Negotiable Instruments

Negotiable Instruments Atty. Ampil Amp il

Notes

INTRODUCTION

Negotiable Instruments ! Determined by whole instrument, by what appears on face, and not elsewhere Intent: To make negotiable instruments just like cash; to fa cilitate commerc c ommercial ial transactions; faith in the instrument 2 Primary Characteristics 1. Negotiable – security, held free from defenses (v. Assignment – not free from defenses) 2. Accumulation of secondary contracts (A game of who ultimately will play) Negotiability – property ! may pass from hand to hand, similar to money, right to hold, and collect sum payable Negotiable Instruments: 1. Promissory note – Maker, Payee, Bearer; a promise 2. Bills of Exchange – Drawer, Payee, Acceptor(drawee, Acceptor (drawee, a ddressee); an an order or command; checks Other parties to negotiated instruments: indorser, indorsee, persons negotiating by mere delivery(payable to bearer), persons to whom the instrument is negotiated by delivery Holder – payee or indorsee of a bill or note who is in possession of it or the bearer thereof Selling the Instrument Requirements: 1. Must be a Negotiable Instrument 2. Sec. 52 – Must be a holder in due course (holder in good faith of negotiable instrument where no infirmity known to him at time it was negotiated) 3. There must be a valid negotiation Bearer ! delivery Order ! Indorsement + Delivery

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Difference between Negotiable Instrument and Cash - Generally, a holder in due course is protected from personal defenses but not real defenses Incidents in the Life of a Negotiable Instrument 1. Issue – first delivery of instrument complete in form Delivery – transfer of possession with intent to transfer title 2. Negotiation – mode of transferring instrument; makes transferee holder of the instrument 3. Presentment for acceptance, in certain kinds of bills of exchange – consists of exhibiting bill to drawee and demanding that he accept it 4. Acceptance Acceptanc e – signification signi fication of drawee of his assent to order of drawer; write word accepted followed by signature of drawee 5. Dishonor by N on-Acceptance 6. Presentment for Payment 7. Dishonor by non-payment 8. Notice of Dishonor – must be given to drawer and to each indorser indorser 9. Discharge – by payment in due course by or on behalf of the principal debtor Indorsement – legal transaction effected by the writing of one’s own name on the back of the instrument or upon a paper attached thereto, transfer of full legal title to the paper transaction and an implied guaranty that instrument will be duly paid (special and blank indorsement); an indorsement completed by delivery - Mere delivery without indorsement in instruments payable to order is a mere assignment and not negotiation - An instrument instrum ent payable payab le to bearer bea rer is negotiated by mere delivery

Negotiable Instruments Atty. Ampil

Notes

NEGOTIABLE INSTRUMENTS LAW - Act No.2031, took effect June 2, 1911

*Check is not legal tender except if authorized by law or creditor *Treasury certificate – not legal tender

Section 1 Form of Negotiable Instruments. An instrument to be negotiable must conform to the following requirements: a. It must be in writing and signed by the maker or drawer; b. Must contain an unconditional promise or order to pay a sum certain in money; c. Must be payable on demand, or at a fixed or determinable future time; d. Must be payable to order or to bearer; and e. Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty. *Instrument ! Writing *Signature ! Adopted, Used *Unconditional ! Absolute *Sum Certain ! Inclusion of interest allowed, money only(standard in business); specify denomination *Fixed or Determinable Future time ! must have year *Order/Bearer ! Words of Negotiability; must not be payable to a specified person—if it is then no longer payable to order (assigns, assignees, holder on return of instrument properly endorsed) *Drawee ! Named, or blank to be filled in Legal Tender - Money which law compels creditor to accept in payment of his debt when tendered by debtor in right amount - Philippine Peso - Issued by Central Bank (Notes, Coins) - Manager’s Check, Certified Cashier;s Check

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Section 14 - Incomplete but delivered instruments - Delivery is made with intention of giving effect to it - Provides for prima facie authority for person in possession of an instrument to complete it by filling up the blanks therein (agency to fill up blank) 1. Want of a material particular in the instrument 2. Possession by a person other than drawer or maker 3. Person had authority to fill up blank - Prima facie authority – existing based on (1) signature on blank paper and (2) delivery by person signing for purpose of converting it into a negotiable instrument Material Particular: 1. One that would render the instrument non-negotibale 2. A particular omission of which would NOT render the instrument non-negotiable - date, rate of interest, place of payment •

