intermediate parties are
not secondarily liable if the
document is dishonored
A holder can never acquire
rights to the document
better than his predecessors
BILL OF EXCHANGE
Unconditional order
Involves 3 parties
Drawer is only secondarily
liable
Two presentments: for
acceptance and for
payment
Instances when BILL may be treated as a NOTE:
1. Drawer and drawee are the same person.
1. Drawee is a fictitious person.
2. Drawee has no capacity to contract.
3. When instrument is so ambiguous, the holder may treat
it either as a BILL or a NOTE.
Other Forms of Negotiable Instruments
1. Certificate of deposit issued by banks, payable to the
depositor or his order, or to bearer
2. Trade acceptance
3. Bonds, which are in the nature of promissory notes
4. Drafts, which are bills of exchange drawn by one bank
upon another
ƒ
All of these must comply with Sec. 1, NIL
Note: Letters of credit are not negotiable.
Legal Tender
That kind of money that the law compels a creditor to accept
in payment of his debt when tendered by the debtor in the
right amount.
Note: A negotiable instrument although intended to be a
substitute for money, is generally not a legal tender.
Incidents in “Life” of Negotiable Instrument
1. Issue
2. Delivery
3. Negotiation
4. Presentment for acceptance, in certain kinds of bills of
exchange
5. Acceptance
6. Dishonor by non-acceptance
7. Presentment for payment
8. Dishonor by non-payment
9. Notice of dishonor
10. Discharge
Issue - the first delivery of the instrument, complete in form,
to a person who takes it as a holder.
Delivery - transfer of possession, actual or constructive, from
one person to another
Holder – refers to the:
a. The payee or indorsee of a bill or note who is in
possession of it, or
b. The bearer thereof (sec.191)
Bearer - the person in possession of a bill or note which is
payable to bearer.
Person - includes a body of persons, whether incorporated or
not.
II. FORM AND INTERPRETATION OF INSTRUMENTS
Requisites of Negotiability (Sec. 1, NIL
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.
1. Must be in writing, signed by the maker or drawer;
- Otherwise it cannot be a substitute for money.
2. Must contain an unconditional promise or order to pay a
sum certain in money;
Certainty of sum payable.
The sum payable is a sum certain 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. (sec. 2)
Acceleration clause - renders whole debt due and
demandable upon failure of obligor to comply with certain
conditions.
When promise is unconditional
An unqualified order or promise to pay is unconditional
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.
¾ An order or promise to pay out of a particular fund is not
unconditional.
FUND FOR
PARTICULAR FUND FOR
REIMBURSEMENT
PAYMENT
Drawee pays the payee
There is only one act: the
from his own funds;
drawee pays directly from
afterwards, the drawee
the particular fund
pays himself from the
indicated. Payment is
particular fund indicated.
subject to the condition
that the fund is sufficient.
Particular fund indicated
Particular fund indicated is
is NOT the direct source
the direct source of
of payment but only the
payment.
source of reimbursement.
Indication in the
Indication in the
instrument does not
instrument makes the
affect the unconditional
promise or order
nature of the promise or
conditional.
order.
3. Payable on demand or at a fixed determinable future
time;
Certainty of time of payment
An instrument is payable at a determinable future time 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; or
c.
On or at a fixed period after the occurrence of a
specified event which is certain to happen, though
the time of happening be uncertain.
An instrument payable upon a contingency is not
negotiable, and the happening of the event does not
cure the defect. (sec. 4)
¾ A promise to pay “when able,” “as soon as I can”, etc.,
without specification of an absolute date is not
negotiable. However, there is a difference of opinion as
to whether it is a conditional promise or an absolute
promise to pay at un unreasonable time:
a. Under the first view, negotiability is destroyed
both by the condition and by want of a fixed
time for payment;
b. Under the second view, by the general
principle that a promise to pay within a
reasonable time is not so certain as to render
an instrument negotiable.
Aftersight Draft - payable only after the expiration of the
stipulated period from acceptance (legal sight).
¾
When payable on demand:
a. When it is so expressed to be payable on demand,
or at sight, or on presentation; or
b. In which no time for payment is expressed.
Note: Where an instrument is issued, accepted, or indorsed
when overdue, it is, as regards the person so issuing,
accepting, or indorsing it, payable on demand.
4. Payable to order or to bearer
When payable to order
The instrument is drawn payable:
a. To the order of a specified person or
b. To him or his order.
¾ The payee must be named or otherwise indicated therein
with reasonable certainty.
¾ 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.
When 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. (Sec. 9)
5. Identification of the drawee
¾ Where the instrument is addressed to a drawee
(meaning in a bill of exchange), he must be named
or otherwise indicated with reasonable certainty.
The holder must know to whom he should present it
for acceptance and/or payment; otherwise, the
¾
purpose of negotiable instrument as a tool in
commercial dealings will be greatly hampered.
(Reviewer on Commercial Law, Sundiang and
Aquino)
A bill may be addressed to more than one drawee
jointly, whether they are partners or not; but not to
two or more drawers in the alternative or in
succession. (Sec. 128)
Test of Negotiability: presence of requirements in Section 1
of NIL.
Factors that Determine Negotiability:
1. The whole instrument itself
2. Only what appears on the face of the instrument
3. Provisions of the NIL, Sec.1
BAR QUESTION (Q): Which of the following
stipulations or features of a promissory notes (PN)
affect or do not affect its negotiability, assuming
that the PN is otherwise negotiable? Indicate your
answer by writing the paragraph number of the
stipulation or feature of the PN as shown below and
your corresponding answer, either ‘Affected” or
“Not affected.” Explain.
(a) The date of the PN is “February 30, 2002.”
(b) The PN bears interest payable on the last day
of each calendar quarter at a rate equal to 5%
above the then prevailing 91-day Tbill rate as
published at the beginning of such calendar
quarter.
(c) The PN gives the maker the option to make
payment either in money or in quantity of
palay of equivalent value.
(d) The PN gives the holder the option either to
require payment in money or to require the
maker to serve as the bodyguard or escort of
the holder for 0 days.
SUGGESTED ANSWER (SA):
(a) NOT AFFECTED. The date is not one of the
requirements for negotiability.
(b) NOT AFFECTED. The interest is to be computed
at a particular time and is determinable. It
does not make the sum uncertain or the
promise conditional.
(c) AFFECTED. Giving the maker an option renders
the promise conditional.
(d) NOT AFFECTED. Giving the holder an option
does not make the promise conditional.
Additional provisions not affecting negotiability.
General Rule: the instrument is non-negotiable if it contains
a promise or order to do any act in addition to the payment
of money.
Exceptions:
a. authorizes the sale of collateral securities in case
the instrument be not paid at maturity; or
b. authorizes a confession of judgment if the
instrument be not paid at maturity; or
c. waives the benefit of any law intended for the
advantage or protection of the obligor; or
d. gives the holder an election to require something to
be done in lieu of payment of money.
ƒ
Confession of judgment – a written statement signed by
the defendant, setting forth the basis of liability and
authorizing the entry of judgment thereon.
