Negotiable Instruments Memory Aid UM - Summer Class 2011 Outlined By NCM (Excerpts from H.S.De Leon, Dean Abad and Atty. Roland Pondoc)
Negotiable Instruments: WSPH i. written contracts for the payment of money; ii. by its form, intended as a substitute for money iii. intended to pass from hand to hand, iv. to give the holder in due course the right to hold the same and collect the sum due. Functions and importance of NI: SEC 1. operates as a s ubstitute ubstitute for money – allows it to go from hand to hand in the commercial markets and to take the part of money in commercial transactions. 2. the the medi media a of exch exchan ange ge for for most most comm commer erci cial al transacti transactions ons (Checks) (Checks) – they are a safe and convenient means of doing business that eliminate the risk of dealing in cash. 3. serves serves as a medium medium for credit credit transaction transaction – men without cash in hand are enabled by means of credit to condu onduc ct and and carr arry to compl omplet etiion busin usines ess s and and commercial enterprises. Note: Checks are primarily used for immediate payment such as a substitute for money, while the ordinary bill of exchange and the promissory note are intended for the circulation of credits such as a credit instrument. Characteristics/Features Characteristics/Features of NI: 1. Negotiability – it may may pass pass from from one one pers person on to another similar to money. 2. Accumulation of secondary contracts – negotiated from one person to another, hence, additional parties can become involved. Every negotiation is a contract in itself, there will be more parties to whom the holder can demand payment. Note: If it cann cannot ot be tran transf sfer erre red, d, then then it is nonnonnegotiable. Common forms of NI: 1. Promissory Note: PSM i. unconditional promise to pay in writing made by one person to another, ii. signe igned d by the the make maker, r, enga engagi ging ng to pay pay on demand or a fixed determinable future time iii. a sum certain in money to order or bearer. When the note is drawn to maker’s own order, it is not complete until indorse by him. (Sec. 184 NIL)
2. Bill of Exchange: OSRM i. unconditional order in writing writing addressed by one person to another, ii. signed by the person giving it, r equiring equiring the person to whom it is addressed addressed to iii. pay on demand or at a fixed or determinable future time iv. a sum certain in money to order or to bearer. (Sec. 126 NIL) 3. Check - bill bill of exch exchan ange ge draw drawn n on a bank bank and and payable on demand. (Sec. 185 NIL) special kind of a bill of exchange. • Other examples of NI: CBDB/DTB CBDB/DTB 1. Certificate of deposit; 2. Bank Notes; 3. Due Bills; 4. Bonds; 5. Drafts; 6. Trade Acceptances; and 7. Banker’s Acceptances. Non-negotiable Instruments: WTPC/LBD 1. Warehouse Receipts; 2. Treasury Warrants; 3. Postal Money Order; 4. Certificate of Stocks; 5. Letter of Credits; 6. Bill of Lading; and 7. Dock Warrants. Note: it cannot be negotiated negotiated but can be transferred transferred by assignment. Life cycle of NI: INPAD/PDNPD 1. Issuance 2. Negotiation 3. Presentment for acceptance in some NI 4. Acceptance itself 5. Dishonored by non-acceptance 6. Presentment for payment 7. Dishonored by non-payment 8. Notice of dishonor 9. Protest in some cases 10. Discharge Promissory Note vs. Bill of Exchange: Promissory Note: “Promise “Promise Paper” i. unconditional pr promi omise; ii. involves 2 parties; iii. iii. Make Makerr is prim primar aril ily y lia liabl ble; e; and and iv. iv. only only 1 pr presen esentm tmen entt – for for pay payme ment nt.. Bill of Exchange: “Order “ Order Paper” i. unconditional order; ii. involves 3 parties; iii. iii. Draw Drawer er is only only seco second ndar aril ily y lia liabl ble; e; and and 1
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generally 2 presentments - for acceptance and for payment. Form Form of NI: NI: An inst instru rume ment nt to be nego negoti tiab able le must must conform to the ff. requirements: (Sec. 1 NIL) PN: SUDO / BofE: SUDOC 1. IT MUST MUST BE IN WRITIN WRITING G AND AND SIGNE SIGNED D BY THE MAKER OR DRAWER. Notes: •
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The instrument must be in writing; writing ; otherwise, nothin nothing g could could be negoti negotiate ated d or passed passed from from hand to hand. The writing may be in ink, print or pencil. It may be upon parchment, cloth, leather or any other substitute of paper. There is no such thing as an oral negotiable instrument.
It must be signed by the maker or drawer. It may consist of mere initials, numbers or thumb marks, but the holder must prove that what is written is intended as a signature of the person sought to be charged. His His signat signature ure is prima prima facie facie eviden evidence ce of his • intention to be bound as either maker or drawer. ------------------------------------------------------------------------------------------------------------------------------------------------2. IT MUST CONTAIN AN UNCONDITIONAL PROMISE OR ORDER TO PAY A SUM CERTAIN IN MONEY. MONEY. •
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The promise or order must be unconditional; it must must not not be a subj subjec ectt to any any cond condit itio ion n or contingency. It must be payable absolutely. The sum payable must be certain; hence, it must be defini definite te and specif specific, ic, to assure assure clari clarity ty in determining the value of the instrument.
If the the instr instrum ument ent calls for an act, act, other other than than the the payment of money, it is not negotiable. Exceptions: sale of collateral securities confession of judgment waives benefit of law gives option to the holder to require something to be done in lieu of money (Sec. 5 NIL) • • • •
Elaborated by Sec. 2 NIL: Sum is certain even if it is to be paid with: The instrument is still negotiable even if one of the ff. is stated: a. Interest – at fixed rate, or at increased/reduced rate. b. In installments – installments – must be stated in the instrument: a. intere interest st of of each each inst install allmen ment; t; and and b. due date date of of each each instal installm lment ent.. c. In instal installme lment nts s with with accele accelerat ration ion clause clause – a promise promise that if any installment installment or interest is not paid as agreed, the whole shall become due.
d. With With exchan exchange ge – refers refers to instru instrumen ments ts that that are payable in foreign currency. The exchange rate must be stated, stated, otherwise otherwise the latest exchange rate will be the basis. e. Costs of collection or attorney’s fees – in case payment shall not be made at maturity, there shall be added to the amount due on the note costs of collection or an attorney’s fee. •
Elaborated by Sec. 3 NIL: a. Indi Indicat catio ion n of part partic icul ular ar fund fund from from wh whic ich h the the acceptor disburses himself after payment. • The particular fund indicated fund should only be the source of reimbursement and should not be the direct source of payment; else it becomes conditional and therefore non-negotiable. An instru instrume ment nt which which contai contains ns a direct direction ion to • debit a particular account is negotiable. b. Statement of the transaction which gives rise to the instrument. The statement of the consideration for which the instrument has been issued does not make it conditional; thus, it has no adverse legal effect on the negotiability of the instrument. ------------------------------------------------------------------------------------------------------------------------------------------------3. IT MUST MUST BE PAYA PAYABL BLE E ON DEMAND, DEMAND, OR AT A FIXED OR DETERMINABLE FUTURE TIME. •
Elaborated by Sec. 7 NIL: Instrument is payable upon DEMAND if: a. It is expressed to be so payable on sight or upon presentation an instrument payable on demand is due and • payabl payable e immedi immediate ately ly after after its delive delivery. ry. It is a present debt due at once. Ex. Other words equivalent to “on demand” (PN) “at sight” (BofE) “on pr presentation” “on call” “at anyt anytiime call alled for” or” “At sight” means that the instrument is payable as soon as it is seen by the party primarily liable. b. No period of payment is stipulated – when no time is expressed. c. Issued, Issued, accepted, accepted, or endorsed endorsed after maturity maturity – when the maturity date has already lapsed (overdue) and the drawee is willing to pay, then it is payable on demand. Elaborated by Sec. 4 NIL: Inst Instru rume ment nt is paya payabl ble e upon upon a DETE DETERM RMIN INAB ABLE LE FUTURE TIME if: a. There is a fixed period after sight/date. Fixed period/time: “I promise to pay P or order the sum of P10,000 on October 29, 2009.” •
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Fixed period after sight: “Sixty days after sight, pay to the order of P the sum of P10,000.” 2
b. To a specified person or his order – “Pay to P •
Fixed period after date: “Sixty days after date, I promise to pay P or order the sum of P10,000.”
b. On or before a specified date/fixed determinable future time. On or before a fixed time: “On or before October 10, 2009, I promise to pay P or order P10,000.” •
The maker has the option to pay in advance or on the fixed date. •
On or before a fixed determinable time: “On or before the start of the next school semester, I promise to pay P or order P10,000.” Determinable future time means a time that can be determined with certainty after the execution of the instrument.