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An indorser warrants that an instrument is in all respects what it purports to be and that if he is a general indorser, that it is valid and subsisting Reasonable v. unreasonable time: 8 months, 14 months Rights of holder in due course – can collect from maker, personal defense not available

Negotiable Instruments Atty. Ampil •

Notes

Personal Defense: that instrument was not filled up strictly in accordance with the authority given or that it is not filled up within a reasonable time

INCOMPLETE INSTRUMENT - want of a material particular DELIVERED NOT DELIVERED Personal defense: Real defense: want not filled up of delivery of a strictly in mechanically accordance with incomplete the authority given instrument or that it is not filled up within a reasonable time Cannot be Can be interposed interposed against to ANY holder holder in due - presumption of course delivery rebutted by proof of nondelivery To a holder not in Instrument can be due course: enforced to parties different views, subsequent to either instrument completion ! cannot be enforced Indorsers are or enforced up to liable extent of authority given; instrument can be enforced against parties subsequent to completion Presumption of delivery Under Section 15: Incomplete and Undelivered Instrument - Prima facie presumption of delivery in hands of holder in due course Under Section 16: Mechanically complete and Undelivered Instrument - Presumption of valid delivery is not merely prima facie but conclusive when

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instrument is in possession of holder in due course Immediate – privity not proximity Conditional delivery – condition imposed on delivery and not on the promise or oder to pay Section 16 Personal defense: want of delivery of a mechanically complete instrument - not available against holder in due course Rights of finder – No title to a lost bill or note vests in the finder Remedy: Maintain trover, action for money had and received for his use, replevin -- against finder DELIVERY OF NEGOTIABLE INSTRUMENT 1. Delivery is essential to the validity of any negotiable instrument 2. As between immediate parties, or those in like cases, delivery must have been with intention of passing title 3. An instrument signed by maker or drawer but not completed by him and retained in his own custody, is invalid as to him for want of delivery, even though stolen and negotiated to holder in due course 4. But when the instrument in (3) is in the hands of holder in due course, there is prima facie presumption of delivery 5. Where custody of incomplete instrument is entrusted to another, who wrongfully completes and negotiates it to holder in due course, delivery to agent or custodian is sufficient delivery to bind the drawer or maker 6. Where maker or drawer executes a complete instrument found in possession of another:


Notes

a. Holder in due course – conclusive presumption of delivery b. Holder not in due course – prima facie presumption of delivery Section 17 (+)Ambiguous or (+) Omissions 1. Sum payable: Words over figures, unless words are ambiguous or uncertain (marginal figures control in case of ambiguity in words) 2. Payment of Interest, date not specified: runs from (1) date of instrument ! (2) date of issue 3. Date of undated instrument – date is time of issue 4. Provisions: Written over Printed 5. Bill or Note: Holder may treat it as either 6. Signature, not clear in what capacity person making it intended to sign: deemed to be Indorser 7. “I promise to pay”, signed by two or more persons ! jointly and severally liable Section 18 General Rule: A person whose signature does not appear on the instrument is not liable Exceptions: 1. Where duly authorized agent signs for a person, person is liable 2. When a person sought to be charged forges the signature of another person, forger is liable 3. Where a person sought to be charged signs on a paper separate from instrument itself, as in allonge, although the allonge may be considered part of the instrument; or when acceptance is written on a paper other than the bill itself, under sections 134 and 135. 4. Where the person uses an assumed name or trade name ! equivalent to signature

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Section 19 - The signature of a party may be made by duly authorized agent, no particular form of appointment necessary - Authority established as in other cases of agency Section 20 Requisites for 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 3. Disclose his principal(need not be in signature) Section 21 Per Procuration, P.P. - warning that agent has a limited authority and a person who takes instrument is bound at his peril to inquire into extent and nature of agency Section 22 - An indorsement made by a minor or corporation may be enforced against maker or acceptor or other parties prior to the minor - Incapacity of indorser cannot be set up as a defense - Applicable to lunatics, imbeciles and other incapacitated persons