ƒ
Kinds of confession of judgment
a. cognivit actiomen – literally means “he has
confessed action”. It is a written confession of
action by the defendant acknowledging is
indebtedness to the plaintiff after the action has
been filed. It is given after the action is brought to
save expenses.
b. relicta verificationem – literally means “his
pleadings being abandoned.” It is confession of
judgment by withdrawal of the defense.
Note: However, warrants of attorney to confess judgment,
are not authorized nor contemplated by our law. They are
void as against public policy because they enlarge the field
for fraud, because under these instruments, the promissory
bargains away his right to a day in court. The NIL does not
sanction nor validated any provision otherwise illegal.
Omissions and Provisions that do not affect Negotiability
(Sec. 6)
The validity and negotiable character of an instrument are
not affected by the fact that:
a. it is not dated; or
b. does not specify the value given, or that any value
had been given therefore; or
c. does not specify the place where it is drawn or the
place where it is payable; or
d. bears a seal; or
e. designates a particular kind of current money in
which payment is to be made.
¾ if it is not dated, the instrument will be considered to be
dated as of the time it was issued.
¾ consideration for the instrument is presumed. (art. 154
NCC & sec. 25 NIL)
¾ sec. 73 specifies where presentment for payment should
be made when the place of payment is not specified
Rules of construction:
a. Where the sum payable is expressed in words and also in
figures and there is a discrepancy between the two, the
sum denoted by the words is the sum payable; but if the
words are ambiguous or uncertain, reference may be had
to the figures to fix the amount;
b. Where the instrument provides for the payment of
interest, without specifying the date from which interest
is to run, the interest runs from the date of the
instrument, and if the instrument is undated, from the
issue thereof;
c. Where the instrument is not dated, it will be considered
to be dated as of the time it was issued;
d. Where there is a conflict between the written and
printed provisions of the instrument, the written
provisions prevail;
e. Where 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;
f. Where a signature is so placed upon the instrument that
it is not clear in what capacity the person making the
same intended to sign, he is to be deemed an indorser;
g.
Where an instrument containing the word "I promise to
pay" is signed by two or more persons, they are deemed
to be jointly and severally liable thereon. (sec. 17)
Consideration
¾ Presumption of consideration. - 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.
¾ Value - any consideration sufficient to support a simple
contract. An antecedent or pre-existing debt constitutes
value; and is deemed such whether the instrument is
payable on demand or at a future time.
¾ Holder for value – one who has given a valuable
consideration for the instrument issued or negotiated to
him.
•
What constitutes holder for value:
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 become such prior to
that time.
•
where the holder has a lien on the instrument
arising either from contract or by implication of
law, he is deemed a holder for value to the extent
of his lien.
¾ Effect of want of consideration: a 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.
Absence of consideration – total lack of any valid
consideration for the contract is
only a personal
defense.
Failure of consideration – failure or refusal or one party
to do, perform or comply with the consideration agreed
upon is also only a personal defense.
III. TRANSFER AND NEGOTIATION
Types of transfers:
1. Assignment - transfer of title to the instrument, with the
assignee generally taking only such title as his assignor
has, subject to all defenses available against his
assignor;
2. Negotiation - transfer of a negotiable instrument from
one person to another made in such a manner as to
constitute the transferee the holder thereof
3. By Operation of Law – such as by succession, by
insolvency.
Distinctions between Negotiation and Assignment
NEGOTIATION
1. Refers only to
negotiable
instruments;
2. The transferee is a
holder;
3. A holder in due course
is subject only to real
defenses;
4. A holder in due course
ASSIGNMENT
1. Refers generally to an
ordinary contract;
2. The transferee is an
assignee;
3. An assignee is subject
to both real and
personal defenses;
4. Generally, an assignee
may acquire a better
right than that of a
prior party
5. A general indorser
warrants the solvency
of prior parties;
6. An indorser is not
liable unless there be
presentment and
notice of dishonor;
7. Negotiation is
governed y the NIL.
c.
To transfer his rights as such indorsee,
where the form of the indorsement
authorizes him to do so.
But all subsequent indorsees acquire only the
title of the first indorsee under the restrictive
indorsement. (sec. 37)
merely steps into the
shoes of the assignor;
5. An assignor does not
warrant the solvency of
prior parties unless
expressly stipulated or
the insolvency is known
to him;
6. An assignor is liable
even without notice of
dishonor;
d.
7. Governed by Arts. 1624
to 1635 (on assignment
of credits) of the Civil
Code.
Methods of negotiation
1. Order Instrument – Indorsement and Delivery.
2. Bearer Instrument – Delivery only.
Indorsement - legal transaction effected by the writing of
one's own name at the:
a. back of the instrument or
b. upon a paper (allonge) attached thereto with or
without additional words specifying the person to
whom or to whose order the instrument is to be
payable whereby one not only transfers legal title to
the paper transferred but likewise enters into an
implied guaranty that the instrument will be duly
paid.
¾ General Rule: indorsement must be of the entire
instrument.
Exception: where instrument has been paid in part, it
may be indorsed as to the residue.
¾ Kinds of indorsement:
a. Special - specifies the person to whom or to whose
order, the instrument is to be payable (sec. 34)
b. Blank - specifies no indorsee:
•
Instrument is payable to bearer and may be
negotiated by delivery (sec. 34)
•
May be converted to special indorsement by
writing over the signature of indorser in blank
any contract consistent with character of
indorsement.
c. Restrictive - when the indorsement either:
i. Prohibits further negotiation of the
instrument; or
ii. Constitutes the indorsee the agent of the
indorser; or
iii. Vests the title in the indorsee in trust for
or to the use of some other persons. But
mere absence of words implying power to
negotiate does not make an indorsement
restrictive.
•
A restrictive indorsement confers upon the
indorsee the right:
a. To
receive
payment
of
the
instrument;
b.
To bring any action thereon that the
indorser could bring;
Such indorsement destroys the negotiability of
the instrument and bars further negotiation to
a holder in due course.
Qualified - constitutes the indorser a mere assignor
of the title to the instrument. (sec. 38)
•
made by adding to the indorser's signature
words like "sans recourse,” “without recourse",
"indorser not holder", "at the indorser's own
risk", etc.
•
The purpose of this kind of indorsement is to
transfer title without guaranteeing payment by
the primary party.
•
It does not mean, however, that the qualified
indorser incurs no liability at all. The effect is
merely to limit his liability. He is secondarily
liable for breach of is warranties as an indorser
under Sec. 65. Thus, he is liable if the
instrument is dishonored by NON-ACCEPTANCE
or NON-PAYMENT due to:
a. forgery;
b. lack of good title to the instrument
indorsed;
c. lack of capacity to contract on the part of
prior parties; or
d. the fact that the instrument was valueless
or not valid at the time of the indorsement
which fact was known to him.
Conditional - right of the indorsee is made to
depend on the happening of a contingent event
•
Party required to pay may disregard the
conditions.
•
This kind of indorsement has no effect on the
further negotiation of the instrument. The
party required to pay, if he chooses, may make
payment, disregarding the condition without
incurring any liability because he is expressly
authorized to do so under Sec. 39. But the
person who received payment will hold the
proceeds subject to the right of the conditional
indorser.
ƒ
e.
f.
g.
Absolute - one by which indorser binds himself to
pay:
i. upon no other condition than failure of
prior parties to do so; and
ii. upon due notice to him of such failure.