c. On or at a fixed date after the occurrence of an event certain to happen though the exact date is not certain. On the occurrence of a specified event: “I promise to pay P or order the sum of P10,000 upon the death of his father.” After the occurrence of a specified event: “Thirty days after the death of his father, I promise to pay P or order the sum of P10,000.” •
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If the instrument is payable upon a contingency, the happening of the event does not cure the defect (still non-negotiable). Contingency – an uncertain future event or an event which may or may not happen. --------------------------------------------------------------------------4. IT MUST BE PAYABLE TO ORDER OR TO BEARER. Notes: •
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or order P10,000.” It may be drawn payable to the order of: a. A payee who is not a 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. Elaborated by Sec. 9 NIL: Instrument is payable to BEARER: a. When it is expressed to be so payable – “I promise to pay bearer P10,000.” b. When payable to the person named or bearer – “Pay to P or bearer P10,000.” Or “Pay to P or holder P10,000.” c. Payable to order of fictitious or non-existent person and this fact was known to drawer – “Pay to Superman or order P10,000.” d. Name of payee not name of any person – “Pay to cash.”, “Pay to money.”, “Pay to cash or order.” e. Only and last indorsement is an indorsement in blank – Blank indorsement is payable to bearer and may be negotiated by delivery. (Sec. 34 NIL) Notes: Once a bearer instrument, always a bearer instrument – despite an indorsement, it can be negotiated further by mere delivery. --------------------------------------------------------------------------5. WHERE THE INSTRUMENT IS ADDRESSED TO A DRAWEE, HE MUST BE NAMED OR OTHERWISE INDICATED THEREIN WITH REASONABLE CERTAINTY. •
Notes: This provision applies only to bills and checks. The reason for this last element is to enable the • payee or holder to know upon who he is to call for acceptance or payment. Where a bill is addressed to the “treasurer” of a corporation, the drawee is sufficiently indicated. --------------------------------------------------------------------------The validity and negotiability of an instrument is not affected by the fact that: (Sec. 6 NIL) a. It is not dated; or b. does not specify the value given or that any had been given; or c. does not specify the place where it is drawn or payable; or d. bears a seal; or e. designates the kind of current money in which payment is to be made. •
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If payable to order – indorsement plus delivery. If payable to bearer – delivery only. An instrument payable to a specified person only is not an order instrument, thus, non-negotiable as the promise or order is limited to paying one person only. The payee must be named or otherwise indicated therein with reasonable certainty. If there is no payee, there would be no one to indorse the instrument payable to order. Therefore useless to be considered negotiable.
Elaborated by Sec. 8 NIL: Instrument is payable to ORDER: a. Where it is drawn payable to the order of a specified person – “Pay to the order of P P10,000.”
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The instrument need not to follow the language of the law, any terms are sufficient which clearly indicate an intention to conform to the requirements hereof. (Sec. 10 NIL) 3
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If the instrument bears a date, it is presumed that said date is the date when it was made by the maker, drawn by the drawer, accepted by the drawee, or indorsed by the payee or holder. (Sec. 11 NIL) Ante-dating or post-dating an instrument does not render it invalid or non-negotiable provided this is not done for an illegal purpose or to commit fraud. (Sec. 12 NIL)
The date may be inserted in an instrument when: (Sec. 13 NIL) a. an instrument expressed to be payable at a fixed period after date is issued undated. b. where acceptance of an instrument payable at a fixed period after sight is undated. Effects: •
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Any holder may insert the true date of issuance or acceptance. The insertion of a wrong date does not avoid the instrument in the hands of a subsequent holder in due course. As to the holder in due course, the date inserted (even if it be the wrong date) is regarded as the true date.
Steps in issuance of NI: 1. The mechanical act of writing the instrument completely and in accordance with the requirements of Sec.1 NIL. 2. The delivery of the complete instrument by the maker or drawer to the payee or holder with the intention of giving effects to it. Requisites for a Holder in Due Course (HIDC): COVI (Sec. 52 NIL) Four requisites must be complied, otherwise, he is not qualified to be a HIDC. a. Receives the instrument complete and regular on its face. •
An instrument is considered complete and regular on its face if: a. the omission is immaterial; and b. the alteration on the instrument was not apparent on its face.
b. Became a holder before it was overdue and had no notice that it had been previously dishonored if such was the fact. • An instrument is overdue after the date of maturity. On the date of maturity, the instrument is not yet overdue and the holder is still a HIDC.
Chapter II – CONSIDERATION Sec. 24 NIL. Presumption of consideration. Every NI is deemed prima facie to have been issued for a valuable consideration, and every person whose signature appears thereon to have becomes a party thereto for value. The presumption is only prima facie. It may be • rebutted or disproved by evidence to the contrary. Sec. 25 NIL. What constitutes value. • Value is any consideration sufficient to support a simple contract. Such as: PILSB a. Pre-existing debts; b. Interests; c. Labor rendered services; d. Support; and e. Benefits. If without for value, the holder is not a HIDC. Not Value: a. Gift; b. Donation; c. Fear; d. Love; e. Gratitude. •
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Good faith means lack of knowledge or notice of defect or infirmity. d. At time he took the instrument, no notice of infirmity in instrument or defect in the title of the person negotiating it. (He is in good faith, so to speak). Notes: Every holder is presumed to be a HIDC (Sec. 59). He who claims otherwise has the burden of proof. --------------------------------------------------------------------------Abnormal Instruments: •
1. INCOMPLETE but DELIVERED (Sec. 14 NIL). Two (2) kinds: a. Incomplete instrument but delivered. b. A signature and a blank piece of paper signed by the person for the purpose of converting it into a negotiable instrument. A must. Two (2) requisites to bind the person who signed the instrument before delivery: i. It must be filled-up strictly with the authority given; and ii. Within a reasonable time.
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c. Takes the instrument for value and in good faith.
Effects to a HIDC: If the instrument falls on the hands of a HIDC, it • is valid and effectual for all purpose as though it was filled up strictly in accordance with the authority given and within reasonable time. 4
Rules where instrument is incomplete but delivered: 1. Authority to fill-up the blanks – the holder or the person in possession has prima facie authority to complete an incomplete instrument by filling up the blanks therein. 2. Authority to put up any amount – a signature on a blank paper delivered in order that may be converted into a NI operates as a prima facie authority to fill it up as such for any amount. 3. Right against party prior to completion – the instrument may be enforced only against a party prior to completion if filled up strictly in accordance with the authority given and within reasonable time. Notes: iii. In both cases (a & b), the presumption is that the blank was filled up in accordance with the authority given and within reasonable time. iv. The defense that the instrument had not been filled up in accordance with the authority given and within reasonable time is not available as against a holder in due course. v. Sec. 14 raises a Personal Defense – if the last holder is a HIDC, Maker is liable to pay. 2. INCOMPLETE and UNDELIVERED (Sec. 15 NIL). Before delivery: Before delivery, an incomplete and undelivered • instrument which is completed and negotiated without authority is not a valid contract in the hands of ANY holder as against the person who signed the instrument. After delivery: However, after delivery, persons who signed the instrument can be held liable to HIDC. Persons liable: General Indorsers are liable because they warrant that the instrument is genuine and valid; thus, they are estopped to deny the validity of the instrument. Notes: • Where an incomplete instrument has not been delivered, it will not, if completed and negotiated without authority, be a valid contract in the hands of any holder against any person who signed before delivery. The invalidity of the instrument is only with • reference to the parties whose signatures appear before and not after delivery. Sec. 15 raises a Real Defense – even if the last • holder is a HIDC, Maker is not liable to pay. (Indorsers are liable because they warrant that the instrument is genuine and in all respects what it purports to be. As their signatures appear on the instrument after delivery, the instrument is valid as to them.) •
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3. COMPLETE BUT UNDELIVERED (Sec. 16 NIL).
Effects of a Complete but Undelivered instrument: • If a complete instrument is undelivered, then it is inoperative because delivery is a requisite to liability. It is considered incomplete; thus, revocable. In the absence of delivery, the instrument • though complete in all its pa rticulars, there is no contract. In possession of an immediate party or a remote party: Immediate party – a party having been held to • know of the conditions or limitations placed upon the delivery of the instrument. Remote party – a party who is not in direct • contractual relation to each other. They can be transformed into “immediate party.” If a complete instrument is found in their • possession, there is a prima facie presumption of delivery (but subject to rebuttal). Notes: If the instrument is no longer in the possession of the person who signed it and it is complete in its terms, “a valid and intentional delivery by him is presumed until the contrary is proved.” •
Delivered conditionally or for a special purpose If delivery was conditional or for a special • purpose only, then it is not for the purpose of transferring title to the instrument. However, it is presumed to be made with the intention to transfer title – this can be rebutted. Effects to a HIDC: • If a complete instrument is in the hands of a HIDC, a valid delivery thereof by all parties prior to him is CONCLUSIVELY presumed. Notes: •
Sec. 16 raises a Personal Defense – if the last holder is a HIDC, Maker is liable to pay.
