Copyright © Amity University

PAN African eNetwork Project

Course Name : MFC

Subject Name : Business Environment & Law

Semester - I

Faculty Name: Santosh Kumari

Copyright © Amity University

NEGOTIABLE INSTRUMENT

Negotiable Instruments Act, 1881

Importance of Negotiable Instrument

Facilitates payment and settlements in the businesses.

Easy transferability of value of instrument.

It has been amended in 1988 (Dishonour of Cheques and for penalties and 2002 (modified for requirements as per the electronic commerce)

The payments through the NI are widely accepted throughout the world.

Negotiable Instrument

Meaning and characteristics of Negotiable Instrument

NI means “ a promissory note, bill of exchange or cheque payable either to order or to bearer

Free transferability – *by delivery (payable to bearer) or *by endorsement and delivery (payable to order)

Holder presumed to be the owner

Holder in due course gets the title from all defects, if the title is acquired with good faith and for consideration. Can also sue for recovery of the sum

The instrument transferable till maturity.

Kinds of NI’s

Kinds of NI’s

o Negotiable by statute- NI Act only recognizes three kinds of NI i.e. PN, BOE and Cheque

o Negotiable by custom or usage- certain instruments which have acquired the characteristics of the NI by usage and custom of trade. E.g. the Government PN, Banker’s Draft, Pay orders, hundies, delivery orders , railways receipts for goods are all held to be NI.

Presumptions relating to NI

Presumptions relating to NI

o Sections 118 and 119 of the NI act has certain presumptions in order to facilitate business transactions:

o It shall be presumed that every NI is drawn for consideration

o Every bill is accepted within a reasonable time before its maturity

o The instruments are endorsed in the order, in which they appear on it.

o Every holder is presumed to be a holder in due course All the above presumptions are rebuttable by evidence to the contrary. The burden of proof lies on the defendant and not upon the plaintiff

Classification of the NI

Classification of the NI

Bearer Instruments- payable to bearer

Order Instruments- expressed to be payable to order

Inland Instruments- drawn and made in India upon any person resident in India, even though payable in a foreign country

Foreign Instruments- Not an Inland Instrument, must be drawn outside India and made payable outside or inside India

Demand Instruments- Time for payment is specified in PN and BOE/ payable at sight

Ambiguous Instruments- which can be treated as PN or BOE by the holder

Continued......

Inchoate or incomplete instruments- when the person signs and delivers a instruments which is wholly blank or incomplete and gives the authority to make it complete to the holder

Accommodation Bills- A bill drawn , accepted or endorsed without consideration

a) Party lending his name to oblige to the other party is accommodating or accommodation party b) The party so obliged is called the party accommodated

Trade Bills- When a bill is drawn, accepted or endorsed for consideration it is called a “ genuine trade bill”

Escrow- When the NI is delivered conditionally or for special purpose as a collateral security or for safe coustody only and not for transferring the absolutely.

Promissory Notes ( Section 4)

Promissory Notes ( Section 4)

PN is an instrument in writing not being a bank note or a currency note

It contains an unconditional undertaking.

Signed by the maker to pay a certain sum of money only.

To or to the order of certain person, or to the bearer of the Instruments.

Parties to the PN a) Maker- the person making or executing the note promising to pay the amount stated therein b) Payee -The person to whom the amount is payable To comply with other formalities like date, place, consideration, stamp etc.

Bill of Exchange (Section 5)

Bill of Exchange (Section 5)

BOE is an instrument in writing

Containing an unconditional order

Signed by the maker

Directing a certain person to pay

A certain sum of money only

To or to the order of

Certain person or to the bearer of the instrument

Distinction between PN and BOE

In a PN there are only two parties- maker and the payee

It contains an unconditional promise by the maker to the payee

No acceptance is necessary

The liability of the maker or drawer is primary and absolute

The maker stands in immediate relationship with the payee

No notice of dishonor need to be given.

In a BOE, there are three parties- drawer, the drawee and the payee

It contains an unconditional order to the drawee or his agent to pay according to the drawer’s directions.

A bill has to be accepted if it is a bill payable “ after sight”

The liability of the drawer secondary i.e. when there is non payment by the drawee.

Notice of dishonor to be given by the holder to the drawer

The maker and the drawee do not stand in immediate relationship.

Parties to a Bill of Exchange

Parties to a Bill of Exchange

Drawer- Person who draws the bill

Drawee- the person on whom the bill is drawn

Acceptor- person who accepts the bill ( he may be the drawee or a stranger on behalf of drawee)

Endorser- person who endorses the bill in favour of another Person

Endorsee- person in whose favour the bill is endorsed

Bill in sets – They are usually drawn in set of three, which are called as ‘Via’. The whole set constitutes only one bill

Cheque

Cheque

Signed by the drawer

Contains an unconditional order to a specified banker to pay on demand

A certain sum of money to or to the order of a specified person or the bearer of the instrument. Therefore all cheques are bills of exchange but whereas all bills of exchange are not cheques.It can be ante – dated or post dated.

In case of a cheque till it becomes stale ( on expiry of 6 months from the date of issue). It may be made payable to two or more or one of two alternatively or some of several payees.