Joint - indorsement of instrument payable to 2 or
more persons; all must indorse in order for the
transaction to operate as a negotiation.
•
Exceptions to the rule requiring joint
indorsement:
a. Where the payees or indorsees are
partners; and
b.
Where the payee or indorsee indorsing
has authority to indorse for the
others.
h.
¾
3.
Rules on Indorsements:
•
•
•
à
à
•
2.
Irregular - a person who, not otherwise a party to
an instrument, places thereon his signature in blank
before delivery.
Effect of transfer without indorsement:
a. transfer vests in the transferee such title as the
transferor had therein (assignment), and
b. the right to have the indorsement of the
transferor.
à
For the purpose of determining whether the
transferee is a holder in due course, the
negotiation takes effect as of the time when
the indorsement is actually made.
à
Applicable only to order instruments
Indorsement of a bearer instrument: where an
instrument, payable to bearer, is indorsed specially,
it may nevertheless be further negotiated by
delivery; but the person indorsing specially is liable
as indorser to only such holders as make title
through his indorsement.
Note: The rule only applies to originally bearer
instruments. If it is originally a BEARER instrument,
it will always be a BEARER instrument. As opposed
to an original order instrument becoming payable to
bearer, if the same is indorsed specifically, it can
NO LONGER be negotiated further by mere delivery,
it has to be indorsed.
Striking out indorsements: 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.
If the instrument is payable to bearer on its face,
then whether or not there are indorsements on the
back of the instrument would be immaterial to the
title of the bearer, who is presumptively the owner
and holder by his mere possession of such
instrument. None of the indorsement would be
necessary to it’s title since mere delivery would
have been sufficient to transfer title from one
holder to another.
Where the instrument is payable to order on its
face, the situation is different. First, the
indorsement of a special indorsee is necessary for
the further negotiation of the instrument. Second,
the last indorsement controls the method of further
negotiation.
When prior party (reacquirer) may negotiate: where an
instrument is negotiated back to a prior party, such
party may reissue and further negotiate the same. But
he is not entitled to enforce payment thereof against
any intervening party to whom he was personally liable.
à
In the following cases, a prior party cannot further
negotiate the instrument:
1. Where it is payable to the order of a third
person, and has been paid by the drawer;
Where it was made or accepted for
accommodation and has been paid by the
party accommodated;
In other cases, where the instrument is
discharged when acquired by a prior party.
IV. HOLDERS
Classes of holders:
1. simple holder (sec. 51)
2. holder for value (sec. 26)
3. holder in due course (sec.52, 57)
Holder in Due Course
ƒ
holder who has taken the instrument under the following
conditions:
a.
b.
c.
d.
That it is complete and regular upon its face;
That he became the holder of it before it was
overdue, and without notice that it has been
previously dishonored, if such was the fact;
That he took it in good faith and for value;
That at the time it was negotiated to him, he had
no notice of any infirmity in the instrument or
defect in the title of the person negotiating it.
¾
When title defective - The title of a person who
negotiates an instrument is defective when he obtained
the instrument or any signature thereto, by:
a. fraud,
b. duress, or force and fear,
c. other unlawful means,
d. illegal consideration,
e. negotiation in breach of faith,
f. circumstances amounting to fraud.
¾
What constitutes notice of defect. - The person to
whom it is negotiated must have:
a. actual knowledge of the infirmity or defect, or
b. knowledge of such facts that his action in taking the
instrument amounted to bad faith. (sec. 56)
¾
Notice before full amount is paid - where the
transferee receives notice of any infirmity in the
instrument or defect in the title of the person
negotiating the same before he has paid the full amount
agreed to be paid, he will be deemed a holder in due
course only to the extent of the amount paid by him.
¾
When person not deemed a holder in due course where an instrument payable on demand is negotiated
on an unreasonable length of time after its issue, the
holder is not deemed a holder in due course.
•
Reasonable time, what constitutes. - regard is to be
had to the
a. nature of the instrument,
b. the usage of trade or business with respect to
such instruments, and the
c. facts of the particular case.
•
Effect: in the hands of any holder other than a
holder in due course, a negotiable instrument is
subject to the same defenses as if it were nonnegotiable.
¾
General Rule: every holder is deemed prima facie to be
a holder in due course
Exception: when it is shown that the title of any person
who has negotiated the instrument was defective, the
burden is on the holder to prove that he or some person
under whom he claims acquired the title as holder in due
course (shifting of burden of proof).
Limitation: the last-mentioned rule does not apply in
favor of a party who became bound on the instrument
prior to the acquisition of such defective title. (sec. 59)
¾
Rights of a holder in due course:
a. he may sue on the instrument in his own name;
b. he may receive payment and if payment is in due
course, the instrument is discharged.
c. holds the instrument free from any defect of title of
prior parties,
d. holds the instrument free from defenses available to
prior parties among themselves, and
e. may enforce payment of the instrument for the full
amount thereof against all parties liable thereon.
¾
Payment in due course is payment made:
a. at or after the maturity of the instrument
b. to the holder thereof
c. in good faith and without notice that his title is
defective.
¾
Shelter Rule:
a.
derives his title through a holder in due course, and
b. who is not himself a party to any fraud or illegality
affecting the instrument, has all the rights of such
former holder in respect of all parties prior to the
latter.
¾
Rights of a Holder NOT in Due Course
1. He may sue on the instrument in his own name;
2. He may receive payment and if the payment is in
due course, the instrument is discharged;
3. He is entitled to the instrument but holds it subject
to the same defenses as if it were non-negotiable;
and
4. He has all the rights of the holder in due course
from whom he derived his title in respect of all
parties prior to such holder, provided he is not
himself a party to any fraud or illegality affecting
the instrument.
IN A BILL OF
EXCHANGE
1.
Persons primarily liable on instrument: the person who, by
the terms of the instrument, is absolutely required to pay the
same. All other parties are "secondarily" liable.
Classification of parties according to liability
IN A PROMISSORY
NOTE
1. Maker
2. Indorser
3. Persons negotiating by delivery
2.
Drawer
Acceptor
Indorsers
Persons negotiating by delivery
Parties Primarily Liable
a. Maker (Sec. 60)
•
engages to pay according to the tenor of the
instrument; and
•
admits the existence of the payee and his then
capacity to indorse at the time of the making
of the note.
•
A person placing his name on the face of a note
is prima facie a maker and liable as such; and
he is presumed to have acted with care and to
have signed the instrument with full knowledge
of its contents.
b. Acceptor or Drawee (Sec. 62)
•
engages to pay according to the tenor of his
acceptance;
•
admits:
1. the existence of the drawer,
2. the genuineness of his signature and
3. his capacity and authority to draw the
instrument; and
4. the existence of the payee and his then
capacity to indorse.
Note: the drawee is not liable until he accepts
the instrument
•
Where a check is certified by a bank, it is
equivalent to an acceptance. Since certification is
equivalent to acceptance, a bank which has
certified a check whether at the request of the
holder or of a drawer, has the same liabilities and
makes the same warranties as an acceptor. It
cannot, after certification, question the
genuineness of the drawer’s signature. If it
discovers that such signature is forged subsequent
to certification but prior to payment, it cannot
refuse to pay on the check. If its discovery comes
after it has paid the check, it cannot recover
back what it paid on the ground of mistaken
payment unless the holder is guilty of fraud or
negligence.