4. FORGERY (see Sec.23 NIL notes)
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1. Delivery is essential to the validity of any negotiable instrument. 2. As between immediate parties or those is like cases, delivery must be with intention of passing title. 3. An instrument signed but not completed by the drawer or maker and retained by him is invalid as to him for want of delivery even in the hands of a holder in due course. 4. But there is prima facie presumption of delivery of an instrument signed but not completed by the drawer or maker and retained by him if it is in the hands of a holder in due course. This may be rebutted by proof of nondelivery. 5. An instrument entrusted to another who wrongfully completes it and negotiates it to a holder in due course, delivery to the agent or custodian is sufficient delivery to bind the maker or drawer. 6. If an instrument is completed and is found in the possession of another, there is prima facie evidence of delivery and if it be a holder in due course, there is conclusive presumption of delivery. 7. Delivery may be conditional or for a special purpose but such do not affect the rights of a holder in due course. Rules of construction in case of ambiguity or omission: (Sec. 17 NIL) 1. Sums expressed in words and in figures are different. • When there is a discrepancy between the sum expressed in words and the sum expressed in figures, the words control. However, when the words are ambiguous, reference may be had to the figures to determine the true amount. 2. Date when stipulated interest to run not specified – if the date when the stipulated interest is to run is not specified, the interest runs from the date of the instrument or if undated from the date of its issue. 3. An undated instrument is considered dated as of the date of its issue. 4. Written and printed words in conflict – in case of conflict between the written and printed provisions, the written provisions prevail. Written words are deemed to express the true intention of the maker or drawer because they are placed there by him. 5. Whether instrument bill or note in doubt – in case of doubt as to whether the instrument is a bill or note, the holder may treat either at his election. 6. Capacity in which the person signed in doubt – in case of doubt due to the ambiguous location of the signature, the party who signed is deemed to be an indorser , who assumes the least liability, and not as a maker or drawer. 7. Instrument signed by two or more persons – their liability may either be solidary or joint. “I promise to pay” signed by two or more • persons gives rise to solidary liability. “We promise to pay” signed by two or more • persons gives rise to joint liability. Sec. 18 NIL. Liability of person signing in trade. •
General rule: A person whose signature does not appear on the instrument is NOT liable. Exceptions: a. One who signs in a trade o r assumed name. (Sec. 18) b. A duly authorized agent. (Sec. 19) c. A forger.(Sec. 23) Sec. 20 NIL. Liability of a person signing as agent. General rule: An agent is not liable on the instrument if he were duly authorized to sign for or on behalf of a principal. Requisites: a. He must be duly authorized; b. He must add words to his signature indicating that he signs as an agent; and c. He must disclose his principal. If an agent does not disclose his principal , the • agent is personally liable on the instrument. Sec. 21 NIL. Per Procuration - operates as notice that the agent has a limited authority to sign. Effects: The principal is only bound if the agent acted within the limits of the authority given. The person who takes the instrument is bound to inquire into the extent and nature of the authority given. •
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Sec. 22 NIL. Effect of indorsement by infant/corporation. General rule: Infants and corporations incur no liability by their indorsement or assignment of an instrument. Effects: No liability attached to the infant or the corporation. The instrument is still valid and the indorsee acquires title. --------------------------------------------------------------------------FORGERY (Sec. 23 NIL) •
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Two (2) kinds: a. Forged signature; and b. Signature made without authority. Effects: a. no right to retain; b. no right to give a discharge; and c. no right to enforce payment can be acquired. It is only the forged signature or unauthorized signature that is declared to be inoperative. The instrument or other signatures which are genuine may still exist and be enforced. •
Exceptions: Forged or unauthorized signatures may produce rights or title, IF: a. The party against whom it is sought to enforce such right is precluded (prevented) from setting up the forgery or want of authority. Persons precluded from setting up the defense of forgery: 6
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The forger himself. Those who warrant or admit the genuineness of the signature in question (indorsers, persons negotiating by delivery, and acceptors of BofE). Those who, by their acts, silence or negligence, are estopped from setting up the defense of forgery Estoppel.
b. Where the forged signature is not necessary to the holder’s title, in which case the forgery may be disregarded. Rights of parties in cases of forged indorsements: 1. Payable to order (PN) – the party whose signature was forged is not liable to any holder, even to a HIDC. The indorsement, being forged is inoperative. 2. Payable to bearer (PN) – the party whose signature is forged is liable to a HIDC, but not to the one who is not a HIDC. The reason is that the instrument being originally payable to bearer, it can be negotiated by mere delivery. Hence, even if the indorsement is forged, the forgery may be disregarded. 3. Payable to order (BofE) – the party whose signature was forged is not liable to any holder, even to a HIDC. The indorsement, being forged is inoperative.
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Partial failure of consideration is a defense pro tanto.
Pro tanto defense is a defendant's counterclaim against the plaintiff for one-half the requested damages. To the extent of the failure. •
Absence of consideration means a total lack of any valid consideration on the contract, in consequence of which the alleged contract must fail. Failure of consideration means the failure or refusal of one party to do, perform or comply with the consideration agreed upon. •
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The defense of want of consideration is ineffective against a HIDC. A drawee who accepts the bill cannot allege want of consideration against the d rawer.
Sec. 29 NIL. Liability of an accommodation party. Accommodation party - is one who signs the instrument as maker, drawer, acceptor, or indorser without receiving value therefor and for the purpose of lending his name to some other person. Effects: An accommodation party is liable to the holder for value notwithstanding that such holder knew that of the accommodation. Want of consideration cannot be interposed by the accommodation party An accommodation maker may seek reimbursement from a co-maker even in the absence of any provision in the NIL; the deficiency is supplied by the New Civil Code. He may do this even without first proceeding against the debtor provided: a. He paid by virtue of judicial demand. b. Principal debtor is insolvent. •
4. Payable to bearer (BofE) – when the bill is originally payable to bearer, the drawee may debit the drawer’s account in spite of the forged indorsement. The reason is that the forged indorsement is not necessary to the title of the holder. Notes: •
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Section 23 applies only to forged signatures or signatures made without authority. Alterations such as to amounts or like fall under Section 124. Drawee bank is conclusively presumed to know the signature of its drawer.
Forgery is a Real Defense. --------------------------------------------------------------------------Sec. 26 NIL. What constitutes holder for value. Holder for value – is one who has given a valuable consideration for the instrument issued or negotiated to him. A holder of a NI is presumed to be a holder for • value until the contrary is shown by any party who claims otherwise.
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Sec. 27 NIL. When lien on instrument constitutes holder for value – 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 h is lien. One who has taken a NI as collateral security for a debt has lien on the instrument.
Accommodation Party vs. Regular Party: Accommodation Party: Signs an instrument without receiving value therefore. Signs an instrument for the purpose of lending his name to some other person. May always show by parol evidence that he is only such an accommodation party. Cannot avail of the defense of absence or failure of consideration against a HIDC. After paying the holder, may sue for reimbursement the accommodated party. •
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Sec. 28 NIL. Effect of want of consideration. Absence or failure of consideration may be set • up against a holder not a HIDC.
Regular Party: Signs the instrument for value. Does not sign for the purpose of lending his name to other person. • •
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Cannot disclaim or limit his personal liability as appearing on the instrument by parol evidence. May avail the defense of absence or failure of consideration against a HIDC. May not sue any subsequent party for reimbursement. --------------------------------------------------------------------------Chapter III - NEGOTIATION •
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Assignment is governed by Articles 1624 – 1635 of the Civil Code (Assignment of Credits). --------------------------------------------------------------------------INDORSEMENT Indorsement is the writing of the name of the payee on the instrument with the intent to: to transfer the title to the same; or • guarantee the instrument; or acknowledge payment. •
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Sec. 30 NIL. What constitutes negotiation. Negotiation – is the transfer of a NI from one person to another made in such a manner as to constitute the transferee the holder thereof. There is no negotiation if the transfer does not make the transferee the holder of the instrument. For a bearer instrument - by delivery. For an order instrument - by indorsement and delivery. Delivery – means the transfer of possession, actual or constructive, from one person to another. (Sec. 191, [6]) Negotiation vs. Assignment: As to application: • Negotiation only applies to NI, but is not applicable to non-negotiable instruments. • Assignment applies to both NI and nonnegotiable instruments. As for the transferee: In negotiation, the transferee is a holder. • In assignment, the transferee is an assignee. HIDC/Assignee: In negotiation, a HIDC is subject only to • real defenses and may acquire better title or greater rights under the instrument than those possessed by the transferor or a prior party. In assignment, an assignee subject to • both real and personal defenses and merely steps into the shoes of the assignor. Indorser/Assignor: In negotiation, a general indorser • warrants the solvency of prior parties. In assignment, an assignor does not • warrant the solvency of prior parties unless expressly stipulated or the solvency is known to him. As to liability: In negotiation, an indorser is not liable • unless there be presentment and notice of dishonor. In assignment, an assignor is liable • even without notice of dishonor. As to governing articles: • Negotiation is governed by the NIL. •
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Sec. 31 NIL. Indorsement. How made. Indorsement to be must be: i. written ii. on the instrument itself or upon a piece of paper attached. Notes: The paper attached with the indorsement is an allonge. An allonge must be attached so that it becomes a part of the instrument, it cannot be simply pinned or clipped to it. •
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Necessity of indorsement: 1. It is essential to the execution of an instrument payable to the order of the maker or d rawer. 2. Essential to the negotiation of an order instrument, not a bearer instrument. 3. Without an indorsement of an order instrument, one cannot be a HIDC thereof even though he is entitled to have the indorsement made. Sec. 31 NIL. Indorsement must be of entire instrument. The indorsement must be an indorsement of the entire instrument. An indorsement which purports to transfer to the indorsee a part only of the amount payable, or which purports to transfer the instrument to two or more indorsees severally, does not operate as a negotiation of the instrument. But where the instrument has been paid in part, it may be indorsed as to the residue. •
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Kinds of Indorsements: 1. Special Indorsement: (Sec. 34 NIL) 8
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Also known as specific indorsement. It is one where the indorser identifies the person to whom the instrument is transferred as a holder thereof.
