CLASSIFICATION OF PARTIES ACCORDING TO LIABILITY 1. Primarily liable a. The maker of the promissory note b. The acceptor of a bill of exchange; and c. The certifier of a check. 2. Secondarily liable/conditionally liable a. The drawer of a bill; and b. The indorser of a note or a bill. 3. Not liable: a. The drawee until he accepts the instrument in which case he becomes an acceptor PRIMARY vs. SECONDARY PARTY PRIMARY PARTY – unconditionally bound; absolutely required to pay the instrument upon its maturity SECONDARY PARTY – conditionally bound; undertakes to pay the instrument only after certain conditions have been fulfilled (due presentment for payment or acceptance to the primary party and the taking of proceedings required by law after dishonor
SECTION 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. LIABILITY OF MAKER 1. Liability of maker unconditional – The maker is undoubtedly a party liable as he is the one to whom the holder will look first for payment and the one who is expected to pay. a. Engages to pay the note according to its terms, subject to no condition; b. 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; c. Remains fully liable despite the fact that the instrument is presented for payment late unless prescription has run d. Due presentment for payment and due notice of dishonor are not necessary to fix the liability of any drawer or indorser 2. Admissions of maker a. Admits the existence of the payee and his then capacity to endorse
b. The payee must exist because there is no negotiable instrument until it is delivered to him c. The payee must have the capacity to contract because the note is intended to be negotiated and not to be retained with the payee
Pay to Clarice or order the amount of PhP 8,000.00 Sgd. Paul
Clarice indorsed the note to Marie. PARTIES: 1. Paul – maker 2. Clarice – payee/indorser 3. Marie - holder QUESTION: Can Paul raise the following defenses? a. Agreement between him and Clarice is only for PhP 800? b. Clarice is non-existent/fictitious person? c. Minority/insanity of the payee?
SECTION 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 * The drawer by merely signing his name on the bill as drawer, admits the existence of the payee and his then capacity to indorse the instrument at the time it was executed. 1. Liability of drawer conditional – the drawer does not promise to pay the bill absolutely. He makes no warranty but he engages to pay after certain conditions are complied with, to wit:
a. The bill is presented for acceptance or for payment to the drawee; b. The bill is dishonored by non-acceptance or non payment; and c. The necessary proceedings of dishonor are duly taken * Liability of drawer only secondary – the drawer is only secondarily liable to the holder, or to any subsequent indorser, who may be compelled to pay it. * The drawer may, by express stipulation, inserted in the instrument, negative or limit his own liability to the holder. To Walter Pay to order of Peter. Sgd. Russel
Peter indorsed the bill to Ann then to Bill then to Cherrie. Russel is only liable to Cherrie, the present holder if Walter dishonors the bill by non acceptance or non payment and the necessary proceedings of dishonot are taken. After such proceedings are taken, the indorsers Peter, Ann, and Bill would also be liable to Cherrie. If Bill pays Cherrie, Bill may in turn recover from Russel, Peter or Ann. Peter, Ann, and Bill are the intervening indorsers. Russel, as drawer, is permitted by law to negative or limit his own liability to the holder. Thus, Russel may insert in the bill the words “I shall not be bound in case this instrument is dishonored” or “without recourse.” DRAWER vs. MAKER 1. The drawer issues a bill of exchange, while the maker, a promissory note; 2. The drawer is only secondarily liable while the maker is primarily liable; and 3. The drawer can negative or limit his liability, while the maker may not do so.
SECTION 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. LIABILITY OF ACCEPTOR 1. Liability of drawee before acceptance – the drawee of a bill is not liable thereon before acceptance. * Unless the drawee accepts, he owes no duty to either the payee or other holder; his only obligation is to the drawee to pay in accordance with the latter’s orders. * As a general rule, a refusal by the drawee to accept a bill constitutes a dishonor of the instrument which triggers the liability of secondary parties (drawer and indorser) except those indorsing qualifiedly. 2. Liability of drawee after acceptance – once accepted, the drawee becomes an acceptor (the same position as a maker). * An acceptance occurs when the drawee signs his name somewhere on the face of the instrument. 3. Liability of acceptor primary * The acceptor cannot retract his acceptance as against a holder for value, since he has thereby suspended the holder’s remedies against the drawee. * He has the same liability as the maker and the drawer with respect to the existence of the payee and his capacity to indorse. * Like the maker of a promissory note, neither presentment for payment nor notice of dishonor is necessary to charge him with liability, except where he is an acceptor for honor. WARRANTIES OF THE ACCEPTOR 1. Existence of the payee 2. Capacity of the payee to pay 3. Existence of the drawer 4. Genuiness of the signature 5. Capacity and authority to draw the bill
DEFENSES PRECLUDED a. Drawer is fictitious or non-existent.
b. Drawer’s signature is a forgery. c. Acceptor has no funds in his hands belonging to the drawer with which to pay the bill. d. Drawer has overdrawn his account. e. Drawer has no capacity to contract or has no capacity to draw the bill. MATTERS NOT ADMITTED * The acceptor does not admit the genuineness of the indorser’s signature because it is only the signature of the drawer that he warrants.