Notes

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

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Forgery: counterfeit making or alteration of any writing, and may consist in the signing of another’s name or the alteration of an instrument in the name, amount, description of the person and the like, with intent to defraud. Applies to forged signatures or signatures made without the authority of the person whose signature it purports to be Forgery: 1. Ordinary forgery 2. Fraud in factum – fraud amounting to forgery(distinguish from fraud in inducement) 3. Duress amounting to forgery 4. Fraudulent impersonation - Double intent: controlling intent is that an instrument is made payable to person before him EXCEPT if name of payee already known to maker or drawer or was more particularly identified in some manner - Theory of actual intent(regard of person before him as actual payee), Theory of estoppel Persons precluded from setting up defense of forgery

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A. Those who warrant or admit genuineness of the signature in question 1. Indorsers 2. Persons negotiating by delivery 3. Acceptors (A drawee, by accepting the bill, admits the genuiness of the signature of the drawer) B. Those who by their acts, silence or negligence are estopped from setting up the defense of forgery - Declaration, Act, Omission or Negligence - Unreasonable Delay(the one who ought to be apprised of forgery must have been prejudiced) - Estoppel by negligence in delivery CONSIDERATION Section 24 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. - presumption is satisfactory if not contradicted Section 25 Value is 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. Consideration – means inducement to a contract: cause, motive, price or impelling influence which induces a contracting party to enter into a contract Gift notes are not supported by sufficient consideration


Notes

Section 26 HOLDER FOR VALUE Where value has at any time been given for the instrument, the holder is deemed holder for value in respect to all parties who become such prior to that time Section 27 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. Section 28 Absence or failure of consideration is a matter of defense 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: 1. Where A issues check for payment of forged certificates of stock 2. Note given for future illicit cohabitation 3. Note by husband to his wife, upon promise of wife to withdraw all opposition to proceedings for divorce instituted by him 4. A note given in consideration of an agreement to stifle or hinder a public prosecution for a felony 5. When the consideration for commercial paper is clearly fraudulent Failure of Consideration - Neglect or failure of one of the parties to give, to do or to perform the consideration agreed upon - Giving of valuable consideration was contemplated but that it failed to pass

Requisites: Accommodation Party 1. He must be a party to the instrument, signing as maker, drawer, acceptor or indorser 2. He must not receive value therefor 3. He must sign for purpose of lending name or credit -Accommodation party is generally regarded as surety for party accommodated - Corporations are not liable as accommodation party even to holders for value(ultra vires) - Officers signing as accommodation party without authority to do so for their individual dents or transactions are personally liable thereon - Accomodation party can interpose defense of want of consideration against one not a holder in due course III. NEGOTIATION Section 30 An instrument is negotiated when it is transferred from one person to another in such manner as to constitute the transferee the holder thereof. If payable to bearer, it is negotiated by delivery; if payable to order, it is negotiated by the indorsement of the holder completed by delivery. Method of Transfer 1. By assignment 2. By operation of law(death of holder, insolvency, death of joint payee) 3. By Negotiation

Section 29 Liability of Accommodation Party Accommodation Party – An accommodation party is one who has

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signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefore, and for the purpose of lending his name to some other person. 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 only to be an accommodation party.

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Notes

- Negotiation is not confined to delivery to payee Section 31 The indorsement must be written on the instrument itself or upon a paper attached thereto. The signature of the indorser, without additional words, is a sufficient indorsement Indorsement: - mode of transfer - contract Allonge – indorsement written on paper attached to the instrument, must be tacked or pasted to instrument so as to become a part of it; allowable only when there is physical impossibility of writing indorsement on instrument itself(questionable view, will not facilitate fraud) Section 32 1. GENERAL RULE: Indorsement must be of entire instrument 2. A partial indorsement, when unauthorized, does not operate as an indorsement 3. Exception: Where the instrument has been paid in part, it may be indorsed as to the residue 4. Transfer to two or more persons severally does not operate as a negotiation of the instrument Section 33 Kinds of Indorsement: 1. Special – specifies to whom or to whose order the instrument is to be payable 2. In Blank 3. Absolute 4. Conditional 5. Restrictive 6. Qualified 7. Joint 8. Successive

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9. Irregular 10. Facultative Section 35 The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement LIMITATIONS: - Must not change the contract of blank indorser: pay to x and y; demand and notice waived; I guaranty payment; without recourse Section 36 An indorsement is restrictive which either: 1. Prohibits the further negotiation of the instrument 2. Constitutes the indorsee the agent of the indorser 3. Vests the title in the indorsee in trust for or to the use of some other persons The mere absence of words implying power to negotiate does not make a n indorsement restrictive. - There is a presumption of consideration in restrictive indorsement

Section 37 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 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.