2. Blank Indorsement: (Sec. 34 NIL) It is one where the indorser merely signs his name without identifying the person to whom the instrument is transferred as a holder thereof. •
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Specifies no indorsee, and an instrument so indorsed is payable to bearer, and may be negotiated by delivery.
Conversion of a Bank Indorsement to a Special Indorsement: 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. (Sec. 35 NIL) 3. Restrictive Indorsement: (Sec. 36 NIL) It is one where the transferee of the instrument does not acquire full rights of the owner of the instrument as a holder thereof. It is one that restricts or prohibits entirely • the further negotiation of an instrument, or modifies the rights of the holder or the liabilities of the indorser. •
Three (3) types of Restrictive Indorsements: i. Prohibits the further negotiation of the instrument; or ii. Agency type - Constitutes the indorsee the agent of the indorser; or iii. Trust type - Vest the title in the indorsee in trust for or to the use of some other persons. But the mere absence of words implying power to negotiate does not make an indorsement restrictive.
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It may be made by adding to the indorser's signature the words "without recourse" or “sans recourse” or any words of similar import.
Notes I: As such assignor, he cannot be held liable unless he violates his warranties under Sec. 65. Such an indorsement does not impair the negotiable character of the instrument. The qualified indorser guarantees only the genuineness of the instrument but does not guarantee its payment. He will be liable only of the signature of the maker turns out to be a forgery. He will not be liable if the maker refuses to pay. •
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Without recourse – means without resort to a person who is secondarily liable after the default of the person who is primarily liable. Limited liability of qualified indorser: He is liable only if the instrument is dishonored by nonacceptance or non-payment due to: 1. Forgery; 2. Lack of good title on the part of the indorser; 3. Lack of capacity to indorse on the part of the prior parties; 4. The fact that at the time of the indorsement, the instrument was valueless or not valid, and he knew of that fact. Qualified Indorsement warrants: (Sec. 65 NIL) GGCN a. The instrument is genuine and in all respect what it purports to be; b. The indorser has good title to it; c. All prior parties had the capacity to contract; d. Indorser has no knowledge of any fact that would impair the validity or the value of the instrument. (More on p.14 of this memory aid) Limitations of warranties: If by delivery – extends only to immediate • transferee. Warranty of capacity to contract does not apply • to persons negotiating public or corporate securities.
Rights of a Restrictive Indorsee: (Sec. 37 NIL) 1. To receive payment of the instrument; 2. To bring any action thereon that the indorser could bring; 3. 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. 4. Qualified Indorsement: (Sec. 38 NIL) The indorsement merely makes the indorser an assignor of his title to the instrument. •
Notes II: A qualified indorser cannot raise the defense of a. forgery; b. defect of his title or that it is void; c. the incapacity of the maker, drawer or previous indorsers. •
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A qualified Indorsement makes the indorser mere assignor of title of instrument, relieves him of general obligation to pay if instrument is dishonored, but he is still liable for the warranties arising from instrument only up to warranties of general indorser. 9
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The warranty is to the capacity of prior parties at the time the instrument was negotiated. Subsequent incapacity does not breach the warranty. Lack of knowledge of the indorser as to any fact that would impair the validity or the value of the instrument must be subsisting all throughout. A person Negotiating by Delivery warrants same as those of qualified indorser and extends to immediate transferees only.
5. Conditional Indorsement: (Sec. 39 NIL) It is one which is dependent upon a contingent event that may or may not happen. It is one by which the indorser imposes • some other condition to his liability, or on the indorsee’s right to collect the proceeds of the instrument. Notes: A conditional indorsement does not prohibit the further negotiation of the instrument, regardless, of whatever the condition has been fulfilled or not. It should be remembered that while a condition • in the indorsement does not destroy negotiability. •
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Effects of indorsing an instrument originally PAYABLE TO BEARER: (Sec. 40 NIL) It may further be negotiated by mere delivery. The person indorsing is liable as indorser to such persons as to make title through his indorsement. • •
This section only applies to instruments originally payable to bearer. Therefore, it cannot apply where the paper is originally made payable to order and indorsed in blank. See example P. 124 – De Leon. • Indorsement where payable to two or more persons: 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. (Sec. 41 NIL) This section refers to a joint indorsement. Exceptions: a. Where the payees or indorsees are partners; b. Where the payee or indorsee indorsing has authority to indorse for others. •
“Pay to A and B” = valid, “Pay to A or B” = invalid Effect of instrument drawn or indorsed to a person as cashier: (Sec. 42 NIL) 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. The presumption established in this section may be disproved by sufficient evidence to the contrary. It may be shown that the instrument really belongs to the cashier personally as the real creditor of the maker or drawer. •
Indorsement where name is misspelled, and so forth: (Sec. 43 NIL) (Counter-sign) 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. Indorsement in representative capacity: (Sec. 44 NIL) Where any person is under obligation to indorse in a representative capacity, he may indorse in such terms as to negative personal liability. An instrument may be indorsed by a person either personally or through an agent. The authority of the agent need not be in writing. •
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Time of indorsement; presumption: (Sec. 45 NIL) Except where an indorsement bears date after the maturity of the instrument, every negotiation is deemed prima facie to have been effected before the instrument was overdue. This section is important because in order to constitute one a HIDC, he must have taken the instrument before it was due. If the indorsement is without a date, the presumption is that it was negotiated before maturity. The presumption, however, is rebuttable. •
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Place of indorsement; presumption: (Sec. 46 NIL) Except where the contrary appears, every indorsement is presumed prima facie to have been made at the place where the instrument is dated. Continuation of negotiable character: (Sec. 47 NIL) General Rule: An instrument negotiable in origin is always negotiable. This is true even if the NI is already overdue, but any holder who acquires the instrument can no longer be a HIDC. Exceptions: It will not continue to be negotiable when: It has been restrictively indorsed; and It has been discharged by payment or otherwise. • •
Elaborations of Sec. 119 NIL: Causes of Discharge of the Instrument: DAC/DH a. Payment by the debtor; b. Payment by accommodated party; c. Intentional cancellation by holder of instrument; d. Any other act discharging a simple monetary obligation; and 10
e. Debtor becomes holder of the instrument at/after
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maturity in his own right. Notes: •
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Discharge of the instrument discharges all the parties thereto. Payment must be in due course, and by the principal debtor or on his behalf. If payment is not made by the principal debtor, payment only cancels the liability of the payor and those obligated after him but does not discharge the instrument. Payment by an accommodation party does not discharge the instrument.
Striking out indorsement: (Sec. 48 NIL) A holder may strike out any indorsement which is not necessary to his title. Effects: An indorser whose indorsement is struck out is discharged. All indorsers subsequent to such indorser who has been discharged are likewise relieved. •
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Effects of a transfer without endorsement: (Sec. 49) The transferee acquires such title as the • transferor had therein. The transferee acquires the right to have the indorsement of the transferor. Negotiation takes effect as of the time the indorsement is actually made. •
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A negotiable instrument is subject to any and every defense or defect in the instrument, whether real or personal, as if it were nonnegotiable. A holder who is not himself a HIDC but derives his title from a HIDC is given the rights of such prior holder. A holder even though he be a holder only for collection may sue in his own name.
Not a holder in due course: (Sec. 53 NIL) Where an instrument payable on demand is negotiated an unreasonable length of time after its issue, the holder is not deemed a HIDC. The above section inferentially requires that • such an instrument must be presented for payment within a reasonable time from its issue. Notice BEFORE amount paid: (Sec. 54 NIL) Rights of a transferee who receives NOTICE of any infirmity or defect BEFORE he has PAID THE FULL amount for the instrument: He will be deemed a HIDC only to the extent of • the amount therefore paid by him. Payments made after knowledge of such • infirmity or defect will render the transferee as one who is not a HIDC with respect to the payment of the balance.
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When prior party may negotiate instrument: (Sec. 50) This section refers to reacquirer or a holder who negotiates an instrument and then subsequently reacquires it. If a prior party reacquires an instrument before • maturity date, he may negotiate the same further. But after paying the holder, he may not claim payment from any of the intervening parties. --------------------------------------------------------------------------Chapter IV – RIGHTS OF THE HOLDER Rights of the Holder (In General): (Sec. 51 NIL) a. He may sue on the instrument in his name; and b. He may receive payment – the instrument is discharged if payment is in due course. Payment is made in due course when it • is made at or after the maturity of the instrument to the holder thereof in good faith and without notice that his title is defective. (Sec. 88 NIL) Classes of holders: 1. Holders simply (Sec. 51); 2. Holders for value (Sec. 26); and 3. Holders in due course (Sec. 52). Holder – the payee or indorser of a bill or note, who is in possession of it, the bearer thereof.