•
V. LIABILITIES OF PARTIES
1.
2.
3.
4.
If a drawee-bank accepts or pays a check despite
a stop payment order from the drawer, through
oversight or otherwise, it cannot refuse to pay
the holder or recover what has been paid; neither
may it debit the drawer’s account unless the
acceptance nor payment was made prior to the
receipt of the order.
Parties Secondarily Liable
a. Drawer (Sec. 61)
•
admits the existence of the payee and his
capacity to indorse;
•
engages that the instrument will be accepted
or paid by the party primarily liable; and
•
engages that if the instrument is dishonored
and proper proceedings are brought, he will
pay to the party entitled to be paid.
b. General Indorser (Sec. 66)
•
Warrants:
c.
1. genuineness of the instrument;
2. his good title to it;
3. capacity to contract of prior parties; and
4. instrument is valid and subsisting.
•
engages that the instrument will be accepted
or paid by the party primarily liable; and
•
engages that if the instrument is dishonored
and proper proceedings are taken, he will pay
to the party entitled to be paid.
Irregular Indorser – a person, not otherwise a party
to an instrument, places his signature thereon in
blank before delivery.
Rules:
•
If instrument payable to the order of a 3rd
person, he is liable to the payee and
subsequent parties.
•
If instrument payable to order of maker or
drawer, he is liable to all parties subsequent to
the maker or drawer.
•
If he signs for accommodation of the payee, he
is liable to all parties subsequent to the payee.
Distinctions:
PRIMARY PARTY
1. Unconditionally bound;
2.Absolutely required to
pay upon the maturity of
the instrument.
SECONDARY PARTY
1. Conditionally bound;
2. Undertakes to pay only
after certain conditions
have been fulfilled:
a. due presentment for
payment or acceptance to
primary party;
b. dishonor by such
party; and
c. the taking of
proceedings required by
law after dishonor.
INDORSER
1. A party to either a note
or a bill;
2. Does not make any
admission regarding the
existence of the payee and
his capacity to indorse; and
3. Has warranties.
DRAWER
1. A party only to a bill;
2. The drawer makes such
admission;
3. Makes no warranties, but
he engages to pay after
certain conditions are
complied with.
GENERAL INDORSER
1. Makes either a blank or
special indorsement;
2. Indorses the instrument
after its delivery to the
payee; and
3. Liable only to parties
subsequent to him
IRREGULAR INDORSER
1. Always makes a blank
indorsement;
2. Indorses before its
delivery;
3. Liable to the payee and
subsequent parties unless
he signs for the
accommodation of the
payee in which case he is
liable only to all parties
subsequent to the payee.
3.
Parties with Limited Liability (sec.
Financing v. Sambok, 120 SCRA 864)
a. Qualified Indorser - warrants that:
65;
Metropol
instrument is genuine and in all respects what
it purports to be;
à
he has good title to it;
à
all prior parties had capacity to contract;
à
he has no knowledge of any fact which would
impair the validity of the instrument or render
it valueless.
Persons Negotiating by Delivery
à
warranties same as those of qualified indorsers;
and
à
warranties extend to immediate transferee
only.
à
b.
LIABILITY
1. To pay a sum certain.
2. Requires Notice of
Dishonor.
3. Action can be brought
only on maturity of
instrument.
BY MERE DELIVERY OR BY
QUALIFIED INDORSEMENT
1. No secondary liability;
2. Warrants that he has no
knowledge of any fact,
which would impair the
validity of the instrument
or render it valueless.
WARRANTY
1. No obligation to pay.
2. Notice of Dishonor is not a
requirement.
3. Action may be brought
anytime.
GENERAL INDORSER
1. With secondary liability;
2. Warrants that the
instrument is, at the time
of his indorsement, valid
and subsisting.
4. Other parties who may be liable:
General Rule: One whose signature does not appear on the
instrument shall not be liable thereon.
Exceptions:
1. The principal who signs through an agent is liable;
2. The forger is liable;
3. One who indorses in a separate instrument (allonge) is
liable;
4. One who signs his assumed or trade name is liable; and
5. A person negotiating by delivery (as in the case of a
bearer instrument) is liable to his immediate indorsee.
Requisites for an Agent to escape liability:
1. must be duly authorized;
2. add words to his signature indicating that he signs as an
agent, that is, for or on behalf of a principal, or in a
representative capacity; and
3. disclose his principal.
¾
¾
A signature by “procuration” operates as notice that the
agent has but a limited authority to sign, and the
principal is bound only in case the agent in so signing
acted within the actual limits of his authority. (sec. 21)
Indorsement or assignment of the NI 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.
(sec. 22)
Accomodation Party
a.
b.
c.
Absence or failure of consideration, partial or total;
Want of delivery of complete instrument;
Insertion of wrong date in an instrument, where it is
payable at a fixed period after date and it is issued
undated or where it is payable at a fixed period
after sight and the acceptance is undated;
d. Filling up of blank contrary to authority given or not
within reasonable time, where the instrument is
delivered;
e. Fraud in inducement;
f. Acquisition of instrument by force, duress, or fear;
g. Acquisition of the instrument by unlawful means;
h. Acquisition of the instrument for an illegal
consideration;
i. Negotiation in breach of faith;
j. Negotiation under circumstances that amount to
fraud;
k. Mistake;
l. Intoxication (according to better authority);
m. Ultra vires acts of corporations where the
corporation has the power to issue negotiable paper
but the issuance was not authorized for the
particular purpose for which it was issued;
n. Want of authority of agent where he has
o. apparent authority;
p. Insanity where there is no notice of insanity on the
part of the one contracting with the insane person;
and
q. Illegality of contract where the form or
consideration is illegal.
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
¾ Liability: 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.
¾ Effects:
1. accommodation party is generally regarded as a
surety for the party accommodated;
2. When accommodation party makes payment to
holder of the note, he has the right to sue the
accommodated party for reimbursement.
¾
Rights of accommodation parties as against each other:
the other may demand contribution from his coaccommodation party without first directing his action
against the principal debtor provided:
1. he made the payment by virtue of judicial demand;
or
2. the principal debtor is insolvent.
Note: A corporation cannot act as an accommodation
party. The issuance or indorsement of negotiable
instrument by a corporation without consideration and
for the accommodation of another is ultra vires.
(Crisologo v. CA, 117 SCRA 594).
Order of liability of indorsers:
1. among themselves – indorsers are liable prima facie in
the order in which they indorse; but evidence is
admissible to show that, as between or among
themselves, they have agreed otherwise (sec. 68)
2. to the holder – indorsers are liable in any order
VI. DEFENSES
Kinds:
1. Real/Absolute Defenses - those that attach to the
instrument itself and are available against all holders,
whether in due course or not.