Notes

Extent of negotiability after restrictive indorsement: 1. That all three forms of restrictive indorsement impose some degree of limitation of negotiability 2. That they do not all impose the same degree of limitation 3. That the indorsement itself discloses the extent of the limitation in the particular case Section 38 QUALIFIED INDORSEMENT A qualifiedindorsement constitutes the indorser a mere assignor of the title to the instrument. It may be made by adding to the indorser’s signature the words “without recourse” or any words of similar import. Such an indorsement does not impair the negotiable character of the instrument. - Without recourse to a person who is secondarily liable after the default of the person who is primarily liable - Qualified indorser is secondarily liable if the instrument is dishonored by nonacceptance or non-payment due to: "# forgery $# lack of good title on the part of the indorser %# lack of capacity to indorse on the part of the prior parties &# the fact that, at the time of the indorsement, the instrument was valueless or not valid and he knew of the fact - A qualified indorsement does not impair the negotiable character of the instrument Section 39 CONDITIONAL INDORSEMENT - A conditional indorsement does not make an instrument non-negotiable; but if the condition is on the face of the instrument, making the order or promise to pay conditional, the condition renders it non-negotiable - Maker can disregard conditions

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Conditional indorsee must hold payment from maker in trust until fulfillment of condition, subject to rights of conditional indorser

Section 40 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. - An instrument originally payable to bearer is always payable to bearer Section 41 Where an instrument is payable to the order of two or more payees or indorsees who are not partners, all must indorse unless the one indorsing has authority to indorse for the others. Exceptions: 1. Where payee indorsing has authority to indorse for the others 2. When payees are partners Section 42 Where an instrument is drawn or indorsed to a person as “cashier” or other fiscal officer of a bank or corporation, it is deemed prima-facie to be payable to the bank or corporation of which he is such officer, and may be negotiated by either the indorsement of the bank or corporation or the indorsement of the officer. - Corporation does not include cities and towns Section 43 Where the name of a payee or indorsee is wrongly designated or misspelled, he may indorse the instrument as therein described adding, if he thinks fit, his proper signature.


Notes

Section 44 Where any person is under obligation to indorse in a representative capacity, he may indorse in such term as to negative personal liability. Presumptions: 1. Instrument is drawn or indorsed to a person as “cashier” or other fiscal officer of a bank or corporation, it is deemed prima-facie to be payable to the bank or corporation of which he is such officer 2. Every negotiation is deemed prima facie to have been effected before instrument was overdue (except where indorsement bears date after maturity of instrument) 3. Date written is presumed to be true date. 4. Every indorsement is presumed prima facie to have been made at place where the instrument is dated. Section 47 An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise. - After maturity, an instrument originally negotiable continues to be negotiable in the sense that the contracts of the parties to it continue and are governed by the Negotiable Instruments Law. However, it ceases to be negotiable in the sense that a transferee after maturity is not a holder in due course and is therefore not free from defenses obtaining between prior parties. Transfer to such transferees would be equivalent to a mere assignment and subject to defenses(would be a mere assignment). Section 48 The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all

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indorsers subsequent to him, are thereby relieved from liability on the instrument. Section 49 Equitable Assignment – Transfer of a negotiable instrument, payable to order, by mere delivery and without indorsement Rights of transferee for value: 1. Acquires rights (and defenses) of transferor 2. Right to require transferor to indorse instrument - The time when transferee becomes holder in due course is at the time of actual indorsement Section 50 Where instrument is negotiated back to prior party, such party may, subject to the provisions of this Act, 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. - Avoid Circuitry of Suits


Notes

Section 51 The holder of a negotiable instrument may to sue thereon in his own name; and payment to him in due course discharges the instrument.