Differences between Cheque and BOE

BOE The drawee liable only after it is accepted

Days of grace (three) are allowed in case of a bill except for payment on demand

Drawee may be any one including the banker

It should be presented for payment, otherwise it may dischare the liability of the drawer

BOE cannot be crossed

A notice of dishonor has to be given to the drawer

Cheque A cheque does not require acceptance and it is intended for immediate payment

No days of grace

The drawee is always a banker

Delay in presenting does not discharge the drawer from his liability

It may be crossed

Crossing of Cheques

Crossing of Cheques

A cheque can be an open or crossed cheque

Open cheques can be encashed directly across the counter by presenting to drawee bank. But if it is lost or stolen it can be encashed by any body unless countermanded (stop payment).

Crossing of the cheque was introduced with a view to avoid the losses that may result from the open cheques.

Crossing is a direction to the bank to pay the money generally to a bank or to a particular bank.

It is made with the intention to make the payment secured.

Its negotiability is not affected unless “Not Negotiable“ is inserted but it is still transferable.

Modes of Crossing

Modes of Crossing

Where a cheque bears across it face an addition of words "and company” or any abbreviation thereof, between two parallel traverse lines, or of two parallel simply, the addition shall be deemed a crossing and it is known as ‘general crossing’.

General Crossing- In general crossing it is the responsibility of the drawee bank not to make payment otherwise than a bank

continued….

Other modes

Special Crossing - Across its face it bears an addition of the name of a banker with or without the words “ Not Negotiable”.

Restrictive Crossing - “Account payee” are added to the general or special crossing. The amount has to be credited to the account of the payee. They are not negotiable.

Not Negotiable Crossing - It means that the title of the transferee cannot be better than the transferor. It is crossed so, as a protection to the drawer or holder of the cheque against miscarriage or dishonesty in the course of transit by making it difficult to get cashed, until it reaches its destination.

Crossing after issue of the cheque

Crossing after issue of the cheque

If the cheque is not crossed, the holder of the cheque may cross it either generally or specially.

If the cheque is crossed generally, the holder may cross it specially

The holder may add the words "Not Negotiable” to the crossing

If it is crossed to specified banker, it may be again crossed to another specified banker, or agent for collection.

Parties to a Negotiable Instrument

Parties to a Negotiable Instrument

Capacity of parties- Every person capable of contracting may bind himself and be bound by the making, drawing, acceptance, indorsement, delivery and negotiation of the NI

The capacity of the party to a NI is co-extensive with the capacity of his or her contract capacity to contract

Minor can draw, indorse, deliver and negotiate such instruments as to bind all other parties other than himself.

Minor can also acquire all rights under it, and if he is a holder he is entitled to sue all the prior parties to the instruments.

If minor is one of the parties and all others are adults, then other than the minor all are liable. Adults are not discharged from liability even if the minor is discharged.

Holder ( Sec 8)

Holder ( Sec 8)

A person who is entitled to hold the negotiable instruments in his own name, to possess the instrument and to recover or receive its amount due from the parties thereto is called a holder.

To be a holder the person must be named in the instrument as a payee, or the endorsee or a bearer thereof

Holder in due course (HDC)

Holder in due course (HDC)

If a person proves that he acquired the instrument for a valuable consideration, then he is known as holder in due course.

The holder in due course should show that for consideration he became the payee or indorsee of the instrument , if it is payable to the order.

In such cases, the instrument should have been indorsed and delivered to him, as his title to the instrument will be incomplete without delivery.

Other essentials to be a holder in due course

Other essentials to be a holder in due course

The HDC should have acquired the instrument any time before the amount became payable.

If a person takes the instrument after the day the amount becomes payable, such a person cannot take the place of HDC, and the rights acquired by him are only co-extensive with that of his immediate transferor.

The HDC should have acquired the title without notice of the defect in the title

Privileges of a HDC

Privileges of a HDC

The presumption is that the HDC obtains title to the instrument free from equity.

If the instrument is stamped but otherwise inchoate,the person who has signed and delivers is prevented from asserting against the HDC as the stamp in itself is sufficient to cover the amount, though the instrument was incomplete.

Until the instrument is duly satisfied, every prior party to a NI is liable thereon to a holder in due course.

If the bill or note is negotiated to a HDC, then the negotiating parties cannot avoid liability if there was a condition or special purpose attached to it.

Continue….

Continued......

Once the NI passes through the hands of the HDC, the NI get cleansed of all its defects, provided the holder is not a party to the fraud

No defence can be set up against the holder in due course

The validity of the instrument as originally made or drawn cannot be denied by the maker/ drawer/ acceptor for honor

The endorser cannot deny the signature or capacity to the contract of any prior party to the instrument

Liabilities of Parties (Drawer)

Liabilities of Parties (Drawer)

Liability of the drawer- the drawer is liable to compensate in case of dishonor by the drawee or acceptor, provided due notice has been given to or received by the drawer.

The liability of the drawer in case of bill is secondary in nature. It is the acceptor who is primarily liable to make the payment.

By drawing a bill, the drawer undertakes that on presentment of the same to the acceptor, it will be accepted and duly honored and

If it is dishonored by the acceptor or not accepted, the drawer will compensate to the holder or the indorser, provided due notice is given to him.