Examples:
a. Alteration;
b. Non-delivery of incomplete instrument;
c. Duress amounting to forgery;
d. Fraud in factum or fraud in esse contractus;
e. Minority;
f. Marriage in the case of a wife;
g. Insanity where the insane person has a guardian
appointed by the court;
h. Ultra vires acts of a corporation, where the
corporation is absolutely prohibited by its charter or
statute from issuing any commercial paper under
any circumstances;
i. Want of authority of agent;
j. Execution of instrument between public enemies;
k. Illegality of contract where it is the contract or
instrument itself which is expressly made illegal by
statute; and
l. Forgery.
2. Personal/Equitable Defenses – those which are available
only against a person not a holder in due course or a
subsequent holder who stands in privity with him.
Examples:
FRAUD IN FACTUM
1. It exists in those cases in
which a person, without
negligence, has signed an
instrument which was in
fact a negotiable
instrument, but was
deceived as to the
character of the instrument
and without knowledge of
its, as where a not was
signed by one under the
belief that he was signing
as a witness to a deed.
2. This kind of fraud is a
real defense because there
is no contract. It implies
that the person did not
know what he was signing.
But where the signer by the
exercise of reasonable
diligence could have
discovered the nature of
the instrument, the fraud
cannot be considered a real
defense, as where a person,
who can read, signed a note
but failed to read it.
¾
1.
FRAUD IN INDUCEMENT
1. It is that which related
to the quality, quantity,
value or character of the
consideration of the
instrument. In this case,
the signer is led by
deception to execute what
he knows is a negotiable
instrument. It implies that
the signer knew what he
was signing but that he was
induced by fraud to sign.
2. Such type of fraud is only
a personal defense because
it does not prevent a
contract.
Effects of Defenses:
Complete and undelivered instrument
•
•
•
2.
3.
4.
as between immediate parties and as regards a
remote party other than a holder in due course, the
delivery must be authorized in order to be effectual
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
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
Incomplete but delivered instrument
•
where the instrument is wanting in any material
particular, the person in possession thereof has a
prima facie authority to complete it by filling up the
blanks therein.
•
it must be filled up strictly in accordance with the
authority given and within a reasonable time
•
if any such instrument, after completion, is
negotiated to a holder in due course, it is valid and
effectual for all purposes in his hands, and he may
enforce it as if it had been filled up strictly in
accordance with the authority given and within a
reasonable time.
Incomplete and undelivered instrument
•
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.
•
However, subsequent indorsers are liable.
Forgery
•
counterfeit making or fraudulent alteration of any
writing, which may consist of:
1. signing of another’s name with intent to
defraud; or
2. alteration of an instrument in the name,
amount, name of payee, etc. with intent to
defraud.
•
Effect: signature is wholly inoperative, and no right
to retain the instrument, or to give a discharge
therefore, or to enforce payment thereof against
any party thereto, can be acquired through or under
such signature
•
Exception: unless the party against whom it is
sought to enforce such right is precluded from
setting up the forgery or want of authority.
•
Cut-Off Rule
General Rule: Parties prior to the forged signature
are cut-off from the parties after the forgery in the
sense that prior parties cannot be held liable and
can raise the defense of forgery. The holder can
only enforce the instrument against parties who
became such after the forgery.
Exception: When the prior parties are precluded
from setting up the defense of forgery.
Persons precluded from setting up the defense of
forgery are:
1. Those who by their acts, silence, or negligence,
are estopped from setting up the defense of
forgery;
2. Those who warrant or admit the genuineness of
the signature in question. These include acts or
•
A.
B.
omissions that amount to ratification, express
or implied.
Note: Persons precluded from setting up the
defense of forgery may still recover damages under
the NCC provisions on quasi-delicts.
Rules on Forgery:
Promissory Notes
1. Maker’s signature forged
Order Instrument
a. Maker is not liable because he never
became a party to the instrument.
b. Indorsers subsequent to forgery are liable
because of their warranties.
c. Party who made the forgery is liable.
Bearer Instrument
a. Maker is not liable.
b. Indorsers may be made liable to those
persons who obtain title through their
indorsements.
c. Party who made the forgery is liable.
2. Payee’s signature forged
Order Instrument
a. Maker and payee not liable
b. Indorsers subsequent to the forgery is
liable.
c. Party who made the forgery is liable
Bearer Instrument
a. Maker is liable. Indorsement is not
necessary to title and the maker engages
to pay holder.
b. Party who made the forgery is liable
3. Indorser’s signature forged
Order Instrument
a. Maker, payee, and indorser who signature
was forged is not liable.
b. Indorsers subsequent to forgery are liable
because of their warranties.
c. Party who made the forgery is liable.
Bearer Instrument
a. Maker is liable. Indorsement is not
necessary to title and the maker engages
to pay holder.
b. Indorser whose signature was forged is not
liable
c. Party who made the forgery is liable.
Bill of Exchange
1. Drawer’s signature forged
In an Order Instrument
a. Drawer is not liable.
b. Drawee is liable if it paid (nor recourse to
drawer) because he admitted the
genuineness of the drawer’s signature.
Drawee cannot recover from the collecting
bank because there is no privity between
the collecting bank and the drawer. There
is no warranty as to the signature of the
drawer. (Associated Bank v. CA)
c. Indorsers subsequent to forgery are liable.
d. Party who made the forgery is liable
In a Bearer Instrument
a. Drawer is not liable
b. Drawee is liable if it paid. Drawee cannot
recover from the collecting bank because
2.
3.
5.
it is bound to known the drawer’s
signature since the latter is its depositor.
c. Party who made the forgery is liable.
Payee’s signature forged
Order Instrument
a. Drawer, drawee and payee not liable. Cutoff rule applies.
b. Indorsers subsequent to forgery are liable.
c. Party who made the forgery is liable
Bearer Instrument
a. Drawer is liable. His indorsement is not
necessary to pass title.
b. Drawee is liable. No privity between
drawer and payee because indorsement of
payee is not necessary (Ang Tek Lian case,
87 SCRA 383)
c. Payee is not liable
d. Collecting bank is liable because of
warranty.
e. Party who made the forgery is liable.
Indorser’s signature forged
Order Instrument
a. Drawer, payee and indorser whose
signature was forged are not liable.
b. Drawee is liable if it paid.
c. Indorsers subsequent to forgery are liable.
d. Party who made the forgery is liable.
Bearer Instrument
a. Drawer is liable. Indorsement is not
necessary to pass title.
b. Drawee is liable.
c. Indorser whose signature was forged is
liable because indorsement is not
necessary to pass title.
d. Party who made the forgery is liable.
Alteration
•
Effect: the instrument is avoided
•
Exceptions:
1. against a party who has himself made,
authorized, or assented to the alteration
2. subsequent indorsers
3. holder in due course not a party to the
alteration - he may enforce payment according
to its original tenor
•
Changes constituting material alteration:
1. date;
2. sum payable, either for principal or interest;
3. time or place of payment;
4. number or relations of the parties;
5. medium or currency in which payment is to be
made;
6. that which adds a place of payment where no
place of payment is specified; and
7. any other change or addition which alters the
effect of the instrument in any respect.
Note: a material alteration is one that alters the
effect of the instrument; one which changes the
items required to be stated under Sec. 1, NIL.
•
Spoliation – alteration made by a stranger.