Section 52 What constitutes a holder in Due Course.—

Rights of a holder in general: 1. He may sue on the instrument in his own name (even if he is a holder only for collection or as a pledge of the instrument) - Transferee for value: delivery w/o indorsement ! may sue in his own name is the transferor could have done so(transferor vests in transferee such title as transferor had) 2. He may receive payment and if the payment is in due course, the instrument is discharged Payment in due course: 1. Made at or after maturity of the instrument 2. To holder 3. Holder: In good faith and without notice that his title is defective

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A HOLDER IN DUE COURSE is a holder who has TAKEN THE INSTRUMENT under the following conditions: a. That it is COMPLETE any REGULAR UPON ITS FACE; b. That he became the holder of it BEFORE IT WAS OVERDUE, and WITHOUT NOTICE that it had PREVIOUSLY been DISHONORED, if such was the fact; c. That he took it in GOOD FAITH and FOR VALUE; d. 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.


Notes

1. PRESUMPTION: Every holder is presumed prima facie to be a holder in due course 2. Complete and Regular Instrument – no evidence of apparent alteration, regular indorsement(in case of 2 payees, both indorse), with maturity date, when omission is immaterial, name of payee inserted after striking out another name and is a common practice of bank 3. An overdue instrument is notice that it has been dishonored(OVERDUE – after date of maturity) ! refers to instrument payable at a fixed or determinable future time (payable on demand is covered by Section 53.) 4. Chargeable with notice: (1) one taking an overdue instrument; (2) one acquiring an instrument for grossly inadequate consideration 5. Good faith – refers to indorsee or transferee, not to seller of paper (bad faith – knowledge of facts which render it dishonest for him to take a particular piece of negotiable paper(knowledge of some truth that would prevent action by those commercially honest man)) 6. Inquiry – important in case circumstances are suspicious 7. Buying at a discount does not raise an inference of a tainted instrument. 8. NIL: Things that may be wrong in an instrument: a. Defenses: absence or failure of consideration; mistake, minority and other forms of incapacity, lack of authority of agent b. INFIRMITIES: things that are wrong in the instrument itself c. DEFECTS OF TITLE: Equitable defenses, breach of faith in negotiation

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9. DEFECTS OF TITLE a. Acquisition of instrument by fraud, force, duress or fear, unlawful means, illegal consideration b. Negotiation of instrument in breach of faith, or under circumstances that amount to fraud 10. INFIRMITIES: Things that are wrong in the instrument itself (as distinguished from those that are lacking in the contracts on the instrument) a. Wrong date inserted where the instrument is expressed to be payable at a fixed period after sight is undated b. Filling up of blanks not in accordance with authority given or within reasonable time where instrument delivered wanting in material particular c. Filling up and negotiating without authority an incomplete and undelivered instrument d. Lack of valid and intentional delivery of a mechanically complete instrument e. Agent signing per procuration beyond scope of his authority f. Forgery g. Material alteration 11. Drawee can not be a holder in due course; Section 52 refers to an indorsee, pledgee or payee; must be a holder and not an acceptor 12. Where an instrument payable on demand is negotiated an unreasonable length of time after its issue, the holder is not deemed a holder in due course. Unreasonable length of time ! usually not more than 1 year(unless installments paid monthly, or interest or presented only upon completion of contract covered by the instrument)


Notes

Section 54 Notice of Infirmity before full payment ! Holder in due course only to the extent of amount paid by him ! Illustration: He can collect from maker or drawer only to the extent of the amount he paid for the instrument prior to notice of infirmity or defect in title Section 55 DEFECTIVE TITLE: The title of a person who negotiates an instrument is defective within the meaning of this Act When he obtained an instrument, or any signature thereto, by FRAUD, DURESS, or FORCE AND FEAR, or OTHER UNLAWFUL MEANS, or for an ILLEGAL CONSIDERATION, or when he negotiates it in a breach of faith, or under such circumstances as amount to a fraud. FRAUD (Intentional misrepresentation) - Means to obtain instrument or signature constitutes FRAUD - Subsequent negotiation of said instrument when indorsee knows of the fraud makes the indorsee NOT a holder in due course DURESS, or FORCE AND FEAR (Person signed because gun was pointed at him) OTHER UNLAWFUL MEANS(stolen instrument) ILLEGAL CONSIDERATION (If value given for an instrument is illegal, the one who gave the illegal consideration has a defective title) Negotiates it in a breach of faith(note already paid, note held only as collateral or security, note negotiated after he fails to pay valuable consideration he agreed to give in exchange of note) ! The person negotiating the note in breach of faith has a defective title Circumstances amounting to a fraud

