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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. 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

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. 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

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 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. 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) 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). 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. The payee must be named or otherwise indicated therein with reasonable certainty. 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 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

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.

Confession of judgment a written statement signed by the defendant, setting forth the basis of liability and authorizing the entry of judgment thereon. 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. if it is not dated, the instrument will be considered to be dated as of the time it was issued. consideration for the instrument is presumed. (art. 154 NCC & sec. 25 NIL) 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 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. 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. 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. 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;

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; 7. Governed by Arts. 1624 to 1635 (on assignment of credits) of the Civil Code.

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) 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. 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.

c.

6. An indorser is not liable unless there be presentment and notice of dishonor; 7. Negotiation is governed y the NIL.

d.

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. 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. 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;

e.

f.

g.

h.

Irregular - a person who, not otherwise a party to an instrument, places thereon his signature in blank before delivery.

2. 3.

Rules on Indorsements: 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. 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. 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 its 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. IV. HOLDERS

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.

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 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.

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. 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) 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. 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

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. 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;

subject to the same defenses as if it were nonnegotiable. 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) 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. 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. 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. 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. V. LIABILITIES OF PARTIES 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.

IN A BILL OF EXCHANGE

1. 2. 3. 4.

Drawer Acceptor Indorsers Persons negotiating by delivery

1.

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 drawers 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. 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 drawers 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.

b.

instrument is genuine and in all respects what it purports to be; he has good title to it; all prior parties had capacity to contract; he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. Persons Negotiating by Delivery warranties same as those of qualified indorsers; and warranties extend to immediate transferee only. 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.

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.

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. 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. 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. 65; Metropol

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. 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

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. 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

3.

Parties with Limited Liability (sec. Financing v. Sambok, 120 SCRA 864) a. Qualified Indorser - warrants that:

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 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. 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. 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:

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. 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. 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.

a. b. c.

Effects of Defenses: Complete and undelivered instrument

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

A.

2.

3.

4.

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 anothers 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

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. Makers 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. Payees 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. Indorsers 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. Drawers 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 drawers 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.

it is bound to known the drawers signature since the latter is its depositor. c. Party who made the forgery is liable. Payees 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. Indorsers 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.

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:

5.

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 banks right to charge against the drawers account the amount of an altered check. However, the latters negligence, before or after the alteration, may estop him from

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.

a.

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. c. Where the bill expressly stipulates that it shall be presented for acceptance; or

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. 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: Instrument is payable at a fixed or determinable future time (time instrument) - presented for payment is on the next succeeding business day 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: excluding the day from which the time is to begin to run, and by including the date of payment applies to instruments which are payable at a fixed period after date, after sight, or after that happening of a specified event. 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. 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.

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. 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. 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. 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. 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). 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.

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. 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. 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. Effect of failure to give notice: parties secondarily liable are discharged 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. When notice of dishonor dispensed with:

1. 2. 3.

when party to be notified knows about the dishonor, actually or constructively; if waived; and when after due diligence, it cannot be given.

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. 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. 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. 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. 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. 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)

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. 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. 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. 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.

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. 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. 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. Foreign Bill of Exchange: 1. Drawn in the Philippines but payable outside the Philippines. 2. Payable in the Philippines but drawn outside the Philippines. 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 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. 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;

4. 5.

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.

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 holders 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 holders right to enforce the instrument. 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. 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. Note: In either case, renunciation does not affect the rights of a holder in due course without notice. 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 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. 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. 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 holders consent is necessary. 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. 5. 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. Managers / Cashiers 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 banks manager signs managers check while cashiers check is signed by the bank cashier.

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 Stale check one which has not been presented for payment within a reasonable time after its issue 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. 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. 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. Travelers check one upon which the holders 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 Iron Clad Rule: Prohibits the countermanding of payment of certified checks. (Republic of the Philippines v. PNB. GR No. 16106. December 1, 1961)

3. 4.

6.