•
The general rule denies the drawee bank’s right to
charge against the drawer’s account the amount of
an altered check. However, the latter’s negligence,
before or after the alteration, may estop him from
•
setting such alteration as against an innocent
drawee bank who has paid the check.
In cases of altered checks and checks with forged
indorsements, the drawee bank must notify and
return them to the collecting bank before 4:00 p.m.
of the next day of clearing, but the drawee bank
may still return them even after such time provided
he does so within 24 hours from its discovery of the
alteration or forged instruments so that recovery of
the amount may be had. BUT, in no event beyond
the period fixed or provided by law for filing of a
legal action by the returning bank against the bank
sending the same.
Note: Alteration is only a partial real defense
because a holder in due course can still enforce it
according to its original tenor.
VII. ENFORCEMENT OF LIABILITY
Presentment for payment – the presentation of an
instrument to the person primarily liable for the purpose of
demanding and receiving payment.
General Rules:
•
presentment for payment to charge persons
primarily liable is not necessary
•
presentment for payment to charge persons
secondarily liable is necessary
Exceptions:
a. drawer - where he has no right to expect or require
that the drawee or acceptor will pay the instrument
(sec. 79)
b. indorser - where the instrument was made or
accepted for his accommodation and he has no
reason to expect that the instrument will be paid if
presented.
c. when dispensed:
i.
where, after the exercise of reasonable
diligence, presentment as required cannot
be made;
ii.
where the drawee is a fictitious person;
iii.
by waiver of presentment, express or
implied. (sec. 82)
d. when the instrument has been dishonored by nonacceptance (sec. 151)
Sufficiency of presentment.
It must be:
1. made by the holder or any person authorized to
receive payment on his behalf;
2. at a reasonable hour on a business day;
3. at a proper place;
4. to the person primarily liable or if he is absent or
inaccessible, to any person found at the place
where the presentment is made.
How made:
1. personal demand for payment at the proper place; and
2. readiness to exhibit the instrument if required, and to
receive payment and to surrender the instrument if the
debtor is willing to pay.
•
Purpose of exhibition:
To enable the debtor to:
a.
•
determine the genuineness of the instrument and
the right of the holder to receive payment; and
b. to enable him to reclaim possession upon payment.
When exhibition excused:
a. when debtor does not demand to see the instrument
but refuses payment on some other grounds, and
b. when the instrument is lost or destroyed.
When made:
•
where the instrument is payable at a fixed or
determinable future time, presentment must be made
on the day it falls due
•
where it is payable on demand:
a. promissory note: presentment must be made within
a reasonable time after its issue
b. bill of exchange: presentment for payment will be
sufficient if made within a reasonable time after
the last negotiation thereof
•
the check must be presented for payment within a
reasonable time after its issue or the drawer will be
discharged from liability thereon to the extent of the
loss caused by the delay.
Presentment for acceptance – the production or exhibition
of a bill of exchange to the drawee for his acceptance or
payment
General Rule: presentment for acceptance is not necessary to
render any party to the bill liable.
Exception: presentment for acceptance must be made:
a. Where the bill is payable after sight, or where
presentment for acceptance is necessary in order to
fix the maturity of the instrument; or
b.
Where the bill expressly stipulates that it shall be
presented for acceptance; or
c.
Where the bill is drawn payable elsewhere, then at
the residence or place of business of the drawee.
(sec. 143)
Note: in all the above cases, the holder must either present
the bill for acceptance or negotiate it within a reasonable
time; otherwise, the drawer and all indorsers are discharged.
How made:
1. made by or on behalf of the holder;
2. at a reasonable hour;
3. on a business day;
4. before the bill is overdue and within reasonable
time;
5. to the drawee or some person authorized to accept
or refuse acceptance on his behalf.
Time of maturity:
•
every negotiable instrument is payable at the time fixed
therein without grace
•
when the day of maturity falls upon a Sunday or a
holiday, the instruments are to be presented for
payment on the next succeeding business day
•
when the day of maturity falls upon a Saturday:
ƒ
Instrument is payable at a fixed or determinable
future time (time instrument) - presented for
payment is on the next succeeding business day
ƒ
instruments is payable on demand - at the option of
the holder, be presented for payment:
a. before 12:00 noon on Saturday when
that entire day is not a holiday or
b. the next succeeding business day.
How computed:
ƒ
excluding the day from which the time is to begin to
run, and by including the date of payment
ƒ
applies to instruments which are payable at a fixed
period after date, after sight, or after that
happening of a specified event.
Days presentment may be made. If date of presentment is:
a. Sunday or a holiday – must be made on the next
succeeding business day
b. Saturday – before 12:00 noon on Saturday provided
that it is not a holiday.
Proper place for presentment:
a. Where a place of payment is specified in the instrument
and it is there presented;
b. Where no place of payment is specified but the address
of the person to make payment is given in the
instrument and it is there presented;
c. Where no place of payment is specified and no address is
given and the instrument is presented at the usual place
of business or residence of the person to make payment;
d. In any other case if presented to the person to make
payment wherever he can be found, or if presented at
his last known place of business or residence.
Where presentment is excused:
a. Where the drawee is dead, or has absconded, or is a
fictitious person or a person not having capacity to
contract by bill.
b. Where presentment can not be made after the
exercise of reasonable diligence
c. Where, although presentment has been irregular,
acceptance has been refused on some other ground.
Note: bill may be treated as dishonored by nonacceptance.
When delay in presentment excused – delay is caused by
circumstances beyond the control of the holder and not
imputable to his default, misconduct, or negligence. When
the cause of delay ceases to operate, presentment must be
made with reasonable diligence.
When delay for presentment excused:
a. bill is drawn payable elsewhere than at the place of
business or the residence of the drawee.
b. holder has no time, with the exercise of reasonable
diligence, to present the bill for acceptance before
presenting it for payment on the day that it falls
due.
Effect: does not discharge the drawers and indorsers.
Duty of holder where bill not accepted. - where a bill is
duly presented for acceptance and is not accepted within the
prescribed time (24 hours – sec. 136), the person presenting
it must treat the bill as dishonored by non-acceptance or he
loses the right of recourse against the drawer and indorsers.
Acceptance: the signification by the drawee of his assent to
the order of the drawer. It is the act by which the drawee
manifests his consent to comply with the request contained
in the bill of exchange directed to him.
How made :
1) must be in writing
2) signed by the drawee
3) must not express that the drawee will perform his
promise by any other means than the payment of
money.
•
the holder of the bill presenting the same for acceptance
may require that the acceptance be written on the bill,
and if such request is refused, may treat the bill as
dishonored.
•
where an acceptance is written on a paper other than
the bill itself, it does not bind the acceptor except in
favor of a person to whom it is shown and who, on the
faith thereof, receives the bill for value.
Period for drawee to accept - allowed 24 hours after
presentment in which to decide whether or not he will accept
the bill; if acceptance is given, it dates as of the day of
presentation.
Constructive/Implied acceptance: where a drawee refuses
within 24 hours after delivery or within such other period as
the holder may allow, to return the bill accepted or nonaccepted to the holder, he will be deemed to have accepted
the same.
Note: same effect if the drawee destroys the instrument.
Kinds:
1. General - assents without qualification to the order of
the drawer.