Continue…..

Continued…..

The drawer can also limit his or her liability by using the sans recourse indorsement

If the holder fails to give notice , then the drawer is not liable and beyond this he is discharged from his/her liability.

This is not only with reference to the bill but also upon the original debt.

Liability of the Drawee

Liability of the Drawee

The relationship between the banker( drawee) and customer is that of debtor and creditor.

The banker has to undertake to honor the customers cheque until the funds are available with the bank in the customers account.

Banker can refuse to honor the customers in certain instances like,

a) bankers lien, b) no amount to honor in the customers account, c) post dated fund presented before the date, d) if the instrument is ambiguous, e) if the customer been declared insolvent, f) if the customer has countermanded the cheque, g) if the bankers receives the notice of death or insanity

Liability of the Drawee Bank for Wrongful Dishonour

Cheques to be presented during the usual banking hours.

If there is sufficient fund in the customers fund and still the bank does not honor the cheque , it has to fulfill the monetary loss of the customer and also the injury to reputation of the customer.

This remedy against the bank is available only to the drawer of the cheque and not the holder of the cheque.

Liability of the Drawee Bank Where the Drawer’s Signature is Forged

If bank honor’s a cheque which is forged, the bank cannot get the statutory protection, even if the sign could not be distinguished.

The Act provides protection to the drawee bank paying a cheque that carries a forged indorsement.

This section applies if the bank pays a cheque that carries a forged indorsement and it is payable to order and it purports to be indorsed by or on behalf of the payee. ………..If the bank on which is drawn, makes the payment in due course, then the bank is discharged from its liability even if the signature of the payee might be forged.

Liability of the ‘Maker of the note’ and ‘Acceptor of the bill’

Both the maker and the acceptor are liable to make the payment.

The liability of the maker in case of note and acceptor in case the bill is absolute, Unconditional and primary. The liability exists only when he signs and delivers the note

But to make the acceptor liable only signature is not enough, it has to be accepted i.e. notice of acceptance should be given and the bill has to be delivered.

As the acceptor is not the originator of the bill as in case of the note, the acceptor can have an option to give a qualified acceptance.

Liability of endorserLiability of endorser

Every indorser after dishonor is liable as upon an instrument payable on demand to every subsequent holder.

The indorser is in a position of a new drawer and the liability of the indorser is conditional.

By endorsing the bill the endorser undertakes that the instrument will be accepted and paid as per the tenor of presentment.

If it is dishonored, he will compensate the holder or subsequent indorsers who is compelled to pay for it subject to due notice of dishonor.

The indorsers liability as per this provision (sec 35) will not commence until the indorsed instrument is delivered to the transferee. The indorser has to make good the loss but he can make qualified indorsement by using ‘sans recourse indorsement’.

Liability of the other parties

Liability of the other parties

Every prior party to the indorsement will be liable to the subsequent party until the instrument is duly discharged or satisfied.

If the indorser knows that bill was forged, he cannot later deny the liability by pleading forgery as a reason.

The indorser cannot challenge the holder’s title. He will be liable twice. One to the holder and the other to the true owner of the instrument.

Acceptor of the bill drawn in fictitious name and payable to the drawer’s order is not, by reason that such name is fictious,relieved from liability to any holder in due course.

NegotiationNegotiation

Negotiation of an instrument may be either by delivery or by indorsement. Delivery of NI is an essential ingredient in order to bind the parties as they are incomplete and revocable.

The delivery should be with an intention to passing of the property . A PN , BOE or Cheque is considered to be completed only when it is delivered i.e., actual or constructive

As between the immediate parties, delivery to be effectual must be made by the party making , accepting or indorsing the instrument or by a person authorized by such person

For other parties, other than HDC it has to been shown that the instrument was delivered conditionally or for special purpose only and not for the purpose of transferring absolutely the property therein. All the NI’s are negotiable by delivery after indorsement.

Endorsements / Indorsements

Endorsements / Indorsements

A bearer instrument is defined as an instrument where the only or last indorsement is an indorsement in blank.

Partial Indorsement- No writing on a negotiable instrument is valid for the purpose of negotiation if such writing purports to transfer only a part of the amount appearing to be due on the instrument, …….

But where such amount has been [partly paid, a note to that effect may be indorsed on the instrument, which may then be negotiated for the balance ( This is called partial indorsement)

Features of indorsement

Features of indorsement

Intention should be there for negotiating the instrument.

Effected by the signature of drawer or holder of a negotiable instrument.

Indorsement can be made on the back or face of instrument (generally – it can be made on a plain paper or on a stamp paper)

The person who signs is called – Indorser/endorsor.

The person in whose favour it is made is called-Indorsee/endorsee.

The additional slip pf paper, if used for indorsement is called as “ allonge”

Legal aspects of endorsement

Legal aspects of endorsement Negotiation

The endorsee acquires the property or interest in the instrument as a holder. He can further pass the title negotiation, other than for restrictive endorsement (Transfer)

It can be negotiated till the payment is made

Endorsement in part is invalid if the endorser dies before delivery, endorsement becomes invalid.