When TITLE defective: (Sec. 55 NIL) The title of a person who negotiates an instrument is defective when: a. By Acquisition: When he obtained the instrument, or any signature thereto, by: 3FDUI • f raud f orce • f ear • • duress other unlawful means • for an illegal consideration • b. By Negotiation: When he negotiates it: BF in breach of faith • any circumstances that amount to f raud. •
What constitutes Notice of Defect: (Sec. 5 6 NIL) To constitute notice, the Transferee must have actual knowledge of the infirmity or defect of title of the person negotiating the instrument. Mere suspicion is not enough. 11
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However, if the transferee has knowledge of some facts that ought to put him in inquiry, and he took the instrument without making such inquiry, he is deemed to have taken the instrument in bad faith.
“Infirmity in the instrument” means that something is wrong with the instrument itself; like: forgery or material alteration. “ D efect in the title of the person” means that something is wrong in the manner he obtained the instrument; like: Want of consideration or acquisition by means of fraud or duress. Rights of a HIDC: (Sec. 57 NIL) SRFDE i. To sue on the instrument in his own name; To r eceive payment on the instrument – ii. Payment to him in due course discharges the instrument; iii. To hold the instrument f ree of any defect of title of prior parties; iv. He is free from defenses available to prior parties among themselves; and He may enforce payment of instrument for full v. amount, against all parties liable. Defenses affecting NI: 1. Personal Defense: (or Equitable Defense) Are those which arise in the course of the life of • the instrument emanating from the conduct or circumstances surrounding its acquisition by a party thereto. Effects to a HIDC: It is not a good defense against a HIDC. It is because a HIDC holds the instrument free from any defect of title of prior parties or free from the defenses available to prior parties among themselves. Effects to a holder not a HIDC: It is a good defense against a party not a HIDC. It is because a holder not a HIDC holds the instrument subject to the defenses available to prior parties among themselves. Examples of Personal Defenses: a. Complete but undelivered instrument; b. Incomplete but delivered instrument; c. Acquisition of the instrument by means of fraud in inducement; d. Acquisition of the instrument by means of fear, force or duress; e. Acquisition of the instrument for an illegal consideration; f. Acquisition of the instrument by unlawful means; g. Absence of consideration in the acquisition of the instrument; h. Insertion of a wrong date where date is a material particular; i. Negotiation in breach of faith; and j. Negotiation under circumstances amounting to fraud. • •
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2. Real Defense: (or Legal Defense) • Are those that attach to the instrument itself and, as such, are available as defense against the whole world including a HIDC. Examples of Real Defenses: a. Incomplete and undelivered instruments; b. Forgery; c. Minority; d. Material Alteration; e. Cognovit actionem or confession of judgement instrument; and f. Fraud in factum or fraud in esse contractus. When subject to original defenses: (Sec. 58 NIL) In the hands of a holder not a HIDC, an instrument is subject to defenses as if it were non-negotiable. • However, a holder who derives his title from a HIDC acquires the rights of a HIDC in respect to all parties prior to the said HIDC from which he acquired the instrument; provided that such holder is not a party to any fraud or illegality affecting the instrument. Who is deemed HIDC: (Sec. 59 NIL) Every holder is deemed prima facie to be a HIDC. The holder referred to in this section is the • Payee or Indorsee who is in possession of the instrument, or the bearer thereof. When it 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 HIDC. This rule, however, will not apply with respect to • parties who are already bound on the instrument prior to the acquisition of the defective title. --------------------------------------------------------------------------Chapter V – LIABILITIES OF PARTIES •
IN GENERAL: Parties primarily liable: • Maker of promissory note. Acceptor of bill of exchange. • Certifier of a check. • Liabilities: Unconditionally liable; • Duty bound to pay the holder at date of maturity, • WON holder demands payment from him, and he is not relieved from liability even if the instrument should become overdue due to failure of holder to make such demand. Person primarily liable: person who by the • terms of the instrument is absolutely required to pay the same. • Presentment for payment not necessary to charge primary party. Liability of the Maker: (Sec. 60 NIL) 12
Warranties of a Maker: TPC i. He will pay the PN according to its tenor; ii. He admits the existence of the payee; iii. He admits that the payee has the capacity to indorse. Notes: He engages to pay the note according to its terms, subject to no condition whatsoever. He promises to pay not only to the payee but to • any subsequent holder who is legally entitled to the instrument at its maturity date even if the holder does not demand payment at that time. Due presentment for payment and due notice of dishonor are not necessary for the purpose of charging the maker with liability. He cannot allege that the payee is a fictitious person. He cannot allege that the payee is a minor, • insane or the corporation is acting ultra vires.
See example. P.91 – Abad. • Effects: Payee can either accede to the condition and the bill will be paid accordingly. Payee can refuse the condition and treat the bill as dishonored.
Exception: • He remains fully liable even if the instrument is presented for payment late unless prescription has run.
Liabilities: Conditionally liable. Not bound to pay unless the following has been • fulfilled: DDT 1. Due presentment or demand from primary party for payment or acceptance; 2. Dishonor by such party; and 3. Taking of proceedings required by law after dishonor.
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Tenor of GENERAL ACCAPTANCE: He can accept the bill without varying the terms – this is called general acceptance. In case of GA, he is liable on the bill according to the tenor of the instrument. See example. P.91 – Abad. •
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IN GENERAL: Parties secondarily liable:
Liability of the Acceptor: (Sec. 62 NIL) Warranties of the Acceptor: ADGC/AC i. He will pay the bill according to the tenor of his acceptance; ii. He admits the existence of the drawer; iii. He admits that the signature of the drawer is genuine; iv. He admits the capacity of the drawer; v. He admits that the drawer has the authority to draw the instrument; and vi. He admits the existence of the payee and his capacity to indorse. Notes: •
He is liable only if he accepts. If he accepts, the drawee becomes known as the acceptor. An acceptance occurs when the drawee signs his name somewhere on the face of the instrument. He cannot deny that the drawer is a fictitious person, or that his signature is not genuine. He cannot deny that the drawer is a minor, or the drawer has no authority to sign the instrument or that the corporation as drawer is acting ultra vires. He cannot deny the existence of the payee and his capacity to indorse. •
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Drawer of a bill. Indorsers both note and bill.
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Liability of Drawer: (Sec. 61 NIL) Warranties of the Drawer: CDP i. He admits the existence of the payee and his then capacity to indorse; ii. He engages that, on due presentment, the bill will be accepted or paid, or both, according to its tenor. iii. That if it is dishonored by non-acceptance or non-payment, he will pay to the holder of the bill or to any subsequent indorser who was compelled to pay it, provided the necessary proceedings on dishonor were duly taken. Notes: •
He is only secondarily liable because he is not absolutely required to pay the instrument.
Negativing or limiting his own liability to the holder: The drawer may negative or limits his liability to the holder by inserting a provision to that effect in the instrument. Ex. “In case of dishonor, I am not liable for the amount of this instrument.” To fix the liability of the Drawer, the ff. steps must be taken: DDT 1. Due presentment or demand from primary party for payment or acceptance; 2. Dishonor by such party; and •
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Tenor of his ACCEPTANCE: • He can vary the terms of the instrument such that he can become liable only according to his own terms. However, he is absolutely required to pay according to the tenor of his acceptance. •
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3. Taking of proceedings required by law
after dishonor. The steps must concur; otherwise the Drawer will be discharged from liability. When a person deemed Indorser: (Sec. 63 NIL) A person who signs an instrument not as maker, drawer or acceptor is deemed to have signed as an Indorser. If it is not clear in what capacity a person signed the instrument, he is deemed to be an Indorser.
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An indorser may vary the terms of his liability, thus, he may indorse “san recourse” and limit his liability on the instrument. The indorser may also sign as “surety”, in which case he becomes jointly and severally liable with the principal debtor without regard to appropriate presentment for payment, notice of dishonor and exhaustion of the assets of the principal debtor. If a person signs an instrument “For purpose of identification only”, he incurs no liability thereon. Where a person places his indorsement on an instrument negotiable by delivery, he incurs all the liability of an indorser. (Sec. 67 NIL)
Liability of Irregular Indorser: (Sec. 64 NIL) Requisites to be an Irregular Indorser: PSB a. He is not otherwise a party to the instrument; b. He signs the instrument in blank; and c. He signs before delivery of the instrument; otherwise, if after delivery, this section will not apply. Cases regarding the liability of an Irregular Indorser: 1. Instrument payable to the order of a third person – he is liable to the payee and to all subsequent parties. 2. Instrument payable to the order of maker or drawer or is payable to bearer – he is liable to all parties subsequent to the maker or drawer. 3. If he signs for the accommodation of payee – he is liable to all parties subsequent to the payee. See examples. P. 173 – De Leon. • Warranties of an Irregular Indorser are the same as those of a General Indorser under Sec. 66 NIL.