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Section 56 NOTICE OF DEFECT 1. Actual knowledge of defect or infirmity - not mere suspicion, fear or surmise - Some truth such as that the instrument is tainted in some way, as would prevent the taking of the instrument by commercially honest men is enough - Knowledge of agent is knowledge of principal 2. Actual knowledge of facts that his action in taking the instrument amounts to bad faith(actual or constructive notice of facts is not necessary to constitute bad faith) - Knowledge and bad faith may be established by circumstantial evidence: 1. Duty of Inquiry 2. Ignoring strong and decisive circumstantial evidence would be negligence and an act of bad faith - Notice that there was something wrong, not necessarily notice of particular wrong committed, amounts to bad faith in taking instrument - Willful ignorance(not just negligence) - Suspicious circumstances with means of verifying them 3. Chargeable with notice: (1) one taking an overdue instrument; (2) one acquiring an instrument for grossly inadequate consideration


Notes

Section 57 RIGHTS OF A HOLDER IN DUE COURSE 1. He may sue on instrument in his own name 2. He may receive payment and if payment is in due course, the instrument is discharged 3. He holds the instrument free from any defect of title of prior parties and free from defenses available to prior parties among themselves (FREE FROM ALL PERSONAL DEFENSES(EQUITABLE) BUT NOT REAL(LEGAL) DEFENSES) 4. He may enforce payment of the instrument for the full amount thereof against all parties liable thereon

Section 58 A person NOT a holder in due course acquires the rights of a holder in due course if: (free from personal defenses) "# He derived title from holder in due course $# He was not himself a party to any fraud or illegality affecting the instrument - He must therefore prove that the person whom he derives his title was a holder in due course Exception: Does not apply to one who is NOT a holder in due course who reacquires the instrument from a holder in due course; or when instrument is retransferred to an agent of payee.

PERSONAL DEFENSES – available only against that person or a subsequent holder who stands in privity with him REAL DEFENSES – attaches to instrument itself; defense against everybody 1. Forged or unauthorized signature 2. Void contract 3. Signature obtained by misrepresentation 4. Contract lost vitality(due to a subsequent event, material alteration, lapse of time, discharge by payment in due course, bankruptcy proceedings) Exception: An instrument cannot be enforced against the person to whom the legal defense is available but it can be enforced against those who precluded from setting up the defense Joint debtors/makers ! defense available to both only if defense arises from nature of obligation and not defenses personal to only one(ex. Minority)

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Section 59 Every holder is deemed prima facie to be a holder in due course EXCEPT: - If it has been shown that title of any person who has negotiated the instrument is defective, burden shifts to holder to prove that he is a holder in due course Exception to the Exception: - If party became bound to the instrument prior to the acquisition of defective title, burden is not shifted to holder to prove that he is holder in due course

REAL DEFENSE (F2EU ADM2 WIWI) 1. Forgery (23) 2. Fraud in Factum 3. Execution of instrument between public Enemies 4. Ultravires act of corporation, where the corporation is absolutely prohibited by its charter or statute from issuing any commercial paper under any circumstances 5. Alteration (124,125)


Notes

6. 7. 8. 9.

Duress amounting to forgery Minority (18) Marriage in case of wife Want of delivery of incomplete instrument (16) 10. Insanity where the insane person has a guardian appointed by court 11. Want of authority of agent (15) 12. Illegality of contract where it is the contract or instrument itself which is expressly made illegal by statute LIABILITIES OF PARTIES 60 Liability of Maker The maker of a negotiable instrument, by making it, engages that he will pay it according to its tenor, and admits the existence of the payee and his then capacity to indorse. 1. Liability of maker: Primarily, Unconditional, Absolute ! Note must be paid according to its terms 2. Admits existence of payee and payee’s capacity to indorse 61 Liability of Drawer The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder. Liability of drawer is subject to conditions: 1. That instrument is dishonored 2. That the necessary proceedings of dishonor are duly taken *He may negative his liability