2. Qualified - which in express terms varies the effect of
the bill as drawn.
a. Conditional - makes payment by the acceptor
dependent on the fulfillment of
a condition
therein stated.
b. Partial - an acceptance to pay part only of the
amount for which the bill is drawn.
i. Local - an acceptance to pay only at a
particular place.
ii. Qualified as to time
iii. The acceptance of some one or more of
the drawees but not of all.
3. Constructive
Rights of parties as to qualified acceptance.
•
Holder: he may refuse to take a qualified acceptance
and if he does not obtain an unqualified acceptance, he
may treat the bill as dishonored by non-acceptance.
•
Drawer or indorser: when he receives notice of a
qualified acceptance, he must, within a reasonable time,
express his dissent to the holder or he will be deemed to
have assented thereto (implied assent).
•
•
Acceptance for Honor - an undertaking by a stranger to a bill
after protest for the benefit of any party liable thereon or for
the honor of the person for whose account the bill is drawn
which acceptance inures also to the benefit of all parties
subsequent to the person for whose honor it is accepted, and
conditioned to pay the bill when it becomes due if the
original drawee does not pay it.
ƒ
Requisites:
1. the bill must have been protested for dishonor
by non-acceptance or for better security;
2. the acceptor for honor must be a stranger and
not a party already liable on the instrument;
3. bill must not be overdue;
4. acceptance for honor must be with the consent
of the holder of the instrument.
ƒ
Formalities:
1. must be in writing;
2. must indicate that it is an acceptance for
honor;
3. signed by the acceptor for honor;
4. must contain an express or implied promise to
pay money;
5. the accepted bill for honor must be delivered
to the holder.
Notice of Dishonor - notice given by the holder or his agent
to a party or parties secondarily liable that the instrument
was dishonored by non-acceptance by the drawee of a bill, or
by non-payment by the acceptor of a bill or by non-payment
by a maker of a note.
- If such notice is given by a notary public, it is called
PROTEST.
¾
Effect of failure to give notice: parties secondarily liable
are discharged
¾
Requisites:
1. Given by holder or his agent, or by any party who
may be compelled by the holder to pay;
2. Given to secondary party or his agent;
3. Given within the periods provided by law;
4. Given at the proper place.
¾
When notice of dishonor dispensed with:
Effect of taking a qualified acceptance: the drawer and
indorsers are discharged from liability on the bill unless they
have expressly or impliedly authorized the holder to take a
qualified acceptance, or subsequently assent thereto.
Other rules of acceptance:
a bill may be accepted before it has been signed by the
drawer, or while otherwise incomplete, or when it is
overdue, or after it has been dishonored by a previous
refusal to accept, or by non payment
when a bill payable after sight is dishonored by nonacceptance and the drawee subsequently accepts it, the
holder, in the absence of any different agreement, is
entitled to have the bill accepted as of the date of the
first presentment.
•
an unconditional promise in writing to accept a bill
before it is drawn is deemed an actual acceptance
in favor of every person who, upon the faith
thereof, receives the bill for value.
•
where a check is certified by the bank on which it is
drawn, the certification is equivalent to an
acceptance.
Effect: the drawer and all indorsers are discharged
from liability thereon.
1.
2.
3.
¾
when party to be notified knows about the dishonor,
actually or constructively;
if waived; and
when after due diligence, it cannot be given.
How given:
1. by bringing verbally or
2. by writing to the knowledge of the person liable the
fact that a specified instrument, upon proper
proceedings taken, has not been accepted or has
not been paid, and that the party notified is
expected to pay it.
¾
To whom given:
1. Non-acceptance (bill) – to persons secondarily
liable, namely, the drawer and indorsers as the case
may be.
2. Non-payment (both bill and note) – indorsers.
Note: Notice must be given to persons secondarily
liable. Otherwise, such parties are discharged.
Notice may be given to the party himself or to his
agent.
¾
By whom given:
1. the holder
2. another on behalf of the holder
3. any party to the instrument who may be compelled
to pay it to the holder, and who would have a right
of reimbursement from the party to whom notice is
given.
¾
¾
¾
¾
¾
Notice of dishonor given by or on behalf of a holder
inures to the benefit of:
a. all parties prior to the holder, who have a right
of recourse against the party to whom the
notice is given; and
b. all holders subsequent to the holder giving
notice.
Notice of dishonor given by or on behalf of a party
entitled to give notice inures to the benefit of:
a. the holder; and
b. all parties subsequent to the party to whom
notice is given.
Where an instrument is dishonored in the hands of an
agent, he can do either of the ff.:
a. directly give notice to persons secondarily
liable thereon; or
b. give notice to his principal. In such case, he
must give notice within the time allowed by
law as if he were a holder.
A party giving notice is deemed to have given due notice
where:
a. the notice of dishonor is duly addressed, and
b. deposited in the post-office, even when there
is miscarriage of mail.
Where a party receives notice of dishonor, he has, after
the receipt of such notice, the same time for giving
notice to antecedent parties that the holder has after
the dishonor.
¾
Notice may be waived either before the time of giving
notice, or after the omission to give due notice. Waiver
may be expressed or implied.
¾
As to who are affected by an express waiver depends on
where the waiver is written:
1. if it appears in the body or on the face of the
instrument, it binds all parties; but
2. if it is written above the signature of an
indorser, it binds him only.
¾
Notice of dishonor is not required to be given to the
drawer in any of the ff. cases:
1. drawer and drawee are the same;
2. drawee is a fictitious person or not having the
capacity to contract;
3. drawer is the person to whom the instrument is
presented for payment;
4. the drawer has no right to expect or require
that the drawee or acceptor will honor the
instrument;
5. where the drawer has countermanded
payment.
¾
Notice of dishonor is not required to be given to an
indorser in the ff. cases:
1. drawee is a fictitious person or does not have
the capacity to contract, and indorser was
aware of that fact at the time he indorsed the
instrument;
2. indorser is the person to whom the instrument
is presented for payment;
3. instrument was made or accepted for his
accommodation.
¾
If an instrument is not accepted by the drawee, there is
no sense presenting it again for payment, and notice of
dishonor must at once be given.
If there was
acceptance, presentment for payment is still required
and if payment is refused, there is a need for notice of
dishonor.
¾
An omission to give notice of dishonor by non-acceptance
does not prejudice the rights of a holder in due course
subsequent to the omission.
Dishonor by Non-Payment
When instrument dishonored by non-payment:
a. it is duly presented for payment and payment is
refused or cannot be obtained; or
b. presentment is excused and the instrument is
overdue and unpaid.
Effect of dishonor: an immediate right of recourse to all
parties secondarily liable thereon accrues to the holder.
Dishonor by Non-Acceptance
Instances:
a. When it is duly presented for acceptance and such
an acceptance is refused or can not be obtained; or
b. When presentment for acceptance is excused and
the bill is not accepted (sec. 149)
Effect: an immediate right of recourse against the
drawer and indorsers accrues to the holder and no
presentment for payment is necessary.
Note: where a bill is duly presented for acceptance and
is not accepted within the prescribed time (24 hours),
the person presenting it must treat the bill as dishonored
by non-acceptance.