Presumption- Endorsement made in the order it appears

Endorsers signature-Not to be in block letters

Endorser should spell his name in the same way as it appears on the cheque.

Need not include prefixes and suffixes

Kinds of endorsement

Kinds of endorsement

Endorsement in blank: If there is only name of the endorser ( payable to bearer)

Endorsement in full- If it made to a specified person, A blank endorsement may be converted into full.

Sans recourse endorsement- Exclude his personal liability by limiting the liability.

Conditional endorsement- If a condition is specified by the endorser

Restrictive endorsement- If it specified to one person only

Facultative endorsement- If the provisions of giving notice of dishonor is waived by the endorse

Assignment should be in writing

Notice of transfer of actionable claims must be given by the transferee to the debtor in case if the assignment in order to complete the title

The title is subject to all the defects, equities of the assignor

Transferee to prove consideration for transfer

Negotiation by delivery /endorsement and delivery

No notice of such kindrequired in negotiation

The title of the transfereeis better than the transferor

Consideration is presumedin negotiation

Difference between Assignment and Negotiation

Instruments obtained by unlawful means

Instruments obtained by unlawful means

Stolen instruments- Acquires no title

Instruments obtained through fraud or coercion- usually not liable , but liable if due and reasonable care not taken

Instruments obtained for unlawful consideration- Does not create a legal obligation but HDC obtains good title

Forged instruments- Generally it cannot convey title

Forged endorsement-depends of the different situations

Presentment

Presentment

Meaning- Showing an instrument to the drawee, acceptor or maker for acceptance, sight or payment.

The three kinds of presentment are:

Presentment of BOE for acceptance

Presentment of PN for sight

Presentment of NI for payment

Presentment must be made in a place and time specified or in the place of business or residence or where ever the person is found.

Presentment when excused

Presentment when excused

Presentment is excused and the instrument can be treated as dishonored in the following circumstances

a) When the drawee cannot be found after reasonable search

b) Where the drawee is a fictitious person or incapable of contracting

c) Where the presentment is irregular, acceptance has been refused on some other ground.

d) Where the drawee becomes bankrupt or is dead

Dishonor of a NI

Dishonor of a NI

Non-acceptance of the bill or non- payment results in dishonor of the instruments.

Dishonor by non- payment happens when the maker, drawee of the cheque or acceptor of the bill makes a default in payment upon being duly required to pay the same.

It is considered to be dishonored by non-payment when the presentment for payment is excused and the overdue remains unpaid.

Continue…..

Dishonor continued…

Dishonor by non- acceptance happens in the following ways:

a) When the drawee does not accept within 48 hours of presentment

b) When presentment for acceptance is excused and the bill remains unaccepted.

c) When the drawee is incompetent

d) When the acceptance by the drawee is qualified

e) when the drawee is fictitious person or cannot be found after reasonable search a notice of dishonour is a must to all prior parties whom the holder wants to make liable except in those cases where the law considered it as unnecessasry.

Noting and protest

Noting and protest

A noting is a process of recording of dishonor by the notary public upon the instrument within a reasonable time of dishonor.

It is the discretion of the holder to get it noted.

A bill that is noted must contain the fact of dishonor, the date, the reasons. It will also have the notary charges.

When the process of noting is certified, it is called protest.

Dishonor of cheques ( Sec 138-142)

Dishonor of cheques ( Sec 138-142)

> After the Amendment Act of 1988, the NI Act provide for criminal penalties in the event of dishonor of cheques for insufficiency of funds.

> The drawer may be punished under sec 138 with imprisonment for two years (after 2002 Amendment Act) or with fine which may extend to twice the amount of the cheque or with both.

> (The Amendment has inserted five new sections 143- 147 for the procedure to be followed for the trial)

Conditions to attract criminal penalty under sec 138 are:

The cheque is dishonored due to insufficiency of funds

The payment for which the cheque was issued was for the discharge of a legally enforceable debt or liability in whole or part of it. ( If it is a gift , then the liability will not arise)

The cheque has to be presented to the paying bank within six months from the date that it was drawn.

The payee or the HDC should have been given a notice of dishonor of the cheque from the bank.( The court to take cognizance of the complaint, if it given by the payee or the HDC)

The drawer will be liable only if he fails to make the payment within days of such notice period. The payee or HDC of the cheque should have made a written complaint within one month of cause of action.

Discharge of a Negotiable Instrument

Discharge of a Negotiable Instrument

Discharge of parties

a) By cancellation

b) Release

c) Payment

d) If the holder gives more time to the drawee than 48 hours

e) by default in presenting the cheque within a reasonable time

f) Dissenting parties discharged by qualified or limited acceptance

g) Material alteration etc………..

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NEGOTIABLE INSTRUMENTS LAWNEGOTIABLE INSTRUMENTWritten contract for the payment of money, by its form intended as substitute formoney and intended to pass from hand to hand to give the holder in due course theright to hold the same and collect the sum duePROMISSORY NOTE· unconditional promise in writing made by one person to another signed by the maker· engaging to pay on demand, or at a fixed or determinable future time a sum certainin money to order or to bearer· where a note is drawn to the maker’s own order, it is not complete until indorsed by him.