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In favor of: 1. Holder 2. Any of indorsers intervening between the holder and the drawer is compelled to pay by the holder 62 Liability of Acceptor The acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance and admits: (a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee and his then capacity to indorse. 1. Acceptor primarily liable: pay absolutely and unconditionally, according to tenor of acceptance 2. Drawee is not liable on the bill before acceptance 3. Acceptor engages to pay according to tenor of his acceptance 63 When a person deemed indorsers. A person placing his signature upon an instrument otherwise than as maker, drawer, or acceptor, is deemed to be indorser unless he clearly indicates by appropriate words his intention to be bound in some other capacity. - cannot be changed by parol evidence 64 Liability of irregular indorser. Where a person, not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as indorser, in accordance with the following rules: (a) If the instrument is payable to the order of a third person, he is liable to the payee and to all subsequent parties. (b) If the instrument is payable to the order of the maker or drawer, or is payable to bearer, he is liable to all


Notes

parties subsequent to the maker or drawer. (c) If he signs for the accommodation of the payee, he is liable to all parties subsequent to the payee. 65 Warranty where negotiation by delivery and so forth. Every person negotiating an instrument by delivery or by a qualified indorsement warrants: (a) That the instrument is genuine and in all respects what it purports to be; (b) That he has a good title to it; (c) That all prior parties had capacity to contract; (d) That he has no knowledge of any fact which would impair the validity of the instrument or render it valueless. BUT when the negotiation is by delivery only, the warranty extends in favor of no holder other than the immediate transferee. The provision of subdivision (c) of this section do not apply to a person negotiating public or corporation securities other than bills and notes. PRESENTMENT FOR PAYMENT A. Made by holder or person authorized to receive payment on his behalf B. To the person primarily liable of if absent and inaccessible, to any person found at place where payment is made IF no place of payment specified: 1. Where person primarily liable is dead and no place of payment specified, presentment must be made to personal representative, if such there be and he can be reasonably found 2. Persons liable as partners – presentment may be made on any one of them, even if firm dissolved 3. Several persons, not partners ! presentment must be made to them all

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Payable on demand – reasonable time after issue(note), or after last negotiation(bill) Not payable on demand – Must be made on day it falls due Sunday, Holiday, Saturday ! next business day Instrument falling due or becoming payable on Saturday, Payable on Demand – may be presented before 12 noon on Saturday 1. As specified in instrument If payment payable at bank – must be during banking hours except if person to make payment has no funds there to meet it at any time during the day, then presentment at any hour before bank is closed is sufficient - Where instrument is made payable at a bank, it is equivalent to order to bank to pay the same for the account of principal debtor thereon 2. Address of person to make payment 3. Usual Place of business or residence 4. Where person can be found or last known place of business or address Instrument must be exhibited, and when paid, it must be delivered When Presentment for payment not required: 1. To charge drawer: where drawer has no right to expect or require that the drawee or acceptor will pay the instrument 2. To charge indorser: where instrument was made or accepted for his accommodation and he has no reason to expect that instrument will be paid if presented Delay in making presentment excused: when delay is caused by circumstances beyond control of the holder and not imputable to his default, misconduct, or negligence. When cause of delay ceases to operate, presentment must be made with reasonable diligence.


Notes

Presentment for payment excused: (a) Where, after the exercise of reasonable diligence, presentment, as required by this Act, cannot be made (b) Where drawee is a fictitious person (c) By waiver of presentment, express or implied

NOTICE OF DISHONOR When instrument is dishonored by nonacceptance or non-payment Notice of dishonor must be given to each: 1. Drawer 2. Indorser Otherwise, they will be discharged. They may also be given to agent provided agent is duly authorized to receive notice Notice may be given to secretary at public office or wife at home When party entitle to notice is dead, then May be given to personal representative if with reasonable diligence, he can be found or if no personal representative, to residence or last place of business Notice to one partner is notice to firm, even if there has been dissolution Notice to persons jointly liable – to each of them unless one has authority for the others When a party has been adjudged bankrupt or an insolvent, or has made an assignment for benefit of creditors, notice may be given to party himself or to his trustee or assignee

WHO GIVES NOTICE OF DISHONOR? 1. Holder 2. Any person on behalf of holder – inures to benefit of all subsequent holders 3. Any party to the instrument who may be compelled to pay it(notice given only to those whom he has a right of reimbursement) – inures to benefit of holder and all parties subsequent to party whom notice is given 4. May be given by agent – if dishonored in hands of agent, he may give notice to parties liable or notice to his principal (must give notice to principal within time allowed by law)

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Each installment, in the absence of an acceleration clause, is equivalent to a separate note.