The indorser has good title to it; All prior parties had the capacity to contract; Indorser has no knowledge of any fact that would impair the validity or the value of the instrument.
Applicability of this section: This section applies in the ff. instances: a. The instrument is payable to bearer and it is negotiated by mere delivery; b. The instrument is payable to order and it is negotiated in qualified indorsement; and c. The instrument is payable to order and the only or last indorsement is in blank, and it is negotiated further by mere delivery. Notes: •
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The person negotiating by mere delivery or by qualified indorsement is only secondarily liable on the instrument. They are liable only if the person primarily liable will not pay and the four warranties above enumerated have been violated by them.
Difference: • Negotiation is by delivery only – the warranty extends only to his immediate transferee. Qualified Indorsement – the warranty extends • to all parties who derived the title through his indorsement. Liability of a General/Unqualified Indorser: (Sec. 66 NIL) Warranties of a General Indorser: GGCV i. That the instrument is genuine and in all respects what it purports to be; ii. That he has a good title to it; iii. That all prior parties had the capacity to contract; and iv. That is valid and subsisting. In addition: DP Engages that the instrument will be accepted or • paid or both according to its tenor on due presentment. Engages to pay the amount thereof if it be • dishonored and the necessary proceedings on dishonor are taken. Notes: A General Indorser or Unqualified Indorser guarantees that the instrument is valid and subsisting, whether or not he has no knowledge of that fact. So, if the instrument indorsed turns out to be invalid, the Unqualified Indorser is liable because of the fourth warranty. •
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Qualified Indorsement/Negotiation by delivery: (Sec. 65 NIL) Warranties of a Qualified Indorser/Negotiation by delivery: GGCN The instrument is genuine and in all respect i. what it purports to be;
To fix the liability of a General Indorser, the ff. steps must be taken: DDT 14
1. Due presentment or demand from
primary party for payment or acceptance; 2. Dishonor by such party; and 3. Taking of proceedings required by law after dishonor. Order of liability AMONG Indorsers: (Sec. 68 NIL) The presumption is that Indorsers are liable in the order in which they indorse; unless it is shown otherwise by parol evidence. Among themselves: • Every indorser is liable to all subsequent indorsers. • An indorser cannot be held liable to a prior indorser. Exception: Irregular Indorser will not be liable to the accommodated party although from the order in which he indorsed, the latter appears subsequent to the former. To the holder: As far as the holder is concerned, he can go • against any indorser in any order. •
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Joint indorsers are liable joint and severally. Their liability being solidary, a notice of dishonor given to one of them will suffice to hold all the joint indorsers liable on the instrument.
Liability of an Agent or Broker: (Sec. 69 NIL) This section refers to an instrument payable to bearer and negotiated by mere delivery by an agent or broker . He is personally liable in the manner of an • indorser who negotiated the instrument by mere delivery if he did not disclosed the name of the principal and the fact that he is only an agent. Liabilities of an Accommodation Party: (Sec. 29 NIL) See P.7 of this Memory Aid. --------------------------------------------------------------------------Chapter VI – PRESENTMENT FOR PAYMENT Presentment for payment – is the presentation of the instrument to the person primarily liable for the purpose of demanding and receiving payment. The instrument must be exhibited to the person • whom payment is demanded, and when it is paid, the instrument must be delivered to the party paying it. (Sec. 74 NIL)
Effect of want of demand on principal debtor: (Sec. 70 NIL) Presentment for payment NOT NECESSARY: It is not necessary in order to charge the person • primarily liable (Maker or Acceptor) on the instrument.
In other words, the holder can sue the maker or the acceptor, although no demand has been made on him, as soon as the date for payment has passed without the instrument being paid. Presentment for payment NECESSARY: It is necessary in order to charge the Drawer and Indorser. •
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Instrument payable at a special place: The ability and willingness on the part of the • primary party to pay at a special place (ex. At a bank, office or at a residence) at maturity are equivalent to a tender and offer of payment on his part so that if the instrument is not paid and is overdue, he cannot be considered in delay. Therefore, not being fault, he is not liable for the costs and interests subsequently accrued by such delay. (He is still liable for the amount due though) •
Where presentment required by terms of the instrument: • Presentment for Payment is still not necessary to charge the Maker or Drawer even if the terms of the instrument require it. The failure to make the presentment would not put him in default notwithstanding that the instrument is overdue and unpaid. •
Effects where presentment NOT made: If the instrument is not presented to the person primarily liable, the Drawer and the Indorsers are discharged from their secondary liability unless such presentment is excused or discharged with. •
Presentment where instrument is not payable on demand; and where payable on demand: (Sec. 71 NIL) Instrument is not payable on demand. (Payable at a fixed or at a determinable future time) – Presentment must be made on the day it falls due; otherwise, the Drawer and Indorsers will be discharged from liability. Presentment made before maturity is not • effective. Instrument payable on demand: PN – presentment for payment must be made to • the Maker within a reasonable time after its issue. BofE – presentment for payment to the Drawee • or Acceptor must be made within a reasonable time after the last negotiation thereof. Last negotiation means the last transfer for value. •
What constitutes SUFFICIENT presentment: (Sec. 72 NIL) Presentment for payment, to be sufficient, must be made: 15
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By WHO – by the Holder, or by some person authorized to receive payment on his behalf; When – at a reasonable hour on a business day; Where – at a proper place as herein defined; To Whom – to the person primarily liable on the instrument, or if he is absent or inaccessible, to any person found at the place where presentment is made.
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If the presentment for payment does not comply with any of the requisites provided in this section, the effect is the same as if no presentment is made. Consequently, the persons secondarily liable are discharged.
Place of presentment: (Sec. 73 NIL) Place of presentment is made at a proper place: a. The place for payment is specified – it is there presented as stated. b. If no place is specified – the given address of the person to make payment in the instrument. c. If no given address of the person to make payment – the usual place of business of the person to make payment. d. If presentment cannot be made at any other place – his last known place of business or residence, or a place wherever he can be found. Notes: •
The proper place of presentment should be applied in the order of the enumeration from (a) to (d).
Presentment where instrument payable at BANK: (Sec. 75 NIL) Must be made during Banking hours: Banks does not make payment outside of banking hours – persons who are secondary liable will be discharged. Any time during the day: Presentment at any hour before the bank is closed is sufficient to hold persons secondary liable. Before close of Banking hours: The person to make payment has until the close of banking hours of the bank where the instrument is made payable in which to pay it.
2. Partners – presentment for payment may be
made to any one of them, even though there has been dissolution of the firm. (Sec. 77 NIL) 3. Joint Debtors – presentment must be made to them all. (Sec. 78 NIL) Notes: •
If there is a place specified in the instrument, presentment should be made at such place.
Presentment NOT required to charge the ff: Instances where in spite lack of presentment, a party secondarily liable is still not discharged from liability. Drawer: (Sec. 79 NIL) Thus, presentment is not required to charged the Drawer if: • He has no right to expect – he has no funds with the drawee. • Drawer and Drawee is same person. Indorser: (Sec. 80 NIL) • Thus, presentment is not required to charged the Indorser if: • He is an indorser for whose accommodation an instrument is made or accepted – the accommodated payee-indorser is the real debtor and not the maker or acceptor. •
When delay in making presentment is EXCUSED: (Sec. 81 NIL) Delay in MAKING presentment for payment is excused when: CI i. The delay is caused by circumstances beyond the control of the holder; ii. The delay is not imputable to his default, misconduct or negligence. Notes: •
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Only the delay in making presentment is excused and not the making of the presentment itself. Circumstances beyond the control of the holder – are events which could not be foreseen, or which, though foreseen are inevitable. When the cause of delay ceases to operate, presentment must be made with reasonable diligence.
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No place of payment is specified, and: 1. Principal debtor is dead – presentment for payment must be made to his personal representative (if he can be found with the exercise of reasonable diligence). (Sec. 76 NIL)
When presentment for payment is EXCUSED: (Sec. 82 NIL) Presentment for payment is excused where: EFW i. After the exercise of reasonable diligence, presentment cannot be made; ii. The drawee is a f ictitious person; By waiver of presentment; expressed or implied. iii. Notes: • Reasonable diligence implies active search. Dishonored by non-payment: (Sec. 83 NIL) 16
The instrument is dishonored by non-payment when: a. It is duly presented for payment but payment is refused or cannot be obtained. b. Presentment is excused and the instrument is overdue and unpaid.
Rule where instrument payable at bank: (Sec 87 NIL) Where the instrument is payable at a bank it is equivalent to an order to the bank to pay the same for the account of the principal debtor thereon. Notes: •
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An instrument is dishonored by non-payment a long as it is not paid even if the primary party may be willing to pay.