BILL OF EXCHANGE· unconditional order in writing addressed by one person to another signed by theperson giving it· requiring the person to whom it’s addressed to pay on demand or at a fixed ordeterminable future time a sum certain in money to order or to bearer· Check: bill of exchange drawn on a bank payable on demand.Kinds of checks:1. personal check2. manager’s/cashier’s check – drawn by a bank on itself. Issuance has the effect ofacceptance3. memorandum check – “memo” is written across its face, signifying that drawerwill pay holder absolutely without need of presentment

4. crossed check –Effects:a. check may not be encashed but only deposited in bankb. may be negotiated only once, to one who has an acct. with a bankc. warning to holder that check has been issued for a definite purpose so that hemust inquire if he received check pursuant to such purpose, otherwise notHDCKinds:a. general (no word between lines, or “co” between lines)b. special (name of bank appearing between parallel lines)

BEARERPerson in possession of a bill/note payable to bearer

HOLDERPayee or indorsee of a bill or note who is in possession of it, or the bearer thereof.

THE LIFE OF A NEGOTIABLE INSTRUMENT:1. issue2. negotiation3. presentment for acceptance in certain bills4. acceptance5. dishonor by on acceptance6. presentment for payment7. dishonor by nonpayment8. notice of dishonor9. protest in certain cases10.discharge

NEGOTIABILITY

REQUISITES1. in writing and signed by maker or drawer· no person liable on the instrument whose signature does not appear thereon( subject to exceptions)· one who signs in a trade or assumed name liable to the same extent as if he hadsigned in his own name· signature of any party may be made by a duly authorized agent, no particularform of appt. necessary2. unconditional promise or order to pay· unqualified order or promise to pay is unconditional though coupled witha. an indication of a particular fund out of which reimbursement to be made,or a particular account to be debited with amount, orb. a statement of the transaction which gives rise to the instrument· an order or promise to pay out of a particular fund is not unconditional

a sum certain in money· even if stipulated to be paid---a. with interest, orb. by stated installments, orc. by stated installments with a provision that upon default in payment of anyinstallment/interest, the whole shall become due, ord. with exchange, whether at a fixed rate or at the current rate, ore. with costs of collection or an attorney’s fee, in case payment not made atmaturity

3. payable on demand,· when expressed to be payable on demand, or at sight, or on presentation;· when no time for payment expressed, or· where an instrument is issued, accepted or indorsed when overdue, it is, asregards the person so issuing, accepting, or indorsing it, payable on demandor at a fixed or determinable future time· when it’s expressed to be payable at a fixed period after date or sight, or· on or before a fixed or determinable future time fixed therein, or· on or at a fixed period after the occurrence of a specified event which is certain tohappen, though the time of happening be uncertain· an instrument payable upon a contingency not negotiable, and happening ofevent doesn’t cure it

4. payable to order· where it is drawn payable to the order of a specified person or to him or his order.May be drawn payable to order of ---a. a payee not the maker/drawer/drawee, orb. drawer or maker, orc. drawee, ord. two or more payees jointly, ore. holder of an office for time being· when the instrument is payable to order the payee must be named or otherwiseindicated therein with reasonable certaintyor bearer,· when expressed to be so payable· when payable to person named therein or bearer· when payable to order or fictitious/non-existent person, and such fact known tothe person making it so payable, or· when name of payee doesn’t purport to be the name of any person, or· when the only/last indorsement is in blank

5. where addressed to drawee: such drawee named/ indicated therein withreasonable certainty· bill may be addressed to two or more drawees jointly, whether partners or not,but not to two or more drawees in the alternative or in succession· bill may be treated as a PN, at option of holder, wherea. drawer and drawee are same personb. drawee is fictitious/incapacitatedEFFECT OF ADDITIONAL PROVISIONSGen. Rule: order/promise to do any act in addition to the payment of money rendersinstrument non-negotiable.Exception: negotiability not affected by provisions w/c1. authorize sale of collateral security if instrument not paid at maturity2. authorize confession of judgment…3. waives benefit of any law intended for advantage/protection of obligor4. give holder election to require something to be done in lieu of money

CONTINUATION OF NEGOTIABLE CHARACTERUntil1. restrictively indorsed2. discharged by payment or otherwiseTRANSFERDELIVERY· NI incomplete and revocable until delivery for the purpose of giving effect thereto· as betweena. immediate partiesb. a remote party other than holder in due coursedelivery, to be effectual, must be made by or under the authority of the partymaking/drawing/accepting/indorsing· in such case delivery may be shown to have been conditional, or for a specialpurpose only, and not for the purpose of transferring the property in theinstrument

D. as to presence/absence of express limitations put by indorser upon primary obligor’sprivileges of paying the holder1. Conditional – additional condition annexed to indorser’s liability.· Where an indorsement is conditional, a party required to pay the instrument maydisregard the condition, and make payment to the indorsee or his transferee,whether condition has been fulfilled or not· Any person to whom an instrument so indorsed is negotiated will hold thesame/proceeds subject to rights of person indorsing conditionally2. unconditionalINDORSEMENT OF BEARER INSTRUMENT· Where an instrument payable to bearer is indorsed specially, it may neverthelessbe further negotiated by delivery· Person indorsing specially liable as indorser to only such holders as make titlethrough his indorsementUNINDORSED INSTRUMENTS· Where holder of instrument payable to his order transfers it for value withoutindorsing, transfer vests in transferee1. such title as transferor had therein2. right of transferee to have indorsement of transferor· for purposes of determining HDC negotiation effective upon actual indorsement