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NOTICE 1. May be written or verbal 2. May be an insufficient written notice supplemented and validated by verbal communication 3. Misdescription does not vitiate notice unless party to whom notice is given is in fact misled 4. Must be sufficient to identify instrument and indicate that it has been dishonored by non-acceptance or non payment 5. May be given by delivering personally or through mails(once addressed and deposited in the post-office, sender is deemed to have given due notice notwithstanding any miscarriage in the malls) 6. Must have statement that party giving notice intends to look for party addressed for payment


Notes

2. Not imputable to his default, misconduct or negligence 3. Notice must be given when cause of delay ceases to operate

WHEN TO GIVE NOTICE? 1. As soon as instrument is dishonored, and unless delay is excused, within time fixed by Act 2. Cannot give notice before maturity but may give on date of maturity provided instrument has been presented and dishonored 3. Where a party receives notice of dishonor, he has the same time for giving notice to antecedent parties 4. On the day Following DIshonor Notice given out of time would be considered not to have been given. *Place not important as long as party receives it within specified time NOTICE of DISHONOR may be WAIVED, express or implied 1. If embodied in instrument, binding on all 2. If written above signature of indorser, binds indorser only 3. Where presentment waived, notice of dishonor also waived NOTICE is dispensed with when, after exercise of reasonable diligence, it cannot be given or does not reach parties sought to be charged. - Where due notice of dishonor by nonacceptance has been given, notice of a subsequent dishonor by non-payment is not necessary unless in the meantime the instrument has been accepted. - An omission to give notice of nonacceptance does not prejudice the rights of a holder in due course subsequent to the omission DELAY in giving Notice is excused: 1. When delay caused by circumstances beyond control of holder

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NOTICE NEED NOT BE GIVEN TO DRAWER: 1. Where drawer and drawee are the same person 2. When drawee is a fictitious person or a person not having capacity to contract 3. When the drawer is the person to whom the instrument is presented for payment 4. Where 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 NEED NOT BE GIVEN TO INDORSER: 1. When drawee is a fictitious person or a person not having capacity to contract, and the indorser was aware of that fact at the time he indorsed the instrument 2. Where the indorser is the person to whom the instrument is presented for payment 3. Where the instrument was made or accepted for his accommodation.

WHEN PROTEST NEED NOT BE MADE: where any negotiable instrument has been dishonored, it may be protested for non-acceptance or non-payment as the case may be; but protest is not required except in case of foreign bills of exchange.


Notes

DISCHARGE OF NEGOTIABLE INSTRUMENT (a) By payment in due course by or on behalf of principal debtor (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation (c) By the intentional cancellation of holder (d) By any other act which will discharge a simple contract for the payment of money (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right DISCHARGE OF PERSONS SECONDARILY LIABLE a. By any act which discharges the instrument b. By the intentional cancellation of his signature by the holder c. By the discharge of a prior party d. By a valid tender or payment made by a prior party e. By a release of the principal debtor unless the holder’s right of recourse against the party secondarily liable is expressly reserved f. By any agreement binding upon the holder to extend the time of payment or to postpone the holder’s right to enforce the instrument unless made with the assent of the party secondarily liable or unless the right of recourse against such party is expressly reserved STRIKING OUT Section 48. The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument.

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Section 121. Where the instrument is paid by a party secondarily liable thereon, it is not discharged; but the party so paying it is remitted to his former rights as regards all prior parties, and he may strike out his own and all subsequent indorsers and again negotiate the instrument, except: (a) Where it is payable to the order of a third person and has been paid by the drawer; and (b) Where it was made or accepted for accommodation and has been paid by the party accommodated. RENUNCIATION 1. The holder may expressly renounce his rights against any party to the instrument 2. Renunciation must be in writing unless instrument is delivered to person primarily liable 3. At any time before or after its maturity 4. Instrument will be discharged if renunciation: a. Absolute and unconditional b. Against Principal Debtor c. Made at or after the maturity of instrument 5. A renunciation does not affect the rights of a holder in due course without notice. CANCELLATION: If made unintentionally, under a mistake or without authority of holder, it is inoperative. But it must be proven by the party making the allegation. SPOLIATION: An alteration made by a stranger to the instrument - instrument is discharged but debt survives (since holder in due course can recover according to original tenor) - If alteration constitutes forgery, original debt as well as instrument is discharged

Negotiable Instruments

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