Effect of dishonor by non-payment: (Sec. 84 NIL) An immediate right of recourse to all parties secondarily liable thereon accrues to the holder. Notes: The immediate right of recourse against • secondary parties will accrue only after the giving of due notice of dishonor to them. Time of Maturity: (Sec. 83 NIL) When the day of maturity falls upon: Timed Instrument: i. Sunday or Holiday – the instrument is payable on the next succeeding day. ii. Saturday – the instrument is payable on the next succeeding day, that is Monday. If Monday is a holiday, then it is Tuesday. On Demand: It may be presented before 12:00 o’clock noon on Saturday or on Monday, at the option of the holder. •
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The instrument is payable at the time fixed herein without grace. If grace is provided in the instrument, the instrument is payable on the last date of grace. See example. P. 199 and 200 – De Leon.
Computation of time of Maturity: (Sec. 86 NIL) Where the instrument is payable at a fixed period after date, after sight, or after the happening of a specified event: The time of payment is determined by excluding the day from which time is to begin to run, and by including the date of payment. •
Examples: Instrument dated April 5, 2009, payable after three months after date – due date is July 5, 2009. Instrument dated Nov. 8, 2008, payable after twelve months – due date is Nov. 8, 2009 and not Nov. 9, 2009. Instrument payable ten days after Oct. 11, 2009 – due date is Oct. 21, 2009. By counting or adding ten days from Oct. 11, 2009, the last of the ten days is Oct. 21, 2009.
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This section applies only where the instrument is payable at a particular named bank. (ex. PNB) A note made payable at “any bank in Manila” will not suffice authority to pay the note even if the maker has a deposit on any banks in Manila.
Payment in due course: (Sec. 88 NIL) Payment is made in due course when it is made at or after the maturity of the instrument to the holder thereof in good faith and without notice that his title is defective. See example. P. 202 – De Leon. • PIDC discharges the instrument. •
--------------------------------------------------------------------------Chapter VII – NOTICE OF DISHONOR To WHOM notice of dishonor be given: (Sec. 89 NIL) When a NI has been dishonored by non-acceptance or non-payment, the notice of dishonor must be given to the: Drawer; and To each Indorser Any Drawer or Indorser to whom such notice is not given is discharged. • •
When instrument considered to be dishonored: a. If it is not accepted when presented for acceptance; 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. Object of notice of dishonor: i. To inform the parties secondarily liable that the maker or acceptor has failed to meet his engagement; and ii. To advise such parties that they will be required to make payment. Notes: Although the indorser to whom notice is not • given is discharged, he is still liable for breach of warranties pertaining to the instrument.
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As a general rule, failure to give a notice of dishonor to the Drawer or Indorsers will discharge them from any liability on the instrument. Exceptions: 1. When there is a waiver of notice of dishonor under Sec. 109. 17
Notice of dishonor may be waived either: Before the time of notice has arrived; or After the omission to give due notice. Waiver may be expressed or implied. When notice of dishonor is dispensed with under Sec. 112. Notice of dishonor is dispensed with when: After the exercise of reasonable diligence, it cannot be given to or does not reach the parties sought to be charged. When notice of dishonor need not be given to the Drawer under Sec. 114. (SF/PRC) Notice of dishonor is not required to be • given to the Drawer in either of the ff. cases: i. Drawer and drawee are the same person; ii. Drawee is a f ictitious person or a person not having capacity to contract; iii. Drawer is the person to whom the instrument is presented for payment; iv. Drawer has no r ight to expect or require that the drawee or acceptor will honor the instrument; v. Drawer has countermanded payment. When notice of dishonor need not be given to the Indorsers under Sec. 115. (FPA) Notice of dishonor is not required to be • given to the Indorser in either of the ff. cases: i. Drawee is a f ictitious person or not having the capacity to contract, and the Indorser was aware of that fact at the time he indorsed the instrument; ii. Indorser is the person to whom the instrument is presented for payment; iii. The instrument was made or accepted for his accommodation. When the due notice of dishonor by nonacceptance has previously been given, a subsequent notice of dishonor by non-payment need not be given under Sec. 116. See example. P. 124 – Abad. • When omission to give a notice of dishonor by non-acceptance does not prejudice the rights of a HIDC subsequent to the omission under Sec. 117. •
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See example. P. 125 – Abad.
By WHOM notice of dishonor be given: (Sec. 90 NIL) Under this section, the notice may be given: 1. By the holder; 2. By a party to the instrument who might be compelled to pay it and who has a right of reimbursement from the party to whom notice is given; and 3. By an agent in behalf of (1) or (2). See example. P. 110 – Abad. --------------------------------------------------------------------------Chapter VIII – DISCHARGE OF N.I. Instrument; How discharged: (Sec. 119 NIL) DAC/DH i. Payment in due course by or on behalf of principal Debtor. Payment must be made by the Principal • Debtor at or after the maturity of the instrument. Payment by a party secondarily liable will not discharge the instrument because he will just step into the shoes of the holder and acquire the right to demand payment from the principal debtor. Payment before its maturity will not discharge the instrument because the instrument can be re-negotiated. ii. Payment in due course by the party Accommodated where party is made/accepted for accommodation. The accommodated party is actually the • principal debtor; hence, payment by the accommodated party will discharge the instrument. iii. Intentional Cancellation by holder. It must be intentional and not made by mistake. The holder in so doing clearly renounces his rights as creditor in the instrument. In the same manner, renunciation by the holder pursuant to Sec. 122 NIL may discharge an instrument. Cancellation may be done by writing the word “cancelled” or “paid” on the face of the instrument. There is also cancellation when the instrument is torn up, burned or mutilated. •
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Any other act which Discharges a simple contract for payment of money. Obligations are extinguished by: • PLCC/CN Payment or performance; • 18
Loss of the thing due; • Condonation or remission of debt; • Confusion or merger of the rights of creditor and debtor; • Compensation; and Novation. • • Other causes of extinguishment of obligations: ARP Annulment; • Rescission; • Prescription. • Principal debtor becomes the Holder of the instrument at or after the maturity in his own right. When the principal debtor becomes the holder of the instrument in his own right, the instrument is discharged because of the merger in his person of the characters of creditor and debtor. “In his own right” means not in a representative capacity. The reacquisition must be “at or after maturity date” otherwise no discharge will be effected because the debtor on reacquiring the instrument can renegotiate the same. •
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of a right of recourse against the party discharged by the holder. This subsection applies only to discharge by the act of the holder and not to discharges by operation of law. Valid tender of payment made by prior party. A valid tender of payment made by a • prior party, if accepted, would result in the discharge of said party and of all parties subsequent to him. Release of Principal Debtor, unless holder’s right of recourse against the party secondarily liable is expressly reserved. The release of the Principal Debtor discharges the instrument and all secondary parties. However, it would not be the case if the holder reserved his right of recourse against secondary parties. This reservation of the right of recourse • must be express. Any Agreement binding upon holder to extend 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. The agreement to extend the time of payment does not discharge the a party secondarily liable: a. Where the extension of time is consented to by such party; and b. Where the holder expressly reserves his right of recourse against such party.
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Effects of Sec. 119: Primarily liable persons and the instrument are • discharged. Discharge – is the release of all parties, • whether primary or secondary, from the obligations of the instrument; renders the instrument non-negotiable. When persons secondarily liable on the instrument are discharged: (Sec. 120 NIL) ACD/VRA i. Any Act which discharges the instrument. Any acts which discharges an • instrument under Sec. 119 NIL also discharges the primarily and secondarily liable parties. • But a discharge of a secondary party does not effect a discharge of the instrument itself. Intentional Cancellation of signature by the ii. holder. If the holder intentionally strikes out the signature of a person secondarily liable, the effect is to discharge him from liability on the instrument as if he has never been a party to the sa me. •
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Discharge of prior party. The reason for the rule is that the discharge deprives a subsequent party •
Right of party who discharges instrument: (Sec. 121 NIL) Payment made by a party secondarily liable will not discharge the instrument. The party so paying will have the following status and rights: a. He will be remitted to his former rights as regard all prior parties; b. He may strike out his own and all subsequent indorsements; and c. He may again negotiate the instrument. Exceptions to the right to negotiate: a. Where a BofE payable to the order of a third person is paid by the drawer upon maturity of the instrument. b. Where the instrument is paid on due date by the accommodated party. Having been paid by the Principal Debtor, the instrument is discharged. See examples. P. 132 – Abad. Renunciation by holder: (Sec. 122 NIL) The holder may expressly renounce his rights against any party to the instrument before, at, or after its maturity. 19
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The express renunciation by the holder must be absolute and unconditional. The renunciation in favor of the Principal Debtor at or after the maturity of the instrument discharges the instrument. Persons secondarily liable are likewise discharged from liability. A renunciation must be in writing unless delivered personally to the person primarily liable thereon.
However, renunciation cannot affect the rights of a HIDC without notice. When cancellation INOPERATIVE: (Sec. 123 NIL) Cancellation is inoperative if made: UMW a. Unintentionally; b. By mistake or through fraud; and c. Without authority of the holder. Cancellation is presumed to be intentional; hence, the burden is on the holder claiming its ineffectiveness to overcome the presumption by contrary evidence. Notes: •
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Cancellation may be of the instrument itself or a mere signature thereof. Cancellation may be made by crossing, tearing, erasing, and burning or by any other means which obliterates the signature or destroys the instrument.