HOLDER IN DUE COURSEHOLDERSec. 191RIGHTS OF HOLDER1. sue thereon in his own name2. payment to him in due course discharges instrumentHOLDER IN DUE COURSE: REQUISITIES1. complete and regular upon its face· sec. 124 (effect of alteration)· sec. 125 (what constitute material alterations)2. holder became such before it was overdue, without notice of any previous dishonor· sec. 53 (demand inst. nego after unreasonable length of time: not HDC)· sec. 12 (effect antedating/postdating)3. taken in good faith and for value· sec. 24 (presumption of consideration)· sec 25 (definition. of value)· sec. 26 (definition. holder for value)· sec. 27 (lien as value)4. at time negotiated to him, he had no notice (sec. 56-def; 54-notice before full amt.paid) of ---a. infirmity in instrumentb. defect in title of person negotiating

1. holds instrument free of any defect of title of prior parties2. free from defenses available to prior parties among themselves3. may enforce payment of instrument for full amount, against all parties liable* If in the hand of any holder (note definition of holder) other than a HDC, vulnerable tosame defenses as if non-negotiableRIGHTS OF PURCHASER FROM HOLDER IN DUE COURSEGeneral Rule: in the hands of any holder other than a HDC, NI is subject to samedefenses as if it were non-negotiable.Exception: holder who derives title through HDC and who is not himself a party to anyfraud or illegality has all rights of such former holder in respect to all parties prior to thelatter.WHO DEEMED HDC· prima facie presumption in favor of holder· but when shown that title of any person who has negotiated instrument wasdefective (sec. 55—when title defective): burden reversed (now with holder)· but no reversal if party being made liable became bound prior to acquisition ofdefective title (i.e., where defense is not his own)

DEFENSES AND EQUITIESKINDS OF DEFENSES1. real defense – attaches to instrument; on the principle that the right sought to beenforced never existed/there was no contract at all2. personal defense – growing out of agreement; renders it inequitable to be enforcedvs. defendantDEFENSES1. INCAPACITY: real; indorsement/assign by corp/infant: passes property butcorp/infant no liability2. ILLEGALITY: personal, even if no K because void under CC 14093. FORGERY: real (lack of consent):a. forgedb. made without authority of person whose signature it purports to be

General Rule:a. wholly inoperativeb. no right to retain instrument, or give discharge, or enforce payment vs. any party,can be acquired through or under such signature (unless forged signatureunnecessary to holder’s title)Exception:Unless the party against whom it is sought to enforce such right is precludedfrom setting up forgery/want of authorityPrecluded:a. parties who make certain warranties, like a general indorser or acceptor

b. estopped/negligent parties* Note rules on Acceptance/Payment under Mistake as applied to:1. overdraft2. stop payment order3. forged indorsements

4. MATERIAL ALTERATION· Where NI materially altered w/o assent of all parties liable thereon, avoided,except as vs. a1. party who has himself made, authorized or assented to alteration2. and subsequent indorsers.· But when an instrument has been materially altered and is in the hands of a HDCnot a party to the alteration, HDC may enforce payment thereof according to orig.tenor· Material Alteration1. change date2. sum payable, either for principal or interest3. time of payment4. number/relations of parties5. medium/currency of payment, adds place of payment where nonespecified, other change/addition altering effect of instrument in anyrespect

*material alteration a personal defense when used to deny liability according to org.tenor of instrument, but real defense when relied on to deny liability according to alteredterms.5. FRAUDa. fraud in execution: real defense (didn’t know it was NI)b. fraud in inducement: personal defense (knows it’s NI but deceived as tovalue/terms)6. DURESS· Personal, unless so serious as to give rise to a real defense for lack ofcontractual intent7. COMPLETE, UNDELIVERED INSTRUMENT· Personal defense (sec. 16)· If instrument not in poss. Of party who signed, delivery prima facie presumed· If holder is HDC, delivery conclusively presumed

7. COMPLETE, UNDELIVERED INSTRUMENT· Personal defense (sec. 16)· If instrument not in poss. Of party who signed, delivery prima facie presumed· If holder is HDC, delivery conclusively presumed8. INCOMPLETE, UNDELIVERED INSTRUMENT· Real defense (sec. 15)· Instrument will not, if completed and negotiated without authority, be a validcontract in the hands of any holder, as against any person whose signature wasplaced thereon before delivery9. INCOMPLETE, DELIVERED· Personal defense (sec. 14)

· 2 Kinds of Writings:1. Where instrument is wanting in any material particular: person in possessionhas prima facie authority to complete it by filing up blanks therein2. Signature on blank paper delivered by person making the signature in orderthat the paper may be converted into a NI: prima facie authority to fill up assuch for any amount· In order that any such instrument, when completed, ma be enforced vs. anyperson who became a party thereto prior to its completion:1. must be filled up strictly in accordance w/ authority given2. within a reasonable time· but if any such instrument after completion is negotiated to HDC, it's valid for allpurposes in his hands, he may enforce it as if it had been filled up properly