When Instrument Considered to be Dishonored
a. If it is not accepted when presented for acceptance;
or
b. If it is not paid when presented for payment at
maturity; or
c. If presentment is excused or waived and the
instrument is past due and unpaid.
Protest - the formal instrument executed usually by a notary
public certifying that the legal steps necessary to fix the
liability of the drawee and the indorsers have been taken.
¾
Effect of waiver: where protest is waived, presentment
and notice of dishonor are also deemed waived. But
where the notice of dishonor is waived, presentment is
not waived.
¾
Applicability: protest is necessary only in case of foreign
bills of exchange which have been dishonored by nonacceptance or non-payment, as the case may be. If it is
not so protested, the drawer and indorsers are
discharged.
¾
Foreign Bill of Exchange:
1. Drawn in the Philippines but payable outside the
Philippines.
2. Payable in the Philippines but drawn outside the
Philippines.
¾
Protest may be made by::
1. a notary public; or
2. any respectable resident of the place where the bill
is dishonored, in the presence of 2 or more credible
witnesses.
Protest for better security is one made by the holder of a bill
after it has been accepted but before it matures, against the
drawer and indorsers, where the acceptor has been adjudged
a bankrupt or an insolvent, or has made an assignment for
the benefit of the creditors.
VIII. DISCHARGE
4.
5.
By any act which would discharge a simple contract:
1. Payment or performance;
2. Loss of the thing due;
3. Condonation or remission;
4. Confusion or Merger;
5. Compensation;
6. Novation;
7. Annulment or Rescission;
8. Fulfillment of a resolutory condition;
9. Prescription.
When persons secondarily liable on the instrument are
discharged:
1. By any act which discharges the instrument;
2. By the intentional cancellation of his signature by
the holder;
3. By the discharge of a prior party;
4. By a valid tender of payment made by a prior party;
5. By the release of the principal debtor, unless the
holder’s right of recourse against the party
secondarily liable is expressly reserved;
6. By any agreement binding upon the holder to extend
the time of payment or to postpone the holder’s
right to enforce the instrument.
¾
In the following cases, the agreement to extend the time
of payment does not discharge a party secondarily liable:
1. where the extension of time is consented to by such
party;
2. where the holder expressly reserves his right of
recourse against such party.
¾
Payment at or after maturity by a party secondarily
liable does not discharge the instrument. It only cancels
his own liability and that of the parties subsequent to
him.
Effects of Renunciation:
1. A renunciation in favor of a secondary party may be
made by the holder before, at or after maturity of
the instrument. Effect: only such secondary party is
discharged and all parties subsequent to him but the
instrument itself remains in force.
2. A renunciation in favor of the principal debtor may
be effected at or after maturity. Effect: the
instrument is discharged and all parties thereto
provided the renunciation is made unconditionally
and absolutely.
Discharge of instrument - a release of all parties, whether
primary or secondary, from the obligations arising
thereunder. It renders the instrument without force and
effect and, consequently, it can no longer be negotiated.
Note: In either case, renunciation does not affect the
rights of a holder in due course without notice.
¾
Instances:
1. By payment in due course by or on behalf of the
principal debtor;
2. Payment by accommodated party;
3. Intentional cancellation by the holder;
By any act which will discharge a simple contract
for the payment of money;
When the principal debtor becomes the holder of
the instrument at or after maturity in his own right.
Cancellation of an instrument includes tearing, erasure,
obliteration, or burning. It is not limited to writing of
the word ‘cancelled”, or “paid”, or drawing of crisscross lines across the instrument.
Payment for Honor - payment made by a person, whether a
party to the bill or not, after it has been protested for non-
payment, for the benefit of any party liable thereon or for
the benefit of the person for whose account it was drawn.
o
¾
Requisites:
1. the bill has been dishonored by non-payment;
2. it has been protested for non-payment;
3. payment supra protest (another term for payment
for honor because prior protest for non-payment is
required) is made by any person, even by a party
thereto;
4. the payment is attested by a notarial act of honor
which must be appended to the protest or form an
extension of it;
5. the notarial act must be based on the declaration
made by the payor for honor or his agent of his
intention to pay the bill for honor and for whose
honor he pays.
2.
Certified Check – one drawn by a depositor upon funds to
his credit in a bank which a proper officer of the bank
certifies will be paid when duly presented for payment
3.
Stale check – one which has not been presented for
payment within a reasonable time after its issue
4.
Crossed check – when 2 parallel lines are drawn across
its face or across a corner thereof. If the name of a bank
appears between the parallel lines, the check is said to
be specially crossed, and payment should be made only
if presented by the named bank. If no name appears
between the parallel lines, the check is said to be
generally crossed, and payment should be made only
upon presentment by some bank.
Note: If the above formalities are not complied with,
payment will operate as a mere voluntary payment and
the payor will acquire no right to full reimbursement
against the party for whose honor he pays.
¾
In payment for honor, the payee cannot refuse payment.
If he refuses, he cannot recover from the parties who
would have been discharged had he accepted the same.
In acceptance for honor, the holder’s consent is
necessary.
¾
The payor for honor is given the right to receive both the
bill and the protest obviously to enable him to enforce
his rights against the parties who are liable to him.
Effects of crossing a check:
a. That the check may not be encashed but only be
deposited in the bank;
b. That the check may be negotiated only once to one
who has an account with a bank; and
c. That the act of crossing the check serves as a
warning to the holder that the check has been
issued for a definite purpose so that he must inquire
if he has received the check pursuant to that
purpose.
5.
Memorandum Check – it is like an ordinary check except
that the word “memorandum,” “mem” or “memo” is
written upon the face of the check, signifying that the
drawer engages to pay the bona fide holder absolutely,
and not upon a condition to pay upon presentment at
maturity and if due notice of the presentment and nonpayment should be given.
6.
Traveler’s check – one upon which the holder’s signature
must appear twice, one to be affixed by him at the time
it is issued and the second o counter-signature, to be
affixed by him in the presence of the payee before it is
paid, otherwise it is incomplete
IX. CHECKS
Check- a bill of exchange drawn on a bank payable on
demand.
Check distinguished from and ordinary bill of exchange
BILLOF EXCHANGE
CHECK
Not necessarily
drawn
It is necessary that a check
on a deposit. The drawee
is drawn on a bank deposit.
need not be a bank.
The drawee is always a
bank.
Death of the drawer of a
Death of a drawer of a
check, with the knowledge
BOE, with the knowledge
of the bank, revokes the
of the bank, does not
revoke the authority of the authority of the banker to
pay.
drawee to pay.
May be presented for
Must be presented for
payment within a
payment within a
reasonable time after its
reasonable time after its
last negotiation because it
issue.
may be further negotiated.
May be payable on demand Always payable on demand
or at a fixed or
determinable future time
Kinds of checks:
1. Manager’s / Cashier’s Check – drawn by a bank on itself
and therefore, it is a primary obligation of the bank.
o
It is accepted in advance by the act of its
issuance
and
is
not
subject
to
countermand
by
the
payor
after
indorsement.
The bank’s manager signs manager’s check
while cashier’s check is signed by the bank
cashier.
Iron Clad Rule: Prohibits the countermanding of
payment of certified checks. (Republic of the Philippines
v. PNB. GR No. 16106. December 1, 1961)