Effect of alteration of instrument: (Sec. 124 NIL) Where a NI is materially altered without the assent of all parties liable thereon, it is rendered void. However, it does not discharge the instrument as against: a. The party who made the alteration; b. The party who authorized or assented to the alteration; and c. Indorsers who indorsed subsequent to the alteration. •
Effects to a HIDC not a party to the alteration: He may enforce payment according to its original tenor. •
b. The sum payable, either for principal or interest; c. The time or place of placement; d. The number or the relations of the parties; e. The medium or currency in which payment is to
be made; or which adds a place where no place of payment is specified; or any other change or addition which alters the effect of the instrument in any respect. See examples. P. 135 – Abad. --------------------------------------------------------------------------Chapter X – ACCEPTANCE How is acceptance MADE: (Sec. 132 NIL) Acceptance of a bill is the signification by the drawee of his assent to the order of the drawer. Acceptance must be: WSP • a. In writing; b. Signed by the Drawee; and c. Must contain an express or implied promise to pay money. Any equivalent word or expression such as “honored,” “seen,” “good,” “I would pay” or the signature of the Drawee alone is valid as acceptance. Holder entitled to acceptance on face of bill: (Sec. 133 NIL) Holder of a bill may require that the acceptance be written on the bill, if request refused, may treat the bill as dishonored. Types of Acceptance: 1. Extrinsic acceptance: (Sec. 134 NIL) Acceptance on a separate instrument. Acceptance is written on a paper other than the • bill itself (Bill is existing). •
In order to bind the Acceptor, it is required that: a. The acceptance be shown to the person to whom the instrument is negotiated; and b. Such person must take the bill for value on the faith of such acceptance. 2. Virtual acceptance: (Sec. 135 NIL) A promise to accept a future non-existing bill. • The promise must be unconditional • and in writing. Deemed an actual acceptance in favor • of every person who, upon the faith thereof , receives the bill for value. See examples. P. 147 – Abad.
What constitutes a MATERIAL ALTERATION: (Sec. 125 NIL) Any alteration which changes: DSTN/CAC a. The date;
3. Constructive acceptance: (Sec. 137 NIL) • There is Constructive acceptance where: i. The drawee destroys the bill when it is presented to him for acceptance; 20
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After the bill is delivered to the drawee for acceptance, he refuses to return the same within 24 hours or within such period of time as the holder may have allowed.
In all of the above instances, the Drawee is deemed to have accepted the bill. An accidental destruction would not constitute acceptance. It must willfully done.
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Partial. To pay part only of the amount for which the bill is drawn; Local. To pay only at a particular place; Qualified as to time; Acceptance of some, one or more of the Drawees but not all.
See examples. P. 151 – Abad and P. 259 – De Leon.
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Time allowed Drawee to accept: (Sec. 136 NIL) The drawee is allowed 24 hours after presentment to decide whether or not he will accept the bill; the acceptance, if given, dates as of the day of presentation. See examples. P. 257 – De Leon. Acceptance of Incomplete bill: (Sec. 138 NIL) Acceptance may be made at any time as follows: BWWA a. Before the bill is signed by the drawer; b. While the bill is still incomplete; c. When the bill is already overdue; and d. After the bill has been dishonored by nonacceptance or non-payment. If a bill payable after sight is dishonored by nonacceptance but subsequently accepted by the Drawee, the holder has the right to have the acceptance dated as of the first time the bill was presented for acceptance. See examples. P. 149 – Abad. Kinds of Acceptance: 1. General Acceptance: A general acceptance assents without qualification to the order of the Drawer. An acceptance to pay at a particular place is a • general acceptance. (Sec. 140 NIL) But if the acceptance expressly states that it is payable there only and not elsewhere, it is a qualified acceptance. Payable at PNB = General Payable only at PNB = Qualified
Rights to parties as to Qualified acceptance: (Sec. 142 NIL) The holder may refuse to take a qualified acceptance, if he cannot obtain a general acceptance; the holder may treat the bill as dishonored by non-acceptance. The holder has the right to have a general • acceptance. If the holder takes a qualified acceptance, the Drawer and the Indorsers are discharged from liability on the bill, unless they have expressly or impliedly consented to the qualified acceptance. --------------------------------------------------------------------------Chapter XI – PRESENTMENT FOR ACCEPTANCE •
When presentment for acceptance must be made: (Sec. 143 NIL) Presentment for acceptance – is the production of the BofE to the Drawee for his acceptance. Presentment for acceptance is required by law in the ff. instances: ASE a. Bills payable after sight in order to fix the maturity of the instrument; b. Stipulation in the bill that it be presented for acceptance because the parties are bound by it; c. Bills payable elsewhere than at the residence or place of business of the Drawee. (This is to allow the Drawee to make arrangements for the payment of the bill)
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2. Qualified Acceptance: In express terms varies the effect of the bill as drawn. •
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Kinds of Qualified Acceptance: CPL/QA i. Conditional. Payment by the acceptor dependent on the fulfillment of a condition therein stated;
In no other case is presentment for acceptance necessary in order to render any party to the bill liable. Hence, presentment for acceptance is not required in the ff: a. Bills payable on demand; b. Bills payable at sight; c. Bills payable on a fixed date; d. Bills payable several days after date; e. Bills upon the occurrence of an event; and f. Bills payable several days after the occurrence of an event. In all of the foregoing, what is necessary is merely a presentment for payment on due date. Failure to make a presentment for acceptance when required will discharge parties secondarily liable on the instrument. When failure to present releases Drawer and Indorser: (Sec. 144 NIL) All bills required by law to be presented for acceptance must be: 21
a. Presented for acceptance; or b. Negotiated within a reasonable time after its acquisition. Otherwise, the Drawer and the Indorsers will be discharged from liability thereon. Presentment; how made: (Sec. 145 NIL) •
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By WHO – by the Holder, or any person dult authorized by him; When – at a reasonable hour on a business day and before the bill is overdue and within a reasonable time; To Whom – to the Drawee or any person duly authorized by him.
a. Where a bill is addressed to two or more Drawees who are not partners: Presentment for acceptance must be made to all • of them unless one has the authority to accept or refuse acceptance for all, in which case presentment may be made to him only. The refusal by one of them to accept will not constitute a dishonor of the instrument until all of them shall have refused. The acceptance by one or more of them but not by all of them will only constitute a qualified acceptance of the instrument. b. Where the Drawee is dead: Presentment is excused. Although not necessary, presentment may be made to his personal representative. • •
c. Where the Drawee has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors: Presentment is not excused. Presentment may be made either to the Drawee himself or to his trustee or assignee. • •
On what days presentment may be made: (Sec. 146 NIL) Under Sec. 85, only bills payable on demand may be presented for payment before 12 o’clock noon on a working Saturday. Under Sec. 146, in presentment for acceptance, all kinds of bills without distinction may be presented before 12 o’clock noon on a Saturday when such day is not otherwise a holiday.
Presentment where time is insufficient: (Sec. 147 NIL) This section excuses delay in making presentment for payment when such delay is caused by presenting the
bill for acceptance at a place other than the place where the bill is drawn payable. It is possible that the holder is situated at a place which is very far from the residence or place of business of the Drawee such that the distance between them would make it impossible for him to make a presentment for acceptance and a presentment for payment on due date without delay. In this case, the delay will not discharge the Drawer and the Indorsers from liability on the instrument. See examples P. 266 – De Leon and P. 157 – Abad. Where presentment is EXCUSED: (Sec. 148 NIL) Presentment for acceptance is excused in the ff. cases: DFAC/RI a. Where the Drawee is dead; b. Where the Drawee is f ictitious; c. Where the Drawee has absconded; d. Where a person has no capacity to contract; e. Where, after the exercise of r easonable diligence, presentment cannot be made; and f. Where an improper presentment is made. In all of the above cases, the holder may treat the bill as dishonored by non-acceptance. When dishonored by non-acceptance: (Sec. 149 NIL) The holder may treat the bill as dishonored by nonacceptance in the ff. cases: RPEQ/WO a. When acceptance is r efused by the Drawee; b. When acceptance cannot be obtained by the holder within the period prescribed by law; c. When presentment is excused; d. Where the Drawee makes a qualified acceptance; e. Where the Drawee refuses to write his acceptance on the face of the bill; and f. When the Drawee performs his promise by any other means than the payment of money. Duty of holder where bill not accepted: (Sec. 150 NIL) When acceptance is refused or cannot be obtained, it is the duty of the holder to treat the bill as dishonored. He must within the time prescribed give a notice of dishonor, or protest when required, to the Drawer and Indorsers; otherwise, they will be discharged from liability. • When a bill is dishonored by non-acceptance, an immediate right of recourse against the Drawer and Indorsers accrues to the holder and no presentment for payment is necessary. (Sec. 151 NIL) •
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