LIABILITIES OF PARTIESA. PRIMARY PARTIES· Person primarily liable: person who by the terms of the instrument is absolutelyrequired to pay the same.· Sec. 70 (effect of want of demand on principal debtor)1. Liability of Makera. Promises to pay it according to its tenorb. admits existence of payee and his then capacity to indorse2. Status of drawee prior to acceptance or payment· sec. 127 (bill not an assignment of funds in hands of drawee)· sec. 189 (when check operates as assignment)

3. Liability of Acceptor· Promises to pay inst according to its tenor· Admits the following:a. existence of drawerb. genuineness of his signaturec. his capacity and authority to draw the instrumentd. existence of payee and his then capacity to endorse· sec. 191, 132, 133, 138 --- formal requisites of acceptance· sec. 136, 137, 150 --- constructive acceptance· sec. 134, 135 --- acceptance on a separate instrument· Kinds of Acceptance:1. general2. qualifieda. conditionalb. partialc. locald. qualified as to time.e. Not all drawee

1. when check certified by bank on which it’s drawn, equivalent toacceptance2. where holder of check procures it to be accepted/certified, drawer andall indorsers discharged from al liability3. check not operate as assignment of any part of funds to credit ofdrawer with bank, and bank is not liable to holder, unless and until itaccepts or certifies check4. certification obtained at request of drawer: secondary parties notreleased5. bank which certifies liable as an acceptor6. checks cannot be certified before payable

B. SECONDARY PARTIES1. Liability of Drawera. Admits existence of payee and his then capacity to endorseb. Engages that on due presentment instrument will be accepted, or paid, orboth, according to its tenor and thatc. If it be dishonored, and the necessary proceedings on dishonor be duly taken,he will pay the amount thereof to the holder or to an subsequent indorser whomay be compelled to pay it· drawer may insert in the instrument an express stipulation negativing / limiting hisown liability to holder2. Liability of Indorsers:· Qualified Indorser and one Negotiating by Deliverya. Instrument genuine, in all respects what it purports to beb. good titlec. all prior parties had capacity to contractd. he had no knowledge of any fact w/c would impair validity of instrument orrender it valueless· in case of negotiation by delivery only, warranty only extends in favor ofimmediate transferee

· Liability of a General or Unqualified Indorsera. instrument genuine, good title, capacity of prior partiesb. instrument is at time of indorsement valid and subsistingc. on due presentment, it shall be accepted or paid, or both, according to tenord. if it be dishonored, and necessary proceedings on dishonor be duly taken, hewill pay the amt. To holder, or to any subsequent indorser who may becompelled to pay it· Order of Liability among Indorsers1. among themselves: liable prima facie in the order they indorse, but proof ofanother agreement admissible2. but holder may sue any of the indorsers, regardless of order of indorsement3. joint payees/indorsees deemed to indorse jointly and severally3. Liability of Accomodation Party· Definition: one who signed instrument as maker/drawer/acceptor/ indorser w/oreceiving value thereof, for the purpose of lending his name to some otherperson

AP liable on the instrument to holder for value even if holder, at time of takinginstrument, knew he was only an AP· Liability of Irregular IndorserWhere a person not otherwise a party to an instrument, places thereon hissignature in blank before delivery, he’s liable as an indorser, in accordance w/ theserules:1. Instrument payable to order of 3rd person: liable to payee and to allsubsequent parties2. Instrument payable to the order of maker/drawer, or payable to bearer: liableto all parties subsequent to maker/drawer3. Signs for accommodation of payee, liable to all parties subsequent to payee· Sadaya v Sevilla Rules:1. a joint and several accommodation maker of a negotiable promissory note maydemand from the principal debtor reimbursement for the amt. That he paid to thepayee2. a joint and several accommodation maker who pays on the said promissory notemay directly demand reimbursement from his co-accommodation maker without firstdirecting his action vs. the principal debtor provided:a. he made the payment by virtue of a judicial demandb. or the principal debtor is insolvent

4. Liability of an Agent· Signature of any party may be made by duly authorized agent, establish as inordinary agency· Where instrument contains or a person adds to his signature words indicatingthat he signs for or on behalf of a principal, he is not liable on the instrument if hewas duly authorized, but the mere addition of words describing him as an agentwithout disclosing his principal, does not exempt from personal liability.· Signature per procuration operates as notice that the agent has but a limitedauthority to sign, and the principal is bound on ly in case the agent in so signingacted within the actual limits of his authority· Where a broker or agent negotiates an instrument without indorsement, he incursall liabilities in Sec. 65, unless he discloses name of principal and fact that he’sonly acting as agent

I. Presentment For AcceptanceWhen presentment for acceptance must be made1. bill payable after sight, or in other cases where presentment for acceptancenecessary to fix maturity2. where bill expressly stipulates that it shall be presented for acceptance3. where bill is drawn payable elsewhere than at residence / place of business ofdraweeWhen failure to present releases drawer/indorserFailure to present for acceptance of negotiate bill of exchange within reasonable timeReasonable TimeMust consider1. nature of instrument2. usage of trade or business with respect to instrument