SECTION 63. When person deemed indorser. – A person placing his signature upon an instrument otherwise than as maker, drawer or acceptor is deemed to be an indorser, unless he clearly indicates by appropriate words his intention to be bound in some other capacity. * Signature on back of the instrument * Evidence of intention to be bound in some other capacity – the law defines the status of the indorser. One who signs as an indorser cannot show by parol or extrinsic evidence. The law requires that he indicates by appropriate words his intention to be bound in some other capacity on the instrument itself. * Liability as guarantor – waives the need for presentment, protest or notice of dishonor. Liable only subsidiarily after the assets of the principal debtor have been exhausted. * Liability as surety – as surety, he is primarily and absolutely liable with the principal debtor without benefit of exhaustion of the properties of the latter and without also the necessity of presentment or notice of dishonor.
SECTION 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 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.
SECTION 65. Warranty; where negotiation by delivery. etc. – Every person negotiating an instrument by delivery or by a qualified indorsement warrants: a. That the instrument is genuine and in all respect 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 that the immediate transferee. The provisions of subdivision (c) of this section do not apply to persons negotiating public or corporation securities, other than bills and notes. Pay to bearer or order Sgd M
P indorsed to A either by delivery or by qualified indorsement. M was insolvent. A cannot recover from P because P does not warrant M’s solvency. But P warrants the following: * he has a good title to it – M stolen the note * all prior parties had capacity to contract – M is a minor * he has no knowledge of any fact which would impair the validity of the instrument or render it useless – P knew that the note was invalid for want or failure of consideration
SECTION 66. Liability of general indorser. – Every indorser who indorses without qualification warrants to all subsequent holders in due course: a. The matters and things mentioned in subdivisions a, b, and c of the next preceding section and b. That the instrument is, at the time of his indorsement, valid and subsisting.
And, in addition, he engages that, on due presentment, it shall be accepted or paid, or both as the case may be, 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 indorses who may be compelled to pay it.
INDORSER
DRAWER
Party to either a note or a bill
Party to a bill
Does not make any admission regarding Makes such admission the existence of the payee and his then capacity to indorse Has warranties
Makes no warranties but engages to pay after certain conditions are complied with Liabilities are conditional in the same manner as those of the general indorser
GENERAL INDORSER Makes either indorsement
a
blank
or
IRREGULAR INDORSER special Always makes a blank indorsement
Indorses the instrument after its delivery Indorses before its delivery to the payee to the payee Liable only to parties subsequent to him
Liable to the payee and subsequent parties unless he signs for the accommodation of the payee in which case he is liable only to all parties subsequent to the payee
SECTION 67. Liability of indorser where paper negotiable by delivery. – Where a person places his indorsement on an instrument negotiable by delivery, he incurs all the liabilities of an indorser. * If he indorses specially, he is liable only to holders who makes title through his indorsement. * If he indorses without qualification, he incurs the liability of a general indorser.
SECTION 68. Order in which indorsers are liable. – As respect one another, indorsers are liable prima facie in the order in which they indorse; but evidence is admissible to show that, as between or among themselves, they have agreed otherwise. Joint payees or joint indorsees who indorsed are deemed to indorse jointly and severally. * The holder of an instrument which has been dishonored is not bound by the above section. As to him, indorsers are liable in any order and none of them can interpose as a defense against him an agreement among themselves that they are not liable in the order of their indorsements. The rule must be qualified in the case of a qualified indorser and an indorser of a bearer instrument, title to which the immediate holder took by delivery alone.
SECTION 69. Liability of agent or broker. – Where a broker or other agent negotiates an instrument without indorsement, he incurs all the liabilities prescribed by section sixty-five of this Act, unless he discloses the name of his principal and the fact that he is acting only as agent. LIABILITY OF AN AGENT OR BROKER a. The agent or broker who negotiates by mere delivery incurs the liabilities prescribed in Section 65. b. The agent or broker who negotiates the instrument by qualified indorsement = Section 65. c. General indorsement = Section 66 EXEMPTION FROM LIABILITY - To escape personal liability, he must disclose his principal and the fact that he is acting only as agent. Parol evidence is not admissible to exempt from liability an agent whose indorsement brings him within Section 69.