3. facts of each caseHow and When Made Sec. 145, 146, 147When Excused Sec. 148Dishonor and Effects· sec. 149 (when dishonored by non-acceptance)· sec. 150 (duty of holder where bill not accepted)· sec. 151 (rights of holder where bill not accepted)· sec. 89 (to whom notice of dishonor must be given)· sec. 117 (effect of omission to give notice of non-acceptance)II. For PaymentWhere necessary Sec. 70Where not necessary Sec. 79, 80, 82, 151, 111Date and time of presentment of instrument bearing fixed maturity Sec. 71, 85, 86, 194

Date of presentment· Where instrument not payable on demand: presentment must be made on date it falls due· Where payable on demand: presentment must be made within reasonable timeafter issue, except that in case of a bill of exchange, presentment for paymentwill be sufficient if made within a reasonable time after last negotiation (but note:though reasonable time from last negotiation, it may be unreasonable time fromissuance thus holder may not be HDC under sec. 71)· Check must be presented for payment within reasonable time after its issue ordrawer will be discharged from liability thereon to extent of loss caused by delayDelay excused Sec. 81Manner Sec. 74, 72, 75Place Sec. 73To Whom Sec. 72, 76, 77, 78Dishonor by nonpayment Sec. 83, 84

General rule: to drawer and to each indorser, and any drawer or indorser to whom suchnotice is not given is dischargedForm, Contents, Time Sec. 95, 96, 102, 103, 104, 105, 106, 108, 113By Whom Given· By or on behalf of the holder or any party to the instrument who may becompelled to pay it to the holder, and who, upon taking it up, would have a rightto reimbursement from the party to whom the notice is given· Notice of dishonor may be given by an agent either in his own name or in thename of any party entitled to give notice, whether that party be his principal ornot· Where instrument has been dishonored in hands of agent, he may either himselfgive notice to the parties liable thereon, or he may give notice to his principal (asif agent an independent holder)

In whose favor notice operates1. when given by/on behalf of holder: insures to benefit ofSa. all subsequent holders andb. all prior parties who have a right of recourse vs. the party to whom it’s given2. Where notice given by/on behalf of a party entitled to give notice: insures for benefitof a. holder , andb. all parties subsequent to party to whom notice givenWaiver Sec. 109, 110Where not necessary to charge drawer1. drawer/drawee same person2. drawee fictitious, incapacitated3. drawer is person to whom instrument is presented for payment4. drawer has no right to expect/require that drawee/acceptor will honor instrument5. drawer countermanded payment

1. drawee fictitious, incapacitated, and indorser aware of the fact at time of indorsement2. indorser is person to whom instrument presented for payment3. instrument made/accepted for his accommodationProtestDefinition: testimony of some proper person that the regular legal steps to fix the liabilityof drawer and indorsers have been takenWhen necessary: sec. 152,Form and contents: sec. 153By whom made: sec. 154Time and Place: sec. 155, 156For better security: sec. 158Excused: sec. 159Waiver: sec. 111Acceptance for HonorSec. 161, 131, 171Bills in Set: 178-183

DISCHARGEA. Of the Instrument1. payment in due course by or on behalf of principal debtor· Payment in due course:1. made at or after maturity2. to the holder thereof3. in good faith and without notice that his title is defective2. payment in due course by party accommodated where party is made/ accepted foraccommodation3. intentional cancellation by holder· If unintentional or under mistake or without authority of holder, inoperative.Burden of proof on party which alleges it was unintentional, etc.4. any other act which discharges a simple contract

5. principal debtor becomes holder of instrument at or after maturity in his own right6. renunciation of holder:· holder may expressly renounce his rights vs. any party to the instrument, before or after its maturity· absolute and unconditional renunciation of his rights vs. principal debtor made at or after maturity discharges the instrument· Renunciation does not affect rights of HDC w/o notice.· Renunciation must be in writing unless instrument delivered up to person primarily liable thereon7. material alteration (sec. 124: material alteration w/o assent of all parties liable avoids instrument except as against party to alteration and subsequent indorsers)

1. any act which discharges the instrument2. intentional cancellation of signature by holder3. discharge of prior party4. valid tender of payment made by prior party5. release of principal debtor, unless holder’s right of recourse vs. 2ndary partyreserved6. any agreement binding upon holder to extend time of payment, or to postponeholder’s right to enforce instrument, unless made with assent of party secondarilyliable, or unless right of recourse reserved.8. Failure to make due presentment (sec. 70, 144)9. failure to give notice of dishonor10.certification of check at instance of holder

11. reacquisition by prior party· where instrument negotiated back to a prior party, such party may reissue and further negotiate, but not entitled to enforce payment vs. any intervening party towhom he was personally liable· where instrument is paid by party secondarily liable, it’s not discharged, buta. the party so paying it is remitted to his former rights as regard to all prior partiesb. and he may strike out his own and all subsequent indorsements, and again negotiate instrument, except· where it’s payable to order of 3rd party and has been paid by drawer· where it’s made/accepted for accommodation and has been paid by partyaccommodated

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